Mandatory pre-dispute arbitration clauses in college enrollment contracts have historically been commonplace at for-profit institutions—a consumer protection challenge that not only makes it difficult for wronged consumers to successfully obtain relief, but also prevents the government from determining, among other things, if any school is routinely defrauding consumers. An Obama-era regulation that took effect in 2017 effectively banned mandatory arbitration clauses by requiring that schools that participate in federal loan programs allow their students the ability to bring their own lawsuit, or join in class action suits, and have their day in court, without first being forced into arbitration—but this rule was essentially reversed by the Trump administration in a rule that took effect this past summer.
Now, a recent court ruling shows not only why the Obama-era ban on arbitration clauses was good policy, but also why it should be reinstated.
The Brief History of the Ban
When the Trump administration took office, it unsuccessfully tried to delay the Obama-era rule on arbitration. When those efforts failed, the Trump administration reversed the ban by issuing a new regulation, allowing mandatory clauses to be used in contracts again. With the new Trump rule taking effect in July of 2020, there was roughly a three-year period when the ban was enforceable, during which schools participating in the Title IV loan program were not allowed to include arbitration clauses in their enrollment contracts and could not enforce clauses they had already inserted into previous contracts; the policy also required that any school that had previously included pre-dispute mandatory arbitration provisions or class action waivers in their agreements must notify those students that the school wouldn’t seek to enforce those terms.
The Recent Illustrating Case
A ruling this week from the United States Court of Appeals for the Eleventh Circuit illustrates both the issue and the importance of the timing as to when the Obama-era ban was in effect.
Donrich Young, the plaintiff in a lawsuit against a for-profit institution, Grand Canyon University (GCU), took out federal loans to attend the GCU. A signed mandatory pre-dispute arbitration clause and class-action waiver was contingent on Young’s enrollment; this was allowed at the time because Young had enrolled prior to the Obama-era rule change taking effect.
Young’s complaint alleges that GCU breached its contract with him. When Young enrolled, GCU stated that a student could complete a doctorate degree by completing just sixty credit hours. However, Young asserts that GCU requires students to take and pay for additional “research continuation courses,” and thus GCU’s claim that students can complete a doctorate in sixty credit hours is a material misrepresentation.
Young and seven other plaintiffs brought a class action suit against GCU. GCU moved to compel arbitration; this action was contrary to an email sent to Young and other students saying that GCU wouldn’t seek to enforce pre-dispute arbitration agreements and class action waivers if they were to assert a borrower defense claim.
A district court sided with GCU’s claim and compelled the parties to arbitrate. Specifically, the court took the dubious stance that the breach of contract, misrepresentation, and statutory fraud claims did not fall under borrower defense claims by statutory definition and therefore were not subject to the regulations’ prohibition on pre-dispute arbitration agreements. The plaintiffs appealed to a higher court that, this past week, reversed the lower court’s ruling. It held that breach of contract and misrepresentation claims do in fact constitute borrower defense claims: a regulation designed to protect borrowers could not exclude basic claims such as breach of contract and misrepresentation.
The finding from the appeals court protects student borrowers, and the case itself illustrates the impact that the timing of the regulation will have on an avenue for a subset of wronged borrowers seeking relief; it also illustrates the critical nature of the borrower defense regulation more broadly, as well as the the value of this specific ban on mandatory arbitration.
Since the Trump administration reversal took effect on July 1, 2020, schools are once again allowed to include mandatory pre-dispute arbitration clauses. But for cases brought before the reversal, the ban on mandatory arbitration and class action waivers was in effect—and even if a school had included an arbitration clause in their contracts written before the Obama rule, these clauses were unenforceable after July 1, 2017. While schools can now once again include and enforce mandatory arbitration provisions, cases brought before the 2020 reversal, and contracts written after July 1, 2017 but before July 1, 2020, will provide a window for a subset of students to have their day in court.
The case also illustrates the need for the Obama-era ban more broadly. The allegations in the complaint are troubling, and without the Obama-era ban, these allegations would otherwise be cloaked under the secrecy of forced arbitration. Going forward, the incoming Biden administration should take action to reverse the Trump administration’s deregulation and bring back the ban on mandatory arbitration and class action waivers. The brief window when the rule was in effect allowed plaintiffs like Donrich Young to have their day in court, and, as this case illustrates, allows the public to better understand colleges’ potentially problematic practices.