For years, for-profit colleges have required students to sign mandatory arbitration clauses as part of their student enrollment documents. These clauses prohibit students from suing the institutions they attended for fraud or misrepresentation. Instead, the clauses force students to arbitrate their claims in a forum that is often more favorable for the college than for the aggrieved student.
The Department of Education recently criticized this practice and is working on some regulations that will prohibit or sharply limit the ability of colleges to stick arbitration clauses in their enrollment documents. Last May, University of Phoenix announced that it will abandon its practice of requiring students to sign arbitration agreements.
Magno v. The College Network, Inc.
Last month, a California appellate court invalidated the arbitration clause in a purchase agreement offered by The College Network, Inc., an education provider based in Indiana but operating in California. Entitled Magno v. The College Network, Inc., the decision strikes a strong blow against a practice that has sharply limited the ability of college students to sue their for-profit colleges when they are hoodwinked by aggressive and misleading college recruiters.
Here are the facts of the case as outlined by the California Court of Appeals for the Fourth Appellate District:
Bernadette Magno, Rosanna Garcia, and Sheree Rudio were Licensed Vocational Nurses (LVNs) in California who sought to become Registered Nurses. A recruiting representative for The College Network Incorporated (TCN) encouraged the three to enroll in TCN's partnership with Indiana State University (ISU) and California State University (CSU). The recruiter told them they could complete much of the necessary coursework for a B.S. degree in Nursing through ISU's distance-learning program and complete their clinical training with CSU.
Magno and her companions signed up for the program, but they found out later that ISU had suspended its LVN to B.S. nursing program. They sued TCN in a California court for violation of California consumer-protection laws. They alleged that TCN concealed important information and falsely represented that enrolling in the TCN program would qualify them to enter ISU's nursing program.
TCN responded to the suit by asking a California trial court to compel the plaintiffs to arbitrate their claims in accordance with an arbitration clause in the purchase agreement each of them had signed. That agreement required Magno and her co-plaintiffs to arbitrate their claims in Indiana before an arbitrator chosen by TCN.
Fortunately, the trial court denied TCN's request, and the trial court's decision was upheld on appeal. The appellate court acknowledged that arbitration clauses are generally favored as a way to settle disputes. Nevertheless, arbitration agreements will be struck down if they were both procedurally and substantively unconscionable.
The arbitration clause was procedurally unconscionable
As the court explained, an arbitration agreement is procedurally unconscionable if the weaker party lacks the ability to negotiate and has no meaningful choice but to sign the agreement or if the disadvantaged party was surprised by the arbitration clause.
In the California court's opinion, the arbitration clause was procedurally unconscionable
in both regards. "Plaintiffs were young, were rushed through the signing process, had no ability to negotiate, did not see the arbitration language 'buried on the back of the preprinted carbon paper forms,' and did not separately initial the arbitration clause."
Moreover, the plaintiffs testified that they were not sophisticated and that TCN's recruiter told them "how everything would be fine and to simply sign here and there." In addition, the recruiter told the plaintiffs they would get a discount if they signed right away. And the plaintiffs also testified that they were unaware of the arbitration clause until after they filed suit.
Based on this evidence, the appellate flatly court ruled that the arbitration clause was procedurally unconscionable. "The arbitration agreement is an adhesion contract; it lies within a standardized form drafted and imposed by a party with superior bargaining strength, leaving Plaintiffs with only the option of adhering to the contract or rejecting it."
The arbitration clause was substantively unconscionable
The court then looked at the language of the arbitration clause and found it to be substantively unconscionable as well because the clause was "unreasonably favorable to the more powerful party." First of all, the court pointed out, the clause required the plaintiffs, who were all California residents, to arbitrate their dispute with TCN in Indiana. This, in the court's view, was substantively unconscionable. After all, TCN solicited the plaintiffs' business in California, and plaintiffs would not have reasonably expected to be forced to arbitrate their disputes with TCN in Indiana.
Nor was the clause less pernicious because it permitted the plaintiffs to participate in the arbitration by phone or video. This forced Magno and her co-plaintiffs to "choose whether to incur significant expenses to pursue their claims in an unreasonable forum or to appear remotely, foregoing the ability to testify in person, while TCN, a company that solicited business in California, participates in proceedings in its own backyard."
Also unconscionable in the court's opinion was the provision that TCN got to unilaterally choose the arbitrator. Although plaintiffs were permitted to withhold their consent to TCN's choice so long as consent was "not unreasonably withheld," that did not alter the fact that TCN had the unilateral right to select the arbitrator.
Finally, the appellate court pointed out that the arbitration clause required the plaintiffs to present their claims within one year, while California consumer protection laws gave plaintiffs much longer to present their claims. In the court's opinion, this was yet another indication that the clause was substantively unconscionable.
Conclusion: The Magno opinion is a win for the good guys
Magno v. The College Network, Inc. is a win for the good guys. All over the United States, for-profit colleges have forced students to waive their right to file lawsuits for fraud or misrepresentation by forcing them to arbitrate their claims in forums generally more favorable to the colleges.
Not all of these arbitration clauses are as unfair as the one TCN was cramming down students' throats, but most are fundamentally unfair. The Magno decision is good ammunition for students who attended for-profit colleges and wish to sue the institutions they attended for fraud or misrepresentation under state consumer-protection laws.
Magno v. The College Network, Inc.. (Cal. Ct. App. 2016). Accessible at http://caselaw.findlaw.com/ca-court-of-appeal/1741812.html
U.S. Department of Education. U.S. Department of Education Takes Further Steps to Protect Students from Predatory Higher Education Institutions. March 11, 2016. Accessible at http://www.ed.gov/news/press-releases/us-department-education-takes-further-steps-protect-students-predatory-higher-education-institutions?utm_content=&utm_medium=email&utm_name=&utm_source=govdelivery&utm_term=
News Release. Apollo Education Group to Eliminate Mandatory Arbitration Clauses. May 19, 2016.
Accessible at http://phx.corporate-ir.net/phoenix.zhtml?c=79624&p=irol-newsArticle&ID=2169809