New Jersey Supreme Court strikes down an arbitration clause in Sanford Brown Institute's student-enrollment agreements: Another nail in the coffin for the for-profit college industry (Morgan v. Sanford Brown Institute)

Almost all for-profit colleges require their students to sign arbitration agreements as a condition of enrollment. In essence, students who sign arbitration agreements give up their right to sue the college they attend, even if they believe they have been victims of fraud or deceptive business practices.

Why do the for-profit colleges insist that students arbitrate their grievances instead of filing a lawsuit?  Several reasons.

First, most commentators agree that arbitration generally favors a corporate entity over a private party. Arbitrators make good money settling disputes, and they know they are likely to have future dealings with corporations such as for-profit colleges. Arbitrators do not want to get a reputation for being hard on for-profit colleges because they know that the for-profits will not choose them to arbitrate future disputes. Thus, their rulings may be more likely to favor a for-profit college over a humble student or at least to limit the amount of damages that might get awarded against a college engaged in wrongdoing.

Second, arbitration usually takes place in a private setting, and arbitrators' decisions are generally not made public. If a for-profit college loses an arbitration case, other potential plaintiffs are not likely to find out about it.

Finally, arbitration clauses generally preclude students from banding together and bringing class action suits against allegedly deceitful colleges, and these clauses often require student grievants to bring their arbitration disputes in a jurisdiction that favors the college.

The Department of Education has signaled that it disfavors the for-profits' practice of forcing students to give up their right to sue as a condition of enrollment, and it says it will draft regulations that will limit this practice. But DOE has not acted yet, and courts have generally upheld the validity of arbitration agreements when those clauses have been challenged.

But the courts may be changing their views. Recently, a California appellate court invalidated an arbitration clause signed by California students who had enrolled in a nursing program with an Indiana education provider.

And last June, in the case of Morgan v. Sanford Brown Institute, the New Jersey Supreme Court invalidated an arbitration clause that Sanford Brown Institute required students to sign. The students had enrolled in an ultrasound technician program, and they accused Sanford Brown of engaging in deceptive practices. Specifically, the students alleged that Sanford Brown had:

misrepresented the value of the school's ultrasound program and the quality of its instructors, instructed students on outdated equipment and with inadequate teaching materials, provided insufficient career-service counseling, and conveyed inaccurate information about Sanford brown's accreditation status.

The students also claimed that Sanford Brown had "employed high-pressure and deceptive business tactics that resulted in plaintiffs financing their education with high-interest loans, passing up the study of ultrasound at a reputable college, and losing career advancement opportunities."

 Sanford Brown asked a a New Jersey court to force the students to arbitrate their claims pursuant to the arbitration clause in the students' enrollment agreements. That clause, according to the New Jersey Supreme Court, consisted of "thirty-five unbroken lines of nine-point Times New Roman font, including this murky passage:

Agreement to Arbitrate--Any disputes, claims, or controversies between the parties to this Enrollment Agreement arising out of or relating to (i) this Enrollment Agreement; (ii) the Student's recruitment, enrollment, attendance, or education; (iii) financial aid or career service assistance by SBI; (iv) any claim, no matter how described, pleaded or styled, relating in any manner, to any act or omission regarding the Student's relationship with SBI, it employees, or with externship sites or their employees; or (v) any objection to arbitrability or the existence, scope, validity, construction, or enforceability of this Arbitration Agreement shall be resolved pursuant to this paragraph . . . . 

Ultimately, the New Jersey Supreme Court ruled in the case, and the court invalidated Sanford Brown's arbitration clause. In the court's view, the clause was not "written in plain language that would be clear and understandable to the average consumer that she is giving up the right to pursue relief in a judicial forum" [internal quotation marks and citations omitted].

"In summary," the court concluded, "the arbitration provision and purported delegation clause in Sanford Brown's enrollment agreement failed to explain in some sufficiently broad way or otherwise that that arbitration was a substitute for having disputes and legal claims resolved before a judge or jury." Without some minimal knowledge of the meaning of arbitration, the court ruled, the complaining students could not give informed assent to arbitration and to waiving their right to seek relief in a court.

The New Jersey Supreme Court's Morgan decision is a good decision for all students who have been wronged by a for-profit college. Following on the heels of a similar decision in California, the Morgan opinion drives another nail in the coffin of the for-profit college industry, which has protected itself from liability for deceptive and fraudulent practices by forcing their students to waive their right to sue. In New Jersey and California at least, students now have a better chance of getting their claims against allegedly deceptive for-profit colleges heard by a court. And if students are successful in their  cases and obtain substantial judgments against the colleges that wronged them, some of these colleges will be forced to close.

And that, in my opinion, would be a good development.

References

Magno v. The College Network, Inc.. (Cal. Ct. App. 2016). Accessible at http://caselaw.findlaw.com/ca-court-of-appeal/1741812.html

Morgan v. Sanford Brown Institute, 137 A.3d 1168 (N.J. 2016). Accessible at http://law.justia.com/cases/new-jersey/supreme-court/2016/a-31-14.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?

Yet another injustice: For-profit colleges force ripped-off students to arbitrate their claims rather than seek relief in the courts

The federal student loan program is a metaphorical train wreck--the wreck of a passenger train crowded with hapless commuters. The injured are strewn all over the landscape waiting to be treated.

The federal student loan program is a metaphorical train wreck.

If President Obama were a compassionate man, he would introduce legislation to assist the people who have been hurt by their participation in the federal student loan program. But he's not doing that. To extend the train-wreck metaphor further, Obama wants to close his eyes to the carnage on the railroad tracks and focus all his attention on designing a safer railroad car.

The President has done nothing to ease the plight of millions of young people who are burdened by student-loan debt and can't find decent jobs. Instead, he is pushing a college rating system that supposedly will help students make better choices about where to attend college. And he also wants more students to sign up for long-term student-loan repayment plans.

 

Of course, everyone knows that the most egregious student-loan abuses involve the for-profit colleges, which have been accused of high-pressure recruiting tactics and misrepresentations about students' job prospects. From time to time former students have sued for-profit colleges under state consumer protection laws, seeking damages based on claims that they'd been ripped off.

 

But the for-profits have figured out a clever way to stop lawsuits against them. Many of them force students to sign arbitration agreements when they enroll. Under these agreements, students waive their right to sue the college, even if they later believe they were induced to enroll based on misrepresentations. Instead, students are forced to submit their claims to arbitration, which most often benefits the college, not the student. More on this later.

Ferguson v. Corinthian Colleges: Students at for-profit colleges are denied right to a jury trial

Here's a recent example. In Ferguson v. Corinthian Colleges, Inc., decided last August by the Ninth Circuit Court of Appeals, Kevin Ferguson and Sandra Muniz, former students at schools operated by Corinthian Colleges, Inc., sought to bring a class action law suit against Corinthian based on alleged misrepresentations. These were their claims, as outlined by the court:

The thrust of [the former students'] complaint was that Corinthian systematically misled prospective students in order to entice enrollment. Corinth allegedly misrepresented the quality of its education, its accreditation, the career prospects for its graduates, and the actual cost of education at one of its schools. Students were also allegedly misinformed about financial aid, which resulted in student loans that many could not repay. Corinthian also allegedly targeted veterans and military personnel specifically, so that it could receive funding through federal financial aid programs available to those people.

Unfortunately for Ferguson and Muniz, both had signed arbitration agreements with Corinthian or one of its subsidiaries as part of the admission process. Under these agreements, they waived the right to sue Corinthian and agreed to arbitrate any claims under the Federal Arbitration Act (FAA).

When Ferguson and Muniz sued in federal court, Corinthian moved to dismiss their case on the grounds that they were compelled to arbitrate. A federal judge granted Corinthian's motion in part but allowed the former students to seek an injunction against Corinthian in federal court.

On appeal, the Ninth Circuit reversed, ruling that all claims against Corinthian must be arbitrated, including any request for injunctive relief. The Federal Arbitration Act "reflects an 'emphatic federal policy' in favor of arbitration," the court said. Under the Supremacy Clause of the United States Constitution, "the FAA preempts contrary state law" and prevents the states from allowing a party to go to court to resolve claims that the party had previously agreed to submit to arbitration.

Why is Ferguson v. Corinthian Colleges, Inc. a bad decision for students?

Why do the for-profits require students to sign arbitration agreements as a condition of enrolling? Forcing dissatisfied students to arbitrate their claims is advantageous to the corporate universities because students must pay a part of the arbitrator's cost, something many students can't afford to do. In addition, the for-profits prefer to go before an arbitrator rather than a jury, which might be quite sympathetic to a student's claim that he or she was induced to enroll in a for-profit college based on false promises and misrepresentations.

 

Moreover, arbitrators generally do not award punitive damages, their power to grant injunctive relief is limited if not non-existent, and an arbitrator's decision is usually private and not subject to public inspection. No wonder the for-profits require their students to sign agreements promising to arbitrate their complaints and not file lawsuits.

Congress should pass a law barring for-profit colleges from forcing students to sign arbitration agreements

Under the Federal Arbitration Act, as interpreted by the U.S. Supreme Court, states do not have the authority to allow ripped-off students to sue for-profit colleges under state consumer-protection laws if those students signed arbitration agreements, which many of them are forced to do as a condition of enrolling in a for-profit college. This is wrong.

 

President Obama should introduce legislation that prohibits for-profit colleges from forcing students to sign arbitration agreements and specifically permits students to sue for-profit colleges for fraud or misrepresentation under appropriate state consumer-protection laws. The legislation should give students the right to a jury trial, and prevailing students should receive attorney fees and punitive damages when appropriate.

 

Of course, President Obama will never introduce such legislation, and Congress would never pass it if he did. The for-profits are too politically powerful for such a law ever to be adopted.
 

Rather than tackle the abuses in the for-profit college industry, President Obama prefers to introduce a complicated and toothless rating system for colleges--a rating system that will do nothing to reduce the harm so many students suffer when they borrow money to attend a for-profit college or university.

References
 

Ferguson v. Corinthian Colleges, Inc., 733 F.3d 928 (9th Cir. 2013).

The Underemployed Law School Graduate With Massive Student-Loan Obligations: The Hedlund Bankruptcy Case

Almost 37 million people owe money on their college loans, and millions are in default or behind on their loan payments (Brown et al. 2012). Most overburdened student-loan debtors suffer their college-loan debt in silence, and the public is generally unaware of their plight. In a few cases, however, student-loan debtors file for bankruptcy, seeking a discharge from the loan obligations. Often the court decisions in these cases provide details of a particular student-loan debtor’s financial situation.  In particular, the Hedlund case (2012) provides a window into the world of the underemployed law-school graduate who is swamped by massive student-loan obligations.

A Young Man Borrows Money to Go to Law School But Can’t Pay Back the Loans

In the early 1990s, Michael Eric Hedlund borrowed more than $85,000 to go to law school. It must have seemed like a good idea at the time. Michael’s father and brother were attorneys, and he anticipated going to work in his father’s law firm.

Things did not work out as Michael hoped. After graduating from Willamette University’s law school in 1997, Michael took a job in the District Attorney’s office in Klamath Falls, Oregon. He planned to work there for a couple of years and then join his father’s law firm. Unfortunately, Michael failed the bar exam twice. Unable to practice law, he received several extensions on his loan obligations. He applied for a student-loan consolidation, but was told he was ineligible for consolidation because he was not current on his loan payments.

In 1999, Michael found a job as a juvenile counselor, which paid him about $40,000 a year.  His monthly loan payments were $800, which he did not pay regularly. In fact, he only made one loan payment.  In 2002, two loan creditors began garnishing his wages; and in May 2003, Michael filed for bankruptcy.

Michael’s bankruptcy proceedings stretched on for years. In fact, the original bankruptcy judge who presided over his case died before the case was resolved. In March 2012--nine years after Michael filed for bankruptcy, a federal district court ruled that Michael was not entitled to discharge his student loans in bankruptcy.  According Judge Ann Aiken, Michael was not entitled to bankruptcy relief because he had not made a good-faith effort to pay on his loans.

The Pathetic Plight of Many Law School Graduates

Although Judge Aiken rejected Michael’s plea to have his student loans discharged, she was not unsympathetic.  Judge Aiken pointed out that law school tuition rose more than three hundred percent between 1989 and 2009, which is twice the rate of inflation for that period and four times the rate of job growth. “Accordingly,” Judge Aiken observed, “with the exception of the independently wealthy, students must take out loans in order to finance their [law] degrees” (p. 907).

Meanwhile, as tuition costs keep going up, wages for beginning attorney are going down. Citing a report by the National Association for Law Placement, Judge Aiken pointed out that annual compensation for first-year associate attorneys in private practice went down in 2010.  In addition, the demand for new attorneys is shrinking. According to Judge Aiken, “The most recent statistics indicate that, through the year 2018, there will only be 25,000 openings for the law schools’ 45,000 new graduates each year” (p. 907).

In Judge Aiken’s opinion, “[T]he current higher education system is untenable and unsustainable; as a result, increasing numbers of students will be forced to file for bankruptcy” (p. 908). In the judge’s view, the student loan issue--she did not use the word “crisis”--needs to be addressed at a systematic level.

What is the Significance of the Hedlund Case?

Judge Aiken’s opinion in the Hedlund case paints a poignant picture of the plight of underemployed law-school graduate who borrowed heavily to attend law school.  As Judge Aiken pointed out, law school tuitions are now so high that most people must borrow money--a lot of money--to get a legal education. A few years ago, borrowing money to get a law degree was a good bet, but the demand for new lawyers is shrinking and salaries for beginning attorneys are going down.  Thousands of law school graduates are finding themselves underemployed in jobs outside the legal field and unable to pay back their student loans.  Obviously, this is a huge national problem, not only for law-school graduates, but for law schools and for the legal profession as well. 

Under federal bankruptcy law, student-loan debtors cannot discharge their student loans in bankruptcy unless they can show “undue hardship.”  Most law-school graduates are able to find some kind of employment and thus will not qualify for a bankruptcy discharge under this rigorous standard.  Mr. Hedlund, for example, found a non-legal job paying $about 40,000.

Nevertheless, most underemployed law school graduates who have massive student loans will be in dire economic circumstances.  Mr. Hedlund was obligated to pay $800 a month on his loans after he graduated, almost an impossible burden for someone making $40,000 a year.

Unable to discharge their student loans in bankruptcy, a lot of underemployed law-school graduates will be forced to apply for an Income-Based Repayment plan (IBR) in order to manage their loan obligations. Under an IBR, as modified by the Obama administration, debtors will obligate themselves to pay 10 percent of their discretionary income for a period of 20 years (White House, 2012).

Obviously, IBR plans are not an ideal solution for law-school graduates who can’t find well-paying jobs. Instead of beginning good careers practicing law, many graduates will wind up being long-term indentured servants to the government, forking over a percentage of their income over a 20-year period. If Michael Hedlund ultimately chooses the IBR option, he won’t be free of his law-school loan obligations until he is in his 60s.  Somehow, that does not seem fair.

References

Brown, M., Haughwout, A., Lee, D., & Mabutas, M. (2012). Grading student loans.  Federal Reserve Bank of New York.

Hedlund v. Educational Resources Institute, Inc., 468 B.R. 901 (D. Or. 2012).

White House, Office of Press Secretary (2012, June 6). Fact Sheet: Helping Americans manage student loan debt with improvements to repayment options. Retrieved from: http://www.whitehouse.gov/the-press-office/2012/06/06/fact-sheet-helping-americans-manage-student-loan-debt-improvements-repay