Bakersfield College v. California Community College Athletic Association: Court Rules That Mandatory Arbitration Clause is Unconscionable

   In late October, a California appellate court ruled that a mandatory arbitration agreement imposed by the California Community College Athletic Association against a member college was unconscionable and therefore unenforceable. The court concluded that the agreement had been imposed by the Athletic Association against a weaker party that had no power to negotiate and thus was procedurally unconscionable. In addition, the language of the agreement favored the Athletic Association at the expense of member colleges and was substantially unconscionable as well.

Facts

Bakersfield College, a California community college, operates a varsity football program. In order to participate in intercollegiate football competition, the college is required to be a member of the California Community College Athletic Association (the Athletic Association) and to abide by the Athletic Association’s constitution and bylaws.

   The Athletic Association’s constitution authorizes the commissioner of the Southern California Football Association (the Football Association) to impose sanctions and penalties on member colleges.  The constitution also states that a member college that objects to a sanction or penalty may appeal the commissioner’s ruling in a process that ends in binding arbitration.

In May 2013, Bakersfield College was penalized and sanctioned for violating the Athletic Foundation’s bylaws because “the College had provided football players with meals and access to work and housing opportunities not available to others students.” The College appealed this decision through the appellate process outlined in the Athletic Association’s constitution, but it declined to submit to binding arbitration. Instead, Bakersfield filed suit against the Athletic Association and the Football Association for breach of contract and breach of the fair procedure doctrine

   The two Associations argued that Bakersfield had failed to exhaust its administrative remedies by foregoing the binding arbitration process. Bakersfield responded by arguing that it should be excused from participating in binding arbitration because the arbitration provision was unconscionable under California law.  A California trial court sided with the two defendant Associations and ruled that Bakersfield’s lawsuit was barred because the college had not exhausted its administrative remedies.

The California Court of Appeal (Third District) Decision

   On appeal, the California Court of Appeal (Third District) reversed the trial court’s decision. In the appellate court’s view, the challenged arbitration agreement was unconscionable under California law and could not be enforced.   

   The California Court of Appeal began its analysis by stating the law of unconscionability in California. “Unconscionability consists of both procedural and substantive elements,” the court explained.  The court then examined whether the arbitration provision in the Athletic Association’s constitution was procedurally unconscionable.  “When the weaker party is presented the [arbitration] clause and told to ‘take it or leave it’ without the opportunity for meaningful negotiation, oppression, and therefore procedural unconscionability,” the court stated.

   In the case before it, the court continued, “the College had no ability to individually negotiate the terms of the contract at the time it was made. It could not opt-out of the arbitration provision as drafted by the Athletic Association. The uncontroverted evidence supports a finding of procedural unconscionability.” As the court pointed out, Bakersfield had to accept the Athletic Association’s terms if it wanted to participate in intercollegiate athletics, a matter of considerable importance to the college and its students.  “To provide this opportunity to its students, the College had no other alternative -- it had to be a member of the Athletic Association.”

   The court went on to consider whether the arbitration provision was substantially unconscionable.  In making this assessment, the court stated, the paramount consideration is mutuality. “An arbitration agreement requires a ‘modicum of bilaterality,’ meaning the drafter cannot require another to submit to arbitration to pursue a claim but not accept the same limitation when it would act as the plaintiff, without some reasonable justification for such one-sidedness based on business realities.”   

   In assessing the Athletic Association’s arbitration provision, the California appellate court found no mutuality. “The binding arbitration procedure applies only to appeals by member colleges of penalty and sanctions decisions. It is not an alternative dispute procedure applied evenhandedly to all disputes between the parties.” In particular, the provision did not require the Athletic Association to submit its disputes with member colleges to binding arbitration, and thus the provision lacked mutuality.

   The court pointed out other elements of the arbitration agreement that disfavored member colleges.  For example, one subsection authorized the arbitration panel to award costs and attorney fees against a college if the Athletic Association prevailed in arbitration, but there was no parallel language that authorized the panel to award costs against the Association if the college prevailed.   

   The court was also troubled by the manner in which arbitration panel members were selected. Although colleges could nominate panel members, “in practice, the entire master list was solicited, and appointed, solely by the [Athletic Association’s] Executive Director, with no input from member colleges.” In fact, the court noted, “the Athletic Association unilaterally selected all individuals on the master arbitration panel list and did so in secrecy, precluding the colleges from commenting on or objecting to any potentially biased panel member.” Such a procedure, the court state, “does not achieve the minimum levels of integrity required to enforce an agreement to arbitrate.”

   In conclusion, the California Court of Appeal ruled the arbitration agreement that the Athletic Association sought to enforce was both procedurally and substantively unconscionable. “The arbitration agreement is therefore unenforceable,” the court summarized, “and the trial court erred in compelling arbitration of the College’s claims.”

Conclusion

   The court’s decision in the Bakersfield College case has important implications for students who attend for-profit colleges. These colleges typically force students to sign mandatory arbitration agreements as a condition of enrollment. A student has no power to negotiate with a for-profit college regarding arbitration provisions—which are offered on a “take it or leave it” basis. Based on the reasoning in the Bakersfield College case, such arbitration agreements are procedurally unconscionable.   

    Likewise, the terms of a for-profit college’s arbitration agreement may disadvantage students who wish to resolve complaints against their college. For example, in Magno v. College Network, Inc., an arbitration provision forced California students to arbitrate their disputes with a for-profit education provider in Indiana.  Such language, a California court ruled, disadvantaged students in a way that made the arbitration agreement substantively unconscionable and unenforceable.   

   Arbitration agreements have traditionally been favored by the courts. In Dicent v. Kaplan University, an appellate court recently forced a student to arbitrate her claim against a for-profit college rather than litigate. The Bakersfield College provision, which invalidated an arbitration provision as being procedurally and substantively unconscionable, provides strong support for students attending for-profit colleges who want to invalidate a for-profit college’s arbitration agreement and proceed directly to litigation.

References

Bakersfield Coll. v. Calif. Community Coll. Athletic Assoc., __ Cal.Rptr.3d --, 41 Cal.App.5th 753, 2019  WL 5616682 753 (2019).

Dicent v. Kaplan Univ., 758 Fed. Appx. 311 (3d Cir. 2019) (per curiam).

Magno v. College Network, Inc., 204 Cal.Rptr.3d 829332 Ed. Law Rep. 1028 (Cal. Ct. App. 2016). 

Note: A longer version of this article has been published in School Law Reporter, a publication of the Education Law Association.

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?