Arbitration agreements have long been favored by the courts, which traditionally have seen arbitration as an inexpensive alternative to lengthy, costly litigation. For years, courts have routinely upheld the enforceability of arbitration agreements and they have been exceedingly reluctant to overturn an arbitrator's decision.
But in recent years, courts in some states have become increasingly willing to invalidate an arbitration agreement when it is clear that the agreement contains terms that are unfair. Recently, the Hawai'i Supreme Court, in the case of Gabriel v. Island Pacific Academy, ruled that an arbitration agreement that blocked a teacher from suing her former employer was unconscionable.
Laura Gabriel filed suit in a Hawai'i state court, charging that Island Pacific Academy had retaliated against her for filing a sex discrimination complaint by refusing to hire her for the 2014-2015 school year. Gabriel had signed an arbitration agreement promising to settle disputes with her employer through arbitration, and Island Pacific asked the trial court to dismiss Gabriel's complaint and to force Gabriel to pursue her claims against the school through arbitration.
The trial court ruled that the arbitration agreement was enforceable except for one provision. The agreement required Gabriel to deposit one half of the estimated arbitration costs as a precondition to arbitration. This fee amounted to $10,200, which equaled one-third to one-fourth of Gabriel's annual salary. The trial judge ruled that this provision was unconscionable and ordered Island Pacific to pay all arbitration costs when Gabriel's claims were arbitrated.
Gabriel appealed, and the Hawai'i Supreme Court reversed. The supreme court agreed with the lower court that the arbitration agreement's fee-splitting provision was unconscionable but concluded that
unconscionable terms pervaded the whole agreement and thus the agreement should be invalidated in its entirety.
In addition to the fee-splitting provision, the Hawai'i Supreme Court identified another uunfair provision. The agreement required Gabriel to pay Island Pacific's total "damages, costs, expenses and attorney's fees" if she challenged the arbitration agreement in court even if she won her lawsuit. "This provision is plainly substantively unconscionable," Hawai'i's highest court ruled, "and must be stricken as well."
After the fee-splitting provision and the cost-shifting provision were struck from the agreement, the court pointed, the agreement only contained one sentence. Therefore, it was appropriate to invalidate the whole agreement and allow Gabriel to sue the school in court.
For-profit colleges force their students to agree not to sue them as a condition of enrollment
Although the Island Pacific lawsuit did not involve a postsecondary student, it may be relevant to college students who attend for-profit colleges. Many of these students signed arbitration agreements as a condition of enrollment and then discovered that they had been defrauded.
These students might be able to get those arbitration agreements invalidated in a state court on the grounds that the agreements are unconscionable. No doubt many of these agreements have cost-shifting and fee-splitting provisions like the Island Pacific agreement.
Last year, a California appellate court invalidated an arbitration agreement forced on students attending a for-profit program on the grounds of basic unfairness. Among other things, the agreement required California students to arbitrate their claims in Indiana.
Likewise, the New Jersey Supreme Court struck down an arbitration provision in a for-profit school's student-enrollment agreement simply because the clause was printed in very small type and was phrased in such murky language that students might not know they were giving up legal rights by signing the agreement.
Congress and the Department of Education are shielding fraudulent for-profit colleges from being sued
Although state courts seem increasingly inclined to strike down arbitration agreements that disfavor vulnerable parties, Congress and the Department of Education have acted counter to this judicial impulse.
For example, the Consumer Financial Protection Bureau recently tried to stop corporate entities from using arbitration agreements to block lawsuits against them. The CFPB adopted a rule that would have barred financial services institutions from requiring their customers to sign arbitration agreements.
But Congress--acting in the interest of corporations and not consumers--passed a law overturning the CFPB rule. In the Senate, the vote was tied at 50 to 50. Not a single Democratic senator voted for the bill and two Republican senators (Lindsay Graham of South Carolina and Louisiana's John Kennedy) voted against it. Vice President Mike Pence broke the tie by joining with Republican colleagues to trash the CFPB rule.
Likewise, the Obama administration's Department of Education drafted regulations that would have prevented for-profit colleges from forcing students to sign arbitration agreements. Obama's DOE was motivated by the conviction that arbitration agreements disfavored students in favor of for-profit colleges and prevented them from banding together to file class action suits.
Unfortunately, Betsy DeVos blocked those regulations, allowing sleazy for-profits to continue forcing students to sign arbitration agreements.
In the current political climate, it does not seem likely that Congress or the Department of Education will come to the aid of students who are being ripped off by for-profit colleges. It could be that state courts are more sympathetic to students who were forced to waive their right to sue. Students can challenge unfair arbitration agreements in court. Unfortunately, to do so, students will need good lawyers.
Donna Borak and Ted Barrett.Senate kills rule that made it easier to sue banks. CNN.com, October 25, 2017.
Richard Fossey. Why students need better protection from loan fraud. Chicago Tribune, August 25, 2017.
Gabriel v. Island Pacific Academy, Inc., 400 P.3d 526 (Hawai'i 2017).
Andrew Kreighbaum. Few Solutions for Defrauded Borrowers. Inside Higher Ed, June 26, 2017.
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).
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?