Publications

4 Apr 2011

Binding arbitration in student enrollment agreements is valid, two district courts say

Education Services Alert

Dennis M. Cariello
Mark A. Nadeau
Allison L. Kierman

In a compelling affirmation of the right of universities to enforce enrollment agreements containing arbitration and jury trial waiver provisions, two district courts recently held that efforts to set aside those provisions as unconscionable would fail.

An Illinois district court and a Utah district court recently enforced the arbitration and jury trial waiver provisions in the enrollment agreement that Corinthian College, a proprietary institution of higher education, requires its students to sign.  On March 25, 2011, the United States District Court for the Northern District of Illinois granted a motion brought by Corinthian College to compel 33 class action plaintiffs to arbitrate their disputes for deceptive marketing practices as individuals and stayed the proceedings before the district court.  On February 14, 2011, the United States District Court for the District of Utah granted the same motion and stayed the district court class action brought by three plaintiffs on behalf of themselves and others.

In reaching their decisions, both district courts found that the arbitration provision in Corinthian’s Enrollment Agreement was enforceable and was neither procedurally nor substantively unconscionable, and the courts denied the plaintiffs the right to pursue class action litigation and jury trials.

The complaints against Corinthian

The plaintiffs in Miller v. Corinthian Colleges, pending before the United States District Court for the District of Utah, and Montgomery v. Corinthian Colleges, pending before the United States District Court for the Northern District of Illinois, are current and former students of Everest College.  Everest College is a proprietary institution of higher education that is owned and operated by defendants Corinthian Colleges, Inc. and Corinthian Schools, Inc. (collectively, Corinthian).

The Miller plaintiffs brought suit on September 24, 2010, for violation of the Utah Consumer Sales Practices Act, fraudulent misrepresentation, negligent misrepresentation and declaratory judgment.  The Montgomery plaintiffs brought suit on November 23, 2010, for breach of contract, violation of the Illinois Consumer Fraud and Deceptive Business Practices Act and unjust enrichment.  Collectively, the plaintiffs alleged Corinthian had engaged in deceptive marking practices that induced thousands of students into pursuing an education that is of “little value” and did not fulfill Corinthian’s promises.

After suit was filed, Corinthian quickly moved to compel the plaintiffs to pursue individual arbitration of their claims pursuant to the enrollment agreement and addendum that most of the plaintiffs signed and initialed.

The arbitration provision, in relevant part, states:

Agreement to Binding Arbitration and Waiver of Jury Trial.

I agree that any dispute arising from my enrollment, no matter how described, pleaded, or styled, shall be resolved by binding arbitration under the Federal Arbitration Act conducted by the American Arbitration Association under its Consumer Rules.

Terms of Arbitration.

1.         Both I and the School irrevocably agree that any dispute between us shall be submitted to arbitration.

2.         Neither I nor the School shall file or maintain any lawsuit in any court against the other, and agree that any suit filed in violation of this Agreement shall be dismissed by the court in favor of an arbitration conducted pursuant to the Agreement.  Both I and the School agree that filing a court action will cause damage to the other party.  We agree that an appropriate measure of this damage includes costs and attorney’s fees actually incurred in compelling arbitration.  Such damages shall be paid by the party who has filed an action in court within 30 days of the court’s order compelling arbitration.

3.         The costs of the arbitration filing fee, arbitrator’s compensation and facilities fees shall be paid by the School, to the extent that the fees are greater than the applicable Court filing fee.  The School shall not be solely responsible for arbitration costs beyond those for an individual student’s claim.

4.         I agree not to combine or consolidate any Claims with those of other students, such as in a class or mass action.  I may opt out of this no-consolidation provision by delivering a written statement to that effect received by the School within 30 days of my first execution of an Enrollment Agreement with the School. 

5.         Any remedy available from a court under the law shall be available in the arbitration.

6.         Nothing in this Agreement prohibits me from filing a complaint with the state regulatory agency.

* * *

Acknowledgement of Waiver of Jury Trial and Availability of AAA Rules.

By my signature, I acknowledge that I understand that both I and the School are irrevocably waiving rights to trial by jury, and are selecting instead to submit any and all claims to the decision of an arbitrator instead of a court.  I understand that the award of the arbitrator will be binding and not merely advisory.

Both district courts upheld the validity of the arbitration provision in the enrollment agreement.

The enrollment agreement is neither procedurally nor substantively unconscionable

In both cases, the plaintiffs argued that the enrollment agreement, and the arbitration provision therein, is procedurally and substantively unconscionable.  Both courts disagreed.

The plaintiffs contended that the enrollment agreement was procedurally unconscionable because it is an adhesion contract, there is great disparity in the bargaining power between the parties, the agreement was presented on a “take it or leave it” basis, and the plaintiffs did not read or understand the agreement. 

The district courts agreed that there was some degree of procedural unconscionability at issue, but an insufficient amount to invalidate the arbitration provision.  Importantly, the Montgomery court stated: “Contracts like the ones at issue here are a fact of modern life even if the average consumer does not completely understand them.”  The Montgomery court went on to find that the arbitration provision is neither difficult to read nor hidden and plaintiffs are to be bound by the provision even if the plaintiffs did not actually read the provision.  The district courts also found compelling the fact that the plaintiffs could have opted out of the class action waiver.

As for substantive unconscionability, the Miller plaintiffs argued that individual arbitration is impractical, does not yield the relief the plaintiffs are seeking to prevent future harm and is a financial burden.  The Miller court disagreed because the arbitration provision provides that Corinthian is to bear the arbitrator’s expenses and allows for an award of any remedy available from a court under law.

The Montgomery plaintiffs argued that the enrollment agreement was substantively unconscionable because the only reasonable way for them to obtain relief would be through a class action.  Each plaintiff is seeking tuition reimbursement in the amount of $13,227, which the plaintiffs argued is insufficient for them to secure counsel individually. The defendants contended that courts have required plaintiffs to pursue their claims individually for lower amounts.  The Montgomery court agreed and found the enrollment agreement was not substantively unconscionable.

The enrollment agreement does not run afoul of the Utah Consumer Sales Practices Act

The Miller plaintiffs also argued that the arbitration provision of the enrollment agreement contravenes the Utah Consumer Sales Practices Act (UCSPA).  The UCSPA prohibits deceptive marketing and other consumer sales practices.  Among these deceptive acts include knowingly or intentionally adding “in any contract, receipt, or other written documentation of a consumer transaction, or any addendum to any contract, receipt, or other written documentation of a consumer transaction, any confession of judgment or any waiver of any of the rights to which a consumer is entitled under [the UCSPA].”  Utah Code Am1. § 13 11 4(2)(q) (emphasis added).

The UCSPA permits class action relief as follows: “Whether a consumer seeks or is entitled to record damages or has an adequate remedy at law, he may bring a class action for declaratory judgment, an injunction and appropriate ancillary relief against an action or practice that violates [the UCSPA].”  Id. § 13 11 4(2).  Further, the UCSPA states: “A consumer who suffers loss as a result of a violation of this chapter may bring a class action for the actual damages caused by an act or practice” if that act was prohibited by an administrative rule, judicial decision, or consent judgment.  Id. § 13 11 19(4)(a).

The UCSPA does not apply, however, to acts permitted by federal law, including arbitration agreements as they are permitted by the Federal Arbitration Act (FAA).  The Miller court specifically found that the FAA preempts any provision of the UCSPA.  The FAA provides that arbitration agreements “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”  9 U.S.C. § 2.

The Miller court found that the UCSPA applies to a narrow set of transactions – consumer transactions – not contracts generally and, thus, cannot bar arbitration agreements under the FAA.  As a result, the Miller court upheld the enforceability of the enrollment agreement’s arbitration provision.

Enforcement of the arbitration provisions a success for universities

The March 25 and February 14 Orders are a huge success for universities seeking to enforce and include arbitration provisions in their standard contracts.  The Miller and Montgomery decisions indicate that, in today’s modern world, courts are willing to bind individuals to contracts they sign, and the provisions therein, even if it is not clear that the individual has actually read the contract. 

Moving forward, it appears that courts will fully enforce university enrollment agreements and allow universities to avoid class actions and jury trials by including waiver provisions in their enrollment agreements. 

For more information about these decisions, please contact:

Dennis M. Cariello

Mark A. Nadeau

Allison L. Kierman