Arbitration Provisions in Enrollment Agreements Appear to be Safe in Light of Supreme Court Ruling
A recent ruling from the U.S. Supreme Court was lauded by employers for upholding the enforcement of arbitration agreements in employment contracts. An analysis of the ruling shows that it likely extends the same benefit to institutions of higher education on an issue of key importance in recent years: The ability of schools to include arbitration provisions in their enrollment agreements.
In this post, we’ll provide background on arbitration agreements, detail the U.S. Department of Education’s changing stance toward the provisions and provide five things schools should keep in mind as they review their enrollment agreements in light of the court’s ruling.
To enforce or not to enforce
The Federal Arbitration Act (FAA), as interpreted by the U.S. Supreme Court, provides that pre-dispute arbitration agreements are generally valid and enforceable. The FAA implements a strong federal policy favoring arbitration of disputes.
Many schools have taken advantage of the FAA and included provisions in their enrollment agreements that require arbitration of any disputes that might arise between them and their students. As compared to litigation, arbitration offers many advantages that can benefit both schools and students. Arbitration is usually cheaper and faster than litigation, involves simpler procedural and evidentiary rules, is more flexible as to discovery and hearings, allows schools and students to keep their disputes confidential, and permits schools to avoid class actions and limit their risk.
However, in 2016, the Department of Education issued a “borrower defense” rule that, among other things, banned schools from using or enforcing pre-dispute arbitration agreements with students. The Department’s ban on pre-dispute arbitration agreements, which was to take effect on July 1, 2017, seemed to run afoul of the FAA. Although the Department conceded that it did not have the authority to displace or diminish the effect of the FAA, it nevertheless asserted that it had implicit authority to ban pre-dispute arbitration agreements under 28 U.S.C. § 1087d(a)(6) of the Higher Education Act (HEA), which provides that a program participation agreement shall include, among other things, “such other provisions as the Secretary determines are necessary to protect the interests of the United States and to promote the purposes of this part.”
After the election of President Trump, the Department delayed the effective date of the new rule and indicated that it would issue a different rule that will allow schools to use pre-dispute arbitration agreements so long as they make certain disclosures to students. Of course, under a new administration, the Department could revert to its prior course and attempt to reinstate its ban on pre-dispute arbitration agreements. Fortunately for schools, a recent decision by the U.S. Supreme Court indicates that the Department cannot do so.
The NLRA and the HEA
In Epic Systems Corp. v. Lewis, the Supreme Court ruled that employment arbitration agreements that banned class action claims in arbitration were enforceable under the FAA notwithstanding the National Labor Relations Act (NLRA). The Supreme Court ruled that the NLRA does not displace the FAA and does not affect employment arbitration agreements because the NLRA does not contain a clear and manifest intent by Congress to have such an effect.
Like the NLRA, the HEA does not contain a clear and manifest congressional intention to displace the FAA; indeed, the HEA is silent about arbitration. Under the Supreme Court’s reasoning in Epic Systems, the Department likely lacks the authority under the HEA to override the FAA and ban pre-dispute arbitration agreements between schools and students.
What’s next for your arbitration provisions?
Even with the Supreme Court’s favorable precedents as to arbitration, there are several important considerations for schools that seek to require binding arbitration of disputes with their students.
- Get consent. Schools must ensure that they obtain a student’s assent to arbitration. An arbitration provision must be in a document, such as an enrollment agreement, so the school should ensure that there is no dispute that the student actually signed the document and had the opportunity to review the document before signing it. In that regard, wet-ink signatures may be preferable because it is easier to dispute the authenticity of electronic signatures (notwithstanding federal and state laws recognizing electronic signatures).
- Arbitration: It’s mutual. Arbitration agreements should be mutual and require both the student and the school to arbitrate any claims between them. Some courts may not enforce the arbitration agreement if the school reserves the right to sue a student.
- Course offerings change, but an arbitration agreement should not. Schools cannot retain the unilateral right to change the arbitration agreement because that could render the arbitration agreement illusory and unenforceable. In that regard, schools should be careful if their enrollment agreements incorporate school catalogs or other documents that are subject to revision from time to time. In that case, the enrollment agreement should clearly spell out that the arbitration provision is fixed and not subject to change regardless of any revisions to the school catalog or other incorporated documents.
- Consider footing the bill. Courts are more likely to enforce arbitration agreements if students are not required to pay significant expenses to arbitrate. Schools may want to consider agreeing to pay for arbitration filing fees and the compensation of the arbitrator.
- Waive class actions goodbye. One of the most significant advantages of arbitration is that schools can avoid class actions and require students to resolve their disputes on an individual basis. To obtain this benefit of arbitration, schools should be sure that their arbitration agreements clearly prohibit class action claims in arbitration.