Wendel Rosen's Intellectual Property Blog

U.S. Dept. of Education Joins Tide Against Class-Action Waivers/Mandatory Arbitration

There’s been plenty of news regarding a recent trend that contract provisions precluding class actions and mandating arbitration may have hit their high water mark and appear to be receding. I recently wrote about this in an article entitled “Does the Ninth Circuit’s Ernst & Young Ruling Signal a Tipping Point; Is the Tide Turning Against Class-Action Waivers?

High Water Warning Sign

Photo By: Oregon Department of Transportation

In further news of this trend, the U.S. Department of Education just issued final regulations prohibiting participating schools “from using certain contractual provisions regarding dispute resolution processes, such as predispute arbitration agreements or class action waivers.”

A student/borrower seeking to avoid repaying his or her student loan “has a defense to repayment on a loan based on an act or omission of a school.” Prior to the Department of Education’s rule, such students were subject to contract provisions requiring that, even if there were thousands of similarly situated student/borrowers, each student/borrower had to arbitrate his or her dispute singly against his or her school, rather than in court or as a member of a larger class action.

College Student Class-Actions

There have been numerous student class-actions claiming that, particularly with for-profit schools, the schools have misrepresented their post-graduate placement rates ,  overcharged students for fees, and in one noted case involving one Donald J. Trump, overpromised but under delivered on revealing Mr. Trump’s secret real estate techniques as taught by Mr. Trump’s “hand picked” professors.

Affected Federal Loan Programs

The Department of Education’s rule applies to colleges or universities that participate in the Federal Perkins Loan Program, the Federal Family Educational Loan Program, the William D. Ford Federal Direct Loan Program, and the Teacher Education Assistance for College and Higher Education Grant program.

Department of Education Following in Consumer Financial Protection Bureau’s Footsteps

The Department of Education indicated that it was following the same logic as the Consumer Financial Protection Bureau’s recent decision to preclude similar provisions in consumer financial agreements. “The CFPB identified several features of class actions in the consumer financial services markets that we consider applicable to the postsecondary education market.”  (at pg. 54).

The Department of Education determined that its new rule was not preempted by the Federal Arbitration Act, (at pg. 57) finding that it “has clear authority to regulate the conduct of institutions that wish to participate in the Direct Loan Program. https://ifap.ed.gov/fregisters/attachments/FR061616BorrowerDefenseRepayment.pdf at 57.

It’s Anybody’s Guess Where the Next Assault on Class-Action Waivers/Mandatory Arbitrations Will Come From

So add student loan contracts to consumer financial contracts and employment contracts (at least in the Seventh and Ninth Circuits) to the list of contracts where class-action waivers/mandatory arbitration provisions may not be enforceable.

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