Public Citizen, Inc. has sent a petition to the Department of Education requesting the Department to adopt a rule that requires schools to agree, as a condition of receiving Title IV assistance under the Higher Education Act (HEA), not to include pre-dispute arbitration agreements in enrollment or other agreements with students.

In the petition, Public Citizen argues that adoption of such a rule would be consistent with the Department’s authority under the HEA to establish standards for “administrative capability.”  Department regulations require a school’s Title IV contract (called a Program Participation Agreement (PPA)) to contain a commitment to comply with such standards.  Public Citizen wants the Department to include a school’s commitment not to use arbitration agreements in its “administrative capability” standards.  Public Citizen argues that the Department also has authority under the HEA to adopt the rule as a condition of a school’s participation in the Direct Loan Program.

Public Citizen further argues that the rule it seeks is “fully consistent” with the Federal Arbitration Act (FAA) because it would not make any pre-existing arbitration agreements unenforceable and would not bar enforcement of a future arbitration agreement that a school entered into in violation of its PPA with the Department.  According to Public Citizen, if a school violated its PPA in this way, the Department could take administrative action against it but the arbitration agreement would remain enforceable.

Among the rationales offered by Public Citizen for banning arbitration agreements is the use of class action waivers in such agreements.  Given that the CFPB will soon be releasing a proposed rule that is expected to prohibit the use of class action waivers in consumer arbitration agreements, any action by the Department on Public Citizen’s petition should await finalization of the CFPB’s rule.  Moreover, even the CFPB, after conducting the largest empirical study of consumer arbitration ever undertaken, has concluded that no basis exists for a complete ban on arbitration.

Public Citizen’s FAA argument overlooks the reality that putting a school at risk of an administrative action if it uses arbitration agreements creates a penalty that would impede the unencumbered right of parties to agree to arbitrate disputes provided by the FAA.  AT&T Mobility, LLC v. Concepcion, 131 S.Ct. 1740 (2011).  Under well-settled U.S. Supreme Court law, only Congress can create exceptions to the FAA. Compucredit Corp. v. Greenwood, 132 S.Ct. 665 (2012).