The “borrower defense” final rule (Final Rule) issued by the Dept. of Education in November 2016 took effect at noon yesterday after Judge Randolph D. Moss of the D.C. federal district court refused to grant the renewed motion for a preliminary injunction filed by the California Association of Private Postsecondary Schools (CAPPS) seeking to preliminary enjoin the arbitration ban and class action waiver provisions in the Final Rule.  CAPPS had sought to block the provisions from taking effect pending the resolution of the lawsuit filed by CAPPS against the ED and Education Secretary Betsy DeVos to overturn the Final Rule.  Judge Moss found that CAPPS had filed to show that any of its members was likely to suffer an irreparable injury in the absence of an injunction.

Shortly before the Final Rule’s initial July 1, 2017 effective date, CAPPS filed a motion for a preliminary injunction to which the ED responded by issuing a stay of the Final Rule under Section 705 of the Administrative Procedure Act (APA).  The Section 705 stay was followed by the ED’s issuance of an interim final rule delaying the effective date until July 1, 2018 and the promulgation of a final rule further delaying the effective date until July 1, 2019 (Final Rule Delay).

On September 12, 2018, Judge Moss issued an opinion and order in Bauer v. DeVos, another case challenging the Final Rule in which he ruled that the ED’s rationale for issuing the Section 705 stay was arbitrary and capricious and that in issuing the Final Rule Delay, the ED had improperly invoked the good cause exception to the Higher Education Act’s negotiated rulemaking requirement.  The case consolidated two separate lawsuits filed after the ED’s issuance of the Section 705 stay, with one filed by two individual plaintiffs and the other by a coalition of nineteen states and the District of Columbia.  Both lawsuits were subsequently amended to challenge not only the Section 705 stay but also the other actions taken by the ED to delay the Final Rule’s effective date.  While Judge Moss vacated the Section 705 stay, he stayed the vacatur until 5 p.m. on October 12, 2018.

After the ED filed a notice with the court in June 2017 regarding its initial delay of the Final Rule’s effective date until July 1, 2018, CAPPS withdrew its motion for preliminary injunction.  Following the court’s decision in Bauer, CAPPS filed its renewed motion for a preliminary injunction.  In his decision denying CAPPS’ motion, Judge Moss stated that on October 12, the court extended the stay of the vacatur until noon on October 16.

The Final Rule broadly addresses the ability of a student to assert a school’s misconduct as a defense to repayment of a federal student loan.  It does not apply to private loans.  The Final Rule includes a ban on all pre-dispute arbitration agreements for borrower defense claims by schools receiving Title IV assistance under the Higher Education Act (HEA) and a new federal standard for evaluating borrower defenses to repayment of Direct Loans (i.e. federal student loans made by the ED).  Both mandatory and voluntary pre-dispute arbitration agreements are prohibited by the rule, whether or not they contain opt-out clauses, and schools are prohibited from relying on any pre-dispute arbitration or other agreement to block a borrower from asserting a borrower defense claim in a class action lawsuit until the court has denied class certification and the time for any interlocutory review has elapsed or the review has been resolved.  The prohibition applies retroactively to pre-dispute arbitration or other agreements addressing class actions entered into before July 1, 2017.

It would seem that because the Final Rule is now effective, the new federal standard it establishes for evaluating defenses to repayment would be applicable in actions seeking to collect on Direct Loans disbursed on or after July 1, 2017 or to recover amounts previously collected on such loans.  However, because the arbitration ban and class action provisions of the Final Rule are requirements with which a school must comply as a condition of receiving Title IV assistance, the ED presumably could waive such requirements (as well as other provisions subject to ED enforcement such as the actions and events in the Final Rule that can trigger a requirement for a school to provide a letter of credit or other financial protection to the ED to insure against future borrower defense claims and other liabilities to the ED.)

Earlier this week, Judge Randolph D. Moss of the D.C. federal district court heard oral argument on the renewed motion for a preliminary injunction filed by the California Association of Private Postsecondary Schools (CAPPS) seeking to preliminary enjoin the arbitration ban and class action waiver provisions in the “borrower defense” final rule (Final Rule) issued by the Dept. of Education in November 2016 pending the resolution of the lawsuit filed by CAPPS against the ED and Education Secretary Betsy DeVos to overturn the Final Rule.

Shortly before the Final Rule’s initial July 1, 2017 effective date, CAPPS filed a motion for a preliminary injunction to which the ED responded by issuing a stay of the Final Rule under Section 705 of the Administrative Procedure Act (APA).  The Section 705 stay was followed by the ED’s issuance of an interim final rule delaying the effective date until July 1, 2018 and the promulgation of a final rule further delaying the effective date until July 1, 2019 (Final Rule Delay).

On September 12, 2018, Judge Moss issued an opinion and order in Bauer v. DeVos, another case challenging the Final Rule in which he ruled that the ED’s rationale for issuing the Section 705 stay was arbitrary and capricious and that in issuing the Final Rule Delay, the ED had improperly invoked the good cause exception to the Higher Education Act’s negotiated rulemaking requirement.  The case consolidated two separate lawsuits filed after the ED’s issuance of the Section 705 stay, with one filed by two individual plaintiffs and the other by a coalition of nineteen states and the District of Columbia.  Both lawsuits were subsequently amended to challenge not only the Section 705 stay but also the other actions taken by the ED to delay the Final Rule’s effective date.  While Judge Moss vacated the Section 705 stay, he stayed the vacatur until 5 p.m. on October 12, 2018.

After the ED filed a notice with the court in June 2017 regarding its initial delay of the Final Rule’s effective date until July 1, 2018, CAPPS withdrew its motion for preliminary injunction.  Following the court’s decision in Bauer, CAPPS filed its renewed motion for a preliminary injunction.  Oral argument on the renewed motion was held on October 9, 2018.  According to a Politico report, Judge Moss, who was appointed by President Obama under whose administration the Final Rule was promulgated, was skeptical about arguments made by CAPPs that its member colleges would be irreparably harmed if the Final Rule took effect, questioning whether some potential harm to the schools was too speculative or premature for him to address.

The Final Rule broadly addresses the ability of a student to assert a school’s misconduct as a defense to repayment of a federal student loan.  It includes a ban on all pre-dispute arbitration agreements for borrower defense claims by schools receiving Title IV assistance under the Higher Education Act (HEA) and a new federal standard for evaluating borrower defenses to repayment of Direct Loans (i.e. federal student loans made by the ED).  Both mandatory and voluntary pre-dispute arbitration agreements are prohibited by the rule, whether or not they contain opt-out clauses, and schools are prohibited from relying on any pre-dispute arbitration or other agreement to block a borrower from asserting a borrower defense claim in a class action lawsuit until the court has denied class certification and the time for any interlocutory review has elapsed or the review has been resolved.  The prohibition applies retroactively to pre-dispute arbitration or other agreements addressing class actions entered into before July 1, 2017.

On August 31, 2018, following negotiated rulemaking, the ED published a notice of proposed rulemaking that would rescind the Final Rule and replace it with the “Institutional Accountability regulations” contained in the proposal.  Among the major changes to the Final Rule that would be made by the proposal is the removal of the Final Rule’s ban on the use of pre-dispute arbitration agreements and class action waivers.

As of now, Judge Moss’s ruling in Bauer creates the possibility that the Final Rule could become effective as soon as 5:00 p.m. tomorrow.  It seems likely that there will be further developments in the CAPPS litigation before that time.

 

According to a forthcoming article by Professors Andrea Chandrasekher and David Horton in the California Law Review, more consumers and their lawyers would take advantage of individual arbitration if states enacted non-waivable statutes allowing an arbitrator who awards a prevailing consumer fees and expenses under a fee-shifting statute to augment the award with an extra “bounty” for winning the arbitration.  Such laws, the authors argue, would create an incentive for consumers with small dollar claims to arbitrate rather than litigate, just as “bump-up” clauses used in some companies’ arbitration agreements guarantee the prevailing plaintiff a specific recovery even if the arbitrator’s award is less.  That would help produce more “repeat playing” plaintiff’s law firms to help level the playing field between individuals and “repeat playing” corporate law firms.  The authors assert that these state laws would not be subject to Federal Arbitration Act (FAA) preemption because they encourage arbitration rather than discriminate against it.

At first blush, this might look like a creative way to incentivize plaintiffs’ lawyers to abandon litigation and embrace arbitration, which the authors (correctly) applaud for its “speed and relative affordability.”  The authors, however, are not exactly pro-arbitration advocates.  They denigrate arbitration as a “pale substitute for class actions” and call their own bounty proposal “a second-best solution.”  Their preferred solution is that “Congress should ban class arbitration waivers.”  A skeptic might ask whether the article’s bounty proposal is an attempt to achieve payback for AT&T Mobility LLC v. Concepcion, which upheld the use of class action waivers in consumer arbitration agreements, and Congress’ repeal of the Consumer Financial Protection Bureau’s (CFPB’s) final arbitration rule last October, which would have prohibited the use of such waivers.  In fact, the article does refer to “arbitration entrepreneurs” who inundate the same company with hundreds or even thousands of individual arbitration demands, and it recognizes the potential for a “tsunami of frivolous arbitrations” if the proposed state legislation is enacted.

Although the article is replete with statistics and regression analyses, there is other data supporting the view that an extra bounty is not necessary to incentivize the increased use of consumer arbitration.  For example, the CFPB’s 735-page empirical study of consumer arbitration demonstrated that individual arbitration is far more beneficial to consumers than class action litigation.  Individuals in arbitration received an average recovery of nearly $5,400 (166 times the average putative class member’s recovery of $32.35). That should be incentive enough.  The real problem, as we have argued, is that the prior CFPB director refused to use any of the CFPB’s substantial funds to educate consumers on the benefits afforded by arbitration.

Moreover, the CFPB study dispelled the misconception that companies have an unfair advantage over consumers in arbitration.  The study concluded that while most of the arbitration proceedings it studied involved companies with repeat experience in the forum, that was counter-balanced by the fact that counsel for the consumers were also usually repeat players in arbitration.  Indeed, in 81% of the arbitrations in which consumers were awarded affirmative relief, the company was a “repeat player,” but the consumer prevailed anyway.

Finally, there is a strong argument that the FAA would preempt state laws requiring a bounty to be awarded to prevailing plaintiffs.  First, a central premise of the FAA is that arbitration agreements must be enforced as written, and state laws that interfere with those agreements should be preempted.  It is one thing if parties agree to an enhanced recovery under certain conditions.  It is quite another thing if state laws mandate additional payments to prevailing plaintiffs as a condition for enforcing the arbitration agreement.  Second, under the FAA arbitration agreements are to be treated the same as any other contract.  The imposition of an “arbitrator multiplier” would only affect arbitration agreements and, therefore, the proposed state laws would treat arbitration agreements differently from other contracts.  Third, to the extent that imposition of the bounty would result in abuses of the arbitral system by “arbitration entrepreneurs,” it would be hostile to arbitration and therefore preempted.

In sum, this proposal is too clever by half to garner industry support or pass muster under the FAA.

Having lost the battle to prohibit class action waivers in consumer arbitration agreements, consumer advocates have embarked on a new crusade.  Their new crusade is a misguided attempt to persuade the Securities and Exchange Commission (SEC) not to approve initial public offerings by companies whose corporate charters or bylaws require individual arbitration of shareholder disputes. They also argue that the amendment of existing charters or bylaws to add an individual arbitration requirement should not be permitted.

In a letter dated August 21, 2018, to SEC Chairman Jay Clayton, a coalition of 133 public advocacy groups called “Secure Our Savings” (SOS)—spearheaded by Paul Bland, Executive Director of Public Justice, a national nonprofit legal advocacy organization—argued that forcing allegedly defrauded shareholders to arbitrate their claims individually would eliminate the deterrent effect of class action shareholder lawsuits and the opportunity for investors to recover their losses.  According to the letter, “the issues in a typical case of financial fraud are too complex, and the costs of discovery and expert testimony are too high, for these claims to be dealt with effectively through individual arbitration.”

Moreover, the letter states, private securities class actions “serve as an essential supplement to Commission action.”  At the same time, the Consumer Federation of America, one of the signatories to the SEC letter, issued a report arguing that mandatory shareholder arbitration is against the law and the public interest.

If these arguments sound familiar, it is because they are recycled from the efforts of Public Justice and many of the other SOS participants to persuade the CFPB to prohibit class action waivers in consumer arbitration agreements.  Although the CFPB issued a final rule in July 2017 containing such a prohibition, Congress repealed the rule under the Congressional Review Act in October 2017—before the rule’s effective date.

As explained more fully in our legal alert, consumer advocates are likely to fail in this initiative because the securities laws are preempted by the Federal Arbitration Act and the underlying policy arguments made by consumer advocates are flawed.  Based on the legal authority we discuss, the SEC would have a solid legal and policy basis for permitting arbitration provisions with class action waivers to be used in corporate charters or bylaws.

An Executive Order issued by Washington Governor Jay Inslee on June 12, 2018 seeks to rebuff the U.S. Supreme Court’s ruling in Epic Systems LLC v. Lewis, 138 S. Ct. 1612 (May 21, 2018), by implementing new state procurement procedures that overtly discriminate against companies whose employment agreements contain arbitration provisions with class action waivers.  However, the Executive Order may be preempted by federal law.

Epic Systems held that class action waivers in employment arbitration agreements are valid and enforceable under the Federal Arbitration Act (FAA) and are not prohibited by the National Labor Relations Act.  Nevertheless, the Executive Order requires Washington State executive and cabinet agencies to “seek to contract with qualified entities and business owners that can demonstrate or will certify that their employees are not required to sign, as a condition of employment, mandatory individual arbitration clauses and class or collective action waivers.”

The preamble to the Executive Order makes clear that it is specifically targeted to avoid the application of Epic Systems.  It states that the “decision [Epic Systems] will inevitably result in an increased difficulty in holding employers accountable for widespread practices that harm workers,” that “collective power is a real force for change, as evidenced by the ‘Me Too’ movement” and, therefore, “it is incumbent on state agencies to make every effort to encourage and support employers who demonstrate that they value workers’ rights to collectively address workplace disputes.”  A statement by the Governor’s Office confirmed that the Executive Order is predicated on public policy considerations that are antithetical to Epic Systems:

In our state, we value companies that respect workers’ rights …. There is power in numbers.  There is power in transparency.  And there is power in our pocketbook to influence companies to do the right thing.  We can’t change the Supreme Court’s ruling but we can change how we do business.

The Executive Order states that it is effective “[t]o the extent permissible under state and federal law.”  Because the FAA preempts inconsistent state laws, the Executive Order may be preempted by federal law.  The FAA requires rigorous enforcement of arbitration agreements “‘according to their terms, including terms that specify with whom the parties choose to arbitrate their disputes and the rules under which that arbitration will be conducted.’”  Epic Systems, 138 S. Ct. at 1621, quoting American Express Co. v. Italian Colors Restaurant, 570 U.S. 228, 233 (2013).  As the Supreme Court held in AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 344  (2011):

States [cannot take steps that] … conflict with the FAA or frustrate its purpose to ensure that private arbitration agreements are enforced according to their terms …. States cannot require a procedure that is inconsistent with the FAA, even if it is desirable for unrelated reasons ….

The Executive Order is arguably preempted by federal law because it harnesses the economic power of Washington State to discriminate against companies that desire to enter into employment contracts containing arbitration agreements with class action waivers that the Epic Systems Court expressly declared to be lawful and enforceable in an opinion that is the law of the land.  Under substantive federal policy embodied in the FAA, states are forbidden from discriminating against arbitration or singling out arbitration agreements for special treatment.   See, e.g., Doctors’ Assoc., Inc. v. Casarotto, 517 U.S. 681, 687 (1996).  That could be the Achilles’ heel of the Executive Order, since it blatantly discriminates against certain companies based solely on the fact that their employment contracts contain arbitration agreements specifying “with whom the parties choose to arbitrate their disputes and the rules under which that arbitration will be conducted.”  In any event, we consider the Executive Order to be misguided since arbitration is more beneficial to individual employees than class action litigation.

The New York Education Department (NYED) has issued a ruling which states that the Bureau of Proprietary School Supervision (BPSS) will not permit an enrollment agreement, including an arbitration clause, to infringe on the Commissioner of Education’s or the NYED’s jurisdiction “to investigate schools and issue findings (whether or not a complaint is filed), to commence disciplinary action, or otherwise to issue any remedy, including with respect to the tuition reimbursement account, provided by the Education Law and the Commissioner’s regulations.”  BPSS regulates private career training schools.

The ruling further states that mandatory, pre-dispute arbitration will not be approved, regardless of whether a school receives financial aid under Title IV of the Higher Education Act because BPSS has determined that the use of arbitration clauses “would unreasonably undermine a student’s private right of action under New York’s Education Law §5003(8), which permits a ‘student injured by a violation of [Article 101 of the Education Law to] bring an action against the owner or operator of a licensed private career school for actual damages or one hundred dollars, whichever is greater.’”  The ruling includes conditions under which “permissive, post-dispute arbitration may be approved.”

In addition to covering enrollment agreements, the ruling would appear to apply to school financing arrangements offered by a career training school subject to BPSS’s jurisdiction.  Moreover, given the ruling, it also seems likely that BPSS would try to preclude a school from asserting rights under a mandatory, pre-dispute arbitration provision in a private loan note or credit agreement that finances a student’s education at the school.

In our view, NY’s effort is an exercise in futility since it is unlikely to survive a preemption challenge under the Federal Arbitration Act (FAA), which makes arbitration agreements “valid, irrevocable, and enforceable.”  See AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740, 1747, (2011) (“[w]hen state law prohibits outright the arbitration of a particular type of claim, the … conflicting rule is displaced by the FAA”).

 

 

The Department of Education, in an issue paper submitted as part of negotiated rulemaking on its final “borrower defense” rule, is proposing to require schools that use pre-dispute arbitration agreements and class action waivers in agreements with students to provide disclosures to students regarding their use of such agreements and waivers.

The ED’s proposed approach represents a reversal of the ED’s position under the Obama Administration.  In its final “borrower defense” rule issued in November 2016, the ED banned the use of pre-dispute arbitration agreements by schools receiving Title IV assistance under the Higher Education Act.  The final rule also prohibited a school from relying on such an agreement to block the assertion of a borrower defense claim in a class action lawsuit.

In November 2017, the ED announced that it was postponing “until further notice” the July 1, 2017 effective date of various provisions of the final rule, including the rule’s provisions banning the use of arbitration agreements and reliance on such agreements to block class claims.  At that time, the ED also announced that it planned to establish two negotiated rulemaking committees, with one committee to develop proposed regulations to revise the “borrower defense” rule and the other to develop proposed revisions to the “gainful employment” rule that became effective in July 2015 and includes requirements for schools to make various disclosures such as graduation rates, earnings of graduates, and student debt amounts. [link to blog]

 

The CFPB is scheduled to publish a notice in tomorrow’s Federal Register removing the agency’s final arbitration rule from the Code of Federal Regulations (CFR).  The rule was originally published in the Federal Register on July 19, 2017.  However, Congress disapproved the rule under the Congressional Review Act on October 24, 2017, and President Trump signed the joint resolution into law on November 1, 2017.  Subsequently, the CFPB posted a notice on its website that the arbitration rule “has no force or effect” and that the materials relating to the rule on the CFPB’s website “are for informational purposes only.”  Tomorrow’s notice will state the CFPB “is hereby removing the final rule titled Arbitration Agreements from the CFR.”

On November 29, 2017, from 12 p.m. to 1 p.m. ET, Ballard Spahr attorneys will hold a webinar, “Now that the CFPB’s Arbitration Rule is Dead, How Should the Industry React?”  For more information and a link to register, click here.

Two weeks after President Trump signed H.J. Res. 111, the joint resolution passed by the House and Senate disapproving the CFPB arbitration rule, the CFPB has formally acknowledged Congress’ override of the rule under the Congressional Review Act.  The following notice is now posted at the head of the section of the CFPB’s website dealing with the arbitration rule:

“On Nov. 1, 2017, the President signed a joint resolution passed by Congress disapproving the Arbitration Agreements
Rule under the Congressional Review Act (CRA).  Pursuant to the joint resolution, the Arbitration Agreements Rule has
no force or effect. The materials relating to the Arbitration Agreements Rule on the Bureau’s website are for informational
purposes only.”

This is a fitting epitaph for a rule that was misconceived from the outset.  We assume the CFPB will publish a similar notice removing the arbitration rule from the Code of Federal Regulations, although we have not seen such a notice yet.

On November 29, 2017, from 12 p.m. to 1 p.m. ET, Ballard Spahr attorneys will hold a webinar, “Now that the CFPB’s Arbitration Rule is Dead, How Should the Industry React?”  For more information and a link to register, click here.

The CFPB has issued its fifth Financial Literacy Annual Report to Congress.  The report describes the CFPB’s ongoing financial literacy work, “with an emphasis on work during October 2016 through September 2017.”  It covers the CFPB’s financial literacy strategy, its financial education initiatives generally and those specifically targeted at students and young adults, servicemembers, economically vulnerable individuals, and older adults, and its research initiatives.

An Appendix to the report provides a list and brief descriptions of the CFPB’s currently available financial education resources, which include web-based resources and tools, CFPB brochures, CFPB reports and white papers, and consumer advisories.

We have previously commented that the CFPB has not devoted any resources to educating consumers about arbitration.  Congress’ override of the CFPB’s arbitration rule means that the rule cannot be reissued in substantially the same form, nor can a new rule that is substantially the same be issued, unless the reissued or new rule is specifically authorized by a law enacted after the date of the resolution of disapproval.  Since many financial services companies can be expected to continue to use arbitration agreements, a strong need remains for consumers to be educated about arbitration.