Wednesday, October 19, 2011

Private AG actions not subject to Concepcion rule on arbitration

Ferguson v. Corinthian Colleges, 2011 WL 4852339 (C.D. Cal.)

Plaintiffs Ferguson and Muñiz sued on behalf of two classes who enrolled in and/or attended class at one of Corinthian Colleges' academic institutions, Everest and Heald. They alleged that students believe that they will receive a quality education at an affordable price, “when, in fact, they pay some of the highest tuition rates in the country, incur crippling student loans, and graduate with a degree that never qualifies nor prepares them for any job placement other than low-wage, low-skill employment.” They brought a variety of California common-law and statutory claims.

Corinthian argued that arbitration of their claims was mandatory. Ferguson’s enrollment agreement stated:
By my signature, I acknowledge that I understand that both I and The School are irrevocably waiving rights to a 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. … 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 ("AAA") 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.
4. I agree not to combine or consolidate any Claims with those of other students, such as in a class or mass action.
Muñiz's enrollment agreements said:
Any dispute arising from enrollment at Heald College, no matter how described, pleaded or styled, shall be resolved by binding arbitration by a single, neutral arbitrator under the Federal Arbitration Act conducted by the American Arbitration Association ("AAA") at Davis, CA (student's city, state) under its Commercial Rules.... I acknowledge that I understand that both Heald College and I are waiving our rights to a trial by jury….
Both Student and the College irrevocably agree that any dispute between them shall be submitted to Arbitration.
Plaintiffs alleged fraudulent misrepresentation in inducements to enroll, including deception about federal financial aid, the true total cost of attending Corinthian’s programs, the value of its accreditations, and the employment prospects and career placement services plaintiffs could expect. Moreover, they alleged that if they knew that students attending Corinthian’s institutions defaulted on their student loans at alarming rates, they would not have enrolled in the first place.

Corinthian argued that these claims all fell squarely within the relevant arbitration agreements, which cover "any dispute arising from [my] enrollment ...." Plaintiffs responded that their claims centered around deceptive marketing practices and representations made to prospective students in order to induce their enrollment, well before plaintiffs signed their enrollment agreements.

The court began with the "liberal federal policy favoring arbitration," citing Concepción. Here, the language of the agreements was sufficiently broad to encompass the claims asserted in the complaints. A plaintiff's factual allegations need only "touch matters" covered by the contract containing the arbitration clause, with all doubts resolved in favor of arbitrability. While some of the claims, such as fraudulent inducement, rely, in part, on factual allegations occurring before plaintiffs signed the agreements, paid tuition, or attended their first class, enrollment, not just what happened before enrollment, is central to their claims. For example, plaintiffs alleged that enrollment advisors pressure students to enroll and direct that financial aid paperwork be completed so loans come due immediately, and that the advisors continue to make false statements about financial aid and career prospects after students are enrolled.

However, plaintiffs argued that arbitration clauses are “narrow,” and arbitration should be compelled only to disputes "relating to the interpretation and performance of the contract itself," quoting Tracer Research Corp. v. Nat'l Envtl. Servs. Co., 42 F.3d 1292, 1295 (9th Cir.1994). An arbitration clause using “arising out of” language should therefore cover only contract claims, in contrast to a clause covering disputes “arising from or relating to” the agreement. The Ninth Circuit recently reaffirmed this distinction, so that when a tort claim constitutes an independent wrong from any breach of the contract it doesn’t require contractual interpretation and isn’t arbitrable.

However, the relevant language here wasn’t limited to disputes arising under the agreement, instead using broader language such as "any dispute arising from my enrollment,” "any and all claims," "any dispute," "any dispute between us," and "any dispute between [the student and the School]," without reference to the agreements. Thus, each plaintiff’s claim had to go to individual arbitration, with the exception of certain claims.

Plaintiffs argued that they’d be unable to vindicate their statutory rights as private attorneys general if forced to arbitrate their UCL, FAL, and CLRA claims. They contended that the injunctive relief they sought on behalf of the general public (which hasn’t and couldn’t consented to arbitration) couldn’t be sent to arbitration. Corinthian argued that Concepción necessarily means that the FAA preempts California's rule exempting public injunctive relief claims from arbitration.

Nelson v. AT & T Mobility, LLC, No. C10-4802 TEH, 2011 WL 3651153 (N.D.Cal. Aug.18, 2011), accepted this reasoning. A state can’t require a procedure inconsistent with the FAA no matter how desirable that rule would be.

The court here disagreed. “The California Legislature's decision to allow citizens to bring injunctive relief claims under the CLRA, UCL and FAL on behalf of the public is not inconsistent with the FAA. Notwithstanding Concepción, the Supreme Court previously acknowledged that ‘not ... all controversies implicating statutory rights are suitable for arbitration’” (citing Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 627 (1985)). The California Supreme Court has held that "when the primary purpose and effect of a statutory remedy is not to compensate for an individual wrong but to prohibit and enjoin conduct injurious to the general public, i.e., when the plaintiff is acting authentically as a private attorney general, such a remedy may be inherently incompatible with arbitration." Individual plaintiffs don’t benefit from injunctive relief in consumer protection cases; the benefits accrue to the general public, making the CLRA plaintiff a bona fide private attorney general.

Though the capacity to withdraw statutory rights from the scope of arbitration agreements is generally a congressional prerogative, the Supreme Court has never held that a state legislature may not restrict a private arbitration agreement when it inherently conflicts with a public statutory purpose that transcends private interests. Moreover, the FAA’s legislative history doesn’t suggest any contemplation of suppressing private AG actions. While state law can’t prohibit outright the arbitration of a particular type of claim, some injunctive relief claims may not be arbitrable under this framework, which asks whether legal constraints external to the parties’ agreements foreclose arbitration of the claims. “Because Plaintiffs' injunctive relief claims seek to enforce a public right, there is an inherent conflict with sending these claims to an arbitrator.”

As the court explained,
Defendants have identified an easy source of credit in federal student loans, including Title IV federal financial aid as well as military tuition assistance programs such as the Post-9/11 GI Bill. Defendants exploit a vulnerable consumer population by encouraging students to borrow amounts they will never be able to pay back, let alone ever discharge in bankruptcy, ruining the students' financial future for life. Defendants are able to tap into this easy source of credit, realize significant profits, and pass all of the down-side credit risk on to the students. Not only are the students harmed, but since the loans are federally guaranteed, U.S. taxpayers subsidize this scheme at the expense of the students and for the benefit of Defendants' bottom line.… Legal constraints such as the inability of arbitrators to enter an injunction affecting nonparties, as well as the inability to oversee injunctive remedies designed to protect the public as a whole create an inherent conflict and make arbitration unsuitable in this case.
The rest of the claims were stayed pending arbitration, and the public injunctive relief claims proceeded.

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