436 F.Supp.3d 333
D.D.C.2020Background
- In Nov. 2016 the Department of Education adopted Title IV borrower-defense reforms that, as a condition of participating in the William D. Ford Direct Loan program, required schools (via the Program Participation Agreement, PPA) not to rely on predispute arbitration agreements or class-action waivers with respect to "borrower defense" claims.
- "Borrower defense" claims include defenses to repayment or rights to recover payments based on school misconduct (e.g., breach of contract, substantial misrepresentation).
- The Department justified the PPA conditions in part by the Corinthian Colleges collapse, where widespread use of arbitration/class waivers frustrated publicity, enforcement, and recovery and led to multi‑million dollar taxpayer losses.
- CAPPS challenged only the PPA provisions banning reliance on predispute arbitration and class‑action waivers, arguing they (1) conflict with the Federal Arbitration Act (FAA), (2) exceed the Department’s authority under the Higher Education Act (HEA), and (3) are arbitrary and capricious under the Administrative Procedure Act (APA).
- The Department defended the provisions as permissible conditions on program participation aimed at protecting federal funds and the public fisc; the agency also relied on rulemaking record including experience with Corinthian and CFPB research.
- The Court granted summary judgment to the Department, denying CAPPS’s motion. The Court found no FAA preemption, held the HEA authority was sufficient, and rejected the APA challenge. (The Department later issued a 2019 rule rescinding these PPA conditions effective July 1, 2020, but that change did not moot this challenge.)
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the PPA conditions conflict with the FAA | CAPPS: FAA’s §2 and Supreme Court precedent embody an "equal treatment" rule that forbids federal rules or program conditions that disfavor arbitration, so the PPA is preempted. | DOE: The Rule does not invalidate arbitration clauses or change courts’ duty to enforce them; it imposes a condition on federal program participation to protect federal funds. FAA governs enforceability by courts, not agency contracting choices. | Court: PPA conditions are not preempted by the FAA; agency may attach reasonable participation conditions that do not purport to make arbitration agreements unenforceable. |
| Whether the HEA authorizes the Department to impose these PPA conditions | CAPPS: §1087d(a)(6) is an open‑ended catch‑all and cannot be read to displace the FAA absent a clear congressional command. | DOE: HEA expressly authorizes the Secretary to include PPA terms "necessary to protect the interests of the United States and to promote the purposes" of the program; that authority harmonizes with the FAA because the Rule does not invalidate arbitration agreements. | Court: HEA authority suffices to impose the PPA conditions and harmonizes with the FAA; no displacement required. |
| Whether the PPA conditions are arbitrary and capricious under the APA | CAPPS: DOE failed to consider benefits of arbitration, overstated benefits of class actions, relied improperly on CFPB study and failed to account for schools’ reliance interests and intervening Supreme Court precedent (Epic Systems). | DOE: The agency considered relevant empirical studies, its experience (notably Corinthian), effects on publicity/enforcement, allowed post‑dispute arbitration, and adequately explained its rationale and weighing of costs/benefits. | Court: DOE’s record‑based determination was not arbitrary or capricious; DOE adequately considered evidence, reliance interests, and policy tradeoffs. |
| Whether the PPA conditions are unlawfully coercive because schools are dependent on federal loans | CAPPS: The choice is illusory because schools rely on Direct Loan funds; conditioning participation thus coerces waiver of arbitration. | DOE: Conditioning participation in a voluntary federal program to protect federal funds is lawful; many entities accept program terms. | Court: No special constitutional rule bars reasonable conditions on program participation merely because entities depend on federal funds. |
Key Cases Cited
- Epic Systems Corp. v. Lewis, 138 S. Ct. 1612 (2018) (FAA enforces arbitration agreements; statutes touching same subject must be harmonized absent clear congressional intent to the contrary)
- AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011) (state rules that covertly disfavor arbitration are preempted by FAA)
- Kindred Nursing Centers Ltd. v. Clark, 137 S. Ct. 1421 (2017) (FAA requires equal treatment of arbitration agreements and displaces rules that single out arbitration for disfavor)
- Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1 (1983) (establishes liberal federal policy favoring arbitration)
- Motor Vehicle Mfrs. Ass'n v. State Farm, 463 U.S. 29 (1983) (APA review standard: agency must articulate rational connection between facts and choices)
- South Dakota v. Dole, 483 U.S. 203 (1987) (federal spending conditions must be related to program purpose)
- Chamber of Commerce v. Department of Labor, 885 F.3d 360 (5th Cir. 2018) (invalidated DOL rule conditioning regulatory relief on contract terms banning class waivers; distinguished by court here)
- FCC v. Fox Television Stations, Inc., 556 U.S. 502 (2009) (agency must acknowledge change in policy and explain reasons)