917 F. Supp. 2d 751
M.D. Tenn.2013Background
- Plaintiffs are current/former Daymar Institute students alleging false/misleading representations about the institution and job prospects.
- Defendants allegedly operate Daymar campuses in Tennessee and induced enrollment and loans.
- Plaintiffs filed a putative class action asserting state-law claims; arbitration clause and a Delegation Clause exist in Student Enrollment Agreements.
- Dean I/Dean II denied and then reconsidered the Motion to Compel Arbitration based on Kentucky cost-prohibitiveness under Schnuerle.
- Court finds the Kentucky cost-prohibitiveness defense preempted by the FAA and will enforce the Delegation Clause, staying the case pending arbitration.
- Defendants’ pending motions to dismiss and strike class allegations remain moot; equitable concerns about impoverished plaintiffs are noted.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether FAA preempts Kentucky cost-prohibitiveness defense | Dean II recognized cost-prohibitiveness under Kentucky law | Kentucky cost-prohibitiveness is a defense to arbitration | Yes, preempted; cost-prohibitiveness defense cannot bar delegation/arbitration |
| Whether cost-prohibitiveness applies to all contracts or only arbitration | Defense applies generally to vindicating rights | Defense is specific to arbitration | Preempted; defense is not applicable to ‘any’ contract under FAA |
| Whether the Delegation Clause should be enforced despite prior ruling | Arbitration should be avoided due to cost issues | Delegation Clause requires arbitration of arbitrability questions | Delegation Clause enforced; arbitrator will decide enforceability of arbitration clause |
| Whether the case should be stayed or dismissed | Case should proceed if arbitration won’t cover all claims | Stay appropriate pending arbitration | Stay granted pending arbitration; dismissal denied |
| Impact of Concepcion and Rent-A-Center on state-law defenses to arbitration | State-law defenses may apply | FAA preempts state-law defenses that target arbitration | Concepcion/Rent-A-Center support preemption of Kentucky cost-prohibitiveness defense |
Key Cases Cited
- Rent-A-Center W., Inc. v. Jackson, 130 S. Ct. 2772 (2010) (delegation clause; preemption and savings clause discussion under FAA)
- Concepcion, 563 U.S. 333 (2011) (FAA preempts state-law defenses that disfavor arbitration (class action waivers))
- Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614 (1985) (vindication of federal statutory rights in arbitration framework)
- Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991) (federal statutory rights; arbitration may be appropriate to vindicate them)
- Green Tree Fin. Corp.-Al. v. Randolph, 531 U.S. 79 (2000) (costs may deter vindication of federal rights in arbitration)
- Stutler v. TK Constructors, Inc., 448 F.3d 343 (2006) (discussed cost-prohibitiveness vs. Kentucky law defense; preemption concerns)
- Schnuerle v. Insight Communications Co., L.P., 376 S.W.3d 561 (2012) (Kentucky cost-prohibitiveness defense potentially recognized under state law; preemption concerns)