Case Information
UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA CALIFORNIA ASSOCIATION OF
PRIVATE POSTSECONDARY SCHOOLS,
Plaintiff , v. Civil Action No. 17-999 (RDM) ELISABETH DeVOS, Secretary of
Education, et al.
Defendants. MEMORANDUM OPINION
The California Association of Private Postsecondary Schools (“CAPPS”) challenges
regulations promulgated by the Department of Education (“the Department”) in November 2016
to address perceived deficiencies in the William D. Ford Federal Direct Loan (“Direct Loan”)
program.
See
Dkt. 82; Student Assistance General Provisions, Federal Perkins Loan Program,
Federal Family Education Loan Program, William D. Ford Federal Direct Loan Program, and
Teacher Education Assistance for College and Higher Education Grant Program, 81 Fed. Reg.
75,296 (Nov. 1, 2016) (codified in scattered sections of 34 C.F.R.) (“the 2016 Rule” or “the
Rule”). Although CAPPS originally sought to invalidate the 2016 Rule in its entirety, the Court
previously held that CAPPS lacked standing to pursue most of its claims.
See Cal. Ass’n of
Private Postsecondary Schs. v. DeVos
,
Both of the challenged provisions are found in the portion of the Rule that defines the terms of the “program participation agreement”—or “PPA”—that all institutions of higher education must enter into with the Secretary of Education (“the Secretary”) before participating in the Direct Loan program. The first of these terms requires participating schools to agree not to “seek to rely in any way on a predispute . . . agreement with a student who has obtained or benefited from a Direct Loan” that would preclude the student from joining a class action “that is related to” a “borrower defense claim.” 34 C.F.R. § 685.300(e). The second term requires participating schools “not to enter into a predispute agreement to arbitrate a borrower defense claim, or rely in any way on a predispute arbitration agreement with respect to any aspect of a borrower defense claim.” § 685.300(f). A “borrower defense claim,” in turn, is a claim that a student borrower has or could assert as a defense to repayment of a loan to the Secretary (or as a basis to seek recovery of an amount already paid to the Secretary) and includes claims that the participating institution of higher education breached a contractual obligation to the student or made a “substantial misrepresentation” to the student. Id . § 685.300(i)(1); id. § 685.222.
CAPPS moves for summary judgment seeking to invalidate these provisions on three grounds. It argues that (1) they conflict with the Federal Arbitration Act (“FAA”), 9 U.S.C. § 1, et seq. ; (2) they were promulgated in excess of the Department’s statutory authority; and (3) they are arbitrary and capricious, in violation of the Administrative Procedure Act (“APA”), 5 U.S.C. § 706(2)(A). See Dkt. 83-1 at 7–8. The Department of Education opposes CAPPS’s motion and cross-moves for summary judgment. Dkt. 94. For the reasons explained below, the Court concludes that the Department has the better of the arguments and will, according, grant summary judgment in its favor.
I. BACKGROUND
A. Factual and Regulatory Background
In 1993, Congress amended Title IV of the Higher Education Act (“HEA”), 20 U.S.C. § 1001 et seq ., to allow eligible students who attend “participating institutions of higher education” to obtain loans directly from the federal government in order to finance their postsecondary educations. See Student Loan Reform Act of 1993, Pub. L. No. 103-66, 107 Stat. 341 (codified at 20 U.S.C. §§ 1087a–1087h); 20 U.S.C. § 1087a(a). To qualify as a “participating institution” under this program—known as the William D. Ford Federal Direct Loan program—an “institution of higher education” must enter into an agreement with the Secretary of Education that, among other things, “provide[s] for the establishment and maintenance of a direct student loan program at the institution;” “provide[s] that the institution accepts responsibility and financial liability stemming from its failure to perform its functions pursuant to the agreement;” and “include[s] such other provisions as the Secretary determines are necessary to protect the interests of the United States and to promote the purposes of” the Direct Loan program. Id . § 1087d; 34 C.F.R. § 685.100(a) (noting that the Direct Loan program is known as the William D. Ford Direct Loan Program). “No institution of higher education,” however, has “a right to participate in the [Direct Loan] programs authorized under [part D of Title IV of the HEA].” 20 U.S.C. § 1087b(b). The statute further directs the Secretary to “specify in regulations which acts or omissions of an institution of higher education a borrower may assert as a defense to repayment of a” Direct Loan. § 1087e(h).
Pursuant to these authorities, the Secretary issued “standards, criteria, and procedures governing the Federal Direct Student Loan . . . program” in January 1994. Federal Direct Student Loan Program, 59 Fed. Reg. 472, 472 (Jan. 4, 1994). Those standards included the first iteration of the “borrower defense rule,” which permitted Direct Loan borrowers to “assert as a defense against repayment of the loan” to the Department “a claim based on the act or omission of the school” the borrower attended, if (1) the act or omission gave rise to a cause of action against the school under state law, (2) the borrower presented “the claim to the school and received no satisfaction,” and (3) the borrower filed a timely claim with the Department. Id . at 481. The Secretary did not specify any other defenses to repayment, nor did he set forth any procedure by which the Department would adjudicate assertions of defenses to repayment. See id.
In December 1994, the Secretary issued revised regulations. See William D. Ford Federal Direct Loan Program, 59 Fed. Reg. 61,664 (Dec. 1, 1994) (codified at 34 C.F.R. Part 685 (1995 version)). Under the new regulations, borrowers were permitted to “assert as a defense against repayment” of a Direct Loan “any act or omission of the school attended by the student that would give rise to a cause of action against the school under applicable State law.” 34 C.F.R. § 685.206(c)(1) (1995 version). “If the borrower’s defense against repayment [was] successful, the Secretary [was required to] notif[y] the borrower that [she was] relieved of the obligation to repay all or part of the loan and associated costs and fees that the borrower [was] otherwise obligated to pay.” Id. § 685.206(c)(2) (1995 version). The Secretary could also reimburse “the borrower for amounts paid toward the loan voluntarily or through enforced collection.” Id. To recover these losses, the regulations authorized the Secretary to “initiate an appropriate proceeding to require the school whose act or omission resulted in the borrower’s successful defense against repayment of a Direct Loan to pay the Secretary the amount of the loan to which the defense applie[d].” § 685.206(c)(3) (1995 version). These regulations remained in effect, without alteration, for more than twenty years.
The adequacy of this regulatory regime was put to the test in May 2015 by “the collapse of Corinthian Colleges,” a “publicly traded company operating numerous postsecondary schools that enrolled over 70,000 students at more than 100 campuses nationwide.” Student Assistance General Provisions, Federal Perkins Loan Program, Federal Family Education Loan Program, William D. Ford Federal Direct Loan Program, and Teacher Education Assistance for College and Higher Education Grant Program, 81 Fed. Reg. 39,330, 39,335 (June 16, 2016) (to be codified in scattered sections of 34 CFR). According to the Department, “[g]overnment investigations established that Corinthian [Colleges] had for years engaged in widespread misrepresentations and other abusive conduct.” Id. at 39,382. As the Department further explained:
In April 2015, the Department levied a $30 million fine against Heald, a chain owned by Corinthian, for misrepresenting its placement rates, but several days later, Heald and the remaining Corinthian-owned schools closed, and Corinthian filed for bankruptcy relief. The State of California sued Corinthian in September 2013, and obtained a $1.1 billion judgment against the company only in March 2016, after the company had filed for bankruptcy relief. The [Consumer Financial Protection Board (“CFPB”)] sued Corinthian in September 2014, and obtained a $531 million judgment against the company only in October 2015— well after Corinthian had become insolvent and filed in bankruptcy. None of these government actions actually achieved affirmative recovery for Corinthian Direct Loan borrowers.
Id. at 39,382–83. Although two groups of Corinthian students had sought to bring class action lawsuits prior to the company’s collapse and although other students had attempted to bring individual suits, courts held that those actions were barred by arbitration clauses included in the Corinthian enrollment agreements. at 39,383.
Following Corinthian’s collapse, thousands of former Corinthian students applied for
loan relief pursuant to the Department’s borrower defense regulations.
In light of the fallout from Corinthian’s collapse, the Department initiated a rulemaking
to address perceived deficiencies in the borrower defense regulations. Pursuant to the HEA, the
Department began by “obtain[ing] the advice of and recommendations from individuals and
representatives of the groups involved in student financial assistance programs under [Title IV of
the HEA], such as students, legal assistance organizations that represent students, institutions of
higher education, State student grant agencies, guaranty agencies, lenders, secondary markets,
loan servicers, guaranty agency servicers, and collection agencies.” 20 U.S.C. § 1098a(a)(1).
After doing so, the Department published a notice of intent to engage in a negotiated rulemaking,
selected a negotiated rulemaking committee, and held a series of committee meetings in early
2016.
Of particular relevance here, the Department proposed amendments to the regulation governing the terms of the program participation agreement, which participating institutions must agree to before their students may receive Direct Loans. Id. at 39,380–86. Most notably, the Department proposed amending the PPA to require institutions to agree, as a condition of participation in the Direct Loan program, to forego “the use of class action waivers” and “the use of mandatory pre-dispute arbitration” clauses in their enrollment agreements. Id. at 39,380. The Department reasoned that class action waivers and predispute arbitration agreements are inconsistent with the aims of the Direct Loan program because they (1) “[a]ffect whether institutions are held accountable for acts and omissions that give rise to borrower defense claims;” (2) “[m]ake it more likely that the costs of losses from those actions or omissions will be passed on to the taxpayer;” (3) “[r]educe the incentive for institutions to engage in fair and ethical business practices;” and (4) “[f]rustrate or reduce the effectiveness of the Department’s proposed processes for submitting and determining the validity of borrower defense claims.” Id. Both the public and the negotiators were invited to comment on these proposed rules before they were made final. at 39,334.
After receiving over 50,000 comments, the Department published final regulations
governing the Direct Loan Program on November 1, 2016.
(b) Judgment against the school. The borrower has a borrower defense if the borrower, whether as an individual or as a member of a class, or a governmental agency, has obtained against the school a nondefault, favorable contested judgment based on State or Federal law in a court or administrative tribunal of competent jurisdiction. . . .
(c) Breach of contract by the school. The borrower has a borrower defense if the school the borrower received the Direct Loan to attend failed to perform its obligations under the terms of a contract with the student. . . .
(d) Substantial misrepresentation by the school. (1) A borrower has a borrower defense if the school or any of its representatives, or any institution, organization, or person with whom the school has an agreement to provide educational programs, or to provide marketing, advertising, recruiting, or admissions services, made a substantial misrepresentation . . . that the borrower reasonably relied on to the borrower’s detriment when the borrower decided to attend, or to continue attending, the school or decided to take out a Direct Loan.
Id. at 76,083 (quoting proposed 34 C.F.R. § 685.222(b)–(d)). If relief is granted under these new rules, “the borrower is deemed to have assigned to, and [to have] relinquished in favor of, the Secretary any right to a loan refund (up to the amount discharged) that the borrower may have by contract or applicable law with respect to the loan or the contract for educational services for which the loan was received, against the school, its principals, its affiliates, and their successors, its sureties, and any private fund.” at 76,086 (quoting proposed 34 § C.F.R. 685.222(k)(1)).
In the final rule, the Department also adopted the proposed provisions concerning predispute arbitration and class action waivers. Specifically, the Department added the following two new conditions to the PPA:
(e) Class action bans .
(1) The school will not seek to rely in any way on a predispute arbitration agreement or on any other predispute agreement with a student who has obtained or benefited from a Direct Loan, with respect to any aspect of a class action that is related to a borrower defense claim, including to seek a stay or dismissal of particular claims or the entire action, unless and until the presiding court has ruled that the case may not proceed as a class action and, if that ruling may be subject to appellate review on an interlocutory basis, the time to seek such review has elapsed or the review has been resolved.
(2) Reliance on a predispute arbitration agreement, or on any other predispute agreement, with a student, with respect to any aspect of a class action includes, but is not limited to, any of the following:
(i) Seeking dismissal, deferral, or stay of any aspect of a class action.
(ii) Seeking to exclude a person or persons from a class in a class action.
(iii) Objecting to or seeking a protective order intended to avoid responding to discovery in a class action.
(iv) Filing a claim in arbitration against a student who has filed a claim on the same issue in a class action.
(v) Filing a claim in arbitration against a student who has filed a claim on the same issue in a class action after the trial court has denied a motion to certify the class but before an appellate court has ruled on an interlocutory appeal of that motion, if the time to seek such an appeal has not elapsed or the appeal has not been resolved.
(vi) Filing a claim in arbitration against a student who has filed a claim on the same issue in a class action after the trial court in that class action has granted a motion to dismiss the claim and, in doing so, the court noted that the consumer has leave to refile the claim on a class basis, if the time to refile the claim has not elapsed. . . .
(f) Predispute arbitration agreements .
(1) (i) The school will not enter into a predispute agreement to arbitrate a borrower defense claim, or rely in any way on a predispute arbitration agreement with respect to any aspect of a borrower defense claim.
(ii) A student may enter into a voluntary post-dispute arbitration agreement with a school to arbitrate a borrower defense claim. (2) Reliance on a predispute arbitration agreement with a student with respect to any aspect of a borrower defense claim includes, but is not limited to, any of the following: (i) Seeking dismissal, deferral, or stay of any aspect of a judicial action filed by the student, including joinder with others in an action;
(ii) Objecting to or seeking a protective order intended to avoid responding to discovery in a judicial action filed by the student; and
(iii) Filing a claim in arbitration against a student who has filed a suit on the same claim. at 76,087–88 (quoting proposed 34 C.F.R. § 685.300(b)(11) & (e)–(f)).
“Borrower defense claims” are defined, for purposes of this section, as claims arising out of:
an act or omission of the school attended by the student that relates to the making of a Direct Loan for enrollment at the school or the provision of educational services for which the loan was provided, and includes one or both of the following:
(i) A defense to repayment of amounts owed to the Secretary on a Direct Loan, in whole or in part; and
(ii) A right to recover amounts previously collected by the Secretary on the Direct Loan, in whole or in part.
34 C.F.R. §§ 685.222(a)(5), 685.300(i)(1);
see also
Although these regulations are currently in effect, on September 23, 2019, the Department issued a final rule rescinding the predispute class action and arbitration waiver conditions, effective July 1, 2020. Student Assistance General Provisions, Federal Family Education Loan Program, and William D. Ford Federal Direct Loan Program, 84 Fed. Reg. 49,788 (Sept. 23, 2019). In explaining its rationale for rescinding these conditions, the Department reaffirmed its view that “the HEA grants the Department legal authority and wide discretion to place conditions upon receipt of title IV funds,” including the authority to restrict and prohibit the use of predispute arbitration agreements and class action waivers. Id. at 49,839. But, while affirming its authority, the Department decided to make a “policy shift” in favor of the “liberal federal policy favoring arbitration agreements” and thus rescinded the provisions at issue in this proceeding. Id. (quotations omitted) Because the September 2019 rule will not take effect until July 1, 2020, however, the parties maintain—and the Court agrees—that CAPPS’s challenge to the 2016 Rule is not moot. See Dkt. 107.
B. Procedural History
CAPPS filed this lawsuit on May 24, 2017 challenging four aspects of the regulations, including the predispute arbitration and class action waiver conditions. See Dkt. 1 at 69 – 75 (Compl. ¶¶ 202–41). CAPPS sought to enjoin the Department “from implementing, applying, or taking any action whatsoever pursuant to the final regulations,” and sought vacatur of the entire rule. at 75 (Compl. ¶ 242).
A little over a week later, on June 2, 2017, CAPPS filed a motion for preliminary injunction, seeking only to enjoin implementation of the arbitration and class action waiver conditions. Dkt. 6 at 1. While that motion was pending, the Department announced that it planned to stay the implementation of the entirety of the 2016 Rule pursuant to 5 U.S.C. § 705. See Dtk. 20. Two individuals—Megan Bauer and Stephano Del Rose—alongside eight states and the District of Columbia moved to intervene to defend the 2016 Rule. See Dkt. 16, 22. Those intervenors also each filed separate lawsuits, also in this Court, challenging the Department’s stay order as unlawful under the APA. See Bauer v. DeVos , No. 17-1330 (filed D.D.C. July 6, 2017); Massachusetts v. Dep’t of Educ. , No. 17-1331 (filed D.D.C. July 6. 2017). The Court stayed the CAPPS litigation while the Bauer parties litigated the legality of the Department’s stay order. See Minute Entry (March 1, 2018).
On September 12, 2018, the Court held that the stay of the 2016 Rule pursuant to § 705
was unlawful.
See Bauer v. DeVos
,
On September 22, 2018, CAPPS renewed its motion for preliminary injunction, this time
seeking to enjoin the entirety of the 2016 rule, not merely the arbitration and class action waiver
conditions. Dkt. 65. The Court denied the motion for a preliminary injunction, finding that
CAPPS had not established irreparable injury with respect to those conditions and had shown
neither irreparable injury nor the requisite likelihood of success with respect to standing for the
other provisions CAPPS sought to enjoin.
See CAPPS
,
At the same time that CAPPS renewed its motion for a preliminary injunction, it also moved for reconsideration of this Court’s decision to permit Bauer and Del Rose to intervene in defense of the 2016 Rule in this case. Dkt. 64. CAPPS alerted the Court to the fact that the educational institution against which Bauer and Del Rose sought to bring a class action—a class action that would be precluded unless the arbitration and class action waiver conditions went into effect—had filed for bankruptcy, thus barring their claims for reasons independent of the legal effect of the 2016 Rule. See Dkt. 64 at 12–13. The Court held that, because Bauer and Del Rose had pending borrower defense applications before the Department, and thus would have benefited from other portions of the 2016 Rule that CAPPS had challenged, the intervenors had standing to intervene at the time the Court granted their motion for leave to intervene and, accordingly, denied the motion. See Dkt. 108 at 13. However, because CAPPS subsequently amended its complaint to challenge only the arbitration and class action waiver conditions, id. at 13–14, the Court ordered the intervenors to show cause why, at that juncture, their status as intervenors should not be revoked and that they be treated, like the States, as amici, see Dkt. 63 at 40, 53–54. In response to that order to show cause, the intervenors conceded they lacked standing. Dkt. 109. The Court accordingly ordered that Bauer and Del Rose were no longer intervenors in the case and explained that it would consider their prior submissions to be briefs by amici curiae. Minute Order (Jan. 31, 2020).
While that motion for reconsideration was pending—and thus while Bauer and Del Rose were still acting as intervenors—CAPPS moved for summary judgment on its claim that the predispute arbitration and class action waiver conditions were unlawful. Dkt. 83. The Department of Education and Bauer and Del Rose, who were still intervenors at that time, each cross-moved for summary judgment, see Dkt. 92; Dkt. 93, and the States and the District of Columbia filed amicus briefs in support of those cross motions, Dkt. 95; Dkt. 104.
II. ANALYSIS
CAPPS raises three challenges to the 2016 Rule’s requirement that institutions of higher education agree to eschew the predispute class action waiver and predispute arbitration clauses as a condition of participation in the Direct Loan program. First, it argues that these conditions conflict with the FAA, Dkt. 83-1 at 14–24, which favors the enforcement of arbitration agreements. Second, it argues that the Secretary lacked authority under the HEA to adopt the conditions, principally because, in its view, the HEA’s general grant of authority to impose conditions on program participation is insufficient to overcome the specific demands of the FAA. Id. at 24–28. Finally, it argues that the 2016 Rule is arbitrary and capricious because the Secretary did not consider the benefits of arbitration or the drawbacks of class actions, relied on an inapposite CFPB study, and failed to give sufficient weight to the reliance interests of the participating institutions, and argues, in the alternative, that remand is appropriate so that the Department may consider a subsequent Supreme Court decision regarding the FAA. Id. at 28– 33. The Court will consider each argument in turn.
A. Conflict with the FAA
CAPPS devotes the lion’s share of its brief to the contention that the class action waiver and predispute arbitration conditions are “flatly inconsistent with the FAA.” at 14. In support of this theory, CAPPS presses three points: It first argues—correctly—that the FAA embodies a policy favoring the “enforcement” of arbitration agreements and—less obviously— that the 2016 Rule is at odds with that policy. See id. at 15–18. It then posits—incorrectly—that the distinction between a proscriptive rule banning the use of arbitration clauses and a condition on participation in a federal program does not bear the weight that the Department places on it. See id. at 18–22. And, finally, it argues—again, incorrectly—that the condition at issue here is unduly coercive and thus unlawful. See id. at 22–24. At its core, CAPPS’s FAA argument turns on the premise that the FAA’s “equal treatment” principle precludes federal agencies from “disfavoring” arbitration clauses in the administration of a federal program, see Dkt. 83-1 at 18, even when the agency bears statutory responsibility for protecting federal funds used in the program, and the agency reasonably concludes that permitting program participants to use predispute arbitration agreements (and class action waivers) in connection with program activities will likely frustrate the goals of the program and impose substantial costs on taxpayers. Under any colorable understanding of the reach of the FAA, that contention proves too much.
CAPPS’s argument that the 2016 Rule contravenes the FAA turns on whether the “equal
treatment” principle contained within Section 2 of the FAA prohibits federal rules and policies
that merely “disfavor” arbitration. In answering that question, the Court starts, as it must, with
the text of the FAA.
See BP Am. Prod. Co. v. Burton
,
A written provision in . . . a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.
9 U.S.C. § 2. As the Supreme Court has repeatedly explained, this language requires “courts to
abandon their hostility” to arbitration and, “instead[,] [to] treat arbitration agreements”—in the
words of the statute—“as ‘valid, irrevocable, and enforceable.’”
Epic Sys. Corp. v. Lewis
, 138 S.
Ct. 1612, 1621 (2018);
see also
,
e.g
.,
Kindred Nursing Ctrs., Ltd. v. Clark
,
CAPPS and the Department agree that the FAA would displace a federal rule that
declared particular arbitration agreements invalid or unenforceable. Dkt. 83-1 at 16; Dkt. 93-1 at
13–14;
Epic Sys. Corp.
,
Because the regulations do not purport to invalidate or to render unenforceable any
arbitration agreement, CAPPS offers a far more expansive interpretation of Section 2 of the
FAA. To do so, CAPPS quotes language from Supreme Court decisions that have interpreted
Section 2 of the FAA to reflect an “equal treatment” principle in the
enforcement
of arbitration
agreements to argue that the FAA prohibits any federal policy or rule that would “disfavor”
arbitration, including the 2016 Rule.
See
Dkt. 83-1 at 16–18 (quoting
Epic Sys. Corp.
, 138 S. Ct.
at 1621;
Kindred Nursing Ctrs.
, 13f7 S. Ct. at 1424;
DIRECTV, Inc. v. Imburgia
,
To be sure, in enacting the FAA, Congress established “a liberal federal policy favoring
arbitration agreements.”
Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp
.,
CAPPS’s efforts to find support in the case law fares no better. CAPPS argues, for
example, that the Supreme Court’s decision in
Kindred Nursing Centers Ltd.
,
CAPPS’s reliance on the Supreme Court’s decision in Epic Systems faces a similar hurdle. According to CAPPS, Epic Systems stands for the proposition that “federal Departments and agencies . . . may not, in the absence of explicit congressional authorization, invalidate or otherwise discriminate against arbitration agreements.” Dkt. 83-1 at 16. CAPPS is right that federal agencies lack the authority, absent express congressional authorization, to invalidate arbitration agreements. The FAA, after all, declares that arbitration agreements are “valid,” absent the availability of a defense applicable to “any” contractual provision. 9 U.S.C. § 2. But CAPPS identifies no support for its further contention that federal agencies lack authority to disfavor arbitration agreements in any respect. Epic Systems certainly does not support that sweeping proposition. Rather, all the Court held was that neither the National Labor Relations Act (“NLRA”), 29 U.S.C. § 157, nor a National Labor Relations Board decision interpreting the NLRA overrode the FAA’s direction that courts must, in general, enforce arbitration agreements as written. at 1632.
CAPPS’s contention that the Supreme Court “has frequently invalidated rules that have a
disproportionate impact on arbitration clauses even when they do not impose a flat ban or are
nominally neutral,” Dkt. 83-1 at 18, is both an over-generalization and inapposite. True, the
Supreme Court observed in
Kindred Nursing
that the FAA “displaces any rule that covertly
accomplishes” what the Act expressly forbids—the invalidation of arbitration clauses on grounds
not generally applicable to other contractual provisions—“by disfavoring contracts that (if so
coincidentally) have the defining feature of arbitration agreements.”
In Concepcion , for example, we described a hypothetical state law declaring unenforceable a contract that “disallow[ed] an ultimate disposition [of a dispute] by a jury.” . . . Such a law might avoid referring to arbitration by name; but still, we explained, it would “rely on the uniqueness of an agreement to arbitrate as [its] basis”—and thereby violate the FAA.
Id.
(internal citations omitted). Similarly, in
Kindred Nursing
, the Supreme Court held that a
state law protecting “the right of access to the courts and trial by jury” was, for all practical
purposes, the equivalent of a rule precluding the enforcement of agreements to arbitrate. ;
see
also Epic Sys.
,
Both the text of the FAA and Supreme Court precedent focus on judicial enforceability of arbitration agreements; that is, they focus on the legal effect that courts should accord arbitration agreements. But, even if the FAA might go further and, at times, preempt or preclude a state law or federal regulation that does not itself alter the legal effect of the agreement, this case does not raise the type of extraordinary scenario CAPPS hypothesizes. CAPPS posits, for example, that the FAA would surely preclude a federal agency from requiring private entities to pay “a fee of $1 million per arbitration” simply “for the privilege of” opting to arbitrate rather than litigate a dispute. Dkt. 99 at 10. But that is a far cry from what the Secretary did in the 2016 Rule. Here, the Department is not acting as a disinterested regulator but as the administrator of a multi- billion-dollar program and as a participant in the transaction between the student borrowers and the schools they attend.
In that role, the Department has a direct and substantial interest in the performance of the
contracts between student borrowers and schools. It disperses over $120 billion annually under
the Direct Loan program,
see
U.S
.
Department of Education, Federal Student Aid Office, 2018
Annual Report, https://www2.ed.gov/about/reports/annual/2018report/fsa-report.pdf (last
accessed Jan. 31, 2020), and it bears the risk of non-repayment,
see
34 C.F.R. § 685.222(a)(5),
(k) (providing for Department recovery of unpaid student loans from schools, rather than
students, only once a successful student borrower defense has been asserted). When a
participating school misleads a student-borrower or breaches a contractual obligation relating to
a Direct Loan or “the provision of educational services for which the loan was provided,” that
conduct establishes a defense to repayment of the loan to the United States, 34 C.F.R. §
685.222(a)(5), and the Department’s sole recourse is to seek recovery, if possible, from the
school, 34 C.F.R. § 385.222(k). Whether the Department is (1) subrogated to the rights of the
student-borrower; (2) entitled to recover on the theory that the school acted as its agent in
originating the loan; (3) a third-party beneficiary of the enrollment agreement; or (4) entitled to
assert its own contractual rights against the school under the PPA,
see
81 Fed. Reg
.
at 75,931
(citing
United States v. Kearns
,
The PPA conditions requiring Direct Loan program participants to eschew predispute arbitration clauses and class action waivers in their enrollment agreements, moreover, bears a reasonable nexus to the Department’s statutory responsibilities to include conditions in the PPA that are “necessary to protect the interests of the United States and to promote the purposes of” the Direct Loan program. 20 U.S.C. § 1087d(a)(6). In the Secretary’s view, those conditions protect the public fisc by making it less “likely that the costs of losses from [the] acts or omissions [of participating institutions] will be passed on to the taxpayer;” they increase the likelihood that program participants will “engage in fair and ethical business practices” related to the Direct Loan program; and they enhance “the effectiveness of the Department’s . . . processes for submitting and determining the validity of borrower defense claims.” 81 Fed. Reg. 39,380. The Secretary’s conclusions, moreover, were based the Department’s real-world experience in dealing with the aftermath of the collapse of the Corinthian Colleges, which led to the discharge of well over $40,000,000 in Direct Loans, at the expense of the federal government. Id . at 39,383. One cannot plausibly assert—and CAPPS does not assert—that the new conditions included in the PPA are, in reality, regulatory prohibitions on arbitration simply masquerading as contractual terms designed to protect the interests of the United States as a party to the overall loan transaction.
With that understanding of the challenged PPA conditions, this is an easy case. Federal agencies are, of course, free to contract on whatever terms they conclude are prudent and that are otherwise lawful, and the FAA does not preclude federal agencies from declining to include arbitration clauses in government contracts and grant agreements. Cf. Executive Order 12,778 at § 1(c)(3), 56 Fed. Reg. 55,195, 55,196 (Oct. 23, 1991) (prohibiting litigation counsel from “agree[ing] to the use of binding arbitration”). By the same logic, it proves too much to suggest that federal agencies may not contractually preclude their prime contractors from including arbitration clauses in their subcontracts, where the United States may be financially responsible for breaches of those subcontracts. As a matter of substance, however, that is analogous to what the Department has done here. The Department is a party to three-way transaction in which it lends funds to student-borrowers, which the students use to pay participating institutions, and, in the case of a breach of the contractual relationship between the student and the school, the Department bears the risk that it will not be repaid for the loan. Nothing in the FAA precludes the Department from contracting in a reasonable manner to protect its financial interests in that transaction—just as a private lender might do under similar circumstances.
CAPPS argues that the conditional nature of the predispute arbitration and class action
waiver provisions fails to save the 2016 Rule for several reasons. To start, it invokes
Chamber
of Commerce v. Dep’t of Labor
,
Even putting that difficulty aside,
Chamber of Commerce
presented a scenario that bears
little relation to the question posed here. There is, in short, a vast difference between an
agency’s use of its regulatory authority to impose stricter regulatory requirements on parties that
opt to use arbitration in transactions not involving public funds and an agency requiring
participants in a federal program to eschew predispute arbitration clauses in transactions
involving the disbursement, and potential loss, of billions of dollars of taxpayer funds as a
precondition to participation in that federal program. As a result, even assuming that
Chamber
of Commerce
reached the correct result—and the Court expresses no view on that question—that
precedent does not advance CAPPS’s challenge to the PPA conditions at issue in this case.
[1]
This then leads to CAPPS’s two, alternative arguments, both of which challenge the
lawfulness of the conditions the 2016 Rule added to the PPA. It first argues that the conditions
are unlawful because any “spending conditions” an agency may impose in implementing a
federal program “must bear a reasonable relationship to a legitimate purpose of the federal
program at issue.” Dkt. 83-1 at 19. CAPPS acknowledges, of course, that the federal agencies
“may establish and impose reasonable conditions relevant to federal interest[s] in [a] project and
[its] over-all objective.”
Id.
at 19–20 (quoting
South Dakota v. Dole
,
This argument misunderstands that nature of statutory preclusion. As the Supreme Court
observed in
Epic Systems Corp
., “[w]hen confronted with two Acts of Congress allegedly
touching on the same topic,” the courts are “not at ‘liberty to pick and choose among
congressional enactments’ and must instead strive ‘to give effect to both.’”
harmonized, and that one displaces the other, bears a heavy burden of showing ‘a clearly expressed congressional intention’ that such a result should follow.” (same). Here, the HEA grants the Secretary broad authority to include those terms in the PPA that she “determines are necessary to protect the interests of the United States and to promote the purposes of” the Direct Loan program, 20 U.S.C. § 1087d(a)(6), and the FAA declares that arbitration clauses “shall be valid, irrevocable, and enforceable,” 9 U.S.C. § 2. Because—as explained above—the 2016 Rule does not purport to invalidate or to render unenforceable any arbitration agreement, the HEA and FAA are readily harmonized. Nor does CAPPS cite any authority for the novel proposition that courts should circumscribe broad statutory grants of agency discretion, not based on an actual statutory restriction, but based on the court’s divination of congressional policy unmoored from the statutory text.
Finally, CAPPS argues that the conditions the Secretary imposed here are unlawful
because participating schools are so dependent on Direct Loan funds that the “choice” whether to
accept the conditions “is illusory.” Dkt. 83-1 at 22. In pressing this argument, CAPPS relies
principally on decisions involving the First and Tenth Amendments. U.S. Const., Amds. I & X;
Dkt. 83-1 at 22–24 (citing
Nat’l Fed’n of Indep. Bus. v. Sebelius
,
The Court, accordingly, is unpersuaded by CAPPS’s contention that the 2016 Rule is unlawful under the FAA.
B. The Department’s Statutory Authority Under the HEA
CAPPS also argues that the arbitration and class action waiver conditions are unlawful
because they “[e]xceed[] the Department’s statutory authority.” Dkt. 83-1 at 24. CAPPS makes
only one argument in support of this theory: it argues that 20 U.S.C. § 1087d(a)(6) is a “general
catch-all clause” and, as such, is “not sufficient to give the Department the authority to prohibit
the enforcement of bilateral arbitration agreements.” Dkt. 83-1 at 25. More is needed, CAPPS
contends, because a “clear and manifest congressional command” is necessary “to displace the
[FAA].” (quoting
Epic Sys.
,
C. CAPPS’s Challenge to the Rule as Arbitrary and Capricious
Finally, CAPPS challenges the arbitration and class action waiver conditions as “arbitrary
and capricious” under the APA.
See
5 U.S.C. § 706(2)(A); Dkt. 83-1 at 28. All agree that the
APA requires agencies, including the Department of Education, to “examine the relevant data
and [to] articulate a satisfactory explanation for [their] action[s] including a rational connection
between the facts found and the choice[s] made.”
Motor Vehicle Mfrs. Assn. of the U.S., Inc. v.
State Farm Mut. Auto. Ins. Co.
,
CAPPS first argues that the Department “failed to consider adequately extensive data in
the record demonstrating the benefits of arbitration.” Dkt. 83-1 at 28. CAPPS points to its own
comments, which cited both court opinions and empirical studies extolling the virtues of private
arbitration. at 29 (citing AR-J-017077–78). But CAPPS ignores the Department’s extensive
discussion of the failures of arbitration in the context of the Direct Loan program, specifically
with respect to the collapse of Corinthian Colleges.
See
In summary, the Department did not ignore—as CAPPS suggests—the prospect that students and schools may at times mutually benefit from arbitration. CAPPS, of course, disagrees with the Department’s assessment, and, the Department recently reassessed the issue in a manner more in line with CAPPS’s view. A rule is not arbitrary and capricious, however, “merely because [the agency] analyzed [and assessed] the competing interests in a way that displeased the plaintiff” or reached a conclusion on which reasonable minds might differ. N. Am. Catholic Educ. Programming Found., Inc. v. Womble Carlyle Sandridge & Rice, PLLC , 800 F. Supp. 2d 239, 251 (D.D.C. 2011).
CAPPS’s second argument—that the Department also failed to consider the “serious
drawbacks of class actions for students,” Dkt. 83-1 at 30—is unavailing for similar reasons.
Nothing about the 2016 Rule
requires
students to bring their claims as class actions. Indeed,
nothing about the 2016 Rule
requires
students to litigate, rather than arbitrate, their claims—
either on an individual or class basis. Rather, the rule gives students the choice to bring their
claims as a class action. As the student amici point out, “[p]reserving the option for students to
bring class actions where appropriate is not incompatible with the recognition that class actions
can have downsides.” Dkt. 92 at 39. Moreover, far from ignoring the comments regarding the
potential downsides of class actions, the Department discussed them at length and found “little
evidence” to support the conclusion that consumer class actions “produce[] minimal or no actual
benefit” to class members, at least not in the postsecondary education context. 81 Fed. Reg. at
76,026. Indeed, the Department noted that “in one of the few class actions to proceed to trial, a
class of students obtained two million dollars in relief from a for-profit school.”
Id.
at 76,026
n.85 (citing
Jamieson v. Vatterott Educ. Ctrs., Inc.
,
CAPPS’s third argument takes issue with the Department’s reliance on a CFPB study
regarding the use of arbitration agreements and class action provisions in the context of private
lending, including private student loans. Dkt. 83-1 at 31 (citing
We do not suggest that class actions are a panacea, and the criticisms of class actions in other markets may also apply to class actions in the postsecondary education market if such suits were available. We stress that class actions have significant effects beyond financial recovery for the particular class members, including deterring misconduct by the institution, deterring misconduct by other industry members, and publicizing claims of misconduct that law enforcement authorities might otherwise have never been aware of, or may have discovered only much later. The CFPB described these effects in its proposed rule, and as we demonstrated in the [Department’s proposed rule], recent history shows the significant consequences for students and taxpayers in an industry that has effectively barred consumers from using the class action tool. As to the comment that class actions would harm private non-profit institutions, we note that these institutions are already subject to that risk, and nevertheless, only a small percentage of non-profit institutions currently use arbitration agreements with their students. This suggests that institutions in this sector have generally felt no need for such protection, and we see no reason to expect that this regulation will change the exposure of non-profit institutions to class actions or other suits.
81 Fed. Reg. 76,026 (footnotes omitted). Moreover, a key distinction between the public and
private student loan context—which CAPPS ignores—is that public student loans are made with
federal funds. As a result, the Department explained, the federal government has a greater
interest in “publicizing claims of misconduct that law enforcement authorities might . . . never
been aware of” had the parties arbitrated their claims in secret. The fact that the Department
considered the CFPB study—along with a host other factors and evidence—hardly gives rise to
the sort of reliance on an “improper factor[]” that would render the rule arbitrary or capricious.
Select Specialty Hosp. of Atlanta v. Thompson
,
CAPPS next argues that the rule is arbitrary and capricious because the Department failed
to give adequate consideration to the reliance interests of participating institutions. Dkt. 83-1 at
32. Agencies must, in crafting policy, “be cognizant that longstanding policies may have
‘engendered serious reliance interests that must be taken into account.’”
Encino Motorcars, LLC
v. Navarro
,
The Department’s reasoning, moreover, was “entirely rational.” One reason why Corinthian’s collapse had such devastating effects, the Department explained, was because the Department was unaware of the scope of the storm that was brewing. See 81 Fed. Reg. at 76,026. The Department reasoned that agreements requiring students to handle their disputes with Corinthian (and other institutions) by way of private, bilateral arbitration prevented the publicity that would have enabled the Department to engage in enforcement actions earlier. See id. And, the Department further reasoned that ex ante knowledge that students might bring high- profile class actions—or even bring claims at all, as it appeared that cases were rarely arbitrated —might deter institutions from engaging in such misconduct in the first place. The Department adopted the rule only after considering the potential costs to schools and finding those costs to be outweighed by the potential benefits. ; see also id. at 76,029 (noting comments about the impact of increased legal fees due to the arbitration provision); id. at 76,048 (costs associated with increased litigation); id. at 76,052 (compliance costs). Again, the APA requires nothing more.
Finally, CAPPS argues that the Court should set the 2016 Rule aside because the Supreme Court’s decision in Epic Systems represented a significant “change” in the “legal landscape,” which the Department did not have the opportunity to consider when it adopted the rule. Dkt. 83-1 at 33. To the extent this argument merely recycles CAPPS’s contention that the rule is unlawful under the FAA, the Court has already addressed that contention at length. And, to the extent the argument merely asserts that the Epic Systems decision adds to the policy considerations that the Department might, in its discretion, take into account, the Department is free to do so—and, in fact, has issued a new rule, which is not yet effective, rescinding the arbitration and class action waiver conditions. Student Assistance General Provisions, Federal Family Education Loan Program, and William D. Ford Federal Direct Loan Program, 84 Fed. Reg. 49,788 (Sept. 23, 2019). The question whether and when to reconsider a rule in light of evolving policy considerations, however, is a question for agencies and not courts.
The Court, accordingly, is unpersuaded that the provisions of the 2016 Rule that CAPPS challenges are arbitrary and capricious.
CONCLUSION
For the foregoing reasons, the Court will DENY Plaintiff’s motion for summary judgment, Dkt. 83, and will GRANT Defendant’s cross-motion for summary judgment, Dkt. 94.
A separate order will issue. /s/ Randolph D. Moss
RANDOLPH D. MOSS United States District Judge Date: January 31, 2020
Notes
[1] CAPPS does cite to two district court decisions that preliminarily enjoined spending, as
opposed to regulatory, conditions on use of predispute arbitration agreements. In the first case,
Associated Builders & Contractors of Southeast Texas v. Rung
, No. 16-cv-425, 2016 WL
8188655 (E.D. Tex. Oct. 24, 2016), the District Court for the Eastern District of Texas held that
the plaintiff was likely to prevail in its challenge to an Executive Order and Federal Acquisition
Regulations (“FAR”) rule that required contractors for noncommercial items over valued at $1
million to agree not to enter into mandatory, predispute arbitration agreements with their
employees or independent contractor on any matter arising under Title VII or arising out of a
sexual assault or sexual harassment.
Id.
at *13. In the second case,
American Health Care
Association v. Burwell
,