CAPPS v. DeVos Ruling Preserves Ban on Predatory Arbitration Practices

This week, a lawsuit between the California Association of Private Postsecondary Schools (CAPPS, a for-profit college association) and Education Secretary Betsy DeVos ended with a federal judge rejecting a CAPPS request to block Obama-era borrower defense to repayment regulations, setting the rule into effect. But while a ban on predispute arbitration and class action waivers, which we have covered in the past, is one of the provisions that will take effect under this ruling, its enforcement for colleges remains a question.

CAPPS initially challenged the rule shortly before it was scheduled to take effect in July of 2017, focusing on the provision that sought to ban colleges from employing predispute arbitration clauses and class action waivers, used by for-profit colleges to protect themselves at the expense of their students’ right to a day in court. Citing that litigation, the Department decided to delay implementation of the rule on its own accord. This prompted two legal challenges — Bauer v. DeVos and Massachusetts v. Department of Education — to the Department’s authority to halt implementation of the rule.

The Bauer decision last week, in which the Court decided that the Department’s delay of borrower defense regulations violated the law, opened the door for an amended challenge to the rule from CAPPS. The latest filing, among other issues from the 2016 borrower defense rule, reiterated CAPPS’ concerns that the arbitration and class-action waiver bans would “irreparably harm” its institutions by adding burden and causing confusion for the school, inflicting reputational harm, and violating the due process clause of the Constitution.

The Court found that CAPPS failed to prove its argument on all counts, providing no exact details on how the effects of the borrower defense regulations would play out. The Court noted that the schools “[said] nothing about how often they are confronted by covered legal claims brought by their students, about the nature of those claims, or about actual expense of litigating those cases, if any.” It also dismissed CAPPS’ concerns about the difficulty of re-implementing predispute arbitration clauses and class action waivers in the event the 2016 borrower defense regulations were put aside or changed in the future.

Finally, the Court summarily shut down CAPPS challenge on the constitutionality of the ban. It concluded that CAPPS “[did] not come close” to proving that the Department added the new arbitration conditions to schools’ agreements to participate in the federal financial aid programs without adequate reasoning.

To be sure, CAPPS v. DeVos is not likely to be the last challenge to the borrower defense rulemaking. The Department of Education has been silent about how and when schools must notify their students of the change, and when the Department’s enforcement against institutions will take effect. But it means borrowers should immediately feel the benefits of the arbitration ban, with their rights to their day in court restored. The Court’s mandate is clear: The Department of Education has an obligation to immediately put the rule into effect and grant borrowers the benefits it promised them last year. All eyes are on the Department now as borrowers wait for it follow through on that order.