Arbitration clauses in contracts are designed to give parties a clear-cut and less expensive route to resolving potential disputes. But provisions that require parties to go through arbitration and relinquish their right to pursue other legal avenues have been controversial, particularly when one of the parties is viewed as being at a disadvantage to the other, as in the case of nursing homes and their clients.
Those issues took center stage in a decision issued Tuesday by the U.S. Court of Appeals for the Eighth Circuit, which reversed a lower court's ruling last year forcing a for-profit college to defend itself in court against 38 students' charges of fraudulent misrepresentation and negligence. In its ruling, a three-judge panel of the Eighth Circuit said that the arbitration clause contained in the enrollment agreement that students signed before entering High-Tech Institute, a vocational institution in Missouri, compels the student plaintiffs to enter arbitration before they can rightfully pursue their claims in state or federal court.
The decision is likely to have implications for the colleges and universities -- which include many if not most for-profit colleges, but also some programs or schools at nonprofit institutions -- that utilize arbitration clauses to try to limit their exposure to legal risk. While fans of arbitration endorse it as an alternative and less contentious form of resolving legal disagreements, some consumer advocates assert that entities compel arbitration mainly to lower their own legal costs and limit public visibility about disputes involving unhappy students.
The situation at High-Tech involved just such a group of displeased current and former students -- eventually 38 in all. A smaller group of them sued the for-profit college in state court in Missouri in 2007, citing a range of accusations that can be summed up as an alleged failure to provide a meaningful education. High-Tech had the case moved to federal court and asked that the judge stop judicial action and refer the case to arbitration, as mandated by the enrollment agreement the students signed, which read:
Any controversy or claim arising out of or relating to this Agreement, or breach thereof, no matter how pleaded or styled, shall be settled by arbitration in accordance with the Commercial Rules of the American Arbitration Association at Kansas City, Missouri, and judgment upon the award rendered by the Arbitrator may be entered in any court having jurisdiction.
The federal district court ruled, however, that the arbitration clause applied only to some of the students' claims (those related to breach of contract), and that they were free to pursue their tort claims -- those alleging wrongful acts -- in court. In reaching that conclusion, the court disagreed with High-Tech's argument that -- bear with us -- only an arbitrator should be able to decide the question of what must be arbitrated. High-Tech appealed to the Eighth Circuit.
In its ruling Tuesday, the appeals court panel fully upheld the idea that the enrollment agreement signed by the students committed them to arbitration for all claims against the higher education provider. To the students' arguments that the arbitration clause was buried in fine print, the appeals panel responded that the contract was two sides of a page filled with basic information, and that "the arbitration provision was not hidden in unreadable fine print among these other terms." And to the suggestion that the career school cajoled them into signing the agreement, the court said that the students "presented no evidence that High-Tech used high-pressure sales tactics to coerce them."
"[W]e conclude that the district court erred in denying High-Tech's motion to compel arbitration and to continue the stay of judicial proceedings," the appeals panel wrote, directing the lower court to send the case to an arbitrator.
Lawyers for the former High-Tech students and for the higher education company could not be reached for comment.