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February 24, 2016 Practice Points

Arbitration Under Political Attack

By Mark Kantor

In the continuing story of political challenges in the U.S. to consumer and similar types of arbitration, Public Citizen, the advocacy NGO, recently filed a petition with the U.S. Department of Education asking the Department of Education to bar federal funding of for-profit educational institutions that require students to enter into pre-dispute arbitration clauses, whether in enrollment papers or other agreements.

Public Citizen argues that “the Higher Education Act allows the Department of Education to cut off Title IV funding to schools that are not capable of providing the education they promise, and it permits the agency to impose conditions on funding. The rule sought by Public Citizen’s petition is within the department’s authority and should be adopted without delay.” Public Citizen also argues in its petition that such a ban would be consistent with the Federal Arbitration Act. See pp. 23–24 of the petition.

Public Citizen’s petition parallels a request made by nine sitting U.S. Senators to DOE last week. The letter from the Senators (Sens. Dick Durbin (D-IL), Sherrod Brown (D-OH), Richard Blumenthal (D-CT), Barbara Boxer (D-CA), Al Franken (D-MN), Ed Markey (D-MA), Jeff Merkley (D-OR), Chris Murphy (D-CT), and Sheldon Whitehouse (D-RI).

The Senators argue that the U.S. Higher Education Act's provisions requiring schools to enter into program participation agreements with the Department can be employed to require a ban on mandatory arbitration as a condition for schools receiving federal funds. “Moreover,” wrote the Senators, “it is very clear that the federal government can impose contractual conditions on the receipt of federal funds. See South Dakota v. Dole, 483 U.S. 203 (1987).”

Similarly, a senior staff attorney in the New York Legal Assistance Group Special Litigation Unit has made the same recommendation (“on behalf of the Legal Aid Community”) to the Department of Education as part of DOE’s ongoing “negotiated rulemaking” on higher education issues.

If the argument that a federal agency may, based on broad regulatory purposes in federal legislation, condition the availability of federal funds on recipients banning pre-dispute arbitration clauses is correct, then that principle would apply to all federal funding programs, not solely to federal funding of educational programs. However, South Dakota v. Dole, cited by these Senators, was not an arbitration case. South Dakota v. Dole concerned the National Minimum Drinking Age Act which Congress passed in 1984. That Act withheld 5 percent of federal highway funding from States that did not maintain a minimum legal drinking age of 21. South Dakota, which at the time allowed 19-year-olds to purchase low-alcohol 3.2 percent beer, challenged the law, but lost at the Supreme Court. Thus, the situation in South Dakota involved specific a Congressional mandate to withhold federal funds unless the State complied with the specific federal drinking age policy.

Here, of course, the Higher Education Act, which was passed decades ago, says nothing about conditioning federal funding on a bar to pre-dispute arbitration clauses, nor do any provisions of the Higher Education Act address the Federal Arbitration Act’s long-standing approval of arbitration agreements generally. Unlike the situation at issue in South Dakota v. Dole, therefore, Congress cannot be said to have expressly modified the Federal Arbitration Act in other legislation to authorize barring pre-dispute arbitration agreements by for-profit educational institutions.

As should be apparent, this seems to be a coordinated advocacy effort among certain NGOs and Members of Congress critical of arbitration.

It will be interesting to see if interested for-profit educational institutions or any arbitration institutions, oppose these petitions.

Keywords: alternative dispute resolution, adr, litigation, advocacy, politics, for-profit education, federal funding

Mark Kantor is a member of the College of Commercial Arbitrators in Washington, D.C.

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