Antitrust Law Daily Wrap Up, STATE UNFAIR TRADE PRACTICES—Cal. App.: Nursing program could not compel students to arbitrate fraud claims, (Jun 15, 2016)

By Jody Coultas, J.D.

The College Network, Inc. (TCN) could not compel students suing the company for misrepresenting its nursing degree program to arbitrate their claims, according to a California appellate court (Mango v. The College Network, Inc., June 14, 2016, McConnell, J.).

TCN's representative visited Licensed Vocational Nurses (LVNs) who sought to become Registered Nurses (RNs) in California to encourage them to enroll in TCN's distance-learning partnership with Indiana State University (ISU) and California State University (CSU). Perspective students were allegedly told that they would satisfy their general education and prerequisite requirements through TCN online to qualify for admission into ISU's LVN to B.S. in nursing program, then complete their course requirements online through ISU, and complete their clinical training through CSU. The purchase agreements with TCN included a clause stating that students agreed to submit "[a]ny and all disputes, claims, or controversies" to binding arbitration governed by the Federal Arbitration Act (FAA).

In their first year of study, the students learned they would not be eligible for formal admission into ISU, and requested refunds. After TCN refused the refunds, the students filed California Unfair Competition Law and Consumers Legal Remedies Act claims for equitable and monetary relief.

TCN moved to compel arbitration, which was denied as procedurally and substantively unconscionable. The trial court found procedural unconscionability based on evidence that the students were young, rushed through the signing process, had no ability to negotiate, did not see "buried" arbitration language, and did not separately initial the arbitration clause. The trial court also found procedural unconscionability based on TCN's manner of presenting the program. The substantive unconscionability finding was based on the arbitration provision's forum selection clause. TCN appealed.

Arbitration agreements are valid, irrevocable, and enforceable except where there is fraud, duress, or unconscionability. Procedural unconscionability "addresses the circumstances of contract negotiation and formation, focusing on oppression or surprise due to unequal bargaining power." Substantive unconscionability pertains to the fairness of the terms. Both elements must be present for a court to refuse to enforce an arbitration agreement.

The arbitration provision was procedurally unconscionable, according to the appellate court. The trial court's credibility determinations were accepted and the evidence was not reweighed on appeal. Also, TCN did not dispute that the arbitration provision was printed in small print on the back side of the purchase agreement, or that it was never pointed out by sales representatives. The arbitration agreement was an adhesion contract, leaving prospective students with only the option of adhering to the contract or rejecting it. The rushed nature of the negotiation, TCN's encouragement to sign up right away for a discount, and the unequal bargaining power indicated a high degree of procedural unconscionability as well.

The trial court properly held that the arbitration agreement was substantively unconscionable and unenforceable, according to the court. Based on the arbitration provision, college-aged students would be required to travel from San Diego, California, to Marion County, Indiana, to arbitrate their claims against a company that solicited their business in California. There was nothing to suggest that students could have expected that they would be required to resolve any disputes in Indiana. The fact that students could participate in arbitration proceedings by phone or video did not make the clause enforceable. The choice between incurring significant expenses to pursue their claims in an unreasonable forum or to appear remotely, foregoing the ability to testify in person, only benefitted TCN.

The arbitration provision allowed TCN to select the arbitrator and contained no assurances of neutrality was an indicator of substantive unconscionability. Also, the shortened limitations period indicated substantive unconscionability.

Severance of unconscionable provision. The trial court declined to sever unconscionable terms from the parties' arbitration provision. Finding that it could not do so without, in effect, rewriting the arbitration provision, the court voided the entire provision. Because the arbitration provision contained multiple unconscionable terms, some of which could not be severed, the trial court did not err in voiding the entire arbitration agreement.

The case is No. D067687.

Attorneys: Adam T. Hoover and Richard J. Radcliffe (Reich Radcliffe & Hoover) for The College Network, Inc. Hannah J. Bingham (Law Offices of Hannah J. Bingham) and Scott A. Savary (Savary APC) for Bernadette Mango.

Companies: The College Network, Inc.

Cases: StateUnfairTradePractices CaliforniaNews