Class Action Suit v. Westwood College By Students Derailed

The United States District Court for the District of Colorado has denied class action status to a class of students suing Colorado's for profit Westwood College, who allege misrepresentations in its marketing materials. The court ruled on the basis of an arbitration clause with a class action waiver in its enrollment documents, which recent U.S. Supreme Court rulings have established is enforceable, despite the fact that absent the ruling that the judge would have found the provision to be unconscionable. The named parties were ordered to arbitrate pursuant to the agreement. The ruling was made on June 6, but apparently didn't receive much press at the time. The ruling was Bernal v. Burnett (D. Colo., June 06, 2011) 2011 WL 2182903. This class action suit was filed in August, 2010.

Another class action lawsuit brought by students in Texas against Westwood was dismissed in January, 2011 on the ground that the class representative was inadequate.

This doesn't mean that Westwood College has escaped any legal repercussions for its conduct. It settled a federal government lawsuit in May of 2009 for $7 million, in which " the government charged Westwood was not the college it said it was, and that it did not provide careers for its students. The lawsuit covers a period from 2002 to 2005[.]"

The college was placed on probation by its accrediting agency and the State of Colorado in late 2010:

The Accrediting Commission of Career Schools and Colleges put Westwood College on probation in September and issued an order of continued probation Dec. 9, state officials said. "Under the spirit of consumer protection, the Colorado Commission on Higher Education decided to put Westwood College under probation," commission spokesman Chad Marturano told 7NEWS.

Westwood's Colorado accreditation was restored in March of 2011 and it was licensed in Wisconsin in February of 2011.

It also faced regulatory action from the State of Texas for failing to make refunds to students there in September 2010 that could cost the college its accreditation there. Around the same time, Wisconsin ordered it to stop enrolling students because it was not accredited under that state's laws.

Texas officials fined its local affiliates of Westword College $41,000 and put its license on probation in January of 2011.

As Wikipedia notes (and confirmed here):

"In March of 2011, the Veterans Administration disqualified three Westwood College Campuses from the GI Bill Program. The VA took this step after finding, "erroneous, deceptive, and misleading advertising and enrollment practices at these institutions."

Westwood College laid off 100 online admissions office employees based in Colorado Springs, Colorado in January of this year, effective March 23, 2011.

Earlier this month, (more here) Westwood College announced that it would provide what amounts to an unemployment payment for graduates who had decent grades and are looking for work, but have not found it, up to $500 a month for six months (less for some students).

The Internet is also awash with personal rants and testimonials from former students denouncing the Westwood College. Probably no other for profit college system has a more tarnished brand.

Thus, while Westwood College has won some battles, with the end of the class action lawsuit against it in Colorado being the most recent, it remains to be seen if the institution can survive.

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SCOTUS Dislikes Class Actions

Today, a conservative majority of the U.S. Supreme Court in a 5-4 decision, held that a sex discrimination case against Wal-Mart on behalf of its 1.5 million female employees could not be certified as a class action lawsuit. (There was wide agreement that the backpay due in the case could not be handled on a class basis, but there was deep dispute over whether the existence of gender discrimination at the company could be litigated in that manner.)

This is the latest of a string of cases that have disfavored class actions, such another this term that held that the right to conduct a class action arbitration could not be implied from a simple arbitration clause and that the fact that an arbitration clause expressly prohibits class actions could never be sufficient to render it unconscionable under a provision of the federal arbitration act that allows arbitration clauses to be invalidated if they would be unconscionable under state law.   The rulings have largely been statutory or based on court rules, thus they are more easily overriden than rulings based on constitutional grounds, but the rulings are colored by a deep distrust of the class action generally.

Concerns about class actions have also been a central to the tort reform movement, and have been an area where the movement has achieved more than one significant victory, by imposing major procedural limitations on securities law class actions, and by giving the federal courts jurisdiction over many class actions arising under state law that would not qualify for diversity jurisdiction.  Today's ruling, interpreting the class action rule in the federal rules of civil procedure, thus, has wider implications for class actions generally, than it would have a couple of decades ago, because more kinds of class action lawsuits are confined to the federal courts.

To some extent, the distate of big businesses for class actions, and plaintiff friendly group's support for them is simply a matter of mathematics.  In a situation where there are many people with small claims against a single business or small group of businesses, large numbers of people with claims will never choose to bring valid lawsuits because the litigation cost economics don't make sense, and except in the very clearest cases, the verdicts will be a mixed bag.  In contrast, a win in a class action will afford a remedy to everyone with a claim (or a proxy for them) and a win on behalf of all claimants is possible even when a win on the liability issue isn't a sure thing in any given isolated case.

There is also considerable controversy over the fact that "coupon settlements" and contributions to non-profit caues often replace money awards as typical class action remedies, that class actions are expensive to litigate and rarely result in a resolution on the merits by a judge, that there are often multiple competing class actions that must be consolidated arising from single incidents, that forum shopping can be especially problematic in these cases, and that the cases can seem to be attorney driven rather than focused on providing a remedy for a client.  The high cost and long litigation times involve in class action litigation don't speak well for a process which was invented to reduce litigation costs and handle numerous related small claims more efficiently than traditional litigation efforts.

On the other hand, class actions can put pressure on big businesses to comply with the law even when the state regulators of an industry are asleep at the switch, underfunded, run by a political appointee hostile to the agency's purpose, or are the victim of capture by the regulated industry.  Class actions can close the gap between the laws on the books regulating an industry or practice,  and the law as actually enforced.  It can function as a remedy to corrupt administration of regulatory laws.  Class actions are also an arguable preferrable way to regulate industries through decisions by private individuals rather than actions by state officials whom many people who are inclined towards libertarian political ideologies may distrust.

In employment cases, the key attraction of a class action is the question of proof.  It may be much easier to establish discrimination on a statistical basis than it is to prove that it was present in an individual case, and it may be easier to fashion an affirmative action remedy in response to statistically proven discrimination than it is to wade through the details of a money damage remedy on a case by case basis.

But, class action cases can appear to grant legislative or regulatory type authority to courts whose procedures are primarily geared towards resolving disputes that involve only narrow disputes between small numbers of people.  This tendency is particularly apparent in false advertising claims where very large numbers of people are exposed to advertising claims and considerably numbers of people may buy products that are falsely advertised, but the individualized consumer harm may be modest.  Negotiations between alleged wrongdoers and alleged victim's representatives may also lead to court sanctioned remedies, such as certain forms of affirmative action, that could never be approved as legislation in the absence of a violation of the law that is never provided on the merits in court.

The trend seems contrary to the trends in our economy, in which big corporations whose mistakes routinely impact large numbers of people in incidents with a common source, rather than isolated incidents of wrongdoing, are increasingly the norm.  If a big money center bank calculated interest rates on loans, or forecloses on houses improperly, it will usually be because some system has gone wrong or some computer program had an incorrect rule, with the error affecting hundreds of thousands of people nationwide, rather than because there was some isolated defect in one customer's particular case.  Serious misrepresentations to consumers in commerce not infrequently involve massive advertising campaigns rather than an isolated vendor and purchasers in an open air marketplace.  Serious discrimination in employment practices frequently flows from bad leadership at the top of an organization that guides subordinate managers, rather than individualized misconduct by low level managers.  In our modern era of quality control systems in manufacturing, systemic defeats in mass manufactured products are more likely to cause harm than isolated duds that aren't successfully removed from the assembly line: most defective products are the result of a design defect, either in the product itself or the manufacturing process.  An inability to remedy systemic wrongdoing by a big business in a collective way is out of step with an economic reality in which a large share of all wrongdoing has a systemic source.  In the long run, it may be more important to the functioning of our economic to solve systemic problems than to remedy the one off screw ups that can never be completely eliminated.

For what it is worth, big government agencies, like the I.R.S., have many of the same weaknesses in offering remedies to systemic errors that put individuals in low stakes cases in bind, that big businesses do.

Some problems in the way that big businesses and big government operate, may be flaws in how they do justice between third parties who deal with them, rather than actually benefitting these entities themselves.  For example, most securities fraud involves cases where a misrepresentation by a business causes a stock price to fail to reflect the truth for some period of time, which benefits some secondary market stockholders to the deteriment of other secondary market stockholders, while having little or no direct economic impact on the company itself and where only a tiny part of the benefit or harm accrues to company insiders.  Often the beneficiaries and victims of the misrepresentation have no knowledge that they are acting in the basis of a misrepresentation until after the harm has been done. 

Yet, if misrepresentations with immense economic consequences for stock traders routinely lead to no repurcussions for the parties who make them, the soundness of our financial system is seriously undermined.  Some of the parties most responsible in fact for the financial crisis, the major credit rating companies, had very little other than their pitiful compared to the amount at stake in the economy fees, in their decisions, and will bear no consequences for their mistakes, and there is a movement in the securities law world to treat accountants the same way.  Yet, if the people whose observations drive the market have little stake in being accurate, the financial markets are certain to repeat its world economy shaking mistakes.  Millions of people are out of work and have been for many, many months, in substantial part because the tiny number of people on Wall Street who determined how creditworthy bond issuers were had an insufficiently compelling incentive to get their decisions right.

Part of the barrier to the problem is that power dynamics and self-interest driven policy stances are often so transparent in the tort reform area and in the area of class action litigation in particular, that it is hard to separate and address sincere and legitimate concerns from merely self-serving ones in the policy arena.  Also complicating the effort to find a fair way to deal with the cases that drive class action litigation is that extremely loose class action standards and substantive law claims that can be brought as class actions in a handful of states like California create extremes of the process that suggest solutions that aren't necessarily appropriate for the more strictly regulated federal courts or courts in states like Colorado where class action litigation isn't nearly so common.

READ MORE - SCOTUS Dislikes Class Actions

Colorado Securities Act Trumps Forum Selection Clause in Contract

As a general rule, parties to a contract can decide where disputes arising under the contract or between the parties in relation to the transaction are litigated and according to which state's law. When this is part of an arbitration clause, state law determinations that a choice of forum are frequently pre-empted by the Federal Arbitration Act. But, what if the contract provides that suits may be brought in ordinary courts, but only in a particular state?

If that contract is a contract related to a sale of securities that are regulated by the Colorado Securities Act because sales are made by a business with Colorado offices from which it conducts business, the Colorado Court of Appeals has held that the contract's forum selection clause is void as violation of a public policy articulated in that statute in an anti-waiver provision.

The Colorado Court of Appeals followed precedents interpreting similar issues under Colorado's Wage Claims Act and invalidating an arbitration requirement in a case covered by Colorado's Wrongful Withholding of Security Deposits Act. California and Illinois have similarly used anti-waiver provisions to invalidate forum selection clauses.

The Colorado Court of Appeals rejected analogies to federal securities contracts in international situations where state securities law claims are also present, a situation where many federal courts have upheld choice of forum clauses. It also rejected analogies to arbitration cases, where a federal statute applies, and to change of venue motions in the federal courts which do not have an analogous provision for transferring a case to a different state in Colorado's state courts.

In the case decided, in which the clause also selected Texas law as applicable, the distinction was crucial, because the general partnership interests that were marketed are securities under Colorado law, but not under the state securities laws of Texas, and because the Texas securities law, on its face, does not apply to transactions conducted outside the state of Texas.

Notably, this case was not brought as a class action.

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Federal Arbitration Act Strengthened

The U.S. Supreme Court,  in a 5-4 ruling along its "usual" liberal-conservative lines in the case of AT&T Mobility v. Concepcion, has held that the Federal Arbitration Act pre-empts state law in California that holds that waiving the right of access to a class action remedy in an arbitration clause in unconscionable and void when it included in certain kinds of consumer contracts.

Since the U.S. Supreme Court ruling interprets only a federal statute, Congress could pass a law changing the result as it did, for example, in a recent case where Congress disagreed with a U.S. Supreme Court ruling interpreting the statute of limitations under a federal employment law.

The dissent in the case emphasized that the ruling effectively makes it economically impracticable to make all consumers who are harmed by low dollar misconduct in a consumer case to receive a remedy, and instead, effectively insures that the big business with the arbitration clause will profit from its misconduct in these consumer transaction because not all consumers will litigate.  Indeed, since the doctrine of collateral estoppel does not necessarily apply in arbitration cases, in principle, each consumer must separately litigate the merits of the underlying misconduct in full in every case, despite the fact that the harm to each consumer is only about $30.

On the other hand, while this ruling creates a situation where consumers cannot file a class action in this kind of case (either in court, from which they are barred, or in arbitration), the arbitration clause does not necessarily prevent a governmental regulatory body or attorney general from bringing suit against a business for a violation of a state or federal statute in connection with its conduct.  Indeed, this kind of litigation is fairly routine.  The total volume of regulatory actions in consumer cases rivals or exceeds the aggregate volume of consumer class action litigation, while avoiding sticky problems associated with selecting and compensating class counsel in a private class action case.  Generally, since the regulator or governmental agency is not a party to any contract with the business, it cannot be bound by an arbitration clause or other limitation on remedies reached with consumers in that contract.

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