The New York Education Department Bureau of Proprietary School Supervision has issued a ruling banning, arbitration clauses on proprietary and career training school enrollment agreements as well as financing plans extended by schools. The ruling includes conditions under which “permissive, post-dispute arbitration may be approved.”

The Bureau of Proprietary School Services overses all vocational and career training programs in the state of New York. Their website had this statement issued by the agency:

BPSS will not permit an enrollment agreement, or any provision of it, including an arbitration clause, to infringe on the jurisdiction of the Commissioner of Education or the New York State Education Department to investigate schools and issue findings (whether or not a complaint is filed), to commence disciplinary action, or otherwise to issue any remedy, including with respect to the tuition reimbursement account, provided by the Education Law and the Commissioner’s regulations. Furthermore, BPSS will permit an enrollment agreement to contain a provision that BPSS reasonably believes may prove unenforceable due to its foreseeable preemption by federal law or regulation.

Given the foregoing, BPSS has identified the following conditions that must be satisfied before an arbitration clause would be permitted in a school’s enrollment agreement as a reasonable rule, regulation, or condition that the school may wish to insert under 8 NYCRR § 126.7(b)(12).

Mandatory, pre-dispute arbitration will not be approved, regardless of whether a school receives federal financial aid under Title IV of the Higher Education Act (HEA). BPSS has determined that the use of mandatory arbitration clauses would unreasonably undermine a student’s private right of action under New York’s Education Law § 5003(8), which permits a “student injured by a violation of [Article 101 of the Education Law to] bring an action against the owner or operator of a licensed private career school for actual damages or one hundred dollars, whichever is greater.” BPSS has also determined that such clauses would risk creating unwarranted ambiguity with respect to the authority of BPSS under the Education Law, given the general rule that arbitration agreements are enforceable as written.

Permissive, post-dispute arbitration may be approved. However:

  1. the arbitration must not purport to be coextensive with or otherwise delimit the Commissioner’s authority to act, particularly under Education Law § 5003, but also generally;
  2. participation in arbitration must be voluntary for the student; and
  3. an arbitration option must cover only the student’s private right of action under Education Law § 5003(8), accompanied by an appropriate disclosure.

As stated above, in relation to any proposed permissive arbitration clause, it must be clear that BPSS retains its authority under the Education Law, including to investigate complaints and issue findings. This means, among other things pertaining to its authority, that a student’s right to file a complaint cannot be waived or diminished by any agreement to arbitrate, and that the decision of an arbitrator will not have any preclusive or otherwise mutually exclusive effect, in whole or in part, on any determination that BPSS may make as to matters within its jurisdiction. While BPSS, if it thought appropriate, could allow a student to arbitrate a dispute concerning a subject matter that may be coextensive with a BPSS investigation, it is conceivable that a determination by BPSS or the Commissioner in such a situation could be contrary, in whole or in part, to the decision of an arbitrator. In that case, the determination of BPSS (or the Commissioner) would have the effect of overruling the determination of the arbitrator, even though the determination of BPSS was issued after the arbitrator’s decision.

Therefore, the complaint process under Education Law § 5003 should not be referenced in any way by any arbitration clause beyond some version of the phrase: “election of arbitration with respect to any claim of the student shall not affect the jurisdiction of the New York State Education Department, or the authority of the Commissioner of Education, to investigate complaints, or to perform any other act for which authority is conferred on the New York State Education Department or the Commissioner of Education by the Education Law, even if the substance or effect of any arbitration award would be or is contrary to such investigation or action, or the result thereof, including but not limited to any investigative findings, settlement agreements, or final orders issued upon a determination that one or more violations of the Education Law were committed.”

Participation in arbitration by the student must also be voluntary. This means that a student must be able to choose to arbitrate a dispute after it has arisen and must be able to effectively veto a school’s decision to arbitrate such a dispute. Thus, if a student signs an enrollment agreement in which arbitration may be chosen or rejected by the student, regardless of what dispute resolution mechanism a school may select, then it is a voluntary agreement because the student may refuse to arbitrate a dispute. If, however, a school may elect to arbitrate a dispute where a student would not, then BPSS would not consider that mechanism to be voluntary.

In addition, the scope of any student waiver in a permissive, post-dispute arbitration clause may only encompass the aforementioned student private right of action under Education Law § 5003(8) or other lawsuit that a student might otherwise bring privately. BPSS believes that this additional criterion is necessary to prevent any interpretation of an arbitration clause that may lead to a claim that the Department has waived its authority to enforce the Education Law, and to clarify for the student what exactly he or she is giving up when agreeing to arbitrate a dispute. In conjunction, therefore, a sufficiently clear and informative disclosure is required to the effect that the student is aware of his or her rights under Education Law § 5003(8) and, by agreeing to arbitrate a dispute, is waiving those rights (or any other right to sue, as the case may be).