With the Help of the Feds, Plaintiffs' Bar Zeroes in on For-Profit Colleges

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July 28, 2016

The plaintiffs’ bar is nothing if not enterprising, and it may already have trained its eyes on its next litigation target: For-profit colleges and universities.

A newly proposed rule, published last month in the Federal Register, includes several provisions that could prove quite lucrative to the litigation industry.

“First, the law seeks to amend 34 C.F.R. § 668.171 by defining an institution of higher education as ‘financially irresponsible’ if it is subject to a lawsuit by a state, federal, or other oversight entity for $750,000 or 10 percent of the institution’s current assets, unless the institution provides financial protection, such as a letter of credit,” explains The Heritage Foundation’s Andrew Kloster and Mary Clare Reim in The Daily Signal.

“This could encourage plaintiffs’ lawyers to sue colleges frivolously, and seek quick settlements, driving up costs for schools while providing no improvements,” they explain.

Forbes columnist Preston Cooper warns that, “Under this standard, an attorney general could hold a college hostage, possibly for years, without having to prove anything.”

Kloster and Reim also point to a provision that would ban arbitration clauses and class-action waivers in contracts with “institutions that relate to federal direct loans.”

This latter provision is not surprising in that it tracks closely with the plaintiffs’ bar aggressive campaign to ban arbitration clauses across the board; and, with the efforts of some policymakers, such as California Attorney General Kamala Harris and U.S. Senator Dick Durbin, to crack down on for-profit educational institutions.

Even the Washington Post editorial board weighed in with a heavy dose of skepticism on the lawsuit-generation potential of the proposed rule, which it describes as an “overreach.” 

“The 530-page regulation proposed by the Education Department, which would not be limited to for-profits but would also affect traditional public and private colleges and institutions, would vastly — critics say irresponsibly — expand the basis for debt relief with a far lower burden of proof,” notes the editorial board. “Of particular concern is language that allows students to sue if their college made a ‘substantial misrepresentation’ even if there is no harm and no evidence of intent to defraud or mislead, which is generally the standard in fraud claims.”

In other words, let’s say a student graduates from a university and fails to land a job. He or she would face a low bar in claiming that the university misrepresented the ability to gain employment upon graduation — and have a cause of action to sue his or her alma mater.

To sum up, the proposed rule would: Allow more lawsuits by state attorneys general (many of whom outsource litigation to contingency-fee plaintiffs attorneys); lower the burden of proof for graduates to sue their universities for alleged fraud; and, outlaw arbitration by institutions of higher learning.

That sounds like a pretty sweet deal … for the plaintiffs’ bar.

Unfortunately, it could also leave American taxpayers on the hook.

As the Washington Post editorial concludes, “A cottage industry already is forming with law firms and loan-consolidation companies trolling for students with borrower defense claims. Their appeals are not limited to for-profit schools but include well-established traditional colleges and universities. Taxpayers could be on the hook for billions of dollars in student loan discharges.”

It’s pretty clear that, once again, the federal government has proposed a rule ostensibly meant to protect taxpayers but which is really little more than a handout to the American plaintiffs’ bar.