California Court Limits Private School’s Arbitration Provision

Published October 11, 2009

A California appellate court has issued a major decision regarding private schools and arbitration agreements. The Court ruled that to the extent an arbitration provision contained in a private school’s enrollment agreement permits the prevailing party to recover attorney’s fees expended in the defense of a statutory claim, the provision violates public policy and is unenforceable.

The case—which subjected enrollment agreements to the same scrutiny as employment agreements—is the first of its kind decided in California and one of the very few dealing with this issue nationally, and thus is expected to have wide-ranging implications.

In D.C. v. Harvard-Westlake (176 Cal.App.4th 836), students at Harvard-Westlake School—a private school in Los Angeles—used school computers to threaten a classmate because of his perceived sexual orientation, on a third-party Web site. The threatened student’s family pulled him from school and filed the lawsuit.

To prevent the case from going to court, Harvard-Westlake invoked the arbitration clause in the student enrollment agreement—a provision requiring each party to pay its pro-rata share of arbitration expenses and allowing the winning party to recover its attorneys’ fees. Harvard-Westlake prevailed, and the arbitrator awarded the school more than $500,000 in attorneys’ fees and costs. After a Superior Court judge upheld the arbitrator’s award, the family took the case to a state appellate court.

Reversed Decision

This time, the decision—rendered in August after four years of court battles—was reversed. Analogizing cases from the employment context, the court distinguished between statutory and non-statutory claims. For statutory claims, such as violation of a hate-crimes provision—which was at issue here—the court determined the arbitration clause could not subject the family to costs or fees exceeding those that would be incurred if the case were heard by a court. Therefore, a portion of the attorneys’ fees awarded by the arbitrator were improper.

For non-statutory claims, such as negligent infliction of emotional distress, the court was more circumspect, hinting at potential limits schools may face when trying to enforce attorney fees and other provisions included in arbitration agreements. Moreover, the court raised the possibility of schools’ arbitration clauses and attorney fees provisions being unconscionable, and therefore unenforceable altogether. The court explained the parties’ bargaining powers, the circumstances around the agreement’s execution, and the substantive conditions in the enrollment agreement would factor in determining the arbitration agreement’s validity.

Lessons to Learn

In light of this decision, schools should reevaluate whether to incorporate arbitration agreements in their enrollment contracts. While arbitration clauses can—and usually do—ensure a relatively quick and confidential resolution of disputes, that result is not assured. This case, for example, involved 14 depositions and eight expert witnesses, and took more than four years to conclude. Also, arbitration can be expensive, costing thousands of dollars per day. Even when the parties split the cost, they will incur a significant expense not applicable to cases litigated in court.

Moreover, a school’s insurance policy may cover court claims but not arbitration charges. If there is a dispute over which party “prevailed”—for instance, when there are multiple claims and a mixed decision—determining how much in attorneys’ fees must be paid may actually result in more litigation.Nonetheless, schools should consider including an attorney-fees provision because it can discourage frivolous claims. Finally, schools should ensure arbitration clauses reflect the current state of the law.

Even with this most recent decision, the law is somewhat in flux. Schools should weigh their own needs against the limits imposed by statute and case law. In California, at least, schools may not recover attorneys’ fees for statutory claims. Each school should also carefully review whether the terms of its arbitration clause are overly favorable to it (or unduly onerous to the family), to avoid being determined unconscionable by a court.

Michael Blacher ([email protected]) is a partner and Lauren Liebes ([email protected]) is an associate in the Los Angeles office of Liebert Cassidy Whitmore, a law firm dealing in education, labor, and employment law matters.