Dreams protected: A new approach to policing proprietary schools’ misrepresentations

Dreams protected: A new approach to policing proprietary schools’ misrepresentations

Linehan, Patrick F

INTRODUCTION

Consider the story of Michael Joyner.2 Joyner, a sixty-nine year-old man with a sixth grade education, worked as a factory worker for twenty-two years. After seeing subway advertisements and television commercials portraying enrollment in the Albert Merrill School as offering a sure path to a well-paying job, Joyner inquired about the school’s computer programming training program. A school representative immediately administered an “aptitude test,” purportedly aimed at measuring Joyner’s ability to handle the coursework. Joyner neither understood nor completed the exam in the allotted time. Even after observing Joyner’s poor performance, however, the representative assured the eager Joyner that “he had a good head, worth a $10,000 job.” The representative further stated that the school would place Joyner in such a job following his completion of the school’s program. Upon enrollment, representatives had Joyner sign documents that he did not understand and that were not explained. Joyner learned later that these documents were loan applications for approximately $1,500. In the course of his program, Joyner voiced his desire to withdraw from the school and receive a refund of his tuition. His apprehension was met with reassurances from the school director that “everyone passes.” Throughout, the course, Joyner took open-book tests during which students were permitted to copy the answers from other students’ papers. Upon graduation, the school supplied Joyner with a false resume to use in his job search. In the five years after graduation, Joyner interviewed for fifty to sixty potential computer programming positions but did not receive any job offers; he was unable to pass the prospective employers’ proficiency tests. Unable to find a higher-paying computer programming job, Joyner eventually defaulted on his student loan. As a result, Joyner lost his life savings and his meager factory worker wages were garnished.

Joyner’s experience is typical of many individuals, often of low socioeconomic and educational status, who attempt to improve their labor skills by enrolling in vocational training schools. While the events described above occurred over twenty years ago, such horror stories are repeated over and over again, involving students who are promised much but provided little by private proprietary trade schools.3 And as the number of U.S. proprietary schools supplying oversaturated trades rise, individuals are enrolling in proprietary school programs based on inflated (if not outright false) representations made by proprietary school representatives.4

Joyner fortunately was able to. recover his losses,5 in large part because he had an ideal set of facts. In Joyner’s case, the school behaved fraudulently in every respect, from blatant false representations to fraudulent test administration. But in most cases, however, the harm proprietary school students suffer flows from representations far more subtle and nuanced than those the Albert Merrill School employed. Unfortunately, existing legal doctrine and regulatory regimes are ill-suited to protect proprietary school students from such predatory marketing practices.

This Note argues that existing state law, either through public or private enforcement, does not provide proprietary schools with adequate incentives to implement honest, non-predatory marketing techniques, nor does it provide victimized students with adequate remedies when schools do employ these dishonest, predatory techniques. This Note argues that the U.S. Department of Education is the superior entity to police proprietary schools. Although the Department of Education has its own institutional and legal handicaps, any meaningful attempt to address the problem of proprietary school fraud committed against students must take place at the federal level.

Part I of this Note attempts to define the problem of proprietary school fraud in specific terms by describing proprietary schools’ role in post-secondary education and illustrating how proprietary schools’ structure and operations are susceptible to abuse by school administrators. Part II argues that while in theory private actions maximize deterrence and provide individuals with remedies for proprietary schools’ dishonest and predatory practices, the available legal doctrine presents aggrieved students with evidentiary and procedural burdens that hamper success in practice. Part III discusses the theoretical and institutional strengths and weaknesses of the Department of Education and argues that it is best positioned to provide the necessary deterrence and remedy mechanisms. Finally, Part IV explores possible solutions to the institutional and legal deficiencies that prevent the Department of Education from protecting students from proprietary school fraud.

1. DEFINING THE PROBLEM

A. PROPRIETARY SCHOOLS’ ROLE IN POST-SECONDARY EDUCATION

Proprietary schools have attempted to meet the demand for job training and vocational education since before the turn of the century.6 However, significant expansion of the proprietary school market began in 1972, with the enactment of the Higher Education Amendments,7 which granted proprietary schools eligibility to participate in Title IV programs,8 thereby allowing them to offer federally backed student loans.9 According to 1997 data, more than five thousand proprietary schools serve over one million students,10 with sixty-seven percent of these students receiving Title IV federal student aid.11 Proprietary schools comprise fifty percent of all post-secondary institutions 12 and serve nearly fifty-one percent of non-baccalaureate students attending post-secondary institutions.13 Enrollment at proprietary schools is usually small; rosters average between fifty and one hundred students.14 Most enrollees are poor or welfare– dependent minorities who have previously experienced educational failure.15

In theory, proprietary schools provide hands-on job skills training.16 Proprietary schools offer programs that generally fall into one of six categories: personal services (hair styling, cosmetology, etc.) (forty percent), trade/ industrial schools (aviation, trade, arts, allied health) (twenty-two percent), business and secretarial schools (twenty-four percent), and transportation schools (five percent), and other (nine percent).17 The programs are usually of short duration and are focused on the local job market.18 Tuition usually does not exceed $5,000 per year, and federally backed loans are almost always available.19

B. PROPRIETARY SCHOOLS’ STRUCTURE AND ORGANIZATION

Although there is some variation in the internal workings of individual proprietary schools, most have the same structural framework. A typical proprietary school has a small administrative staff directed by a chief administrator, who is usually the school’s owner.20 Proprietary school administrator/owners, even at small schools, may lack firsthand knowledge of the subject being taught at their school,21 and responsibility for admissions, financial aid, recruitment and instructional program are usually delegated to others.22 Significantly, many schools tie recruiters’ and admission counselors’ salaries to the actual tuition paid by students they personally persuade to enroll.23 Such practices can provide an incentive for recruiters and admission counselors to mislead prospective students.

In addition, smaller schools are highly leveraged, and the enrollment of a few students can make the difference between a profit and a loss.24 This provides recruiters and admission counselors additional incentive to pursue students aggressively. This pressure is exacerbated by proprietary schools’ fierce competition with local community colleges, which offer similar educational opportunities at subsidized costs.25 To remain competitive with low-cost community colleges, proprietary schools often must offer enrollment at comparable prices, increasing pressure on proprietary schools to maximize enrollment numbers and tuition payments. Consequently, these market forces, to the extent that they place severe financial pressures on both employees and the institution itself to maximize enrollment numbers, create a breeding ground for overzealous recruiting methods and a willingness to make the sale at any cost.

C. MAKING THE SALE: PROPRIETARY SCHOOLS’ PREDATORY MARKETING TECHNIQUES

Market pressures inherent in the industry are often manifested in proprietary schools’ aggressive marketing and recruitment practices. Such techniques include mailing letters to non-college-bound high school seniors, placing advertisements on daytime and late night television to reach the unemployed and those seeking new jobs, placing upbeat success stories in newspapers, and direct recruiting at local community colleges. In the words of one proprietary school administrator, “We’re in competition for the customer’s disposable income. The product (job training) must be differentiated in the customer’s mind from other possible investments-a car or some other expensive good.”26 To enroll ever greater numbers of students and obtain additional federal funds, the majority of schools spend most of their resources on advertising, often to the detriment of actual educational services.27 As one veteran school regulator stated: “I see the problems every day. If you ask me, they’re all crooks. You get rid of one today, and tomorrow there’re five more to take his place.”28

The danger of such misleading recruiting tactics is particularly alarming when one considers that proprietary schools occupy a sensitive brokering position between students and the blue-collar labor market. Students generally view proprietary schools as the gatekeepers to their trade of choice, as well as an escape from poverty for themselves and their families.29 As a result, proprietary schools make representations that play on these insecurities.

School representatives usually are sophisticated enough to construct representations that are not factually inaccurate or promissory per se but achieve the same degree of persuasiveness. Because such persuasive representations are unlikely to be characterized as false, they are not likely to be grounds for proprietary school liability. These representations fall into one or more of five general categories. First, schools often falsely represent the amount of time required to complete the course. For example, schools have sent letters to prospective students stating that a shorthand reporting course could be completed in eight weeks.30 In another example, a school’s representation that particular students would be able to complete its court reporting program in two years was found to have been fraudulent.31

Second, proprietary schools misrepresent course content and the availability of facilities. In Phillips Colleges of Alabama, Inc. v. Lester,32 for example, the school misrepresented that it would provide a specified number of hours of practical training in cosmetology instruction in both clinical and classroom settings.33 Another school included misleading illustrations of machine tools in its brochure,34 while another misrepresented class size and the number of machines on which students would be trained.35

Third, proprietary schools misrepresent their accreditation status.36 For example, in Motel Managers Training School, Inc. v. Merryfield,37 a school implicitly misrepresented itself by failing to acknowledge its unlicensed status to its students.38 As a result, the franchises granted by the school to its students were held to be invalid.39

Fourth, some proprietary schools misrepresent their ability to confer licensing. For example, in Malone v. Academy of Court Reporting,40 a school misrepresented through mail, telephone, advertising presentations, and door-to– door canvassing that completion of the school’s paralegal program would yield an associate’s degree in paralegal studies and that course credit was transferable to a local university.41

Fifth, and most significantly, schools misrepresent students’ prospects for employment upon graduation. For example, in Delta School of Commerce, Inc. v. Wood,42 the court held that the defendant school intentionally misrepresented itself when it told prospective nurse assistant students that they would receive a salary comparable to that of a nurse upon graduation from the school’s program.43 In another example, a school induced a student to enroll by falsely promising that the school would find the student secretarial employment during the school year.44 Typical prospective students are particularly susceptible to this type of misrepresentation, because a student’s primary motivation for enrolling in a proprietary school is to maximize his or her chance for subsequent higher-paying employment.

Representations of post-graduation employability are particularly pernicious given the less-than-encouraging labor market for people with the skills typically taught at proprietary schools. According to the General Accounting Office (GAO), proprietary schools funnel students into labor markets that are oversaturated with workers.45 The GAO indicates that in twelve states, proprietary school students received training in twenty-three occupational categories where there is a labor surplus, with over two-thirds of these students receiving training in the oversupplied markets of barbering/cosmetology and electrical/electronic technology sectors.46 Proprietary schools’ unstable financial conditions and an increasingly oversupplied vocational skill labor market impose intense pressures on schools to inflate their ability to increase graduates’ marketability. Despite the social good generated by well-intentioned proprietary schools that prepare individuals for entrance into the skilled labor market, this intersection of pressures also raises the specter that proprietary school recruitment will be harmful, warranting increased concern.47

Given prospective students’ overwhelming desire for better livelihoods and the fact that proprietary schools’ profitability depends almost solely on enrollment (with little regard to students’ subsequent employability), the frequent use of false or misleading representations about the benefits of proprietary school education should not be surprising. In fact, fraudulent misrepresentations and deceptive marketing occur within the proprietary school industry with alarming frequency. From 1992 through 1997, almost 800 for-profit trade schools either closed or were stripped of their federal loan eligibility.48 Moreover, although proprietary schools compose one-third of the approximately 6,000 schools eligible for federal student grants and loans, they recently accounted for three-fourths of the Department’s student loan fraud and abuse investigations.49 When considered in light of the enormous harm suffered by students misled by deceptive proprietary schools, this high rate of proprietary school fraud should be cause for much concern.

D. PROPRIETARY SCHOOL RECRUITMENT: A POTENTIALLY HARMFUL ACTIVITY

Students lured into enrolling at proprietary schools by the schools’ misrepresentations can be harmed in two ways. First, a less injurious but nonetheless significant type of harm results when students spend their own money to satisfy tuition obligations. The misled student’s loss consists of the money put toward tuition, and the opportunity costs associated with terminating previous employment or decreasing work hours to attend the program. Second, the more common and more injurious harm occurs when a student applies for, receives, and ultimately defaults on federally backed student loans.50 In addition to losses incurred from direct, out-of-pocket tuition expenditures, students receiving loans incur the added expense of interest accrued on the loan and the indirect harms stemming from student loan default. One such indirect harm is the damage to the individual’s creditworthiness. Proprietary school students often default on student loans because they are unable to secure post-graduation employment in their chosen trade. Unable to realize the promised higher wages, students cannot pay their student loans. Because students usually receive these loans under Title IV of the Higher Education Act’s federal student loan program, default would make it virtually impossible for students to secure educational loans in the future.51 A poor credit rating also precludes students from securing other types of loans, such as home mortgages and automobile financing.52 Finally, federal educational loans may only be discharged in bankruptcy under certain limited conditions, thereby limiting any relief afforded by bankruptcy law.53

The indirect harm occasioned by loan default occurs with great frequency. Almost sixty-seven percent of all proprietary school students receive Title IV aid.54 However, an estimated three in five students who enroll in proprietary schools withdraw prior to completing one-quarter of the program.55 Students may withdraw for a number of reasons. Many proprietary school students may be unable simultaneously to participate in the program and hold down a job to pay tuition and other expenses and are therefore forced to drop out and work full time.56 In addition, proprietary schools often do not adequately test prospective students’ competency to complete their programs, so students are faced with coursework they may be unable to complete.57 Accordingly, students who withdraw from a proprietary school program are faced with the combined burden of mounting debt and no new marketable skill, which makes it very difficult to fulfill their loan obligations. For example, forty-one percent of all proprietary school students defaulted on their loans in 1990, compared to an overall post-secondary student loan default rate of twenty-two percent.58 From 1983 through 1993, federal payments to honor student loan default obligations increased over four hundred percent, from $445 million to $2.4 billion.59 This rate of default places a burden on both defrauded proprietary school students and the federal taxpayers.

Proprietary schools’ predatory marketing practices and the harm they cause. have a disproportional impact on certain minority and low– income populations.60 Proprietary schools by their very nature offer a good that is in demand by individuals who are in need of employment or who work an unskilled job and desire an increase in their earning capacity.61 As a result, proprietary schools often target their predatory marketing efforts toward low-income and predominantly minority communities. For example, the contents of one memorandum directed to admission representatives at one proprietary school was quoted in congressional testimony:

Drive through large housing projects SLOWLY with door sign on. Best times are Friday afternoons and Sunday afternoons.

Meet the managers of low-income and Government housing apartments. Give group presentations.

College career days on black campuses.

Food stamp offices-leave referral cards.

Welfare office-leave referral cards.62

In 1992, low-income proprietary school students spent an average of $1,102 per person in federal loans on proprietary schools, compared with $784 per person spent by middle-income students and $184 spent by high-income students.63 The consequences for low-income students are twofold. First, each dollar lost in a failed investment in a proprietary school education will decrease a low-income student’s total wealth by a larger percentage than that of a higher-income student. Second, because low-income students rely more upon federal student loans than middle- and upper-income students, the monetary harms associated with federal loan default, such as bad credit and potential bankruptcy hardships, are likely to be more damaging to a low-income student.64

II. INADEQUATE STATE LAW PROTECTION: THE FAILURE OF PRIVATE AND PUBLIC ENFORCEMENT

In light of proprietary schools’ use of false and misleading representations that disproportionately harms society’s most vulnerable, the critical need for strong deterrence mechanisms within the legal framework is obvious. However, state and local governments have provided ineffective protection. Individuals harmed by proprietary school fraud have less political clout than the proprietary school industry; thus it is unlikely that they will lobby successfully for more protective state and local legislation.65 In addition, because victims of proprietary school fraud are often culled from marginalized segments of society,66 their plight may not be readily observable or important to those responsible for the initiation of investigations, civil suits and criminal prosecutions.

In theory, the inadequacies of state and locally administered protection against fraud could be overcome by the use of private common-law actions in state court. Such actions would operate independent of the relative political strength of the proprietary school industry and would provide unity of interest and identity among those adversely affected by proprietary schools’ misconduct. Possible private causes of action in private litigation include theories under tort and contract law, as well as certain statutory protections under the rubric of consumer protection law. Although some of these legal avenues find a certain degree of success in providing remediation to injured parties, private actions provide little deterrence of proprietary schools’ harmful conduct. This Part outlines the areas of common law and statutory consumer protection law applicable to proprietary school fraud, and identifies their essential shortcomings in providing effective deterrence.

A. TORT LAW

There are three tort doctrines that could provide redress for victims of proprietary school fraud and could deter proprietary schools from employing predatory practices: (1) fraudulent representation, (2) negligent representation, and (3) educational malpractice.67 However, these doctrines must be received through the prism of the academic abstention doctrine, which courts often invoke to dismiss claims by students against educational institutions. For several reasons, the doctrine of academic abstention reflects courts’ (both state 68 and federal69) reluctance to delve into the operation of educational institutions7o and hold those institutions liable for the harm they cause students. First, schools often are financially burdened and have limited resources to absorb the cost of litigation. Courts believe that whatever good that might be derived from such suits would be counterbalanced by the subsequent dearth of educational opportunities for society, as qualified but financially burdened schools fail because of the need to defend frivolous suits.71 Second, many judges believe that, as experts in law and not in education, they should not participate in the creation of educational policy.72 Finally, because regulatory agencies actively supervise school operations, courts believe that regulatory agencies have greater institutional competence than do courts to adjudicate proprietary school fraud claims.73 Although courts have had more opportunities to apply academic abstention in the context of litigation involving public schools, some courts have invoked the doctrine in the private proprietary school context,74 thus creating a significant obstacle for making victimized students whole and deterring proprietary schools’ predatory practices.

1. Misrepresentation

a. Intentional or Fraudulent Misrepresentation.75 For a fraudulent misrepresentation claim, most states require the plaintiff to prove the following elements: (1) the defendant must have made a false representation; (2) the defendant must have acted with an intent to deceive; (3) the representation must have been directed at a particular person; (4) the plaintiff must have acted in reliance upon the representation’s purported truth (that is, the representation must have been material); and (5) the plaintiff’s reliance must have resulted in injury.76 Fraudulent misrepresentation actions are appealing weapons against fraudulent proprietary school recruitment in three respects. First, fraudulent misrepresentation actions direct judicial scrutiny at specific and isolated instances of proprietary school misconduct, thus limiting court intervention into an educational institution’s operations, which is a major concern under the academic abstention doctrine. Second, fraudulent misrepresentation actions focus the court’s attention on specific, intentional utterances rather than on general proprietary school conduct, thus minimizing the potential for overinclusive findings of liability. Third, as tort actions, fraudulent misrepresentation suits can deter proprietary school misconduct through punitive damages.77

Some victims of proprietary school fraud have brought successful state-level fraudulent misrepresentation actions. For example, in Phillips College of Alabama, Inc. v. Lester,78 the plaintiff, a licensed cosmetologist, enrolled in a cosmetology instructor program in reliance on the school’s written representations.79 The defendant school asserted that students would receive a certain number of hours of practical instructor training by assisting the defendant school’s basic cosmetology program in clinical and classroom settings. However, Lester received far less practical training than he had been led to believe he would receive.80 Direct testimony of school employees established the requisite degree of intent, that is, that the school made promises of future action with no intent to perform the promised act and that the school intended to deceive Lester.81 The Supreme Court of Alabama upheld a jury verdict awarding Lester $15,000 in compensatory damages and $35,000 in punitive damages. Thus, Lester’s claim of fraudulent misrepresentation was successful in remedying his injury and provide some deterrence for future proprietary school misconduct.

The decision in Lester notwithstanding, fraudulent misrepresentation actions in the proprietary school context are difficult to litigate successfully. The requirements of fraudulent misrepresentation actions present greater difficulties for plaintiffs whose factual scenarios are less favorable than the scenario in Lester. With respect to the first (falsity) and second (intent to deceive) elements, it is not always clear that proprietary schools’ representations, however misleading they may be, can be proven to be literally false statements as a matter of fact, made with the intent to deceive. The school in Lester represented that the school itself would provide some service in the future, which it ultimately failed to do. When a school fails to satisfy a forward-looking representation of future performance that is within the school’s direct control, it is fairly easy for plaintiffs to demonstrate that, at the time the representation was made, the school did not intend to perform it-especially if the school’s director admits this intent on the witness stand. It is more difficult to succeed in a fraudulent misrepresentation action when the school falsely represents that the student will find a job paying a specified minimum salary upon graduation. Here the fulfillment of the representation is subject to forces beyond the school’s control, such as a tight labor market or a student’s low competency level. Thus, the school technically does not know the representation is false.

Schwitters v. Des Moines Commercial College,82 in contrast to Lester, illustrates the difficulty in establishing that the proprietary school defendant’s forward-looking statements were false. In Schwitters, the defendant business college represented to the plaintiff that “she could complete a course in shorthand and typewriting, and obtain a position, in eight weeks’ time under the expert individual instruction” of the college.83 The court held that this representation “was no more than a prophecy,” that it “referred only to the future,” and that “its fulfillment, in the very nature of things, depended upon the ability, previous education, industry, and application of the student.”84 This characterization of the representation suggests that forward-looking statements that rely on factors outside the school’s control lack both the requisite degree of falsity and of specific intent required to prove a fraudulent misrepresentation action.

Compared to the representation in Lester, which involved a representation of future performance that was well within the school’s control, the Schwitters representation was more “prophetic.” However, the “prophetic” (as opposed to false) nature of the statement does not make it any less deceptive. Although the statement’s explicit prediction is not solely within the school’s control, the implication to the prospective student is that the predicted outcome is within the school’s control. Such deceptive prophetic statements also carry a more persuasive effect than the baldly false statement in Lester. The Schwitters statement offers the promise of future employability, which strikes at the heart of the students’ desires. Thus, the failure of fraudulent representation actions to address proprietary school statements that are semantically forward-looking but just as deceptively persuasive as concrete false statements allows proprietary schools to craft their marketing language to avoid liability. By promising outcomes which in some way depend on student ability, labor demand, or other factors outside the control of the school, the school can employ deceptively persuasive statements about the benefits to be reaped from their program with little threat of liability under a fraudulent misrepresentation tort action.

The “prophetic” nature of proprietary school misrepresentations can also present problems in proving the defendant’s intent to deceive. To the extent that the proprietary school market is driven by the ability of schools to generate future benefits to its enrollees, it is difficult to make a sufficient showing of the school’s intent to deceive. While a jury may be more willing to infer a proprietary school’s intent to deceive from a baldly false statement regarding promises of future performance within the school’s control, such intent may not be readily inferred by a forward-looking statement, the validity of which depends on factors outside the proprietary school’s control.85

With regards to the fourth element of a fraudulent misrepresentation claim– the requirement that the plaintiff justifiably rely on the defendant’s misrepresentation-it is generally recognized that one does not have the right to rely on statements that are predictive of the future.86 Although this principle does not obstruct actions based on misrepresentations of present facts about an educational program, it may present problems in cases where schools attempt to prophesize about a student’s future employability and job prospects.87

With respect to the fifth element-that the plaintiff’s reliance must have resulted in injury-many states require that the misrepresentation be the proximate cause of the ensuing injury.88 The issue of proximate causation becomes particularly problematic where the misrepresentation in question concerns future employability. The doctrine of academic abstention, discussed in Part II.A, disfavors recognition of causes of action against schools for failure to provide adequate education. One of the rationales underlying this doctrine is courts’ concern about their own inability to discern a causal link between the student’s failure to learn and the school’s educational program.89 For example, in Idrees v. American University of the Caribbean,90 a student sued a private medical school on the ground that it intentionally misrepresented its educational services to him. Along with alleging direct pecuniary loss resulting from these misrepresentations, the plaintiff also sought recovery of lost wages from leaving his laboratory technician job to attend the school, as well as the difference between his present lower-paying job and his former lab technician salary.91 Although the court upheld judgment on the direct pecuniary damages,92 it denied recovery of the more indirect loss, on the ground that such loss might also have been the result of plaintiff’s own actions.93 Thus, it would be difficult for most plaintiffs claiming harm stemming from schools’ prophetic statements to recover under a fraudulent misrepresentation cause of action.

In addition to these substantive legal impediments to successful litigation of fraudulent misrepresentation actions in the proprietary school context, there are also procedural obstacles. Most states, either by legislative enactment94 or judicial development,95 have a heightened pleading requirement for fraud claims similar to the pleading requirement of Rule 9(b) of the Federal Rules of Civil Procedure, although such rules almost always permit generalized pleadings for allegations concerning the defendant’s fraudulent intent.96 Also, intentional fraud claims generally carry a greater burden of persuasion at common law, usually requiring the plaintiff to provide clear and convincing evidence of each element of the action.97 Although these requirements serve as important procedural safeguards against frivolous fraud claims, they erect additional barriers for plaintiffs bringing claims of intentional misrepresentation against proprietary schools.98 Because the truth of a prediction about a proprietary school graduate’s marketability often hinges upon outside factors, the language of a deceptive representation may not provide the particularity required under Rule 9(b)– type procedural rules in the same way that the language of a clear-cut false statement of fact might. Furthermore, predictive statements dependent upon factors outside the school’s control may not rise to the level of fraudulent intent under a heightened standard of proof. b. Negligent Misrepresentation. Plaintiffs can also sue proprietary schools under the doctrine of negligent misrepresentation. Under this doctrine, the plaintiff must establish that the defendant proprietary school: (1) owed a duty of care to the plaintiff; (2) asserted a false statement; (3) intended for the plaintiff to rely upon it; and (4) was aware at the time the statement was made that if the plaintiff relied upon the false statement, the plaintiff would suffer harm; (5) that the plaintiff justifiably relied upon the false statement; and (6) suffered injury as a result of that reliance (that is, causation).99

Although in theory plaintiffs can litigate this claim in the proprietary school context, in practice, plaintiffs face the same problems that arise with negligence claims in general. In particular, given the concerns raised by the academic abstention doctrine, courts are cautious about imposing a duty of care upon educational institutions.100 The public policy arguments underlying the academic abstention doctrine resonate more strongly in a negligence action than in fraudulent misrepresentation actions because courts must determine the appropriate standard of reasonable care, rather than applying the more concrete elements of intent and reliance.101 In Cavaliere v. Duff’s Business Institute,102 for example, the Court held that an action against a private trade school, unless it is grounded in a positive misrepresentation or breach of a contractual term, should be barred: “This court would be hard pressed to determine which of the several alternative methods of teaching court reporting … or any other specialized trade skill was the appropriate one. Nor would it be an easy tack to determine why a particular student failed to acquire certain skills after pursuing a course of instruction aimed at teaching those skills.”103 Accordingly, negligent misrepresentation is not a feasible cause of action for injured proprietary school students to pursue.

c. Educational Malpractice. Another private state law cause of action available to mitigate the deleterious effects of proprietary schools’ predatory marketing techniques is the doctrine of educational malpractice. Under this doctrine, a student could seek to hold a proprietary school liable for damages arising from the schools’ negligence in providing educational services. The doctrine, though rarely recognized as an actionable claim, usually only arises in the context of public education, particularly special education.104 However, the doctrine does stand for the proposition that educators are professionals, and therefore it could theoretically could be used against proprietary schools that hold their educators out as professionals. Considering the difficulty of proving a school’s intent in fraudulent misrepresentation actions and the courts’ reluctance to abandon the educational abstention doctrine and prescribe a standard of care for any school, it is similarly unlikely that educational malpractice will be an effective tool for plaintiffs despite the normative appeal of holding schools to a high standard of care.

B. BREACH OF CONTRACT

Holding proprietary schools accountable for deceptive practices under contract law provides a doctrinal alternative that is in some ways superior to tort actions. First, contract-based claims avoid the concerns raised by the doctrine of academic abstention. By limiting the courts’ involvement in educational policy and administration to the enforcement of the terms of the contract, courts avoid the concerns of the educational abstention doctrine.105 Proprietary for-profit education will almost invariably involve some sort of formal contract. Aside from interpreting the text of formal enrollment agreements, courts have also assessed whether there was a meeting of the minds based on evidence of the parties’ reasonable expectations, given all the facts and surrounding circumstances.106 Such circumstances may include the school bulletin, oral expressions by faculty and administrators, student handbooks, school rules and regulations, and all other relevant expressions of intent and purpose.107 Interpreting such contracts is well within courts’ institutional competence. In addition, plaintiffs in contract actions are limited to compensatory remedies, so there are fewer risks to the financial viability of defendant schools.

Second, not only do breach of contract claims against proprietary schools appear to be better received by courts,108 they also allow plaintiffs to avoid the difficulty of establishing intent in fraudulent misrepresentation actions. For example, in Cencor, Inc. v. Tolman,109 former students alleged that the defendant trade school failed to satisfy obligations expressly provided in their enrollment agreements.110 The court upheld denial of summary judgment for the school, holding that schools are subject to breach of contract claims when students allege that educational institutions have failed to provide “specifically promised” educational services.111 Thus, contract actions similar to that in Tolman allow plaintiffs to avoid the high evidentiary burden of proving fraudulent intent.

However, contract actions are not without their weaknesses. First, the requirement, identified in Tolman, that a school’s promises be specifically enumerated obstructs contract actions where a school’s representations are general and lack detail,112 or where a representation does not take the form of a promise. For example, the Pennsylvania Court of Common Pleas upheld the dismissal of students’ claim of breach of implied contract in Cavaliere v. Duffs Business Institute,113 where students alleged that the school failed to provide “adequate, proper and quality” instruction and instructional tools.114 Drawing an analogy to educational malpractice claims, the court invoked the doctrine of education abstention.115 The court found that the students’ claim that the school failed to provide a quality education was simply too amorphous.116 Accordingly, the plaintiffs’ allegations were insufficient to defeat defendant’s motion to dismiss for failure to state a claim.117

Second, even if contract law principles are effective in providing relief to individual students injured by proprietary school fraud, these principles fail to adequately deal with the widespread nature of the problem. The theoretical underpinnings of contract claims, although sufficient for purposes of individual remedy, provide little in the way of large-scale deterrence. Again, successful breach of contract claims generally limit the plaintiff’s remedy to the lost benefit of the bargain. This requires such losses to be specific and ascertainable. However, with respect to losses incurred by former proprietary school students, it can be extremely difficult and costly to plead and prove damages, such as the loss of increased earning capacity and future employability, with enough specificity to obtain remedies the contractual breach. If the student has defaulted on educational loans, the same problem arises in remedying the harm of a marred credit rating or the inability to apply for other student loans. To the extent a plaintiff could prove ascertainable damages, the cost of doing so-for example, providing economic analysis of the local labor market by deposing and examining labor economists and credit analysts as expert witnesses-would likely limit or altogether preclude any real recovery.

In addition, by limiting student’s recovery to compensatory damages,118 contract actions reduce the monetary penalty ultimately imposed on culpable schools. This deters competent attorneys from taking on such cases, because the potential attorney fees are too low. Further, this allows schools to walk away from such litigation with, at most, merely an adverse judgment requiring them to reimburse the student’s original tuition money.119 As a result, the deterrent impact of these lawsuits is significantly reduced.120

C. CONSUMER PROTECTION STATUTES

Finally, states often have more than one consumer protection statute that could be applied to proprietary schools’ fraudulent practices.121 State consumer protection statutes generally follow the statutory schemes of either the Uniform Deceptive Trade Practices Act (UDTPA),122 the Uniform Consumer Sales Practices Act (UCSPA),123 the Federal Trade Commission Act (FTCA),124 or the Uniform Consumer Credit Code (UCCC).125 Although these statutes differ somewhat from state to state, most consumer fraud statutes apply upon a showing that the defendant represented that the goods or services at issue have characteristics they do not actually have.126 Other state statutes use more general language, simply prohibiting “unfair or deceptive acts or practices in the conduct of any trade or commerce.”127 Many states, either by express statutory authorization128 or judicial interpretation,129 permit civil prosecution of violators of consumer protection law by private plaintiffs, typically allowing plaintiffs to recover a fixed monetary penalty or treble damages, whichever is greater.130 Several states also have a separate consumer-protection-type statute that specifically addresses proprietary schools’ fraudulent conduct.131

Although consumer protection statutes appear to provide a remedy for individual plaintiffs, these statutes do not adequately deter proprietary schools’ deceptive marketing practices. First, consumer protection statutes in some states permit a private right of action only where the potential plaintiff has suffered an “ascertainable” or “actual” loss.132 Second, many state consumer protection statutes also require the additional proof of the defendant’s willful violation133 or the defendant’s unwarranted refusal to settle.134 Third, most states leave the issue of recovery of attorneys’ fees up to the trial judge’s discretion.135 Without the prospect of recovering attorney fees, the only incentive for attorneys to bring proprietary school fraud cases under these statutes is a contingency fee, since the usual victim cannot afford to pay an attorney’s hourly fee. However, total ascertainable damages will usually amount only to a few thousand dollars in tuition, so even a generous contingency fee does not pose a very enticing opportunity for counsel. As a result, monetary incentives for attorneys to represent clients in consumer protection lawsuits against proprietary schools are ineffective in increasing the number of meritorious claims.136 Accordingly, enforcement of consumer protection statutes falls to public enforcement, which is subject to state attorney general budgets, prosecutorial priorities, and the political pressures on elected state and county prosecutors.137

Fourth, many states also require private plaintiffs in statutory consumer protection actions to show that a defendant’s deceptive practice proximately caused their injury.138 Thus, plaintiffs seeking relief under consumer protection statutes encounter the same problems associated with litigating a fraudulent misrepresentation claim.139 Finally, despite the availability of treble damages included in many consumer protection acts, other state statutes are more restrictive in how large a monetary penalty courts are allowed to impose on violators.140

While each private right of action available to proprietary school students has its shortcomings, sole reliance upon private lawsuits also presents other practical difficulty in the effective policing of proprietary school recruitment and marketing: victims of proprietary schools’ fraud, to the extent they are poor and undereducated, usually lack the savvy to exercise their legal rights.141 Accordingly, while a private right of action under a state consumer protection statute can aid individual plaintiffs, such a private right of action is not an effective deterrent against widespread proprietary school fraud.

D. STATE REGULATORY BODIES

Not only do the legal and practical problems facing private legal actions make such state-level policing of proprietary schools’ fraudulent practices a less than optimal solution, but inadequacies inherent in state-level regulatory oversight of proprietary schools compound the difficulty of a state-law-based solution. In many states, public and quasi-public administrative entities oversee the proprietary school industry in order to prevent proprietary schools from harming vulnerable students. For example, many states impose licensing requirements142 and mandatory inspections.143 Some states also require proprietary schools to provide for a surety bond to insure against losses suffered by students that are caused by the school.144 Most states regulate proprietary schools through general consumer affairs agencies; others have separate regulatory entities devoted solely to the supervision of proprietary schools.145

In theory, quasi-public accrediting agencies also play a role in overseeing proprietary schools. Accrediting agencies, like many state regulatory bodies, promulgate industrywide standards that must be met before a proprietary school can receive accreditation.146 Because most state licensing schemes, as well as federal student loan program participation, require that proprietary schools meet accreditation standards, accrediting agencies appear to play an important role in regulating the proprietary school industry.147

However, state administrative agencies and accreditation entities often fail to provide effective oversight of the proprietary school industry.148 There are several possible reasons for these failures. First, the political will to provide sufficient funding for these state agencies often falls prey to anti-bureaucracy rhetoric.149 Often the proprietary school industry lobbies vigorously for less regulation, and this lobby has a much more powerful political position than do low-income students who fall prey to deceptive marketing and recruitment practices.150

Second, the proprietary school industry often exerts power through quasipublic accrediting agencies.151 Many accrediting agencies act more like advocacy groups for proprietary schools than as objective standard-setting organizations.152 As the U.S. Senate reported in 1991, “[a]ccrediting agencies reject the idea that it is their responsibility to see that Title IV funds are administered properly at their schools.”153 The Senate also criticized accrediting agencies for allowing schools to “buy” accreditation by purchasing an already accredited school, allowing the automatic accreditation of branch campuses, and conducting weak on-site evaluations.154 Furthermore, the Senate found that an inherent conflict of interest involved in accreditation: Once an agency approves a school for accreditation, the agency thereafter assumes the role of the school’s advocate.155

Given the manifest problems in the industry, effective oversight of proprietary schools, rather than the rubber-stamp oversight of accrediting agencies, would inevitably lead to the closure of certain schools. The resulting loss of jobs may create a constituency whose interest stands counter to that of victimized students.156 Conversely,.some states’ regulatory regimes have been overbureaucratized, which may prevent a streamlined regulatory effort in the proprietary school context.157 Similarly, state consumer protection agencies and state education agencies have concurrent jurisdiction over proprietary school regulation, which may lead to a disjointed and costly regulatory approach. Effective reform of proprietary school regulation may also suffer at the hand of more politically popular issues in the education arena.158

Hence, while some state tort, contract, or consumer protection laws may enable students to recover against proprietary schools, there are significant drawbacks to a private right of action under each statutory scheme. Further, no private right of action stands as an effective deterrent to proprietary school fraud. Similarly, the flaws in state public or quasi-public regulatory or accrediting agencies prevent such bodies from exercising effective oversight of proprietary schools’ marketing practices. Accordingly, no state-based legal or regulatory scheme provides an optimal solution for fighting proprietary school fraud.

III. FEDERAL POLICING OF PROPRIETARY SCHOOL FRAuD: THE BETTER INSTITUTIONAL ALTERNATIVE

Given the legal and institutional limitations at the state level, the U.S. Department of Education (“the Department”) is better equipped to address proprietary schools’ predatory marketing practices. Enticed by schools’ misrepresentations about graduates’ enhanced employability, many low-income students incur debt obligations they cannot satisfy when they cannot find employment in their chosen field. As discussed earlier, these defaults impose significant costs on the federal government and American taxpayers.159 Thus, compared to states and localities, the federal government has a stronger and more visible monetary incentive to curb the deleterious effects of proprietary schools’ predatory practices.160

The political position of victimized students, which is weak at the state and local levels, may be stronger at the federal level given taxpayers’ interest in efficient administration of the taxpayer-funded Title IV program. Any industry political pressure to limit oversight is countered by the interests of the nation’s taxpayers who share a common interest with victimized students in preventing proprietary schools’ predatory practices.161 While the states have relatively little to lose from student loan default resulting from proprietary schools’ predatory practices, the federal government’s monetary interest in the Title IV program may drive more effective regulation of proprietary school marketing and recruitment.162

In fact, a regulatory framework is already in place within the Department to monitor proprietary schools. The Department audits and generally supervises the operations of proprietary schools participating in Title IV programs. Thus, the Department possesses a wealth of information and expertise with which it could launch a comprehensive enforcement campaign against proprietary school’s predatory practices. For example, the Secretary of Education is required by law to “establish and operate a central data base of information on institutional accreditation, eligibility and certification.”163 In addition, the Department has in place an “Advisory Committee on Student Financial Assistance,” whose purpose is “to provide [the Department with] extensive knowledge and understanding of the Federal, State, and institutional programs of postsecondary student assistance,” and “to make recommendations that will result in the maintenance of access to postsecondary education for low- and middle-income students.”164 Thus, expansion of the Department’s regulatory role would likely impose smaller administrative costs than those required at the state level, where administrative agencies may lack the federal government’s institutional expertise.165

A. THE CURRENT “FEDERAL” REGULATORY FRAMEWORK

The federal statutory and regulatory regime attempts to prevent proprietary schools’ predatory practices by granting the Department a gatekeeper function with regards to schools’ eligibility to participate in Title IV programs. Federal law envisions a highly complex and comprehensive bureaucratic “triad,” with state licensing systems and accrediting agencies playing a significant complementary role alongside federal eligibility and certification requirements.166 Under the present system, federal law requires states to designate one or more administrative bodies to furnish school licensing information, to notify the Department upon revocation of a school’s operating license, and notify the Department when it has “credible evidence” that a school has committed fraud in the administration of federal student loans or has otherwise violated federal loan eligibility rules.167 Administrative agencies and federally recognized accrediting bodies are required to develop standards in areas that tend to indicate school success, such as graduation and placement rates, loan default rates, curricula and faculty, student support services, facilities and equipment, program length, and recruiting and admissions practices.168 Accrediting agencies are also required to assess student achievement when evaluating schools that apply for accreditation.169

Along with the state licensing and accreditation requirements,170 proprietary schools must also maintain a cohort default rate-that is, student loan default rate of a given cohort of students-below a statutory threshold of twenty-five percent for a defined period of time.171 In addition, proprietary schools must ensure that each student applying for Title IV loans has the “ability to benefit” from the program being offered.172 Currently, federal law requires that proprietary schools derive no more than eighty-five percent of their revenues from Title IV funds to be eligible to participate in Title IV programs.173

B. PROBLEMS WITH THE REGULATORY TRIAD

Despite the expansive statutory regulatory scope of federal oversight programs, the non-federal arms of the “triad” fail to adequately play their part as gatekeepers to Title IV funds. Incorporation of state licensing systems and accrediting agencies into this regulatory scheme reflects an attempt to address the federalism concern that education policy be controlled at the state and local level. However, the involvement of non-federal entities detracts from the federal government’s ability to protect federal student loan funds. Neither the state licensing agencies nor accrediting agencies have the same degree of financial interest in Title IV’s administrative integrity as the federal government does. As a result, the regulatory regime’s dependence on their involvement allows for some degree of lax enforcement.

For example, federal law imposes a statutory state licensing requirement; however, the Department’s regulations allow state authorities to define these requirements. As a result, federal regulation, because it incorporates state rulemaking, may be indirectly subject to the political advantages the proprietary schools hold at the state and local level. Thus, although the institutional strengths of the federal government could provide a powerful means of protecting students from proprietary school’s predatory practices, the inadequacies of its non-federal partners undercuts the effectiveness of the federal government in the regulatory triad.

In addition, to participate in Title IV programs, federal law requires that a school first be certified by an accrediting agency recognized by the Secretary of Education.174 However, Department regulations provide little guidance as to the proper criteria that accrediting agencies should meet to be considered legitimate. Instead, the regulations focus on the procedures accrediting agencies should use in granting accreditation.175 This autonomy has permitted accrediting agencies to evolve from independent regulatory entities to associations representing the interests of proprietary schools.176

C. THE FEDERAL GOVERNMENT’S PROSECUTORIAL POWERS

Not only do the ineffective state arms of the triad hamper the Department’s ability to police proprietary schools, but the Department’s prosecutorial ability to address adequately proprietary school’s predatory practices after students are injured by them is also limited. Federal authority to prosecute proprietary schools in this context seems to be limited to prosecutions for fraudulent acts committed against the government only, not against students. Under federal law, “any person who knowingly and willfully embezzles, misapplies, steals, or obtains by fraud, false statement, or forgery and funds “provided or insured [under the Higher Education Act] shall be fined not more than $10,000 or imprisoned for not more than 5 years, or both.”177 At first glance, the plain language of the statute does not exclude the possibility that federal prosecutors could apply it to fraudulent misrepresentations by schools to students. However, federal courts have only applied this statute in the context of fraud committed by schools or students against the federal government,178 suggesting that (sec) 1097 does not apply where schools have made fraudulent misrepresentations to induce students to enroll and to pay their tuition with Title IV funds.179

Nevertheless, Department regulations prohibit schools from making any “false, erroneous or misleading” representations to an enrolled student, prospective student, their families, or the Department.180 Examples may include misrepresentations about the nature of the educational program,181 financial charges,182 or the employability of graduates.183 With respect to the last category, the regulations specifically address misrepresentations such as: (1) the school is connected with an agency providing authorized training leading directly to employment; (2) the school maintains a job placement service for graduates or will otherwise secure or assist students in gaining employment; or (3) government job market statistics in relation to the potential placement of graduates are favorable to the potential student.184

Upon receipt of a complaint by a student or his family that a school has made a misrepresentation, the Department reviews the allegation to determine its factual basis and seriousness.185 For misrepresentations that qualify as “substantial,” meaning those statements reasonably relied upon by students,186 the Department may institute an administrative proceeding that can result in the limitation, suspension, or termination of the school’s Title IV participation eligibility. Alternatively, the Department may institute an administrative proceeding that could result in a fine of up to $25,000 for each violation.187

Unlike state fraudulent misrepresentation actions, the federal regulations do not have a scienter requirement. This appears to make the federal regulations a more useful tool for targeting schools’ fraudulent misrepresentations to students. However, significant obstacles still remain. First, the regulations grant federal Department officials significant discretion in addressing violations of the misrepresentation regulations.188 Using their discretion, federal officials could consistently refuse to restrict offending schools’ participation in Title IV or refuse to impose fines. This use of discretion could, at least theoretically, result in underdeterrence of predatory practices.

Similarly, although the regulations authorize fines of up to $25,000 per violation, they do not impose a minimum penalty. As a result, fines could be considerably lower, which would provide less monetary deterrence. In addition, the regulations leave open the question of what constitutes a single “violation.” At worst, federal officials could, in their discretion, construe as a single misrepresentation made to a large number of prospective students (for example, a brochure or billboard advertisement) instead of a separate violation for each student who enrolls based on the misrepresentation. This latter approach would also lessen the fine’s deterrent effect.

The Department may also exercise its discretion in determining the factual question of what constitutes a “substantial representation.” This discretion allows the Department to determine the reasonableness of students’ reliance upon the representation-an issue more appropriately determined by a jury. It is desirable for juries to determine the reasonableness of students’ reliance on alleged misrepresentations, because there usually are socioeconomic differences between the Department officials and victimized students. Thus, there is a greater chance that juries will contain members who share victimized students’ backgrounds, which may produce better informed, fairer results. Although the Department may have the institutional knowledge to identify the unreliability of a representation from an objective and more empirical point of view, a jury can arguably better assess the subjective reasonableness of the plaintiff in relying upon the representation.

Second and most importantly, the federal regulations offer no remedy to the injured student. Once the student (or a family member) reports the alleged misrepresentation, she is no longer involved in the enforcement process.189 The regulations do not authorize the distribution of any fines to compensate the injured student, confer standing to private parties harmed by the misrepresentation, or provide any other form of specific remedy to the injured student.190 Thus, although the federal government’s interest in protecting the fisc may be protected, nothing is done to compensate the victim.

Finally, despite the institutional strengths the Department may offer in theory to the detection of and enforcement against proprietary school misrepresentations, and despite the alignment of interests of victimized students and the taxpaying public on the federal level, it has been noted recently that the Department has, in practice, fallen short of fulfilling its responsibilities in this context. The Department has failed to conduct in-depth investigations of schools beyond a simple paperwork review.191 Similarly, lengthy administrative adjudicatory proceedings impede prompt action upon knowledge of a school’s fraudulent activity.192 In addition, the Department lacks the staffing and technology to effectively review schools’ continuing eligibility.193 However, despite the federal regulatory regime’s weaknesses, the Department, given the significant monetary interest of the national taxpaying public in the effective administration of Title IV funds and its existing expertise and information base, provides the best available means to address the problem of proprietary schools’ predatory practices, and its capabilities should be strengthened.

IV. ADDRESSING THE PROBLEM: IMPROVING THE DEPARTMENT OF EDUCATION’S INSTITUTIONAL AND LEGAL CAPACITY TO POLICE PROPRIETARY SCHOOL FRAUD AGAINST STUDENTS

To summarize, the legal and institutional obstacles to addressing proprietary schools’ misrepresentations to poor and undereducated students are manifold. The states’ ability to address the problem through private or public law is severely hampered by the inadequacies of the legal doctrines under which such suits are brought, and non-federal entities-state licensing agencies and accrediting agencies-are unable to effectively deal with the problem. Although the U.S. Department of Education has some weaknesses, it is best positioned to address the problem of proprietary schools’ predatory practices if it can compensate for its weaknesses in detecting, deterring, and remedying fraudulent proprietary school misrepresentations.

The Department should compensate for its weaknesses with a two-tiered approach. First, Congress should grant injured students a private right of action that avoids the evidentiary pitfalls of traditional state law rights of action194 and give the Department a right of action to sue proprietary schools for frauds committed against students. Permitting private enforcement of proprietary school regulation would compensate for the Department’s potential institutional deficiencies (the Department’s overburdened caseload and inadequate resources).195 At the same time, allowing the Department to sue proprietary schools for frauds against students would compensate for any deficiencies endemic to private enforcement, such as lack of financial resources and knowledge of legal rights. Second, Congress and the Department should alter the statutory-regulatory regime to compensate for existing legal deficiencies, such as monetary limitations on damages and the excessively narrow scope of the statements covered by the regulations.

A. ADDRESSING THE INSTITUTIONAL DEFICIENCIES: CREATING A FEDERAL RIGHT OF ACTION FOR BOTH INJURED STUDENTS AND THE DEPARTMENT

Allowing injured students and the Department to sue offending proprietary schools under federal law would maximize remediation and deterrence. Although presently the Department can bring administrative action against a proprietary school upon finding evidence of misrepresentation, the Department’s administrative process cannot detect all instances of proprietary school fraud against students. Thus, a private right of action for students would provide supplementary means of detection.

However, because the majority of parties injured by proprietary school fraud are poor and may lack the ability to pursue legal recourse for their injuries, effective enforcement of proprietary school fraud regulation cannot depend solely on the actions of these potential plaintiffs. Thus, a private citizen’s right to sue must be bolstered by combining it with a Department of Education right to sue. Granting the Department standing to sue provides a safety net for injured proprietary school students because it protects against a failure of the Department’s administrative oversight function and compensates for injured students’ limited resources by shouldering some of the financial burden of litigation.196

The creation of these new rights of action would undoubtedly have a downside. Creation of a private right of action would weaken Congress’s power to calibrate regulatory compliance.197 As Judge Posner argues, “the structure of the administrative process is designed to increase political control over the process of legal regulation.”198 By denying a private right of action to enforce a regulatory law such as one restricting proprietary school recruitment practices, Congress can control enforcement levels and penalties through appropriations and the specification of penalties respectively.199

However, because Congress has already given the Department wide discretion in selecting which administrative actions to bring and in imposing penalties, Congress has little power to calibrate regulatory compliance under the present system. Further, given the wide discretion delegated to the Department in this area, Congress can not confidently predict the type of recruitment practices likely to be subject to Department enforcement. In this light, creation of a private right of action would not pose much of a threat to the already diminished level of actual control that Congress wields over enforcement levels under the current regulatory regime.200 Moreover, Congress’s concern for minimizing the loss of Title IV funds through student loan default would most likely outweigh its concern for retaining its ability to dictate the regulatory process for the proprietary school industry.201 Therefore, the argument that a private right of action would erode Congressional oversight is not persuasive.

A stronger argument against the creation of this joint student/Departmental right of action is that it will impose significant judicial costs upon an already overburdened federal court system.202 The burdens associated with increased amounts of litigation moving through the system are higher than the burdens created by an appeal of an administrative order, because the court must decide the relevant issues de novo and does not have the benefit of an administrative record from prior deliberations.203 The strength of this argument hinges on the largely empirical question of whether the savings associated with deterring previously undeterred proprietary school frauds outweigh the judicial costs of entertaining these new actions. Any cost-benefit analysis, however, would have to take into account the intangible costs of emotional and psychological distress suffered by students who are injured by proprietary school fraud and the fact that concurrent jurisdiction is available in state courts, which would alleviate the potential for overcrowded dockets in federal court. In conclusion, the benefits to be gained from the creation of a private cause of action not only outweigh the potential costs of increased litigation, but the benefits also compensate for any possible encroachment on Congress’s oversight authority.

B. ADDRESSING THE LEGAL DEFICIENCIES: CHANGING THE LAW TO FACILITATE MAXIMUM REMEDIATION AND DETERRENCE

In addition to creating a joint right of action against proprietary schools for both the student and the Department of Education, it is also necessary to improve the existing statutory and regulatory framework, to relax potential restrictions on compensatory and punitive damages, and to broaden the excessively narrow scope of proprietary school representations targeted by current Department regulations. In a successful private right of action under state law, the plaintiff is, in theory, to be made whole. In the current proprietary school fraud legal framework, the plaintiff would be compensated for his wasted tuition payment,204 but would likely be left uncompensated for such losses as damaged creditworthiness, ineligibility for additional student loans, and nondischargeability in bankruptcy, which are neither readily ascertainable or easily proven. Worse, in consumer protection claims, recovery is usually limited to a preset amount, which often does not even cover the cost of tuition. Although state tort actions could in theory compensate the victimized student fully, in practice, as discussed earlier, such actions are unlikely to succeed.205 Even the Department’s current regulatory regime provides no remedy to victimized students. The Department may impose a fine of up to $25,000 per violation, but federal law does not provide that any portion of the fine go to the victimized student.206

Plaintiffs should instead be allowed to recover damages for all losses that flow from the proprietary schools’ fraudulent misrepresentation. Such losses could include expenses incurred from bankruptcy proceedings, lost wages resulting from leaving previous employment to attend the proprietary school, and any present and future losses flowing from a damaged credit rating and disqualification from consideration of future student loans. To facilitate a plaintiff’s ability to demonstrate the less ascertainable damages that flow from proprietary school fraud, the Department should also promulgate regulations establishing evidentiary presumptions concerning these types of harms. Such rules should, for example, establish a formula for computing a given student’s projected future losses from a damaged credit rating, or a mandatory minimum recovery for one’s ineligibility to benefit from Title IV loans in the future. To the extent that private actions at the state level currently are deterred by the dim prospect of full recovery of monetary losses, allowing plaintiffs to obtain a more complete recovery through a federal action would increase the incentive for injured students to bring and their lawyers to litigate actions against predatory practices.

Punitive damages can also be a strong mechanism to deter proprietary school fraud. They can be fine-tuned based on the extent of the harm caused by the proprietary schools’ misrepresentation and the amount needed to deter future misrepresentations given the school’s financial condition.207 By allowing for punitive damages for egregious proprietary school misrepresentations, courts in both student- and Department-initiated civil suits can achieve the effect of criminal sanctions without the overly restrictive procedural protections afforded defendant schools in criminal proceedings.208 In addition, although the Department may impose, at a maximum, a $25,000 fine per violation in the administrative context, the Department can within its discretion decline to impose the maximum fine in favor of a lesser one.209 Deterrence against proprietary school fraud could be increased by limiting this discretion and mandating minimum monetary penalties.

Finally, as discussed above, the three categories of statements under the current regulations that may qualify as “substantial misrepresentations” are those regarding the nature of the educational program, the nature of financial charges, and the employability of graduates.210 Although these categories cover a significant portion of proprietary school misrepresentations, they do not include all types of misleading statements made by proprietary schools to students. For example, in Joyner’s case, which was described at the beginning of this Note, the proprietary school representative’s statement, “you’ve got a good head, good for a $10,000 job,” would not, as a matter of law under the current regulatory regime, be recognized as an actionable misrepresentation because it clearly falls outside the ambit of the first two categories, and only barely approaches the third. That is not to say that such a statement should constitute a “substantial misrepresentation” as a matter of fact, but only that such a statement could not, as a matter of law, be argued as misrepresentative before the finder of fact. The current law also excludes from its coverage forward-looking statements about the prospective student’s ability to complete a course and learn the skills taught in the program.

In addition, the categories under the current regulations also encourage an overly formalistic approach toward defending such claims. Defendant schools could effectively fend off a claim by arguing not that the representation was not false or erroneous, or that it was unreasonably relied upon, but merely that the representation did not fit neatly into any of the regulations’ three discrete categories. A more effective legal framework would be to adopt a general definition of a “substantial misrepresentation” that encompasses any false or misleading or erroneous statements upon which plaintiff reasonably-considering all relevant circumstance-could rely211 and allow the finder of fact to decide whether the statement in question falls under that definition. Although it is probable that courts would carve out their own subject-matter compartments eventually, such judicial characterizations would be more flexible and fact– specific than any rigid categories created by statute or regulation. Thus, changing the existing regulatory framework to provide better compensatory and punitive damage schemes, and outlining plaintiffs’ evidentiary burdens more clearly will enable students injured by proprietary school fraud to obtain an adequate remedy and will more effectively deter fraudulent acts in the future.

CONCLUSION

Within the landscape of American higher education, proprietary schools provide opportunities for those who may not be able to take advantage of more academic educational settings. However, they have also created opportunities for dishonest proprietary schools to take advantage of America’s poor and unskilled.

It is difficult to protect the public from predatory proprietary schools. In theory, private litigation in state courts should provide some, although probably not all, of the deterrence necessary to protect students from dishonest proprietary schools and provide compensation when deterrence fails. However, in practice the doctrinal weaknesses inherent in the currently available tort and contract causes of action and consumer protection statutes render private action a weak enforcement tool. Further, given the relative political strengths of the proprietary school industry and individual-often marginalized-proprietary school students, the resulting ineffective state regulatory and accreditation agencies, and the absence of a significant state financial interest in federal proprietary school tuition programs, it is unrealistic to believe that state-level entities will protect victimized students.

At the federal level, the Department of Education’s oversight provides a better means of addressing the problem of proprietary school fraud. However, even at the federal level, institutional and legal regimes are inadequate. The current federal regulatory scheme only addresses proprietary school fraud to the extent it affects the government, and it places little emphasis on compensating the student. Furthermore, the institutional inadequacies common to almost all administrative entities-procedural obstacles, insufficient resources, overburdened caseload-are also present within the Department, which hampers the Department’s enforcement abilities. And although courts are similarly burdened, an overcrowded docket merely slows the process of adjudication. In comparison to the mere time delay resulting from a crowded court docket, an overburdened and underresourced enforcement agency would allow a significant amount of proprietary school fraud to go completely undetected and unaddressed.

Despite its problems, however, the Department provides the most appropriate mechanisms with which to confront the problem of proprietary school fraud. But to achieve maximum deterrence and remedy, both the institutional and legal problems that currently exist in the Department must be addressed. Conferring to both students and the Department a separate federal right of action for schools’ representations would likely achieve maximum protection against the fraudulent conduct of proprietary schools. Allowing private actions will bolster the Department’s ability to identify and address more violations, while allowing the Department to sue on behalf of the injured student would compensate for the students’ inability to finance the expenses of litigation. Further, providing individual remedies, imposing harsher monetary penalties, and defining “substantial misrepresentation” in a less formal manner would provide incentives for private enforcement, maximum deterrence and full recovery for individual losses.

Of course, these proposals do not offer a complete solution to the problem of proprietary school fraud. Changes in bankruptcy laws as applied to student loan defaults caused by proprietary school fraud may also provide relief to injured students. Greater involvement by the Federal Trade Commission in monitoring the content of proprietary school marketing may also minimize the potential for deception. Another option would be to exclude proprietary schools from Title IV programs altogether. However, as long as honest proprietary schools provide valuable educational opportunities and teach skills to facilitate individuals’ entry into the labor market, a more comprehensive legal solution, like the joint student/Department of Education right of action proposed here, will be required.

Copyright Georgetown University Law Center Mar 2001

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