Bernal et al v. Burnett et al

Filing 66

ORDER granting 15 Defendants Motion to Compel Arbitration. The Clerk of the Court is directed to administratively close this case without prejudice to a party moving to have the case reopened for good cause shown upon completion of arbitration proceedings, or for another proper purpose. by Judge William J. Martinez on 6/6/2011.(erv, )

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLORADO
Judge William J. Martínez
Civil Action No. 10–cv–01917–WJM–KMT
KRYSTLE BERNAL, and
AMANDA KROL, on behalf of themselves and all similarly situated individuals,
Plaintiffs,
v.
GEORGE BURNETT, an individual,
WILLIAM OJILE, an individual,
ALTA COLLEGES, INC., a Delaware corporation,
WESTWOOD COLLEGE, INC., a Colorado corporation,
TRAV CORPORATION, a Colorado corporation d/b/a Westwood College and
Westwood College Online,
GRANT CORPORATION, a Colorado corporation d/b/a Westwood College,
WESGRAY CORPORATION, a Colorado corporation d/b/a Westwood College,
EL NELL, INC., a Colorado corporation d/b/a Westwood College,
PARIS MANAGEMENT COMPANY, a Delaware corporation d/b/a Redstone College,
ELBERT, INC., a Colorado corporation d/b/a Westwood College, and
BOUNTY ISLAND CORPORATION, a Delaware corporation formerly d/b/a Redstone
College,
Defendants.

ORDER GRANTING DEFENDANTS’ MOTION TO
COMPEL INDIVIDUAL ARBITRATION

Plaintiffs Krystle Bernal and Amanda Krol filed this action on behalf of
themselves and others similarly situated against George Burnett, William Ojile, Alta
Colleges, Inc., Westwood College, Inc., Trav Corporation d/b/a Westwood College d/b/a
Westwood College Online, Grant Corporation d/b/a Westwood College Online, Wesgray
Corporation d/b/a Westwood College, El Nell, Inc. d/b/a Westwood College, Paris
Management Company d/b/a Redstone College, Elbert Inc. d/b/a Westwood College,

and Bounty Island Corporation d/b/a Redstone College. Plaintiffs—former students at
Defendants’ various entities—allege that Defendants violated the Colorado Consumer
Protection Act by, amongst other things, misrepresenting the type and quality of
services supplied by Defendants’ various for-profit colleges and online educational
programs.
Before the Court is Defendants’ Motion to Compel Individual Arbitration asking
the Court to dismiss this action based on issue preclusion, or, in the alternative, to order
that Plaintiff pursue their claims in individual arbitration. Plaintiffs oppose the motion
and ask the Court to find the arbitration clause unconscionable as a matter of law.
For the reasons explained below, the Court GRANTS Defendants’ Motion to
Compel Arbitration.
I.
A.

BACKGROUND

Factual Background
Plaintiffs Krystle Bernal and Amanda Krol attended Westwood College and/or

Westwood College Online between 2004 and 2009. (Compl. (ECF No. 1) p. 6.)
Defendant Alta Colleges Inc. is the parent company of Westwood Colleges, Inc., which
is the operating company for seventeen colleges and trade schools located in six states
under the names Westwood College, Westwood College Online, and Redstone College.
(Id. ¶ 6.) Defendant George Burnett has been acting CEO and Director of Alta Colleges
since 2006. (Id. ¶ 14.) Defendant William Ojile is Chief Legal and Compliance Officer
for Alta Colleges. (Id. ¶ 15.)
Plaintiffs’ Complaint alleges that Defendants, by and through their employees,

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systemically engage in deceptive trade practices by misrepresenting key facts about
their operations, including the total cost of education at the schools, the prospect of job
placement and salary expectations after graduation, the schools’ accreditation status,
and the transferability of credits obtained at the schools. (Compl. ¶¶ 16-36.) Plaintiffs
claim that Defendants’ “admissions counselors” or “academic counselors” employ highpressure sales tactics to deceptively entice students into enrolling. According to
Plaintiffs, Defendants provide extensive training in these high-pressure sales tactics and
require that their counselors meet “budgets” with respect to enrollment. (Id. ¶¶ 37-50.)
Plaintiffs allege that these systemic practices violate the Colorado Consumer
Protection Act. (Id. ¶¶ 102-120.) Plaintiffs seek class certification, an injunction against
continuing unlawful actions, and monetary relief as allowed by the Consumer Protection
Act. (Id. pp. 43-44.)
B.

Arbitration Agreements
Plaintiff Krystle Bernal enrolled in Defendants’ fashion merchandising program in

2005. (Bernal Decl. (ECF No. 24) ¶ 3.) Plaintiff Amanda Krol enrolled in Defendants’
criminal justice program in March 2004. (Krol Decl. (ECF No. 21-2) ¶ 3.) As part of the
enrollment process, both Plaintiffs completed Defendants’ standard enrollment
documents. (ECF No. 15-2.) Included in the enrollment documents was a stand-alone
document entitled: “Agreement to Binding Arbitration and Waiver of Jury Trial” which
stated in part that the signer “agree[s] that any dispute arising from my enrollment at
Westwood College, no matter how described, pleaded or styled, shall be resolved by
binding arbitration under the Federal Arbitration Act conducted by the American
Arbitration Association (“AAA”) under its Commercial Rules.” (Id.) It further provides:
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“Both the Student and College irrevocably agree that any dispute between them shall be
submitted to arbitration.” (Id.) Additionally, embedded in another document that each
Plaintiff signed was a provision that stated:
I, the applicant . . . acknowledge that any disputes relative to
this contract or the education and training received by me,
no matter how described, pleaded or styled, shall be
resolved through binding arbitration under the Federal
Arbitration Act conducted by the American Arbitration
Association (“AAA”) at Denver, Colorado under its
Commercial Rules. The award rendered by the arbitrator
may be entered in any court having jurisdiction. Refer to
“Agreement to Binding Arbitration and Waiver of Jury Trial”
form in the application materials.
(ECF No. 15-3.) Together these forms will be referred to as the Arbitration Agreements.
Neither Plaintiff had any commercial or business experience before enrolling in
Defendants’ programs. (ECF No. 21-2 & 24.) Krol was seventeen and Bernal was
nineteen when they initially enrolled. (Id.) Plaintiffs did not believe that they had the
right or ability to negotiate any of the terms contained in the enrollment materials. (Id.)
Plaintiffs do not remember signing the Arbitration Agreements. (Id.) Defendants’
admissions representatives made no effort to highlight the Arbitration Agreements in the
admissions materials or to explain what they meant and what rights Plaintiffs were
giving up. (Id.) Neither Plaintiff understood that she was waiving her right to pursue
litigation. (Id.)
C.

AAA Proceeding
In May 2009, Michael Mensch, Tyrone Bailey, and Jessica Rosales (the “Mensch

Plaintiffs”), represented by the same counsel as represents Plaintiffs in this action, filed
a putative class arbitration before the American Arbitration Association arguing that
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Defendants’ business practices violated the Colorado Consumer Protection Act. (ECF
No. 15-5 at 2.) The putative class included “All persons . . . whose last date of
enrollment was on or after three years from the date” of the demand. (Defs.’ Mot. To
Compel at 5.) Bernal and Krol were part of the putative class though they did not know
any of the Mensch Plaintiffs and were not aware of or following the outcome of the
putative class arbitration. (ECF Nos. 21-2 & 22-1.)
The Mensch Plaintiffs sought a “Clause Determination Award that the Arbitration
may be maintained as a class arbitration.” (Id.) The parties chose Arbitrator William
Baker to preside over the clause determination award. On July 16, 2010, Arbitrator
Baker issued a forty-six page Partial Final Clause Construction Award. (ECF No. 25-1.)
He ruled: (1) there was no explicit agreement to class arbitration so as to allow him to
compel class arbitration under Stolt-Nielsen v. AnimalFeeds, 130 S. Ct. 1758 (2010);
and (2) under Colorado law, the arbitration agreement was not unconscionable. (ECF
No. 25-1 at 46.) On March 8, 2011, the Denver County District Court confirmed
Arbitrator Baker’s decision. (ECF No. 63-1.)
D.

Procedural History In This Case
Plaintiffs initiated this action on August 11, 2010. (ECF No. 1.) Defendants filed

the instant Motion to Compel Arbitration on August 24, 2010. (ECF No. 15.) The
Motion is fully briefed and ready for ruling. The Supreme Court issued AT&T Mobility
LLC v. Concepcion, 131 S. Ct. 1740 (2011) on April 27, 2011. The Court requested
supplemental briefing from the parties addressing Concepcion and it was received on
May 19, 2011. (ECF Nos. 63 & 64.)
The case is currently stayed pending resolution of the instant Motion. (ECF No.
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48.) No discovery has been conducted and no scheduling order has been entered.
II.

ANALYSIS

Defendants move to compel arbitration under the Arbitration Agreements signed
by Plaintiffs as part of their enrollment process. (ECF No. 15.) The Motion and
Plaintiffs’ opposition raise two issues: (1) whether Arbitrator Baker’s decision is binding
on Plaintiffs; and (2) if collateral estoppel does not apply, whether the arbitration
agreement is unconscionable.
A.

Collateral Estoppel and Arbitrator Baker’s Determinations
Defendants argue that Plaintiffs are precluded from raising unconscionability

because Arbitrator Baker has already ruled that the Arbitration Agreements were not
unconscionable and his decision was confirmed by the Colorado District Court. In
determining whether a state court judgment has preclusive effect, a federal court
applies the issue preclusion principles of the state rendering the judgment. Hawkins v.
C.I.R., 86 F.3d 982, 986 (10th Cir. 1996). Under Colorado law, collateral estoppel bars
relitigation of an issue if: (1) the issue is identical to that actually and necessarily
adjudicated in a prior proceeding; (2) the party against whom estoppel is asserted was a
party or in privity with a party in the proceeding; (3) there was final judgment on the
merits; and (4) the party against whom estoppel is asserted had a full and fair
opportunity to litigate the issue in the prior proceeding. City of Thornton v. Bijou
Irrigation Co., 926 P.2d 1, 82 (Colo. 1996).
Even if Defendants could show that all four prongs for collateral estoppel were

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satisfied,1 “[u]nder Restatement (Second) of Judgments § 28(2)(b) (1982), there is an
exception to the doctrine of collateral estoppel when ‘the issue is one of law and a new
determination is warranted in order to take account of an intervening change in the
applicable legal context or otherwise avoid inequitable administration of the laws.’”
Central Bank Denver v. Mehaffy et al., 940 P.2d 1097, 1103 (Colo. App. 1997).
Whether a contract is unconscionable is a question of law. See Mullan v. Quickie
Aircraft Corp., 797 F.2d 845, 850 (10th Cir. 1986). The United States Supreme Court
issued AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011) on April 27,
2011—over nine months after Arbitrator Baker issued his decision finding that the
Arbitration Agreements were not unconscionable. Concepcion held that the Federal
Arbitration Act preempted California’s judicially-created rule regarding the
unconscionability of arbitration clauses in adhesion contracts. Though unconscionability
is generally governed by state law, and Colorado’s unconscionability standard is
different than California’s, the Concepcion decision has broad enough implications that
it constitutes an intervening change in the applicable legal context. As Defendants
admitted in their response to the Court’s request for supplemental briefing, “Concepcion
has implications important to this case.” (ECF No. 63 at 5.) Given this intervening
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The Court has reservations about whether Defendants could show Plaintiffs Krol and
Bernal were in privity with the Mensch Plaintiffs. There were no formal Rule 23 protections
afforded to Bernal or Krol; they were not notified of the arbitration proceeding or given the
opportunity to opt out. Arbitrator Baker made no finding as to the capacity of the Mensch
Plaintiffs to serve as adequate class representatives or with respect to whether counsel was fit to
serve as class counsel. Given these facts, Plaintiffs certainly have a plausible argument that
barring their claims under the doctrine of issue preclusion would violate their Due Process rights.
However, because the Court finds that the Concepcion decision constitutes a change in the law
that warrants revisiting the issues determined by Arbitrator Baker, it need not decide whether
Plaintiffs Krol and Bernal were in privity with the Mensch Plaintiffs.
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change in the law, the Court finds that its consideration whether the Arbitration
Agreements are unconscionable is not barred by collateral estoppel. Accordingly, the
Court will examine the merits of Defendants’ Motion to Compel Arbitration and Plaintiff’s
opposing argument that the arbitration agreement is unenforceable.
B.

Merits of Motion to Compel Arbitration
The Federal Arbitration Act (“FAA”) was enacted in response to judicial hostility

to arbitration agreements. See Hall Street Associates, LLC v. Mattel, Inc., 552 U.S. 576
(2008). Section 2 of the FAA provides, in relevant part: “A written provision in any . . .
contract evidencing a transaction involving commerce to settle by arbitration a
controversy thereafter arising out of such contract or transaction . . . shall be valid,
irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the
revocation of any contract.” 9 U.S.C. § 2. The Supreme Court has described Section 2
“as reflecting both a liberal federal policy favoring arbitration and the fundamental
principle that arbitration is a matter of contract.” AT&T Mobility, Inc. v. Concepcion, 131
S. Ct. 1740, 1742 (2011) (internal quotations and citations omitted).
In this case, Plaintiffs do not argue that they did not sign the Arbitration
Agreements. They also do not dispute that the nature of their claims falls within the
scope of the Arbitration Agreements. Thus, the only issue is whether the Arbitration
Agreements are enforceable contracts. If they are, the Court must compel the parties to
arbitration.2

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At argument on the instant Motion, the parties agreed that whether such arbitration
should be class or individual is a matter for the arbitrator to decide. Thus, the only issue for the
Court is whether the parties should be compelled to arbitration in general.
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1.

Legal Standard for Unconscionability

One of the legal grounds for revoking a contract is unconscionability. Univ. Hills
Beauty Acad. Inc. v. Mountain States Tel. & Tel. Co., 554 P.2d 723, 726 (Colo. 1976).
“[A]s a matter of substantive federal arbitration law, an arbitration provision is severable
from the remainder of the contract.” Buckeye Check Cashing v. Cardegna, 546 U.S.
440, 445 (2006). Therefore, to defeat Defendants’ Motion to Compel Arbitration,
Plaintiffs must show that the Arbitration Agreement itself—and not the contract in
general—is unconscionable and, therefore, unenforceable. See Rent-A-Center, 130 S.
Ct. at 2278 (“If a party challenges the validity under § 2 of the precise agreement to
arbitrate at issue, the federal court must consider the challenge before ordering
compliance with that agreement under § 4.”).
Colorado courts consider several factors in determining whether a contractual
provision is unconscionable, including: (1) the use of a standardized agreement
executed by parties of unequal bargaining power; (2) the lack of an opportunity for the
customer to read or become familiar with the document before signing it; (3) the use of
fine print in the portion of the contract containing the provision in question; (4) the
absence of evidence that the provision was commercially reasonable or should
reasonably have been anticipated; (5) the terms of the contract, including substantive
fairness; (6) the relationship of the parties, including factors of assent, unfair surprise,
and notice; and (7) the circumstances surrounding the formation of the contract,
including setting, purpose, and effect. Davis v. M.L.G. Group, 712 P.2d 985, 991 (Colo.
1986).
In At&t Mobility v. Concepcion, the Supreme Court held a state may not apply its
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own law on contract interpretation and formation—including unconscionability—in a
manner that interferes with the Federal Arbitration Act’s presumption in favor of
arbitration. AT&T Mobility v. Concepcion, 131 S. Ct. 1740 (2011). The Court held:
“When state law prohibits outright the arbitration of a particular type of claim, the
analysis is straightforward: The conflicting rule is displaced by the FAA. But the inquiry
becomes more complex when a doctrine normally thought to be generally applicable,
such as duress or, as relevant here, unconscionability, is alleged to have been applied
in a fashion that disfavors arbitration.” Id. at 1747. The Court struck down California’s
so-called Discover Bank rule which provided:
When the waiver [of class proceedings] is found in a
consumer contract of adhesion in a setting in which disputes
between the contracting parties predictably involve small
amounts of damages, and when it is alleged that the party
with the superior bargaining power has carried out a scheme
to deliberately cheat large numbers of consumers out of
individually small sums of money, then . . . the waiver
becomes in practice the exemption of the party “from
responsibility for its own fraud, or willful injury to the person
or property of another.” Under these circumstances, such
waivers are unconscionable under California law and should
not be enforced.
Discover Bank v. Superior Court, 36 Cal.4th 148, 162 (Cal. 2005) (quoting Cal. Civ.
Code § 1668).
The Court stated that “[t]he ‘principal purpose’ of the FAA is to ‘ensure that
private arbitration agreements are enforced according to their terms.’” Id. at 1748
(quoting Volt Information Sciences v. Bd. of Trustees, 489 U.S. 468, 478 (1989)). The
Court acknowledged that parties may agree to limit the subject of their arbitration, may
agree to arbitrate according to specific rules, and may limit with whom they arbitrate.

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“The point of affording parties discretion in designing arbitration processes is to allow for
efficient, streamlined procedures tailored to the type of dispute.” Id. at 1749. However,
the Court emphasized that there is “a liberal federal policy favoring arbitration
agreements, notwithstanding any state substantive or procedural policies to the
contrary.” Id. The Court concluded that “class arbitration, to the extent it is
manufactured by Discover Bank rather than consensual, is inconsistent with the FAA.”
Id. at 1751. Thus, because the Discover Bank rule disfavored arbitration, it was
preempted by the FAA. Id.
Because Colorado’s test for unconscionabilty of a contract provision does not
explicitly disfavor arbitration (class or otherwise), the degree to which Concepcion
changes the legal landscape in Colorado is unclear. There does not appear to be any
reason why the Davis factors are not still good law. Thus, the Court will consider the
facts of this case under that structure, keeping in mind the Supreme Court’s statements
and observations in Concepcion.
2.

Application

The Arbitration Agreements were contained within standardized agreements
prepared by Defendants and not available for Plaintiffs to review until they started the
enrollment process. Plaintiffs have submitted affidavits stating that they did not know
there was an arbitration clause in their enrollment documents; that no one pointed out
the arbitration provisions or explained what they meant during the enrollment process;
that they do not remember seeing the arbitration provisions; and that they did not
believe they had the ability to negotiate the terms of their contracts. Plaintiffs were
required to complete the enrollment documents—including signing the Arbitration
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Agreements—before they were permitted to speak with financial aid advisors. Though
Plaintiffs could have chosen to pursue their education elsewhere, Defendants held the
majority of the power in this situation and utilized it to persuade Plaintiffs into enrolling
with their schools. All of these factors weigh in favor of finding the contracts
unconscionable.
Plaintiffs’ argument has considerable validity and the Court would likely have
found that the Arbitration Agreements at issue here unconscionable pursuant to the
Davis analysis if it were issuing this decision pre-Concepcion. But the Court has to take
the legal landscape as it lies and cannot ignore the Supreme Court’s clear message.
Plaintiffs are essentially arguing that the adhesive nature of the contracts at issue here
(i.e., standardized forms, lack of ability to negotiate, power disadvantage, etc.) makes
the arbitration clause unconscionable. In Concepcion, the Supreme Court rejected the
idea that arbitration agreements are per se unconscionable when found in adhesion
contracts. The Court recognized that California’s rule applied only to adhesion
contracts and observed that “the times in which consumer contracts were anything other
than adhesive are long past.” Id. at 1750. The Court noted that states were “free to
take steps addressing the concerns that attend contracts of adhesion—for example,
requiring class-action-waiver provisions in adhesive arbitration agreements to be
highlighted” but ruled that “[s]uch steps cannot, however, conflict with the FAA or
frustrate its purpose to ensure that private arbitration agreements are enforced
according to their terms.” Id. at 1750 n.6. Thus, the fact that the contract at issue in
Concepcion was an adhesion contract did not affect the Supreme Court’s analysis and,
indeed, the majority in Concepcion appeared to be little troubled by that fact. As a
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result, this Court has no alternative but to discount the weight to be attributed to the
adhesive nature of the Arbitration Agreements at issue here.
Plaintiffs also argue that if they are not allowed to proceed as a class—either in
arbitration or through this lawsuit—they will not be able to pursue their claims. They
assert that the nature of the claims, i.e. fraud, takes time and upfront work to develop,
and that no attorney will be willing or able to do that on an individualized basis. They
also contend that the confidential, non-precedential nature of arbitration will make it
impossible to pursue these claims on an individualized basis as their strongest
witnesses—former employees of Defendants—would be forced to testify over 800
times.
Again, the Court is sympathetic to this argument. There is no doubt that
Concepcion was a serious blow to consumer class actions and likely foreclosed the
possibility of any recovery for many wronged individuals. The dissent in Concepcion
recognized the impact of the majority’s decision and argued that it would effectively end
the ability to prosecute small-dollar claims and that those claims would slip through the
legal system. Id. at 1761. Countering this argument, the majority wrote: “States cannot
require a procedure that is inconsistent with the FAA, even if it is desirable for unrelated
reasons.” Id. at 1753. Thus, the Supreme Court considered the fact that the
Concepcions and other class plaintiffs would be denied any recovery by its ruling, and
ruled against the class plaintiffs nonetheless. The Court is bound by this ruling and,
therefore, cannot be persuaded in this case by the fact that ordering the parties to

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arbitration may impact Plaintiffs’ ability to recover.3
Ultimately, there is no dispute that the agreement to arbitrate was prominently
written in the enrollment documents, including an entirely separate document entitled
“Agreement to Binding Arbitration and Waiver of Jury Trial”. (ECF No. 15-2.) There is
also no evidence that Plaintiffs were subject to significant external pressure driving them
to sign the documents without taking time to review them and/or have someone else
review them. The Arbitration Agreements here appear to contain relatively standard
terms, which would suggest that they are substantively fair. Plaintiffs had to ability to
cancel the contracts and receive a substantial refund. Finally, there is a competitive
market for education programs such as those offered by Defendants and Plaintiffs could
have chosen to pursue their education elsewhere. All of these factors weigh against a
finding of unconscionability.
Courts have repeatedly held that there is nothing inherently unfair about an
agreement to arbitrate. See, e.g., Adams v. Merrill Lynch, 888 F.2d 696, 700 (10th Cir.
1989) (“There is certainly nothing inherently unfair about the arbitration clauses, and
they are therefore valid and enforceable.”). The Arbitration Agreements signed by
Plaintiffs are not out of the mainstream. The circumstances in which the Enrollment
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The Court notes that this case seems more likely than many others to be able to proceed
via individual arbitration. Each individual Plaintiffs’ claims are significantly larger than in many
consumer class actions and the arbitration clause states that the Defendants bear a majority of the
costs for any such arbitration. Moreover, the Colorado Consumer Protection Act contains a feeshifting provision which would allow Plaintiffs, if successful, to recover their attorneys’ fees.
See Colo. Rev. Stat. § 6-1-113(2)(b). At argument, defense counsel stated that at least two of the
Mensch Plaintiffs have pursued individual class arbitration since the Arbitrator ruled on the
claim construction matter. He did not indicate the outcome of those proceedings but the mere
fact that they took place confirms the idea that some individual Plaintiffs may be willing and
able to pursue their claims through individual arbitration.
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Agreements were signed does not appear to have been any more coercive than is
common in a typical adhesion contract. Thus, given the Supreme Court’s ruling in
Concepcion, the Court finds that the arbitration agreements signed by Plaintiffs in this
case were not unconscionable. Accordingly, the Court must enforce the Arbitration
Agreements according to their terms and order the Plaintiffs to submit their claims to
arbitration.
III. CONCLUSION
For the reasons stated above, Defendant’s Motion to Compel Arbitration (ECF
No. 15) is GRANTED. The Clerk of the Court is directed to administratively close this
case without prejudice to a party moving to have the case reopened for good cause
shown upon completion of arbitration proceedings, or for another proper purpose.
Dated this 6th day of June, 2011.
BY THE COURT:

William J. Martínez
United States District Judge

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