California Cosmetology Coalition v. Riley, Civ. A. No. 94-6406 RG(GHKx).

• Decision Date: 22 November 1994
• Docket Number: Civ. A. No. 94-6406 RG(GHKx).
• Citation: 871 F. Supp. 1263
• Court: U.S. District Court — Central District of California
• Parties: CALIFORNIA COSMETOLOGY COALITION, et al., Plaintiffs, v. Richard W. RILEY, Secretary of Education, Defendant.

871 F. Supp. 1263

CALIFORNIA COSMETOLOGY COALITION, et al., Plaintiffs, v. Richard W. RILEY, Secretary of Education, Defendant.

Civ. A. No. 94-6406 RG(GHKx).

United States District Court, C.D. California.

November 22, 1994.

Leslie H. Wiesenfelder and Thomas Dorer, of Dow, Lohnes & Albertson, Washington, DC, Justin J. Shrenger and Edwin D. Hausmann of Murphy, Shrenger & Weiss, Los Angeles, CA, for plaintiffs.

Nora M. Manella, U.S. Atty., Leon W. Weidman, Asst. U.S. Atty., Chief, Civ. Div., Russell W. Chittenden, Asst. U.S. Atty., and Mary L. Perry, Asst. U.S. Atty., Los Angeles, CA, Steven Z. Finley and James O'Neill, Office of the Gen. Counsel, U.S. Dep't of Educ., Washington, DC, for defendant.

ORDER RE PRELIMINARY INJUNCTION

GADBOIS, District Judge.

Plaintiffs' Motion for a Preliminary Injunction came on for hearing before this Court, the Honorable Richard A. Gadbois, Jr., presiding, on Monday, October 24, 1994, at 10:00 a.m. Having considered the moving and opposition papers and arguments of counsel, the Court hereby rules as follows:

Plaintiffs' Motion for a Preliminary Injunction is hereby GRANTED.

I. Background

This suit arises from regulations promulgated by the Secretary of Education pursuant to the Higher Education Act ("HEA"), 20 U.S.C. § 1070 et seq. The Secretary of Education ("Secretary") and the Department of Education ("DOE") promulgated regulations dealing with the refunds due to students who withdraw from, take a leave of absence, or otherwise cease attending postsecondary educational institutions participating in one or more federally authorized student financial aid programs under Title IV of the HEA, as amended, 20 U.S.C. §§ 1070-1099c-1. Title IV programs offer both loan and grant assistance to students who demonstrate the requisite financial need.

Plaintiffs California Cosmetology Coalition ("CCC") and American Association of Cosmetology Schools ("AACS") contend that the regulations promulgated by the Secretary violate the enabling statute by requiring participating institutions to refund more monies than the 1992 Amendments to the HEA deemed "fair and equitable." The statutory and regulatory framework of the instant action is somewhat complex and calls for some preliminary background on the HEA and the accompanying regulations.

On July 23, 1992, Congress enacted the Higher Education Amendments of 1992 ("the 1992 Amendments"), creating a statutory requirement that all postsecondary institutions participating in Title IV Programs must develop a "fair and equitable" policy for refunding institutional charges and unearned tuition to students who do not complete the period of enrollment for which Title IV assistance was provided. Pub.L. 102-325, § 485(a), 1992 U.S.C.C.A.N. 619 (July 23, 1992), codified at 20 U.S.C. § 1091b(a).

Congress prescribed specific minimum standards under the HEA for institutions to calculate and make refunds:

(b) Determinations

The institution's refund policy shall be considered to be fair and equitable for the purposes of this section if that policy provides for a refund in an amount of at least the largest of the amounts provided under —

(1) the requirements of applicable state law;

(2) the specific refund requirements established by the institution's nationally recognized accrediting agency and approved by the Secretary; or

(3) the pro rata refund calculation described in subsection (c) of this section ...

20 U.S.C. § 1091b(b) (emphasis added).

The pro rata refund calculation of § 1091b(c), in turn, applies only to first-time students who drop out on or before 60% of the enrollment period has expired. Plaintiffs do not challenge the Secretary's implementation of the pro rata refund provision, and it is not directly relevant to the analysis that follows.¹

In the 1992 Amendments, Congress also included provisions criminalizing the failure to refund funds, assets or property provided or insured under the Title IV programs. Pub.L. No. 102-325, § 495, codified at 20 U.S.C. § 1097(a).

Prior to the passage of the 1992 Amendments, the Secretary had published a notice of proposed rulemaking ("NPRM"), proposing to amend 34 C.F.R. § 668.22, the institutional refunds and repayments provision, to require institutions calculating student refunds to subtract "any unpaid amount of a scheduled cash payment" from the amount of institutional charges the institution is permitted to retain. 56 Fed.Reg. 66,502 (promulgating 34 C.F.R. § 668.22(a)(3)). These proposed changes were enacted in substantially unchanged form by the Department of Education on June 8, 1993. 58 Fed.Reg. 32,188, amending 34 C.F.R. § 668.22(a).

On February 28, 1994, the Secretary published another NPRM, 59 Fed.Reg. 9526, proposing a substantial restructuring of the refund provisions of 34 C.F.R. § 668.22. On April 29, 1994, the Secretary published interim final regulations adopting the proposed regulations. Plaintiffs claim that these new provisions, though closely paralleling the statutory language of the HEA, depart from the calculations set forth in the HEA. Like the June 1993 regulations, the April 1994 regulations require institutions to exclude unpaid scheduled cash payments from the amount of earned institutional charges the school can retain, thereby increasing the required refund.

Under the Secretary's June 1993 and April 1994 regulations ("the Refund Regulations"), a school is required to calculate each of the three possible refunds, the state law refund, the accrediting agency refund, and the statutory pro rata refund, separately and determine which one is the largest. However, the Refund Regulations also require that the schools refund any unpaid amount of a scheduled cash payment owed the school by the student (calculated by subtracting the amount paid by the student for that payment period from the scheduled cash payment for the payment period). 34 C.F.R. § 668.22(a)(3), (4).² Moreover, if the unpaid amount of a student's scheduled cash payment is greater than or equal to the amount which may be retained by the school under its refund policy, the school must return the total amount to Title IV, HEA assistance to the government. 34 C.F.R. § 668.22(a)(5). It is this additional amount which the schools may not retain under the Refund Regulations, in excess of that expressly deemed "fair and equitable" by Congress, that Plaintiffs contend violates the 1992 Amendments.

Plaintiffs allege that the following regulations violate the plain meaning of the 1992 Amendments by distorting the state law and accrediting agency refund calculation procedures: 34 C.F.R. § 668.22(a)(2), (a)(3), (a)(4), (a)(5), (b)(1)(iv), (c)(2), (c)(3), (f)(2).³ Plaintiffs now move for a preliminary injunction against the Secretary preventing the enforcement of the above regulations.

II. Analysis

A. Res Judicata

As a preliminary matter, this Court must consider the Secretary's contention that Plaintiffs in the instant motion for a preliminary injunction are bound by the doctrine of res judicata as to the ruling of the Honorable Thomas F. Hogan of the D.C. District Court against the Career College Association. See Career College Ass'n, et al. v. Richard W. Riley, Civ. Action No. 94-1372 (D.D.C. Aug. 9, 1994), 27-28, 1994 WL 454713. It appears that four members of Plaintiff AACS' five hundred and four members also belong to the Career College Association. Supplemental Declaration of Ronald E. Smith ¶ 3. No member of Plaintiff CCC is also a member of the Career College Association. Declaration of Robert Gross ¶ 16.

It is undisputed that the issue facing the D.C. District Court was substantially identical to that before this Court: namely, the validity of the Refund Regulations in light of the language of § 1091b(b). Judge Hogan granted summary judgment on this issue in favor of the Secretary. Judge Hogan's reasoning behind this ruling is somewhat terse:

The Secretary has set forth a reasoned basis to support the challenged regulations. Because the Court finds that the regulations are reasonable and implemented in accordance with the 1992 HEA Amendments, the Court grants summary judgment as a matter of law in favor of defendants.

Civ. Action No. 94-1372 (D.D.C. August 9, 1994), 28.

Notwithstanding its brevity, this ruling is a final judgment on the merits for the purpose of res judicata and is a clear rejection of arguments substantially identical to those made by Plaintiffs in the instant case. See Plaintiff Career College Association's Reply Memorandum in Support of Plaintiff's Motion for Summary Judgment, pp. 17-19. This Court must thus determine whether the instant preliminary injunction extends to those four institutions, as yet unnamed, with membership in both the CCA and the AACS.

There must be an identity of the parties between the prior and subsequent suits before operation of the res judicata doctrine is triggered. Allen v. McCurry, 449 U.S. 90, 101 S.Ct. 411, 66 L.Ed.2d 308 (1980); Blonder-Tongue Laboratories, Inc. v. University of Illinois Foundation, 402 U.S. 313, 329, 91 S.Ct. 1434, 1443, 28 L.Ed.2d 788 (1971). Under federal law, mere membership in a trade association alone does not create the privity necessary to bind the member to a judgment against an organization. Viceroy Gold Corp. v. Aubry, 858 F.Supp. 1007, 1018 (N.D.Cal.1994). "A final judgment in federal court against a trade association will not be res judicata against a member unless the member authorized the litigation in some way citations omitted." Id.

It is unclear at this early stage in the proceedings whether the four AACS/CCA members implicitly authorized the previous matter before the D.C. Court by, for example, subsidizing the litigation. See, e.g., General Foods Corp. v. Mass. Dep't of Public Health, 648 F.2d 784, 788 (1st Cir.1981). It is also not apparent that the CCA was a "body vested with representative authority" as to its members, see, e.g., Expert Electric, Inc. v. Levine, 554 F.2d 1227, 1233 (2d Cir.), cert. denied,...