Appeals Court muddies state authority
ITT began as Puerto Rico Telephone Company, doing what the name implies, but in its multitentacled prime was involved in everything from defense contracting to lodging to the baking of Twinkies. It also had an amazing knack for involving itself in far-flung scandals. It collaborated with the Nazis, then sued the Allies for compensation because they bombed one of its German munitions plants. It financed opponents of Chilean President Salvador Allende, who was murdered in a coup.
It even played a walk-on part in Watergate when one of its lobbyists, the briefly famous Dita Beard, was accused of paying a bribe to get Nixon’s Justice Department to drop an antitrust investigation. So vast were ITT’s holdings and so pervasive its influence that the journalist Anthony Sampson wrote a best-seller called The Sovereign State of ITT.
The theory behind ITT-style conglomerates was that managerial skills transferred across industries. A good executive, it was said, could run any company. But the long and tangled history of ITT’s many acquisitions and spinoffs also supports the view that the company existed primarily as a vehicle for generating fees for bankers, brokers and corporate lawyers.
In 1965, ITT got into the for-profit education business by buying Educational Services, Inc., which it rebranded ITT Technical Institute. Twenty-nine years later, ITT Tech was spun off as a stand-alone company. Unlike traditional schools, it relied heavily on TV ads to drum up enrollment. According to former ad executive Paul Friederichsen, the leads generated by each new ITT Tech commercial were tracked on a weekly basis. Underperforming ads were quickly replaced by more enticing come-ons.
Prospective students who called the 800 number on their TV screens were pushed to sign up for government loans. In 2012, Barron’s reported that ITT Tech not only charged the highest tuition “in its industry” but also had the highest rate of loans that went into default, leaving guaranty agencies holding the bag. It might be an exaggeration to say that ITT Tech existed to snag student loans, with job training an afterthought, but not by much.
In 2014, the state of New Mexico sued ITT Tech for alleged violations of the state Unfair Trade Practices Act with regard to its marketing practices. ITT Tech sought to compel private arbitration on the ground that individual students had signed contracts with binding arbitration clauses. ITT Tech also resisted subpoenas seeking information about completed arbitration proceedings, claiming that the confidentiality clauses in its student contracts prevented the state from conducting its investigation.
The trial judge ruled against ITT Tech, which then asked the Court of Appeals to issue a writ of error, invoking an archaic procedure that exists in New Mexico only because the Legislature hasn’t gotten around to abolishing it. The Court of Appeals initially granted the writ, contrary to its own rules and precedent, although it later admitted its mistake. Even judges aren’t sure what purpose the writ of error serves.
It would have been a straightforward matter for the court to say that of course the state isn’t bound by contracts entered by private parties. No citizen has the power to bind its government simply by saying so, and especially not to forestall investigations into alleged fraud. It would be like a bank including fine print on the back of each monthly statement: “By banking with us, you agree that law enforcement cannot investigate us for money laundering.” Or a restaurant printing on its menu: “By placing an order, you agree the government cannot inspect our kitchen or cite us for violations of food safety laws.”
But instead of simply pointing out the preposterousness of ITT Tech’s position, the Court of Appeals searched for and found the most convoluted way possible to affirm the trial court’s ruling. The court didn’t decide whether the contracts were binding on the state. Instead, it seemingly assumed they were but found them unenforceable as contrary to public policy. By choosing to rest its decision on the nebulous concept of public policy rather than the state’s clearly-stated powers under Unfair Trade Practices Act, the court left open the possibility that it could reach the opposite conclusion in the next case by the simple expedient of conjuring up another, countervailing public policy.
In the four years since the lawsuit was launched, ITT Tech went out of business. The status of its students’ loans has become a hot political controversy. It’s not clear from the opinion that it will make much (or any) practical difference to the litigants themselves. And the rest of us don’t even get a clear legal ruling out of it.