The Economy, Trade and Industry Ministry issued a document in June 2002 that tolerated English conversation school industry leader Nova Corp.’s controversial practice of minimizing refunds of students who terminated their contracts, according to sources close to the issue.
Four months before the document was issued, the Tokyo metropolitan government began its own administrative procedures against Nova, criticizing the Osaka-based chain’s refund method as being detrimental to departing students.
But because the ministry’s document said the refund method was not wholly illegal, the metropolitan government discontinued its administrative procedure.
Nova had continued its refund calculation method until March, when the Supreme Court ruled it illegal.
Under the practice, when long-term students–mostly those with three-year contracts–terminated arrangements, the price of lessons already taken were calculated at higher amounts than agreed at the contract-signing.
The students received less of a refund than they expected.
When the ministry ordered Nova to suspend business June 13 under the Specific Commercial Transaction Law, it pointed out the refund method was unlawful if students attempted to terminate contracts for reasons such as difficulty in booking lessons.
However, the ministry’s June 2002 Nova document, distributed to regional ministry bureaus nationwide, noted the calculation method did not necessarily limit student rights to terminate contracts.
As Nova’s practice of calculating higher prices for lessons was actually applied to some forms of contracts, the document said, “It cannot be said the method lacks rationality.”
Nova also nullified unused points purchased by students in advance to take lessons, when students terminated contracts.
In the wake of numerous complaints on terminating Nova contracts received by consumer consultation centers, the ministry’s Consumer Affairs Policy Division drafted the document after interviewing Nova executives.
Copies of the document were distributed to the ministry’s regional bureaus, prefectural governments and consumer consultation centers, effectively allowing Nova to continue using the calculation method.
In February 2002, four months before the document’s issuance, the metropolitan government began its own administrative procedures against Nova, demanding the company review its business practices, including the refund calculation.
Other problems included false explanations to potential students that they would be able to book lessons at any time, and faulty contract forms.
The metropolitan government said Nova admitted in March that employees had made mistakes in judgment when they made sales pitches to potential students, and that Nova promised to correct the problem.
But Nova declined to discuss its refund calculation method with the metropolitan government and said it would take action after consulting the ministry.
When the ministry presented its opinion in the June 2002 document, the metropolitan government could not continue administrative procedures against Nova.
The number of complaints about Nova received by consumer consultation centers continued to increase even after the ministry issued the document.
The number steadily rose from 855 in fiscal 2002 to 982 in fiscal 2004, and to 1,088 in fiscal 2005. In fiscal 2006, the number reached 1,967, accounting for 53 percent of all complaints about foreign language conversation schools.
In September 2005, a consumer organization demanded Nova review the refund calculation method. Nova replied that it calculated prices for terminating contracts based on consultation with administrative authorities.
An official of the Consumer Affairs Policy Division said: “The government presented its view for a case that caused numerous complaints. Though the document was a reply based on Nova’s explanation that students could book enough lessons, we can’t deny it was later used for Nova’s convenience.”
Koji Niisato, a lawyer with expertise in consumer affairs, said: “It was already widely known more than 10 years ago that there were numerous complaints about Nova. As many former Nova students had to forfeit a lot of money without the chance to file lawsuits, the administrative authorities bear a heavy responsibility.”
“The [ministry’s] interpretation of the refund calculation method was denied by the Supreme Court. It’s obvious the ministry magnified the financial pitfalls endured by Nova students. The ministry can’t deny it made the judgment for corporate rather than consumer interests,” he said.