Career Coll. Ass'n v. Duncan, Civil Action No. 11–0138 (RMC).

• Citation: 273 Ed. Law Rep. 749,796 F.Supp.2d 108
• Decision Date: 12 July 2011
• Docket Number: Civil Action No. 11–0138 (RMC).
• Parties: CAREER COLLEGE ASSOCIATION d/b/a Association of Private Sector Colleges and Universities, Plaintiff, v. Arne DUNCAN, Secretary, U.S. Department of Education, et al., Defendants.
• Court: U.S. District Court — District of Columbia

273 Ed. Law Rep. 749

796 F.Supp.2d 108

CAREER COLLEGE ASSOCIATION d/b/a Association of Private Sector Colleges and Universities, Plaintiff,

v.Arne DUNCAN, Secretary, U.S. Department of Education, et al., Defendants.

Civil Action No. 11–0138 (RMC).

United States District Court, District of Columbia.

July 12, 2011.

Held Invalid

34 C.F.R. § 600.9(c).

Brian M. Boynton, Randolph D. Moss, Wilmer Cutler Pickering Hale and Dorr, LLP, Derek S. Lyons, Douglas R. Cox, Veronica S. Root, Gibson, Dunn & Crutcher, LLP, Washington, DC, Timothy John Hatch, Gibson, Dunn & Crutcher, Los Angeles, CA, for Plaintiff.

Marcia Berman, Gregory Peter Dworkowitz, Michelle Renee Bennett, U.S. Department of Justice, Washington, DC, for Defendants.

MEMORANDUM OPINION

ROSEMARY M. COLLYER, District Judge.

Enormous amounts of federal funding for students at colleges, universities and other postsecondary schools allow Uncle Sam to wield a heavy hand in regulating access to such funds. The Secretary of Education, Arne Duncan, has recently adopted a more intrusive approach promulgating regulations under the Higher Education Act of 1965. The Secretary wants to protect student applicants who might be film-flammed into signing up for worthless courses—and using federal monies for tuition which the students cannot then repay. The new regulations became effective on July 1, 2011. Plaintiff Career College Association d/b/a Association of Private Sector Colleges and Universities sues Secretary Duncan and the Department of Education, challenging the new regulations under the Administrative Procedure Act (“APA”), 5 U.S.C. §§ 553, 701–706, and the United States Constitution. While the current extent of regulation may not have been entirely foreseen by Congress, a point the Court does not reach, the terms of the Higher Education Act do not compel a more limited approach and the Secretary has explained his reasoning adequately. However, as to the one aspect of the new regulations that would require distance educators to obtain authorization from every State in which they have students, the Secretary gave no prior notice and its adoption in the final regulations violated the APA. Plaintiff's motion for summary judgment will be denied in part and granted in part, and Defendants' motion for summary judgment will be denied in part and granted in part.

I. FACTUAL BACKGROUND

Title IV of the Higher Education Act of 1965, as amended, 20 U.S.C. § 1070 et seq. (“HEA”), established several types of student aid programs administered by the Department of Education (“Department”), each with the aim of fostering access to higher education. Every year Title IV programs provide more than $150 billion in new federal aid to approximately fourteen million post-secondary students and their families. Students are expected to repay their loans. In 2007 and 2008, 93.6% of full-time students at private, for-profit institutions, 56.6% at public institutions, and 70.0% at private, non-profit institutions received federal aid. Plaintiff Career College Association d/b/a Association of Private Sector Colleges and Universities (“APSCU”) is an association of for-profit schools in the private sector education industry, representing more than 1,500 such schools. Every year, APSCU members educate more than one and a half million students.

To participate in Title IV programs, a school must qualify as an “institution of higher education.” 20 U.S.C. § 1001 (2011). An “institution of higher education” is an educational institution in any state that “is legally authorized within such State to provide a program of education beyond secondary education” (hereafter mainly referred to as “schools”). Id. § 1001(a)(2). The HEA also establishes that proprietary institutions of higher education and postsecondary vocational institutions qualify as institutions of higher education for purposes of federal student assistance programs. Id. § 1002. A qualifying school under the HEA must execute a program participation agreement with the Department to participate in federal financial aid programs. See id. § 1094. Through the program participation agreement, the school commits to a variety of statutory, regulatory, and contractual conditions.

Among these conditions is a general statutory ban on schools making incentive payments based on an employee's success in recruiting students and/or in enrolling students in financial aid programs. See id. § 1094(a)(20). A school is also precluded from engaging in a “substantial misrepresentation of the nature of its educational program, its financial charges, or the employability of its graduates.” Id. § 1094(c)(3)(A). Concerned with the expenditure of federal funds that fail to educate students for jobs that allow them to repay their loans, which the Department believed was insufficiently monitored under prior regulations, the Department set out to improve program integrity.

According to his rulemaking authority under 20 U.S.C. § 1221e–3, Secretary Duncan first established a negotiated rulemaking committee in 2009 to garner public involvement in the development of proposed regulations, as he is statutorily required. See id. § 1098a. The negotiated rulemaking committee did not reach consensus on all points contained in the proposed regulations. See U.S. Department of Education, Program Integrity Issues; Final Rule, 75 Fed. Reg. 66832, 66833 (Oct. 29, 2010) (“Final Rule”) [AR 1, 3].¹ On June 18, 2010, the Department issued a notice of proposed rulemaking on program integrity and commenced a period of notice and comment on the proposed regulations until August 2, 2010. Approximately 1,180 parties submitted comments. Id. The Department promulgated final regulations on October 29, 2010. The challenged regulations—including others not before the Court—became effective July 1, 2011. Final Rule at 66832 [AR 2].

APSCU challenges three parts of the Department's recently-promulgated regulations that affect a school's eligibility to receive Title IV financial aid: the compensation regulations, 34 C.F.R. § 668.14 (Final Rule at 66950–51 [AR 120–21] ); the misrepresentation regulations, 34 C.F.R. § 668.71 (Final Rule at 66958–59 [AR 128–29] ); and the State authorization regulations, 34 C.F.R. § 600.9 (Final Rule at 66946–47 [AR 116–17] ). ²

A. Compensation Regulations

Under the terms of the program participation agreement, a school agrees not to “provide any commission, bonus, or other incentive payment based directly or indirectly on success in securing enrollments or financial aid to any persons or entities engaged in any student recruiting or admission activities or in making decisions regarding the award of student financial assistance.” 20 U.S.C. § 1094(a)(20). Congressional concern behind this provision was the use of financial incentives to enroll students regardless of qualifications or program efficacy—a practice that led to student loan defaults, leaving the taxpayers on the hook.

In 2002, the Department issued “Clarifying Regulations,” 34 C.F.R. § 668.14(b)(22)(ii)(A)–(L) (effective until July 1, 2011) (“Clarifying Regulations”), which established twelve “safe harbors” under which a school could pay compensation without it being considered an “incentive” payment and without fear of sanctions. Among other provisions, the Clarifying Regulations allowed biannual salary increases that would not be deemed impermissible incentive payments if the adjustments were “not based solely on the number of students recruited, admitted, enrolled, or awarded financial aid.” Id. § 668.14(b)(22)(ii)(A) (effective until July 1, 2011) (emphasis added). Another safe harbor allowed for incentive compensation based on students' successful completion of an educational program, id. § 668.14(b)(22)(ii)(E) (effective until July 1, 2011); yet another permitted incentive compensation to managers who did not directly supervise those employees who were immediately involved in recruiting or admissions activities or the provision of financial aid. Id. § 668.14(b)(22)(ii)(G) (effective until July 1, 2011).

But by 2010, the Department decided that the safe harbors were doing “substantially more harm than good.” U.S. Department of Education, Program Integrity Issues; Proposed Rule, 75 Fed. Reg. 34806, 34817–18 (June 18, 2010) (“Proposed Rule”) [AR 147, 158–59]. This conclusion rested on the Secretary's finding that “unscrupulous actors routinely rely upon these safe harbors to circumvent the intent of section 487(a)(20) [20 U.S.C. § 1094(a)(20) ] of the HEA.” Final Rule at 66872 [AR 42]. Thus, the Department concluded that “the safe harbors have served to obstruct those objectives [of section 487(a)(20) ] and have hampered the Department's ability to efficiently and effectively administer title IV, HEA programs.” Id. By omitting the safe harbors, the Department intended to “better align [the regulations] with [the] HEA.” Proposed Rule at 34818 [AR 159].

To change the perceived pattern of regulatory avoidance, the Secretary amended the compensation regulations, 34 C.F.R. § 668.14(b)(22), so that they now define “[c]ommission, bonus, or other incentive payment” as “a sum of money or something of value, other than a fixed salary or wages, paid to or given to a person or an entity for services rendered.” Id. § 668.14(b)(22)(iii)(A). The compensation regulations expressly permit “[m]erit-based adjustments to employee compensation provided that such adjustments are not based in any part, directly or indirectly, upon success in securing enrollments or the award of financial aid.” Id. § 668.14(b)(22)(ii)(A). The ban on such incentive payments now extends to “any higher level employee with responsibility for recruitment or admission of students, or making decisions about awarding title IV, HEA program funds,” id. § 668.14(b)(22)(iii)(C)(2), and to compensation that is based on retention, course completion, graduation, or placement rates. See Final Rule at 66874 [AR 44].

B. Misrepresentation Regulations

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