Articles and Resources

APSCU v. Duncan: D.C. Circuit Ruling on the Department of Education’s Mispresentation, Incentive Compensation and State Authorization Program Integrity Rules

June 12, 2012

Analysis of APSCU v. Duncan
No. 11-5174 (D.C. Cir. June 5, 2012)
full text of decision available at
http://www.cadc.uscourts.gov/internet/opinions.nsf

The recent D.C. Circuit decision on the challenge by the Association of Private Sector Colleges and Universities (APSCU) to the Department of Education’s Title IV program integrity rules addressing misrepresentation, incentive compensation and state authorization delivers, in practical terms, modest but real improvements to rules that institutions of higher education have to live with for the foreseeable future. This is particularly true with regard to the misrepresentation rule. 

Misrepresentation Rule

The Court ruled that the Department’s attempt to amend the regulation authorizing schools to be sanctioned for substantial misrepresentations exceeded the authority granted by Congress in the Higher Education Act (“HEA”) in three areas. Most significantly, the Court vacated the Department’s attempt to expand the definition of “misrepresentation” to include “any statement that has a likelihood or tendency to deceive or confuse.” The Court concluded that the rule could not reach a statement if it merely has the likelihood or tendency to confuse, based on the reasoning that the HEA only prohibits misrepresentations that are substantial in that they are more than “merely confusing statements.” The Court also raised First Amendment concerns about a rule that prohibits true and non-deceitful but confusing statements.

From a practical standpoint, this ruling narrows the scope of the rule by including within its scope only false and misleading, but not simply confusing but non-deceitful, statements. By implication, the ruling suggests that that misleading statements must have an element of untruth and/or some intent to deceive to be sanctionable.  

Although the other two rulings regarding the misrepresentation rule have less practical import, they are satisfying nonetheless.  First, the Court agreed with APSCU that, as amended, the rule’s text simply could not be read to provide the necessary due process procedural protections an agency must follow to initiate a formal proceeding against a school for a substantial misrepresentation. The Court did not accept the Department’s attempt to fix or clarify the regulation by issuing a Dear Colleague Letter stating that they really meant for the procedural protections to apply.  Second, the Court held the Department accountable for overstepping its bounds on the categories of communications subject to the rule. Specifically, the Department drafted the rule so as to sanction substantial misrepresentations “regarding the eligible institution” in a manner that exceeded the three categories of communications specifically authorized in the HEA: communications about the nature of an institution’s educational programs, its financial charges, and the employability of graduates.  The Department tried to add a fourth category – communications “about the institution’s relationship with the Department” that the Court held exceeded the types of communications covered by the HEA. Again, the Court held that an attempted fix by the Department through a Dear Colleague Letter to limit the scope of the rule to the three categories of statements, which was issued by the Department after the litigation by APSCU commenced, could not resolve irreconcilable clear regulatory language.   

The Court remanded these two parts of the rule back to the District Court with instructions to remand to the Department “so that it can revise” these two areas. Practically speaking, the Department must now conform the regulation to read as it has already said in its non-binding agency guidance it meant it to read, with no net gain for schools except textual clarity.

Incentive Compensation Rule

The Court upheld most of the amended incentive compensation rule, but found two aspects of that regulation arbitrary and capricious for want of “reasoned decision-making.” Specifically, the Department did not adequately justify or explain its rationale for eliminating the pre-existing safe harbor for compensation that is “based upon students successfully completing their educational programs, or one academic year of their educational programs.” 34 C.F.R. § 668.14(b)(22)(ii)(E)(2010). The Court could not reconcile elimination of that safe harbor with the overarching purpose of Title IV to expand attainment of postsecondary education and was concerned that its removal could act as a disincentive for recruiters to focus on the most qualified students – a laudable public policy goal. The Court ordered the District Court to remand this issue to the Department to allow it to explain further its rationale to eliminate that particular safe harbor. It is conceivable the Department could reconsider its position and permit this former safe harbor to be reinstated, which would certainly be helpful to institutions under pressure to improve outcomes by allowing them to develop compliant admissions representative compensation and performance review plans that consider, to some extent, the success of admissions representatives in enrolling students who successfully complete. 

The Court also ordered the District Court to remand to the Department the question of whether the Department has an adequate response to public comments filed during the rulemaking process that suggested that the removal of the safe harbors could adversely affect diversity outreach and enrollment by schools. The Court concluded that the Department failed to meet the very minimal standard of an adequate response to public comments raising that concern by wrapping up that particular concern with related concerns without addressing the diversity enrollment concern head-on. The Court expected that “it will be a simple matter for the Department to address these matters on remand.”  If, however, the Department cannot respond adequately to the concern (which appears unlikely), it is unclear to what extent the incentive compensation rule would be invalidated.

State Authorization Rule

The Court upheld the regulation that provides that an institution is legally authorized within a state only if “the state has a process to review and appropriately act on complaints concerning the institution” and if “[t]he institution is established by name as an educational institution by a State through” one of several designated actions.  34 C.F.R. § 600.9(a)(1)(i)(A)(2011). The Court reversed the District Court’s decision that APSCU lacked standing to challenge the regulation by concluding that the injury to APSCU members brought by state action was not speculative or conclusory.  As expected, the Court upheld the District Court ruling that vacated the Department’s attempt to establish specific requirements for schools offering distance education in states where they do not have a physical presence. The Court agreed with the District Court that the regulation violates the Administrative Procedures Act because the Department failed, by not including the issue in the negotiated rulemaking or proposed rule, to provide adequate notice of the new rule to regulated parties.

It remains to be seen whether the Department will include a distance education state authorization rule in a future round of negotiated rulemaking. As we and others have cautioned continuously, however, the Court’s ruling on the distance education component of the state authorization rule has little or no impact on the decision of individual states to expand their oversight authority over schools providing educational services to students residing in their state.  Schools need remain in compliance with state law and stay vigilant in monitoring changes in state law that may affect their operations, at least until a critical mass of states agree to reciprocity for a minimum level of state oversight for distance education purposes.

CONCLUSION

Notwithstanding the rulings in this case, the misrepresentation and incentive compensation rules remain onerous for compliance purposes. There is also a large degree of uncertainty remaining with regard to how the Department will seek to enforce and courts will interpret these amended rules. The state authorization rule has also proven burdensome and compliance with state distance education requirements remains difficult and expensive absent uniform and reciprocal state standards.

For more information about the Misrepresentation, State Authorization, or Incentive Compensation Rules, please contact our Postsecondary Education Practice Group.