Home News Education Politics and Policy Association of Proprietary Colleges (APC) Opinion Summary with Impacts
Association of Proprietary Colleges (APC) Opinion Summary with Impacts

Association of Proprietary Colleges (APC) Opinion Summary with Impacts


By Nick Falvo, Legislative Counsel, Akerman LLP

On the afternoon of Wednesday, May 27, a mere 22 days after oral arguments, Judge Lewis Kaplan of the Southern District of New York, denied the Association of Proprietary Colleges (APC) motion for summary judgment, while granting the Department of Education’s cross-motion for summary judgment, which asked the Court to dismiss APC’s claim challenging the gainful employment regulations.

Kaplan issued a 57-page 228-footnote opinion that was, similar to his demeanor during oral arguments, scathing towards APC.

Kaplan opens his opinion with a background of the GE Rules, often citing the Senate Health, Education, Labor and Pensions Committee Report “For-Profit Higher Education: The Failure to Safeguard the Federal Investment and Ensure Student Success,” also known as the Harkin Report. As many of us will remember that report was often criticized for its political nature. Yet, the report was in the final rule, and Judge Kaplan was able to use it as a resource.

Moving towards the legal discussion, Kaplan first dissects APC’s Due Process claim.

APC contends, among other things, that the GE Rules create a regulatory framework by which schools may be stripped of their HEA eligibility based on evidence that schools never get to see.

APC also argues that the Social Security Administration earnings data on which the Department and the GE Rules rely upon is flawed; that the GE Rules are impermissibly retroactive because they determine compliance based in part on data for periods that precede the rulemaking; and that the rules are so vague and ambiguous that for-profit colleges cannot reasonably determine what is expected of them.

But before Kaplan dives into those arguments, he first determined that the case is ripe for review even though APC did not allege an imminent injury, but merely speculated as to the scope and effect of the pending regulations. He determined that the regulations “purport to give an authoritative interpretation of a statutory provision that has a direct effect on the day-to-day business of many for-profit vocationally-orientated institutions.”

Moving now to APC’s Procedural Due Process claims, Kaplan looks to “the nature of the interest at stake.” First, the property interest. Kaplan had two non-binding precedents he could have followed that specifically deal with the eligibility to participate in the federal student aid programs: one from the DC Circuit and one from the Seventh Circui

(Indiana/Illinois/Wisconsin). Judge Kaplan determined that he agreed with the DC Circuit which ruled in Association of Accredited Cosmetology Schools v Alexander in 1992 that schools have no vested right to future eligibility to participate in the federal student loan program regardless of whether those schools expected to be eligible in the future because schools were not promised or even led to believe that there would be no background changes in the federal law governing the program. His reasoning includes that schools are not the direct beneficiaries of the funding programs (they are third party beneficiaries); the HEA allows the Department latitude to decide whether to confer funding eligibility to a particular program; and other statutes that allow the Department to issue regulations that may limit, suspend, or terminate an eligible institution’s participation in Title IV funding after reasonable notice and opportunity for hearing.

Second, the liberty interest. Generally, a party has a liberty interest in its good name, and if its reputation is “besmirched” by governmental action, it may be entitled to a name-clearing hearing. The Second Circuit (the same Circuit that Kaplan sits on, and thus a binding circuit for Kaplan) has referred to due process claims predicated, as this case was, on the loss of reputation (stigma) coupled with the deprivation of some “more tangible interest” (plus), without adequate process, as “stigma-plus” claims. APC’s claim, even though they did not frame it this way, amounts to this stigma-plus claim based on the reputational and financial harms it says its members will suffer if the GE Rules go into effect as written. However, Kaplan rules that this argument misunderstood the law (Note: It is as if Kaplan re-words APC’s claim, but then says his rewording misunderstands the precedent). APC has neither “explained, persuasively or otherwise, how the GE Rules are capable of being proved false, nor shown that they are derogatory in any meaningful way.” Thus, they have not shown how the rules would stigmatize its member institutions or otherwise cause them reputational harm.

Kaplan also decided that even if APC had a constitutionally protected property and/or liberty interest, their Due Process claim would fail because the GE Rules afford affected schools all the process that is constitutionally required. Schools are given an opportunity to correct the Department’s list of students who have completed the program. Schools are then allowed to challenge the accuracy of the loan debt information. Finally, the school may file an alternate earnings appeal to request recalculation of the program’s most recent final D/E rates. The “touchstone” of due process is the requirement that a person in jeopardy of loss be given notice of the case against him and opportunity to meet it. Kaplan believes that the rules give constitutionally sufficient process.

In a zinger, Kaplan writes, “While for-profit colleges have become heavily reliant on federal student aid, that reliance is of their own creation, not of necessity.”

Kaplan follows the Department’s argument that the ineligibility determination of one program does not have bearing on the eligibility of others (at the same institution). Further, a program that is ineligible is ineligible only for Title IV purposes; it remains free to enroll students able to finance their education in other ways. By contrast, Kaplan writes that the Department has a strong interest in ensuring that students attend schools that prepare them for careers sufficient for them to repay their “taxpayer-financed student loans.”

Kaplan begins his retroactivity opinion by explaining how the rates are calculated. To his understanding, the department calculated the rates for any given year using the average student loan debt and average annual earnings of students who completed the relevant program during what the regulations define as the “cohort period.” For most, but not all, programs subject to the rules, that period is two years and the relevant years for D/E rate calculation purposes are the third and fourth years prior to the award year. The rules also include a five-, six-, or seven-year transition period that will allow schools to pass the D/E rates by reducing the loan debt of currently enrolled students.

APC claims the rules are retroactive because the rules impair the school’s vested right based on debt that occurred as long ago as 2005. Kaplan ruled that these arguments, “too, miss the mark.”

Kaplan establishes the rule that a regulation is retroactive if it alters the past legal consequences of past actions, or if it would impair rights of a party when he acted, increase a party’s liability for past conduct, or impose new duties with respect to transactions already completed.
While Kaplan concedes that APC is correct that a regulation may not take away or impair vested rights, he also notes that APC members have no vested rights. Further, Kaplan has determined the Rules only have future rights that do not affect a programs past eligibility or require schools to refund federal student aid.

While APC relies upon the Supreme Court’s decision in Landgraf v USI Film Products to establish their retroactivity argument, Kaplan determines that Landgraf “does not sustain the weight” that APC puts on it. Landgraf does illustrate the important distinction between regulations that apply directly to past conduct and those that merely arise from conduct antedating the regulation’s enactment. Kaplan sees it that students attending “institutions” (not programs) under the GE Rules would be unable to obtain federal financial aid in the future, while funds received prior to the enacted date will remain unchanged. It should be noted that while APC relies upon Landgraf, Kaplan relies on another case, Bowen v. Georgetown University Hospital, to base his decision.

Kaplan now moves onto the second section of the argument, whether the Department stayed within the confines of its statutory authority under the HEA. Here, APC argued that the Department acted in excess of statutory authority under the HEA and that it has “transmogrified” the phrase “prepare students for gainful employment in a recognized occupation.” Kaplan interprets this as a two-part claim. First, that the statutory phrase “gainful employment” has a plain and unambiguous meaning: “a job that pays.” Second, that even if the phrase was unambiguous, the Department’s interpretation of that language would be unreasonable and contrary to clear congressional intent.

Kaplan establishes that the proper judicial review in cases like this is a Chevron analysis. In a two-part test, a court should first consider if Congress has spoken directly to the precise question at issue. If Congress has spoken, then the review is over, and the intent of Congress must be maintained. If Congress has not spoken directly to the precise issue at hand, then the court should then determine if the agency’s interpretation is based on a permissible construction of the statute. Courts should defer to agency’s interpretation as long as it is “reasonable.”

In Judge Kaplan’s opinion, APC makes a similar argument as APSCU did in 2012 in the first round of gainful employment litigation. Kaplan determines that if APC is arguing the same argument that APSCU did, then there is no need to “replow old ground.” He then quotes, at length, Judge Contreras’ opinion, which determined that (1) there is no unambiguous meaning of what makes employment “gainful” and that the phrase need not mean “any job that pays”; (2) that the structure, purpose, and legislative history of the HEA do not unambiguously foreclose the agency’s interpretation”; and (3) that the gainful employment regulations are a reasonable interpretation of an ambiguous statutory command.

Kaplan also dismisses APC’s “elephant in a mousehole” argument – which essentially claimed that the Department’s Rules signified such a drastic change in a policy that Congress could not have meant to authorize it in the statutory language.

Here too, Kaplan relies on Contreras’ similar opinion from the APSCU case to dismiss APC.

Next, Kaplan considers APC’s unique claim that the GE Rules conflict with the statutory framework of the HEA by usurping the traditional role of accrediting bodies like the New York Board of Regents in evaluating student achievement and in determining the acceptable educational standards for proprietary institutions.

Kaplan sees this argument as “quite surprising, but not for its merit” because it is “at best ill-conceived and at worst misleading.” The GE Rules say nothing whatsoever about the content of the educational programs, they are only concerned about the quality of those programs as measured by graduates ability to repay their loans. While federal law prevents the Department from dictating state schools curricula, the Department is allowed to condition school’s eligibility for federal student aid programs on performance-based metrics measuring student’s success.

Turning to the legislative history, APC claimed that Congress never intended to empower the Department to deny eligibility of Title IV programs based on the Department’s conclusion regarding program quality

Kaplan acknowledges that legislative history is often murky, ambiguous, and contradictory. Taking heed of the Supreme Court’s warning that judicial investigations of legislative history have a tendency to become “an exercise in looking over a crowd and picking out your friends,” Kaplan concludes that the legislative history of the HEA sheds “at best an inconsistent light on what Congress meant when it directed the Department to provide Title IV funding to only schools that prepare students for gainful employment in a recognized occupation.” Thus, in cases such as this, where ambiguity in the statute is the tie, the tie goes to the agency.

Lastly, Kaplan considers the third section of the argument, looking at the regulation as it pertains to the Administrative Procedure Act. APC claims that the rules are “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law” and that they are not supported by substantial evidence in the record.

Kaplan establishes the critical question for which he must answer to base his opinion on as ‘Did the record show that the agency examined the relevant data and articulated a satisfactory explanation for its actions?’ Said otherwise, the agency’s determination must reveal a rational connection to the facts found and the choice made. Only if the court finds a clear error in judgment or the agency relied on factors which Congress did not intend it to consider, failed to consider important aspects of the problem, or if the agency offered an explanation for its decision that runs counter to the evidence before the agency should a court vacate the rules. Agencies must be given ample latitude to adapt their rules and policies to the demands of changing circumstances.

To further summarize APC’s claims, first, the Department relied on flawed and irrelevant data while failing to consider the relevant data, and employed unreliable and biased methods in formulating the rule. Second, the Rules will confuse the public and yield absurd results due to their disproportionate impact on for-profit colleges. And third, the Department’s “ideologically driven” rules are inconsistent with an earlier version of the rules.

With respect to the first claim, Kaplan “puts aside for the moment” the fact that Judge Contreras correctly (in his opinion) rejected this very claim in 2012. Kaplan rules that APC’s argument on this point appears to “utterly disregard the extensive statistical analyses underlying the GE Rules.” Kaplan acknowledges that the Department “conducted a series of multivariate regression analyses” before promulgating the final regulation. The Department then determined that the Rules appropriately and reasonably measure whether a program prepares its students for gainful employment in a recognized occupation.

APC also challenged that the Rules ran afoul of the Department’s Information Quality Guidelines. But Kaplan determined that APC misunderstands the purpose and limitation of those guidelines, which are “intended only to improve the internal management of the Department” and “do not create any private right of action to be used by any party against the government in a court of law or administrative hearing.” Further, the APA only requires that agencies provide the public with proper notice of substantial rulemaking and the ability to comment.

Kaplan then turns to APC’s argument that the Department arbitrarily picked the time period for measuring earnings as soon as 18 months after graduation. However, Kaplan determined that the Department provided a “clear picture” of the connection of current or recent performance of the program with the ability of recent graduates to of pay off student debt when it becomes due. That is all that is required under the APA.

Likewise, Kaplan determined that the 8 percent annual earnings and 20 percent discretionary income passing thresholds are fairly common within the educational content. He also recognized at least four studies cited by the Department that have established their own student loan debt guidelines based upon the 8 percent threshold.

Kaplan pounds one final nail in APC’s coffin by seemingly dismissing APC’s contention that the annual earnings and discretionary income thresholds were promulgated by arbitrary actions when it lowered the thresholds for passing the metrics from 12 and 30 percent respectfully in the 2011 rules to eight and 20 percent in the current GE Rules.

Kaplan says this argument “misses the mark for several reasons.” First, it is not inherently problematic for an agency to change its position. “Agencies must be given ample latitude to adapt their rules and policies to the demands of changing circumstances.” Second, the “dramatic change” is essentially a change in name only because the 2011 rules never went into effect. There was no “settled rule” to which institutions were expected to adhere to and institutions did not actually rely on them. Third, the Department did provide adequate reasoned explanations for changing those thresholds.

Kaplan then spikes the football, writing that APC’s remaining APA arguments fall flat for reasons already discussed and/or provided by Judge Contreras. APC argued that the Rules fail to adjust for economic cycles, but the HEA said nothing about the Department considering fluctuations in the market

APC argued that the rules rely on a single metric, but Kaplan believes the new rules consist of multiple metrics – one comparing debt to annual earnings and another comparing debt to discretionary income – and a program passes if it satisfies the relevant thresholds in either case.

As one would imagine, press and spin was soon to follow.

In a statement, Donna Stelling-Gurnett, executive director of APC, said the group was disappointed by Kaplan’s ruling and plans to explore all options.

“While we agreed with the Department’s goals for this rule from the outset, we remain steadfast in our conviction that this regulation does not achieve those goals,” she said. “Despite headlines suggesting otherwise, most proprietary colleges are providing strong programs and producing strong outcomes, and the best interests of their students are worth championing.”

Despite the ruling, officials at APSCU said the group will forge ahead with its lawsuit. Sally Stroup, APSCU’s general counsel, said the group “remains confident in its legal position” and noted that the association “successfully sued to invalidate the predecessor version of the regulation.” Stroup also noted that the two cases were substantially different. Some media outlets also noted that the APCSU case is the “bigger” case.

Because the case involves Arnie Duncan in his official capacity of Secretary of Education, APC has 60 days to appeal the ruling.

Should APC appeal, I would expect them to also request an injunction or stay, which would temporarily delay the July 1, 2015 implementation of the rules and would likely require a separate judicial hearing in addition to the appeal.

As one would expect, on the heels of Judge Kaplan’s ruling, the Department filed a notice of supplemental authority with the DC Court in regards to the APSCU litigation, noting that in the parties cross-motions for summary judgment, the Department would like Judge John Bates to officially consider Judge Kaplan’s decision in APC v Duncan. Specifically, the Department points out that the court ruled the GE regulations challenged do not exceed statutory authority, are not arbitrary and capricious, and do not violate the Due Process Clause.

APSCU replied to that notice, and naturally argued the APC case should not be considered. Specifically, the APC case is “very different from this case,” and the “APC ruling does leads to no additional support to the Department’s position here.”

Additionally, APSCU contends that the primary issue litigated in the APC case was the plaintiff’s constitutional Due Process challenge, whereas APSCU has not advanced any constitutional Due Process claims.

While APSCU concedes that the New York court rejected APC’s analogous challenge to the Department’s statutory authority to adopt the D/E test, APSCU points out that the opinion is not binding on Judge Bates, and its opinion relies heavily on passages of APSCU I. However, the Department has acknowledged that the conclusions in APSCU I on the scope of the Department’s statutory authority have neither precedential nor preclusive effect. To further that claim, APSCU also claims that Judge Contreras’ interpretation of the statute was erroneous and unpersuasive.

While APSCU also acknowledges some over-lapping of arbitrary and capricious claims, they believe that Judge Kaplan’s discussion was “highly generalized” and did not address a number of specific grounds they have raised demonstrating that the new rule is arbitrary and capricious, including, that the rule relies on outcomes beyond schools’ control, that it will create perverse incentives for schools to admit only students who pose the least risk, and that it imposes overbroad sanctions not rationally tailored to the agency’s purported aim. Nor did the APC Court grapple with the facts that even programs (like Rocky Vista University, a medical school in Colorado that will reportedly close if the rules are implemented) with perfect job-placement rates may not pass the new rule because their graduates choose lower-paying but socially valuable careers, or that the rule relies on a 10-year repayment timeline for associate’s degrees that the Department knows nearly half of students do not meet.

It is also significant that the APC Court did not address many other arguments that APSCU has advanced in this case — for example, APSCU’s claims that the new rule’s disclosure and certification requirements exceed the Department’s statutory authority, violate the First Amendment, and are arbitrary and capricious.

Nicholas Falvo

Nicholas Falvo Nicholas “Nick” Falvo is the Legislative Counsel for Akerman, LLP and responsible for developing federal legislative strategy, researching key policy issues, and building and maintaining relationships on Capitol Hill and the Administration. Nick works closely with various clients, including municipalities, private corporations, trade associations, and not-for-profit organizations.

Recently, Nick has helped establish the Central States Private Education Network (CSPEN). CSPEN is the first all-inclusive, third-party initiated, multi-state collaborative promoting private education and the benefits these institution of higher education provide to a growing number of both non-traditional and traditional postsecondary student populations.

Prior to joining Akerman, Nick was a legislative analyst for a financial services trade association where he represented clients by tracking legislation, drafting memos and updates, interpreting legislation and regulation, and acting as an intermediary between clients, the association, and the Congress.

Nick started his career on Capitol Hill where he worked as a legislative coordinator for Congressman Thaddeus G. McCotter (R-MI). He was responsible for Constitutional, Judicial, Commerce and Veterans Affairs policy issues.

A native of Detroit, Nick holds a Bachelor’s degree from Hillsdale College and a Juris Doctorate from Ave Maria School of Law. In his free time, he enjoys golf, recreational softball, and Detroit sports.

Contact Information:Nick Falvo // Legislative Counsel // Akerman LLP // The Victor Building, 750 9th Street, N.W., Suite 750 Washington, DC 20001 // 202.393.6222 // nicholas.falvo@akerman.com


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