Association of Private Sector Colleges & Universities v. Duncan

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued February 21, 2012 Decided June 5, 2012
No. 11-5174
ASSOCIATION OF PRIVATE SECTOR COLLEGES AND
UNIVERSITIES,
APPELLANT
v.
ARNE DUNCAN, IN HIS OFFICIAL CAPACITY AS SECRETARY OF
THE DEPARTMENT OF EDUCATION AND THE UNITED STATES
DEPARTMENT OF EDUCATION,
APPELLEES
Consolidated with 11-5230
Appeals from the United States District Court
for the District of Columbia
(No. 1:11-cv-00138)
Douglas R. Cox argued the cause for appellant/cross-
appellee. With him on the briefs were Timothy J. Hatch, Nikesh
Jindal, and Derek S. Lyons.
Joshua Waldman, Attorney, U.S. Department of Justice,
argued the cause for appellees/cross-appellants. With him on
the briefs were Tony West, Assistant Attorney General, Ronald
C. Machen, Jr., U.S. Attorney, and Michael S. Raab, Attorney.
2
Before: ROGERS, Circuit Judge, and EDWARDS and
GINSBURG, Senior Circuit Judges.
Opinion for the Court filed by Senior Circuit Judge
EDWARDS.
EDWARDS, Senior Circuit Judge: Every year, Congress
provides billions of dollars through loan and grant programs to
help students pay tuition for their postsecondary education. The
Department of Education (“the Department” or “the agency”)
administers these programs, which were established under Title
IV of the Higher Education Act of 1965 (“the HEA” or “the
Act”), Pub. L. No. 89-329, 79 Stat. 1219, 1232–54. Students
must repay their federal loans; the costs of unpaid loans are
borne by taxpayers.
To participate in Title IV programs – i.e., to be able to
accept federal funds – a postsecondary institution (“a school” or
“an institution”) must satisfy several statutory requirements.
These requirements are intended to ensure that participating
schools actually prepare their students for employment, such
that those students can repay their loans. Three requirements are
at issue here. First, a school must qualify as an “institution of
higher education,” 20 U.S.C. § 1094(a) (2006) – meaning, inter
alia, that the school is “legally authorized” to provide education
in the state in which it is located, id. § 1001(a)(2). Second, a
school must “enter into a program participation agreement with
the Secretary” of Education (“the Secretary”), pursuant to which
the school agrees, inter alia, not to “provide any commission,
bonus, or other incentive payment based directly or indirectly on
success in securing enrollments or financial aid to any”
recruiters or admissions employees. Id. § 1094(a)(20). Third,
a school must not engage in “substantial misrepresentation of
the nature of its educational program, its financial charges, or
the employability of its graduates.” Id. § 1094(c)(3)(A).
In 2009, based on experiences that it had faced in
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administering the Title IV programs, the Department concluded
that the existing regulations covering the state authorization,
compensation, misrepresentation, and other statutory
requirements created opportunities for abuse by schools, because
the regulations were too lax. The Department thus initiated a
rulemaking process to strengthen the regulations so as to protect
the integrity of these programs. On October 29, 2010, following
notice and comment, the agency issued final regulations.
The new regulations included several new provisions that
are the focus of the dispute in this case. First, the Department
adopted for the first time substantive regulations addressing the
HEA’s state authorization requirement. See 34 C.F.R. § 600.9(2011) (“the State Authorization Regulations”). Under the
applicable regulations, a school is now legally authorized by a
state, only if the state has a process to review and act on
complaints concerning institutions, and if the state has
authorized that specific school by name. See id. §
600.9(a)(1)(i)(A) (“the school authorization regulation”). In
addition, in order to be “legally authorized,” a school offering
distance or correspondence education, including online courses,
must obtain authorization from all states in which its students
reside that require such authorization. See id. § 600.9(c) (“the
distance education regulation”). Second, the regulations
covering compensation practices were amended to eliminate
regulatory “safe harbors” pursuant to which schools had adopted
compensation practices that effectively circumvented the HEA’s
proscription against certain incentive payments. See id. §
668.14(b)(22) (“the Compensation Regulations”). Finally, the
Department amended the regulations covering the HEA’s
misrepresentation requirement, see id. §§ 668.71–.75 (“the
Misrepresentation Regulations”), by, inter alia, specifying that
a “misleading statement includes any statement that has the
likelihood or tendency to deceive or confuse,” id. § 668.71(c),
and restyling the Secretary’s menu of enforcement options, see
id. § 668.71(a).
4
The Association of Private Sector Colleges and Universities
(“Appellant” or “the Association”) filed suit in the District Court
challenging the State Authorization, Compensation, and
Misrepresentation Regulations (collectively, “the challenged
regulations”) under the Administrative Procedure Act (“the
APA”), see 5 U.S.C. § 706 (2006), and the Constitution. Both
parties moved for summary judgment. The District Court
granted summary judgment to the Department on Appellant’s
challenges to the Compensation and Misrepresentation
Regulations; found that Appellant lacked standing to challenge
the school authorization regulation; and granted summary
judgment to Appellant on its challenge to the distance education
regulation. See Career Coll. Ass’n v. Duncan, 796 F. Supp. 2d
108 (D.D.C. 2011).
We affirm in part, reverse in part, and remand for further
proceedings consistent with this opinion. First, we affirm the
judgment of the District Court holding that the Compensation
Regulations do not exceed the HEA’s limits. And we mostly
reject Appellant’s claim that these regulations are not based on
reasoned decisionmaking. We remand two aspects of the
Compensation Regulations, however, that are lacking for want
of adequate explanations. Second, we hold that the
Misrepresentation Regulations exceed the HEA’s limits in three
respects: by allowing the Secretary to take enforcement actions
against schools sans procedural protections; by proscribing
misrepresentations with respect to subjects that are not covered
by the HEA; and by proscribing statements that are merely
confusing. We reject Appellant’s other challenges to the
Misrepresentation Regulations. Finally, with respect to the State
Authorization Regulations, we conclude that Appellant has
standing to challenge the school authorization regulation, but
hold that the regulation is valid. However, we uphold
Appellant’s challenge to the distance education regulation,
because that regulation is not a logical outgrowth of the
Department’s proposed rules.
5
I. Background
A. The Higher Education Act
Congress created the Title IV programs to foster access to
higher education. “Every year [these] programs provide more
than $150 billion in new federal aid to approximately fourteen
million post-secondary students and their families.” Career
Coll. Ass’n, 796 F. Supp. 2d at 113–14. Students receiving this
aid attend private for-profit institutions, public institutions, and
private nonprofit institutions. See id. at 114. These students are
expected to repay their federal loans; their failure to do so shifts
their tuition costs onto taxpayers. But schools receive the
benefit of accepting tuition payments from students receiving
federal financial aid, regardless of whether those students are
ultimately able to repay their loans. Therefore, Congress
codified statutory requirements in the HEA to ensure against
abuse by schools. Three are at issue in this dispute.
First, the HEA stipulates that “[i]n order to be an eligible
institution for the purposes of any [Title IV] program[,] . . . an
institution must be an institution of higher education.” 20
U.S.C. § 1094(a). Federal law defines an “institution of higher
education” as an institution in any state that inter alia “is legally
authorized within such State to provide a program of education
beyond secondary education.” Id. § 1001(a)(2); see also id.
§ 1002(a)(1), (b)–(c). The HEA does not define “legally
authorized.” This lack of a statutory definition has meant that,
for virtually all of the HEA’s history, each state has determined
for itself the method of authorizing schools within its borders.
Second, as noted above, each school must enter into a
program participation agreement with the Secretary. Pursuant
to this statutory requirement, a school must agree 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
6
recruiting or admission activities or in making decisions
regarding the award of student financial assistance.” Id. §
1094(a)(20). Congress adopted this provision in 1992 based on
its concern that schools were creating incentives for recruiters to
enroll students who could not graduate or could not find
employment after graduating. See H.R. REP. NO. 102-447, at 10
(1992), reprinted in 1992 U.S.C.C.A.N. at 343; see also United
States ex rel. Lee v. Corinthian Colls., 655 F.3d 984, 989 (9th
Cir. 2011) (“This requirement is meant to curb the risk that
recruiters will sign up poorly qualified students who will derive
little benefit from the subsidy and may be unable or unwilling to
repay federally guaranteed loans.” (citations omitted) (internal
quotation marks omitted)). The Department may initiate an
enforcement action against a school that violates this prohibition
to seek the imposition of a civil fine or the limitation,
suspension, or termination of the institution’s eligibility to
participate in Title IV programs. See 20 U.S.C. § 1094(c)(1)(F),
(c)(3)(B)(i)(I).
Third, the HEA prohibits schools from engaging in
“substantial misrepresentation” regarding “the nature of its
educational program, its financial charges, or the employability
of its graduates.” Id. § 1094(c)(3)(A). Congress adopted this
provision to protect students from “false advertising” and other
forms of manipulative “sharp practice.” H.R. REP. NO. 94-1086,
at 13 (1976). If the agency determines “after reasonable notice
and opportunity for a hearing” that an institution has engaged in
proscribed substantial misrepresentation, it may “suspend or
terminate” the institution’s eligibility to participate in Title IV
programs. 20 U.S.C. § 1094(c)(3)(A). The agency may
alternatively seek the imposition of a civil fine. See id. §
1094(c)(3)(B)(i)(II).
B. Regulatory History
Congress has delegated to the Secretary the authority to
promulgate regulations governing the Department’s
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administration of Title IV and other federal programs. The grant
of authority provides that “[t]he Secretary, in order to carry out
functions otherwise vested in the Secretary by law or by
delegation of authority pursuant to law, . . . is authorized to
make, promulgate, issue, rescind, and amend rules and
regulations governing the manner of operation of, and governing
the applicable programs administered by, the Department.” Id.
§ 1221e-3; see also id. § 1098a(a)(1) (directing the Secretary to
obtain public involvement in the development of regulations
through negotiated rulemaking). In 2009, the Secretary
established a negotiated rulemaking committee to develop new
rules related to its administration of Title IV programs. See
Department of Education, Negotiated Rulemaking Committees;
Establishment, 74 Fed. Reg. 24,728 (May 26, 2009).
The reason for the Department’s new regulations is clear.
The agency had determined that the existing regulations were
too lax, allowing schools to circumvent the proscriptions of the
HEA and threaten the integrity of Title IV programs. For
example, following an investigation, agency officials found that
the University of Phoenix had “systematically engage[d] in
actions designed to mislead the [Department] and to evade
detection of its improper incentive compensation system for
those involved in recruiting activities.” Letter from Donna M.
Wittman, Institutional Review Specialist, to Todd S. Nelson,
President, Apollo Grp., Inc. (Feb. 5, 2004) (“Phoenix Report”),
reprinted in J.A. 145. The Department ultimately chose to settle
with the university’s parent company rather than to pursue a
formal sanction, but allegations of impropriety continued. See
Stephen Burd, More Scrutiny Needed of the University of
Phoenix’s Recruiting Practices, HIGHER ED WATCH (Feb. 19,
2009), http://www.newamerica.net/blog/higher-ed-watch/2009/
more-scrutiny-needed-university-phoenix-10193, J.A. 258.
Nor did the Department have any reason to believe that the
University of Phoenix’s alleged misconduct was aberrational.
8
In 2007, admissions and financial aid employees filed a qui tam
false claims action against Alta Colleges, alleging that the
organization had, in contravention of the HEA, both
misrepresented the nature of its degrees to prospective students
and provided salary increases and bonuses to recruiters based
solely on the number of students they recruited. See Third
Amended False Claims Compl. ¶¶ 2–12, 21–25, 28–43, 44–53,
Dec. 20, 2007, J.A. 200–201, 203–04, 205–07, 208–09. A
former recruiter filed a similar action against DeVry in 2009.
See First Amended Compl. Dec. 31, 2008, J.A. 232. There were
also media reports during this period indicating that other
schools had engaged in compensation and marketing practices
proscribed by the HEA. See, e.g., Rebecca Leung, For-Profit
College: Costly Lesson, CBSNEWS (Jan. 30 2005),
http://www.cbsnews.com/stories/2005/01/31/60minutes/main
670479.shtml, J.A. 192.
The Secretary’s negotiated rulemaking committee failed to
reach consensus. See Department of Education, Program
Integrity Issues, Notice of Proposed Rulemaking (“NPRM”), 75
Fed. Reg. 34,806, 34,807–08 (June 18, 2010). The Department
moved forward, however, and submitted proposed regulations
for public comment. See id. at 34,806. “Approximately 1,180
parties submitted comments” during the comment period.
Department of Education, Program Integrity Issues, Final
Regulations (“Final Regulations”), 75 Fed. Reg. 66,832, 66,833
(Oct. 29, 2010). The Department issued its final regulations on
October 29, 2010. See id.C. The Challenged Regulations
1. The State Authorization Regulations
The Department’s 2002 regulations did not impose any
substantive rules covering state authorization. Before the
promulgation of the new regulations, states determined for
themselves the methods of authorizing schools. But the new
9
regulations eliminate the old regime and require states to follow
specified standards in order to satisfy the HEA’s state
authorization requirement. Two are at issue here.
First, the school authorization regulation applies to all
institutions participating in Title IV programs. It establishes that
[a]n institution . . . is legally authorized by a State if the
State has a process to review and appropriately act on
complaints concerning the institution including enforcing
applicable State laws, and the institution . . . is established
by name as an educational institution by a State through a
charter, statute, constitutional provision, or other action
issued by an appropriate State agency or State entity and is
authorized to operate educational programs beyond
secondary education.
34 C.F.R. § 600.9(a)(1)(i)(A) (2011).
Second, the new regulations include a provision covering
providers of distance education. It sets forth that
[i]f an institution is offering postsecondary education
through distance or correspondence education to students in
a State in which it is not physically located or in which it is
otherwise subject to State jurisdiction as determined by the
State, the institution must meet any State requirements for
it to be legally offering postsecondary distance or
correspondence education in that State.
Id. § 600.9(c).
2. The Compensation Regulations
The Department’s 2002 regulations allowed schools to
engage in specific compensation practices under a series of safe
harbors. As the Department explained in its 2002 rulemaking,
the safe harbors were created to “clarify the current law for most
institutions by setting forth specific payment arrangements that
10
an institution may carry out that have been determined not to
violate the incentive compensation prohibition in” the HEA.
Department of Education, Federal Student Aid Programs, Final
Regulations, 67 Fed. Reg. 67,048, 67,053 (Nov. 1, 2002). In
2010, the Department eliminated the codified safe harbors and
expressly interpreted the HEA to prohibit some of the practices
that had previously been deemed safe. Of the compensation
arrangements that were previously permitted and are now
prohibited, three are at issue.
First, the 2002 regulations allowed schools to provide salary
adjustments – e.g., raises – to persons engaged in recruiting and
admission activities, so long as those adjustments were not made
“more than twice during any twelve month period” and were not
“based solely on the number of students recruited, admitted,
enrolled, or awarded financial aid.” 34 C.F.R. §
668.14(b)(22)(ii)(A) (2010) (emphasis added). In contrast, the
current Compensation Regulations prohibit institutions from
offering any “sum of money or something of value, other than
a fixed salary or wages,” 34 C.F.R. § 668.14(b)(22)(iii)(A)
(2011), “based in any part, directly or indirectly, upon success
in securing enrollments or the award of financial aid,” id. §
668.14(b)(22)(i) (emphasis added). In other words, under the
Compensation Regulations, an institution may a make merit-
based salary adjustment to a recruiter’s salary, but only if the
adjustment is not based in any part, directly or indirectly, on the
recruiter’s success in securing either enrollments or the award of
financial aid. See id. § 668.14(b)(22)(ii)(A).
Second, the 2002 regulations allowed schools to provide
incentive based compensation to employees “based upon
students successfully completing their educational programs, or
one academic year of their educational programs, whichever is
shorter.” 34 C.F.R. § 668.14(b)(22)(ii)(E) (2010). The
Department eliminated this safe harbor.
Third, the 2002 regulations allowed schools to provide
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incentive based compensation “to managerial or supervisory
employees who do not directly manage or supervise employees
who are directly involved in recruiting or admission activities,
or the awarding of title IV, HEA program funds.” Id. §
668.14(b)(22)(ii)(G). The Department eliminated this safe
harbor. Moreover, it interpreted the HEA’s prohibition – which
applies to “persons . . . 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) – to
reach “any higher level employee with responsibility for
recruitment or admission of students, or making decisions about
awarding title IV, HEA program funds,” 34 C.F.R. §
668.14(b)(22)(iii)(C)(2) (2011).
3. The Misrepresentation Regulations
The current Misrepresentation Regulations differ in several
respects from the 2002 regulations. First, the 2002 regulations
defined “misrepresentation” to mean “[a]ny false, erroneous or
misleading statement an eligible institution makes to a student
enrolled at the institution, to any prospective student, to the
family of an enrolled or prospective student, or to the
Secretary.” 34 C.F.R. § 668.71(b) (2010). The 2002 regulations
further defined “substantial misrepresentation” as “[a]ny
misrepresentation on which the person to whom it was made
could reasonably be expected to rely, or has reasonably relied,
to that person’s detriment.” Id.Under the new regulations, “misrepresentation” is defined
as:
[a]ny false, erroneous or misleading statement an eligible
institution, . . . organization, or person with whom the
eligible institution has an agreement to provide educational
programs, or to provide marketing, advertising, recruiting
or admissions services makes directly or indirectly to a
student, prospective student or any member of the public, or
12
to an accrediting agency, to a State agency, or to the
Secretary. A misleading statement includes any statement
that has the likelihood or tendency to deceive or confuse.
A statement is any communication made in writing,
visually, orally, or through other means.
34 C.F.R. § 668.71(c) (2011) (emphases added). The
Misrepresentation Regulations do not, however, establish a new
definition of “substantial misrepresentation.” Id.Second, the 2002 regulations set forth that the Secretary
could initiate a proceeding against a participating institution for
making any substantial misrepresentation “regarding the nature
of its educational program, its financial charges or the
employability of its graduates.” 34 C.F.R. § 668.71(a) (2010).
The 2002 regulations then clarified what kinds of statements
would fall within those three subject areas. See id. §§
668.72–.74. In contrast, the current Misrepresentation
Regulations describe that the agency may initiate a proceeding
against an institution for engaging in misrepresentation
“regarding the eligible institution, including about the nature of
its educational program, its financial charges, or the
employability of its graduates.” 34 C.F.R. § 668.71(b) (2011)
(emphasis added). The regulations then clarify what statements
fall within those subject areas and identify an additional covered
subject area – an institution’s relationship with the Department.
See id. §§ 668.72–.75.
Third, the 2002 regulations and the current
Misrepresentation Regulations differ in their respective
descriptions of the steps that the Secretary must or may follow
after receiving notice of an alleged misrepresentation. The 2002
regulations established that “[i]f the misrepresentation is minor
and can be readily corrected, the designated department official
informs the institution and endeavors to obtain an informal,
voluntary correction.” 34 C.F.R. § 668.75(b) (2010). The
regulations provided in the alternative that “[i]f the designated
13
department official finds that the complaint or allegation is a
substantial misrepresentation,” then he or she initiates a formal
action against the institution, id. § 668.75(c)(1), pursuant to the
procedural requirements set forth in subpart G of the
Department’s regulations, see id. §§ 668.81–.98.
In promulgating the current Misrepresentation Regulations,
the Department restyled the agency’s menu of enforcement
options. The relevant provision reads:
If the Secretary determines that an eligible institution has
engaged in substantial misrepresentation, the Secretary
may –
(1) Revoke the eligible institution’s program
participation agreement;
(2) Impose limitations on the institution’s participation
in the title IV, HEA programs;
(3) Deny participation applications made on behalf of
the institution; or
(4) Initiate a proceeding against the eligible institution
under subpart G of this part.
34 C.F.R. § 668.71(a) (2011). There is no provision in the
regulations specifically addressing how the Secretary should
proceed in the event of a minor misrepresentation. See id. §
668.71.
Like the 2002 regulations, the Department’s final
regulations lay out in subpart G the procedures that the Secretary
must follow to initiate a formal proceeding against an institution
for violating any of the HEA’s requirements. See id. §§
668.81–.98.
D. Procedural History
Appellant is “an association of for-profit schools in the
14
private sector education industry, representing more than 1,500
such schools. Every year, [its] members educate more than one
and a half million students.” Career Coll. Ass’n, 796 F. Supp.
2d at 114. Shortly after the Department issued its final
regulations, Appellant filed this suit in the District Court,
challenging the regulations under both the Constitution and the
APA. Appellant claimed that the Compensation Regulations
include provisions that exceed the authority of the Secretary
under the HEA and are otherwise arbitrary and capricious.
Appellant claimed that the Misrepresentation Regulations:
(1) exceed the HEA’s scope in several respects; (2) are
otherwise arbitrary and capricious; and (3) violate the First
Amendment by imposing content-based and speaker-based
prohibitions on both core noncommercial and protected
commercial speech. Appellant additionally claimed that the
school authorization regulation exceeds the Department’s
statutory authority, because it impermissibly alters the allocation
of power between the federal government and the states in a
traditional area of state concern. Appellant also claimed that the
school authorization regulation is otherwise arbitrary and
capricious. Finally, Appellant claimed that the distance
education regulation is arbitrary and capricious. Both parties
moved for summary judgment.
During the proceedings in the District Court, the
Department issued a Dear Colleague Letter to address questions
that regulated parties had raised regarding the challenged
regulations. See Letter from Eduardo M. Ochoa, Dep’t of Educ.,
to Colleague (Mar. 17, 2011) (“Dear Colleague Letter”), J.A.
130; see also NPRM, 75 Fed. Reg. at 34,820 (reserving the right
to respond to ongoing questions by publishing “a Dear
Colleague Letter”). The letter purported to “provide[] additional
guidance” without “mak[ing] any changes to the regulations.”
Dear Colleague Letter at 1, J.A. 130. The letter specifically
addressed the arguments that Appellant had raised in its
complaint.
15
The District Court granted the Department’s motion for
summary judgment in almost all respects. The court upheld the
Compensation and Misrepresentation regulations entirely, and
it held that Appellant lacked standing to challenge the school
authorization regulation. However, the court granted
Appellant’s motion for summary judgment with respect to the
distance education regulation. It found that the regulation
violated the APA, because the Department had failed to provide
adequate notice that it was contemplating the new rule. Both
parties appealed.
II. Analysis
A. Standard of Review
We review the District Court’s grant of summary judgment
de novo. See Jicarilla Apache Nation v. U.S. Dep’t of Interior,
613 F.3d 1112, 1118 (D.C. Cir. 2010). Furthermore, “[i]n a case
like the instant one, in which the District Court reviewed an
agency action under the APA, we review the administrative
action directly, according no particular deference to the
judgment of the District Court.” Holland v. Nat’l Mining Ass’n,
309 F.3d 808, 814 (D.C. Cir. 2002) (citations omitted).
Appellant’s claims that various provisions of the challenged
regulations are “in excess of statutory jurisdiction, authority, or
limitations, or short of statutory right,” 5 U.S.C. § 706(2)(C), are
reviewed under the well-known Chevron framework. See
Chevron U.S.A. Inc. v. Natural Res. Def. Council, Inc., 467 U.S.
837 (1984).
Pursuant to Chevron Step One, if the intent of Congress is
clear, the reviewing court must give effect to that
unambiguously expressed intent. If Congress has not
directly addressed the precise question at issue, the
reviewing court proceeds to Chevron Step Two. Under
Step Two, “[i]f Congress has explicitly left a gap for the
agency to fill, there is an express delegation of authority to
16
the agency to elucidate a specific provision of the statute by
regulation. Such legislative regulations are given
controlling weight unless they are . . . manifestly contrary
to the statute.” Chevron, 467 U.S. at 843–44.
HARRY T. EDWARDS & LINDA A. ELLIOTT, FEDERAL
STANDARDS OF REVIEW – REVIEW OF DISTRICT COURT
DECISIONS AND AGENCY ACTIONS 141 (2007) (alterations in
original).
The fact that some of the challenged regulations are
inconsistent with the Department’s past practice “is not a basis
for declining to analyze the agency’s interpretation[s] under the
Chevron framework.” Nat’l Cable & Telecomms. Ass’n v.
Brand X Internet Servs., 545 U.S. 967, 981 (2005). As the
Supreme Court has stated, “if the agency adequately explains the
reasons for a reversal of policy, ‘change is not invalidating,
since the whole point of Chevron is to leave the discretion
provided by the ambiguities of a statute with the implementing
agency.’” Id. (citations omitted). An agency’s departure from
past practice can, however, if unexplained, render regulations
arbitrary and capricious. See id.; Rust v. Sullivan, 500 U.S. 173,
186–87 (1991).
Appellant’s claims that the challenged regulations are
“arbitrary, capricious, an abuse of discretion, or otherwise not in
accordance with law,” 5 U.S.C. § 706(2)(A), require us to
determine whether the regulations are the product of reasoned
decisionmaking. As the Supreme Court has explained:
Normally, an agency rule would be arbitrary and capricious
if the agency has relied on factors which Congress has not
intended it to consider, entirely failed to consider an
important aspect of the problem, offered an explanation for
its decision that runs counter to the evidence before the
agency, or is so implausible that it could not be ascribed to
a difference in view or the product of agency expertise.
17
Motor Vehicle Mfrs. Ass’n of the U.S., Inc. v. State Farm Mut.
Auto. Ins. Co., 463 U.S. 29, 43 (1983). In evaluating an
agency’s decisionmaking, our review is “fundamentally
deferential.” EDWARDS & ELLIOTT 172. But we are limited to
assessing the record that was actually before the agency. See,
e.g., Camp v. Pitts, 411 U.S. 138, 142 (1973) (per curiam).
A regulation will be deemed arbitrary and capricious, if the
issuing agency failed to address significant comments raised
during the rulemaking. See PPL Wallingford Energy LLC v.
FERC, 419 F.3d 1194, 1198 (D.C. Cir. 2005). An agency’s
obligation to respond, however, is not “particularly demanding.”
Pub. Citizen, Inc. v. Fed. Aviation Admin., 988 F.2d 186, 197
(D.C. Cir. 1993). A regulation also violates the APA, if it is not
a “logical outgrowth” of the agency’s proposed regulations. See
e.g., Int’l Union, United Mine Workers v. Mine Safety & Health
Admin., 626 F.3d 84, 94–95 (D.C. Cir. 2010). This rule ensures
that regulated parties have an opportunity to comment on new
regulations. See id.Two additional points merit mention before turning to
Appellant’s claims. First, Appellant is pursuing a facial
challenge to the regulations. “To prevail in such a facial
challenge, [Appellant] ‘must establish that no set of
circumstances exists under which the [regulations] would be
valid.’ That is true as to both the constitutional challenges and
the statutory challenge[s].” Reno v. Flores, 507 U.S. 292, 301
(1993) (citations omitted); see also Sherley v. Sebelius, 644 F.3d
388, 397 (D.C. Cir. 2011). “[I]t is not enough for [Appellant] to
show the [challenged regulations] could be applied unlawfully.”
Sherley, 644 F.3d at 397 (citations omitted); see also Rust, 500
U.S. at 183. As we explain below, this limited exception to the
rule for an overbreadth challenge to a regulation of speech has
no application in this case. Where we conclude that a
challenged regulatory provision does not exceed the HEA’s
limits and otherwise satisfies the requirements of the APA, we
18
will uphold the provision and preserve the right of complainants
to bring as-applied challenges against any alleged unlawful
applications.
Second, the Department offered interpretations of the
challenged regulations in its Dear Colleague Letter and also in
its briefs to the District Court and this court. An agency’s
permissible interpretation of its own regulation normally “must
be given controlling weight unless it is plainly erroneous or
inconsistent with the regulation,” Thomas Jefferson Univ. v.
Shalala, 512 U.S. 504, 512 (1994) (citations omitted) (internal
quotation marks omitted), even when the interpretation is first
articulated in the course of litigation, see Auer v. Robbins, 519
U.S. 452 (1997). The Supreme Court has specified additional
constraints on the deference owed to an agency’s interpretation
of its own regulation in Thomas Jefferson, Auer, and other
decisions. See, e.g., Chase Bank USA, N.A. v. McCoy, 131 S.
Ct. 871 (2011); Christensen v. Harris Cnty., 529 U.S. 576(2000). Pursuant to this line of authority, Appellant argues that
the Department’s interpretations are not entitled to any
deference. As we make clear, however, it is unnecessary to
resolve this contention.
B. The Compensation Regulations
1. The Regulations Do Not Exceed the HEA’s Limits
Appellant offers two arguments in support of its claim that
the Compensation Regulations exceed the HEA’s prohibition on
incentive based compensation. Neither is persuasive.
• Salary Adjustments
The HEA prohibits institutions from providing “any
commission, bonus, or other incentive payment based directly
or indirectly on success in securing enrollments or financial
aid.” 20 U.S.C. § 1094(a)(20). In the Compensation
Regulations, the Department interpreted the phrase
19
“commission, bonus, or other incentive payment” to mean “a
sum of money or something of value, other than a fixed salary
or wages.” 34 C.F.R. § 668.14(b)(22)(iii)(A) (2011). The
Compensation Regulations thus allow a school to provide a
salary adjustment to a recruiter, only if the adjustment is 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). At Chevron step one, Appellant must
demonstrate that the HEA “unambiguously forecloses” that
interpretation. Vill. of Barrington, Ill. v. Surface Transp. Bd.,
636 F.3d 650, 661 (D.C. Cir. 2011) (citation omitted).
Appellant has not satisfied that “heavy burden.” Id.Starting with the HEA’s text, we have no trouble
concluding that the phrase “any commission, bonus, or other
incentive payment” is broad enough to encompass salary
adjustments. We need look no further than to the phrase “other
incentive payment.” Since that term is not defined, we must
give it its ordinary meaning. See FCC v. AT & T Inc., 131 S. Ct.
1177, 1182 (2011) (citation omitted). When used as an
adjective, incentive means “[i]nciting” or “motivating,”
AMERICAN HERITAGE DICTIONARY 650 (2d Coll. ed. 1982), and
a payment is “[t]hat which is paid,” WEBSTER’S INTERNATIONAL
DICTIONARY 1797 (2d ed. 1957). A salary adjustment fits within
the plain meaning of the statutory term, because it is something
paid by a school to recruiters to motivate improved performance.
Appellant’s theory that a standard salary adjustment is not
a prohibited form of compensation is perplexing. After all,
Appellant defends the 2002 regulations, see Appellant’s Br. at
3–4, 14, which established that at least some salary adjustments
– i.e., those made more than twice a year as well as those based
solely on recruitment numbers, see 34 C.F.R. §
668.14(b)(22)(ii)(A) (2010) – are prohibited commissions,
bonuses, or other incentive payments. Appellant has not
meaningfully explained how the HEA could authorize the
20
agency to prohibit some salary adjustments but not others. But
quite apart from this incongruity, we find Appellant’s arguments
to be unpersuasive.
Appellant argues that the Department’s interpretation is
foreclosed by basic rules of statutory interpretation. Invoking
the related canons expressio unius est exclusio alterius and
ejusdem generis, Appellant claims that the phrase “other
incentive payment” cannot be a “catch-all that dramatically
changes the scope of the statute.” Appellant’s Br. at 17; see also
Hall St. Assocs., L.L.C. v. Mattel, Inc., 128 S. Ct. 1396, 1404
(2008) (“[W]hen a statute sets out a series of specific items
ending with a general term, that general term is confined to
covering subjects comparable to the specifics it follows.”). And
invoking the canon against surplusage, Appellant argues that to
construe “other incentive payment” broadly would
impermissibly render the prohibition on bonuses and
commissions superfluous. Appellant thus urges that we limit
“other incentive payment” to mean payments such as “rewards
or prizes.” Appellant’s Br. at 17.
This court’s decisions discussing the application of these
canons at Chevron step one are not entirely consistent.
Compare Indep. Ins. Agents of Am., Inc. v. Hawke, 211 F.3d
638, 644–45 (D.C. Cir. 2000) (rejecting agency’s interpretation
at step one based on the tandem canons “of avoiding surplusage
and expressio unius”), with Mobile Commc’ns Corp. of Am. v.
FCC, 77 F.3d 1399, 1405 (D.C. Cir. 1996) (“Expressio unius ‘is
simply too thin a reed to support the conclusion that Congress
has clearly resolved [an] issue.’” (alteration in original)
(citations omitted)), and Tex. Rural Legal Aid, Inc. v. Legal
Servs. Corp., 940 F.2d 685, 694 (D.C. Cir. 1991) (“[A]
congressional prohibition of particular conduct may actually
support the view that the administrative entity can exercise its
authority to eliminate a similar danger.” (citation omitted)). But
it is clear that a court need not follow these canons, when they
21
do “not hold up in the statutory context.” Hawke, 211 F.3d at
644 (citations omitted). Here, Congress phrased the relevant
provision broadly – employing words and phrases like “any”
and “directly or indirectly.” 20 U.S.C. § 1094(a)(20); see also
United States v. Gonzales, 520 U.S. 1, 5 (1997) (noting that
“‘any’ has an expansive meaning”); Roma v. United States, 344
F.3d 352, 360 (3d Cir. 2003) (describing “‘directly or
indirectly’” as “extremely broad language”). Thus, Congress
intended the phrase “other incentive payment” to broadly cover
abuses that Congress had not enumerated. Appellant’s objection
that “[s]alary adjustments are not an obscure form of payment
beyond Congress’s foresight,”Appellant’s Reply Br. at 10,
misses the point. While Congress was undoubtedly aware that
many schools provide salary-based compensation to recruiters,
it may not have anticipated that schools would circumvent the
HEA’s prohibition on incentive based compensation through the
strategic use of salary adjustments.
Nor do we find any other indication that Congress
unambiguously intended to exclude salary adjustments from the
prohibition on incentive based compensation. See, e.g., Bell Atl.
Tel. Cos. v. FCC, 131 F.3d 1044, 1047 (D.C. Cir. 1997)
(describing that courts must “exhaust the traditional tools of
statutory construction” at Chevron step one (citations omitted)
(internal quotation marks omitted)). Appellant directs us to the
Conference Report for the 1992 amendments to the HEA. But
that report demonstrates merely that Congress was concerned
with schools’ “use of commissioned sales representatives.”
H.R. REP. NO. 102-630, at 499 (1992) (Conf. Rep.), reprinted in
1992 U.S.C.C.A.N. at 614. It certainly does not show or even
suggest that Congress was affirmatively unconcerned with the
use of “salaried recruiters.” Appellant’s Br. at 19.
Finally, the fact that courts have interpreted the HEA not to
prohibit certain compensation practices does not compel a
different outcome here. In Corinthian Colleges, the Ninth
22
Circuit stated that “the HEA does not prohibit any and all
employment-related decisions on the basis of recruitment
numbers; it prohibits only a particular type of incentive
compensation.” 655 F.3d at 992. But the court held only that
“adverse employment actions, including termination, on the
basis of recruitment numbers remain permissible” under the
HEA. Id. at 992–93 (citations omitted). It did not address
salary adjustments at all. More importantly, neither that
decision nor the Ninth Circuit’s unpublished decision in United
States ex rel. Bott v. Silicon Valley Colleges, No. 06-15423,
2008 WL 59364 (9th Cir. Jan. 4, 2008) is binding law in this
circuit. And neither decision stated that its holding was
unambiguously compelled by the HEA; hence, neither can
trump the Department’s interpretation. See Brand X Internet
Servs., 545 U.S. at 982.
We therefore proceed to Chevron step two. Appellant
initially argues that the Department forfeited its right to invoke
step-two deference. In the final rule, the Department responded
to comments that its test for identifying prohibited compensation
was unclear, stating that it “believe[d] that the prohibition
identified in section 487(a)(20) of the HEA is clear and that
institutions should not have difficulty maintaining compliance
with the new regulatory language.” Final Regulations, 75 Fed.
Reg. at 66,876–77. An agency cannot claim deference, when it
adopts a regulation based on its judgment that a particular
“interpretation is compelled by Congress.” Peter Pan Bus
Lines, Inc. v. Fed. Motor Carrier Safety Admin., 471 F.3d 1350,
1354 (D.C. Cir. 2006) (citations omitted) (internal quotation
marks omitted). However, it would be a stretch, to say the least,
to hold that the Department’s use of the word “clear”
demonstrates that the agency meant to suggest that its regulatory
interpretation was “compelled by Congress.” Id. In Peter Pan,
the agency had declared that a private party’s interpretation of
a statutory term was “not consistent with the plain language of
the statute and the legislative history,” and the agency had
23
further stated what the statutory phrase “clearly meant.” Id. at
1353 (citation omitted) (internal quotation marks omitted).
But the regulations at issue here reflect more than mere “parsing
of the statutory language.” Id. at 1354 (citation omitted)
(internal quotation marks omitted). The agency adopted the
regulations based on its “experience and expertise,” id. (citation
omitted) (internal quotation marks omitted), after administering
the safe harbors for almost a decade, see Final Regulations, 75
Fed. Reg. at 66,872–73, 66,877.
At step two, we easily conclude that the Compensation
Regulations are entitled to deference, because they are not
manifestly contrary to the HEA. The agency promulgated the
regulations based on known abuses. As the Department
explained, “unscrupulous” institutions used the safe harbor for
salary adjustments to “circumvent the intent” of the HEA and to
avoid detection and sanction for engaging in unlawful
compensation practices. See Final Regulations, 75 Fed. Reg. at
66,872–73, 66,877. The safe harbor enabled a school to tell the
Department that it was basing compensation on both recruitment
numbers and other qualitative factors, when in fact, “these other
qualitative factors [were] not really considered when
compensation decisions [were] made.” Id. at 66,873. As we
have already discussed, the agency’s assessment of the safe
harbor finds support in the record – specifically, in the
Department’s investigation into the practices of one school,
several qui tam actions against other schools, and media reports,
as well as from comments the agency received during the
rulemaking. See, e.g., Comments from Nat’l Ass’n for Coll.
Admission Counseling to U.S. Dep’t of Educ. 1–6 (June 22,
2009) (“NACAC Comment”), J.A. 323–28.
Appellant’s reliance on GAO Report Number 10-370R to
refute the Department’s assessment of the safe harbor is
misplaced. Appellant summarizes that report as finding that
“substantiated violations of the HEA’s compensation restriction
24
have not significantly increased in frequency or severity since
the adoption of the 2002 regulations.” Appellant’s Br. at 31.
But that report expressly “d[id] not . . . assess the overall impact
of the safe harbor regulations on Education’s efforts to enforce
the incentive compensation ban.” U.S. GOV’T ACCOUNTABILITY
OFFICE, GAO-10-370R, HIGHER EDUCATION 2 (2010), J.A. 268.
Indeed, the Department justified the regulations partially on its
conclusion that the safe harbors had made it more difficult to
substantiate violations of the HEA in the first place. Moreover,
the Compensation Regulations address this problem. They
allow the Department to use any evidence that an institution
based compensation on recruitment numbers to substantiate a
violation; thus, the Department no longer needs to see through
an institution’s “smoke and mirrors.” Phoenix Report at 10, J.A.
156; see also id. at 17–18, 25–26 (documenting the school’s
deceptive compensation practices), J.A. 163–64, 171–72.
Appellant also argues that the Department’s interpretation
is arbitrary and capricious, because it deprives institutions of the
ability to provide any merit-based salary adjustments to
recruiters. After all, Appellant insists, a recruiter’s job is to
recruit. But the Department adequately addressed this claim. A
recruiter’s job goes beyond maximizing recruitment numbers; a
recruiter also offers students “a form of counseling” about
whether they are a good fit for a particular institution. Final
Regulations, 75 Fed. Reg. at 66,872. Therefore, a school may
still provide merit-based salary adjustments based on a
recruiter’s ability effectively to match students with that school.
Moreover, the Department has identified a number of other
factors on which permissible salary adjustments may be based
– e.g., professionalism, expertise, student evaluations, and
seniority. See id. at 66,877.
Indeed, even under the 2002 regulations, schools were not
allowed to offer salary adjustments “based solely” on
recruitment numbers. 34 C.F.R. § 668.14(b)(22)(ii)(A) (2010).
25
Schools have thus been required to take into account job-
performance factors unrelated to recruitment numbers for nearly
a decade. We think it implausible that schools are now at a loss
for such factors. Appellant objects that its members cannot rely
on the factors that they identified under the 2002 regulations,
because the Department has sought to punish schools for using
those factors. See Appellant’s Br. at 23 n. 3; Appellant’s Reply
Br. at 22 n.10. This argument is farcical. The Department
means to sanction institutions for using these factors to hide
their true compensation practices. The Department has never
adopted Appellant’s straw-person position that factors such as
professionalism or experience are inherently related to
recruitment numbers. And because of the facial nature of
Appellant’s challenge, we need not address the concern that the
Department could adopt that position under the regulations in
the future. In the event that the Department does so, a school
may seek relief through an as-applied challenge.
• Managers and Supervisors
The Compensation Regulations apply the HEA’s incentive
based compensation prohibition to higher level employees. To
achieve this effect, the Department interpreted the phrase “any
persons . . . 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), to include
“higher level employee[s] with responsibility for recruitment or
admission of students, or making decisions about awarding title
IV, HEA program funds,” 34 C.F.R. § 668.14(b)(22)(iii)(C)(2)
(2011). This interpretation easily passes muster under Chevron.
At step one, the statutory phrase is broad, using the word
“any” to modify “persons,” “recruiting,” and “admission
activities.” Appellant argues that the phrase “engaged in” must
be construed narrowly. But the term is undefined, and Appellant
offers no authority suggesting that the term has a limited,
specific meaning. The Department, by contrast, argues
26
persuasively that “engaged in” should be read broadly based on
both the plain meaning of “engage” – “[t]o involve onself,”
AMERICAN HERITAGE DICTIONARY 454 – and case law, see
Ramos v. Universal Dredging Corp., 653 F.2d 1353, 1358 (9th
Cir. 1981) (noting that a statute should be “liberally construed”
because of its use of the “broad” phrase “‘engaged in maritime
employment’”). The phrase “admission activities” is also broad
and can connote supervision as well as participation. See
AMERICAN HERITAGE DICTIONARY 77 (defining “activity” to
include “[a] specified form of supervised action or field of
action”). Therefore, there was a statutory basis for the
Department to conclude that persons “with responsibility for”
recruitment or admission activities can be “engaged in”
recruitment or admission activities.
At step two, the Department’s interpretation that the HEA’s
prohibition on incentive based compensation can apply to higher
level employees is permissible, because it is not manifestly
contrary to the statute. Here too, the Department was
responding to known abuses. As the Department explained in
its proposed rulemaking, “senior management may drive the
organizational and operational culture at an institution, creating
pressures for top, and even middle, management to secure
increasing numbers of enrollments from their recruiters.”
NPRM, 75 Fed. Reg. at 34,818. This conclusion finds support
in the administrative record – particularly, the Department’s
investigation into the practices of the managers overseeing
recruitment at the University of Phoenix. See Phoenix Report at
10–12, 17–20, J.A. 156–58, 163–66.
Appellant’s argument that the Department’s application of
the HEA to higher level employees is counter to the Act’s
legislative history – whether intended as a Chevron step-one or
step-two argument – is unpersuasive. The House Report on
which Appellant relies demonstrates merely that Congress was
concerned with “salespeople,” H.R. REP. NO. 102-630, at 499
27
(1992) (Conf. Rep.), reprinted in 1992 U.S.C.C.A.N. at 614, not
that Congress manifestly did not intend to regulate managers
and supervisors. Appellant’s claim that the Department
forfeited its right to invoke Chevron is also unavailing for the
reasons discussed above.
Finally, the Department has committed to evaluating
whether a specific employee or manager is subject to the
incentive based compensation prohibition on a case-by-case
basis. See Final Regulations, 75 Fed. Reg. at 66,874. If the
agency overreaches by pursuing actions against institutions that
provide incentive based compensation to employees or
managers who are not responsible for driving organizational
culture toward a focus exclusively on recruitment numbers,
those institutions may seek appropriate as-applied relief.
2. Two Aspects of the Regulations Are Arbitrary and
Capricious for Want of Reasoned Decisionmaking
Appellant argues that the Compensation Regulations fail for
want of reasoned decisionmaking. For the most part, we find
Appellant’s arguments to be specious and unworthy of serious
discussion. The Compensation Regulations “have sufficient
content and definitiveness as to be a meaningful exercise in
agency lawmaking,” Paralyzed Veterans of Am. v. D.C. Arena
L.P., 117 F.3d 579, 584 (D.C. Cir. 1997), with or without
reference to the Department’s Dear Colleague Letter. The
Department provided an adequate and more-than-conclusory
explanation for why it adopted the regulations, primarily based
on its experience administering the 2002 safe harbors. The
Department’s budgetary analysis does not call into question the
benefits of the regulations – it reflects that the benefits were
difficult to quantify. And the Department was entitled to replace
bright-line rules with contextual rules.
Business Roundtable v. SEC, 647 F.3d 1144 (D.C. Cir.
2011), on which Appellant places much emphasis, is easily
28
distinguishable, even apart from our conclusion that the
Department has satisfactorily justified its adoption of the
Compensation Regulations. In Business Roundtable, we found
a regulation to be arbitrary and capricious, because, in
promulgating it, the SEC had failed to satisfy its “unique
[statutory] obligation to consider the effect of a new rule upon
‘efficiency, competition, and capital formation.’” Id. at 1148
(citation omitted). Appellant points to no such “unique”
statutory obligation here. Moreover, in Business Roundtable,
this court criticized the SEC for failing to consider empirical
studies and quantitative data. See id. at 1150–51. The Appellant
points to no data or study the Department ignored and thus
Business Roundtable is of no help to its argument.
There are two aspects of the regulations, however, that are
lacking for want of adequate explanations. First, the elimination
of the safe harbor for compensation “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), is arbitrary and capricious without
some better explanation from the Department. Congress created
the Title IV programs to enable more students to attend and
graduate from postsecondary institutions. This specific safe
harbor seems perfectly in keeping with that goal. Indeed, the
elimination of this safe harbor could even discourage recruiters
from focusing on the most qualified students.
The Department offered a brief explanation for its
elimination of this safe harbor. But its fleeting reference to
“short-term, accelerated programs” and its isolated examples of
students who graduated from schools but could not find
commensurate work, see Final Regulations, 75 Fed. Reg. at
66,874, are insufficient. Furthermore, the Department points to
nothing in the record supporting these assertions. It may well be
that the Department actually eliminated this safe harbor based
on the agency’s belief that institutions have used graduation
29
rates as a proxy for recruitment numbers. But the Department
never offered that explanation. We thus remand to the District
Court with instructions to remand to the Department to allow it
to explain its decision to eliminate this specific safe harbor. Cf.
La. Fed. Land Bank Ass’n, FLCA v. Farm Credit Admin., 336
F.3d 1075, 1085 (D.C. Cir. 2003) (remanding, rather than
vacating, based on the conclusion that it was “not unlikely” that
the agency “‘[would] be able to justify a future decision to retain
the [r]ule’” (citation omitted)).
Second, the Department failed to address the concern,
identified by at least two commenters, that the Compensation
Regulations could have an adverse effect on minority
enrollment. During the comment period, the Career Education
Corporation posed the following question to the Department:
How will the new regulations apply to employees who are
not involved in general student recruiting, but who are
involved in recruiting certain types of students? Examples
would include college coaches who recruit student athletes,
and employees in college diversity offices who recruit
minority students.
Letter from Career Educ. Corp. to Jessica Finkel, U.S. Dep’t of
Educ. 40 (Aug. 1, 2010), J.A. 357. DeVry, Inc. asked similar
questions:
Can schools increase compensation to personnel involved
in diversity outreach programs for successfully assembling
a diverse student body? Does the Department intend to
foreclose schools’ ability to compensate their staffs for
successfully managing outreach programs for students from
disadvantaged backgrounds . . . ?
Letter from DeVry, Inc. to Jessica Finkel (Aug. 1, 2010), J.A.
359.
As noted, an agency’s obligation to address specific
30
comments is not demanding. Here, the Department fell just
short. In the rulemaking, the Department appears to have
grouped together related comments. In one such bundle, the
Department summarized that “[s]ome commenters . . . asked
whether the proposed regulations would permit a president to
receive a bonus or other payment if one factor in attaining the
bonus or other payment was meeting an institutional
management plan or goal that included increasing minority
enrollment.” Final Regulations, 75 Fed. Reg. at 66,874.
In the discussion that followed, the Department stated that
the Compensation Regulations “apply to all employees at an
institution who are engaged in any student recruitment or
admission activity or in making decisions regarding the award
of title IV, HEA program funds.” Id. However, the Department
never really answered the questions posed by Career Education
Corporation and DeVry, Inc., because it failed to address the
commenters’ concerns. It may be that the Department
misinterpreted the concerns raised by the comments to be
limited to minority recruitment by higher-level employees. See
id. Nevertheless, the agency’s “failure to address these
comments, or at best its attempt to address them in a conclusory
manner, is fatal to its defense.” Int’l Union, United Mine
Workers, 626 F.3d at 94 (citation omitted). We therefore
remand to the District Court with instructions to remand to the
Department to allow it to address these concerns. It will be a
simple matter for the Department to address these matters on
remand.
In short, because the Department has not adequately
explained its reasoning with respect to two aspects of the
Compensation Regulations, we reverse, in part, the judgment of
the District Court. The case is remanded with instructions to
remand to the Department for further consideration. On remand,
the Department must better explain its decision to eliminate the
safe harbor based on graduation rates, and it must offer a
31
reasoned response to the comments suggesting that the new
regulations might adversely affect diversity outreach.
C. The Misrepresentation Regulations
1. The Regulations Exceed the HEA’s Limits in Three
Respects
Appellant claims that the Misrepresentation Regulations
exceed the HEA’s limitations in several respects: by allowing
the Secretary to sanction an institution without providing it with
statutorily required procedural protections; by allowing the
Secretary to sanction an institution for making
misrepresentations regarding subjects that are not covered by the
HEA; and by allowing the Secretary to take action against an
institution for making statements that are not substantial
misrepresentations.
• Procedural Protections
The HEA provides that the Secretary may – following
reasonable notice and opportunity for a hearing – limit, suspend,
or terminate a school’s eligibility to participate in Title IV
programs for making certain misrepresentations. See 20 U.S.C.
§ 1094(c)(3)(A). Section 668.71(a) of the Misrepresentation
Regulations states that, upon determining that an institution has
engaged in substantial misrepresentation, the agency may: “(1)
Revoke the eligible institution’s program participation
agreement; (2) Impose limitations on the institution’s
participation in the title IV, HEA programs; (3) Deny
participation applications made on behalf of the institution; or
(4) Initiate a proceeding against the eligible institution under
subpart G of this part.” 34 C.F.R. § 668.71(a) (2011). Subpart
G of the Department’s regulations sets forth the procedures that
the agency must follow to initiate a formal proceeding against
a school. See id. §§ 668.81–.98.
According to Appellant, because section 668.71(a) lists the
32
agency’s options using “or,” and because only the fourth option
requires the agency to follow subpart G’s procedures, the effect
of the provision is to allow the agency to take the first three
actions without following those procedures. Appellant does not
challenge section 668.71(a)(3), which deals only with
applicants, as opposed to participating schools. But Appellant
argues that sections 668.71(a)(1) and (a)(2) exceed the HEA’s
limits by allowing the agency – without affording any
procedural protections – to revoke certified schools’ program
participation agreements and to impose limitations on certified
schools’ participation. We agree.
The Department does not contest that if sections
668.71(a)(1) and (a)(2) have the described effect, they are
impermissible. Instead, it attempts to salvage section 668.71(a)
as a whole by interpreting sections 668.71(a)(1) and (a)(2) not
to affect the procedural rights of certified schools. We
acknowledge that the Department has consistently maintained
the same position with respect to these sections throughout the
rulemaking. See, e.g., Dear Colleague Letter at 14, J.A. 143
(“There is nothing in revised section 668.71(a) that reduces the
procedural protection given by the HEA and applicable
regulations to an institution to contest the specific action the
Department may take to address substantial misrepresentation
by the institution.”); Final Regulations, 75 Fed. Reg. at 66,915
(“[N]othing in the proposed regulations diminishes the
procedural rights that an institution otherwise possesses to
respond to [an adverse] action.”). The Department’s
explanations are unconvincing. They merely purport to explain
why the disputed regulatory provisions were never erroneous in
the first place by reinterpreting the regulation in a way the text
does not support.
With respect to section 668.71(a)(1), the Department
contends that the word “revoke” is a term of art that refers
specifically and only to the act of ending an agreement with a
33
provisionally certified institution. See 20 U.S.C. § 1099c(h)
(allowing for provisional certification of schools). The
Department apparently uses the word “terminate” to describe the
process of ending an agreement with a fully certified school.
See 34 C.F.R. § 668.86(a) (2011). Under this interpretation,
section 668.71(a)(1) would be valid, because the Department
may “revoke” provisional certification without following the
procedures required to “terminate” an agreement with a fully
certified school. See 34 C.F.R. § 668.13(d) (2011); Career Coll.
Ass’n v. Riley, 74 F.3d 1265, 1274–75 (D.C. Cir. 1996). But
section 668.71(a)(1) simply cannot bear the Department’s
interpretation. The section authorizes the agency to revoke the
agreement of an “eligible institution,” not of any provisionally
certified institution. We thus cannot defer to the Department’s
interpretation, because it is inconsistent with the terms of the
regulation. See Thomas Jefferson Univ., 504 U.S. at 512.
The Department’s interpretation of section 668.71(a)(2)
fares no better. The agency interprets that section to require the
Secretary to follow the procedures for imposing limitations on
the eligibility of institutions that are found in subpart G of the
Department’s regulations. See Gov’t’s Br. at 46–47 (citing 34
C.F.R. §§ 668.86(a)(1)(ii), (b)(1), (4)). But section 668.71(a)(4)
independently authorizes the Secretary to initiate proceedings
under subpart G. In other words, under the Department’s
interpretation, section 668.71(a)(2) is wholly included within
section 668.71(a)(4). The interpretation is thus plainly
inconsistent with section 668.71(a) as a whole, which lists the
Secretary’s options using the disjunctive. Under principles of
statutory construction, “terms connected by a disjunctive
[should] be given separate meanings, unless the context dictates
otherwise; here it does not.” Reiter v. Sonotone Corp., 442 U.S.
330, 339 (1979) (citation omitted); see also In re ESPY, 80 F.3d
501, 505 (D.C. Cir. 1996) (per curiam) (“[A] statute written in
the disjunctive is generally construed as ‘setting out separate and
distinct alternatives.’” (citation omitted)).
34
In sum, section 668.71(a) exceeds the Act’s limits by
allowing the Secretary – without affording procedural
protections – to revoke a program participation agreement with
a fully certified school and to impose limitations on the
eligibility of a fully certified school. The judgment of the
District Court is reversed on this point, and we remand to the
trial court with instructions to remand to the Department, so that
it can revise this provision.
• Misrepresentations Regarding Nonproscribed
Subjects
The HEA authorizes the agency to sanction an institution
for engaging in “substantial misrepresentation of the nature of
its educational program, its financial charges, or the
employability of its graduates.” 20 U.S.C. § 1094(c)(3)(A). In
notable contrast, the Misrepresentation Regulations provide that
the agency may sanction an institution for engaging in
“substantial misrepresentation regarding the eligible institution,
including about the nature of its educational program, its
financial charges, or the employability of its graduates.” 34
C.F.R. § 668.71(b) (2011) (emphasis added). The regulations
then clarify four categories of proscribed misrepresentations –
i.e., about the nature of an eligible institution’s educational
program, id. § 668.72, about the nature of an institution’s
financial charges, id. § 668.73, about the employability of an
institution’s graduates, id. § 668.74, and about an institution’s
relationship with the Department, id. § 668.75.
Appellant claims that the regulations allow the agency to
sanction schools for making misrepresentations regarding
subjects that are not covered by the HEA. We agree. Section
668.71(b) prohibits institutions from engaging in
“misrepresentation regarding the eligible institution.” That
phrase obviously covers the three subjects listed in the HEA, but
it also plainly encompasses more. Because it is followed by the
word “including,” the phrase encompasses both the enumerated
35
subjects listed in 20 U.S.C. § 1094(c)(3)(A) and anything falling
within the ordinary meaning of “misrepresentation regarding the
eligible institution.” See Schumann v. Comm’r, 857 F.2d 808,
811 (D.C. Cir. 1988). And an institution can clearly make
misrepresentations “regarding the institution” that do not fall
within the HEA’s three listed subject areas. We find immediate
support for that proposition in section 668.75, which prohibits
an institution from misrepresenting its relationship with the
Department, see 34 C.F.R § 668.75 (2011) – a subject that is not
proscribed by the HEA.
Here too, the Department essentially concedes the point. It
explained in the Dear Colleague Letter, and it argues here, that
the Misrepresentation Regulations should not be read to
authorize the agency to sanction misrepresentations regarding
nonproscribed topics. We cannot defer to this belated
interpretation, however, because it is plainly inconsistent with
the terms of the regulation. Thomas Jefferson Univ., 512 U.S.
at 512; see also Appalachian Power Co. v. EPA, 249 F.3d 1032,
1048 (D.C. Cir. 2001) (per curiam) (“[W]e should not defer to
an agency’s interpretation imputing a limiting provision to a rule
that is silent on the subject, lest we ‘permit the agency, under the
guise of interpreting a regulation, to create de facto a new
regulation.’” (citation omitted)). We therefore reverse on this
point and remand to the District Court with instructions to
remand to the Department, so that it can revise sections
668.71(b) and 668.75 to match its description of how the
regulations should function.
• “Substantial Misrepresentation”
The HEA prohibits institutions from engaging in
“substantial misrepresentation,” a phrase which is not defined in
the statute. In the Misrepresentation Regulations, the
Department adopted a new regulatory definition of
misrepresentation but kept the existing definition of substantial
misrepresentation. Appellant argues that the regulations as
36
modified exceed the HEA’s limits in several respects; we find
only one claim persuasive.
The agency has long defined “misrepresentation” as used
in the HEA to mean “[a]ny false, erroneous or misleading
statement.” E.g., 34 C.F.R. § 668.71(b) (2010). The new
Misrepresentation Regulations start with that same definition,
but further define “[a] misleading statement” to “include[] any
statement that has the likelihood or tendency to deceive or
confuse.” 34 C.F.R. § 668.71(c) (2011). Appellant’s primary
argument is that the provision exceeds the HEA’s limits, insofar
as it reaches statements that merely have the likelihood or
tendency to confuse. We review this claim under Chevron, and
we reject the Department’s interpretation at step one.
“Misrepresentation” means “[t]he act of making a false or
misleading statement about something, usu. with the intent to
deceive.” BLACK’S LAW DICTIONARY 1016 (7th ed. 1999).
Appellant argues that the statute unambiguously proscribes only
statements that are “false” or “misleading” – i.e., “[t]ending to
[lead in the wrong direction]” or “deceptive.” AMERICAN
HERITAGE DICTIONARY 803. A statement that is merely
confusing falls outside of that scope. The Department counters
that a “misrepresentation” can be a statement that is true, see
BLACK’S LAW DICTIONARY 1016 (“[A]n assertion need not be
fraudulent to be a misrepresentation.” (alteration in original)
(quoting RESTATEMENT (SECOND) OF CONTRACTS § 159 cmt. a.
(1981)), as well as a statement that is not made with the intent
to deceive, see id. (“Thus a statement intended to be truthful
may be a misrepresentation because of ignorance or
carelessness, as when the word ‘not’ is inadvertently omitted or
when inaccurate language is used.” (quoting RESTATEMENT
(SECOND) OF CONTRACTS § 159 cmt. a. (1981)).
If there is any merit to the Department’s claim that a
misrepresentation may include a statement that is both truthful
and nondeceitful, this view can hold no water in the context of
37
the HEA, which prohibits institutions from engaging in
substantial misrepresentation. See AMERICAN HERITAGE
DICTIONARY 1213 (defining “substantial” as “[c]onsiderable in
importance, value, degree, amount, or extent”). Furthermore, to
allow the Department to proscribe statements that are merely
confusing would raise serious First Amendment concerns – even
with respect to commercial speech. We therefore hold that,
under the HEA, “substantial misrepresentation” unambiguously
means something more than a statement that is merely
confusing. We accordingly vacate section 668.71(c), insofar as
it defines misrepresentation to include true and nondeceitful
statements that have only the tendency or likelihood to confuse.
We do not take Appellant to be challenging the
Department’s interpretation that the HEA reaches “misleading
statement[s],” insofar as that term encompasses “any statement,”
truthful or otherwise, “that has the likelihood or tendency to
deceive.” 34 C.F.R. § 668.71(c) (2011); see also Appellant’s
Br. at 42–44. Nor do we see how Appellant could challenge that
aspect of the Misrepresentation Regulations. At Chevron step
one, as we have already noted, a misrepresentation can be a true
statement that is deceitful. And at step two, the Department
justified the regulations based on known abuses, see Final
Regulations, 75 Fed. Reg. at 66,914, that are borne out by the
record, see, e.g., U.S. GOV’T ACCOUNTABILITY OFFICE, GAO-
10-948T, FOR-PROFIT COLLEGES (2010), J.A. 439; NACAC
Comment 9–16 (summarizing investigations, allegations, and
reports of, inter alia, schools’ deceitful marketing practices),
J.A. 331–38. Moreover, the fact that one of the studies the
Department cited in the rulemaking was subject to
methodological criticisms and revision after the Department
promulgated the regulations, see Bobb Barr, GAO ‘Exposé’ of
For-Profit Colleges, P OLITICO (Feb. 2, 2011),
http://www.politico.com/news/stories/0211/48601.html, does
not call into question the Department’s reasoning.
38
Appellant separately argues that the Misrepresentation
Regulations exceed the HEA’s limitations by defining
“substantial misrepresentation” without an intent requirement.
See Appellant’s Br. at 46–47; Appellant’s Reply Br. at 37–38.
The scope of Appellant’s argument is unclear. On the one hand,
Appellant could be challenging only the Department’s
regulatory definition that “misleading statement[s]” include
nondeceitful, confusing statements. If that is the extent of
Appellant’s position, then we have already addressed it.
On the other hand, Appellant could be objecting to the
Department’s longstanding interpretation that the HEA prohibits
“false” and “erroneous” statements, regardless of the speaker’s
intent. If Appellant sought to advance that broader argument, it
needed to do so more much clearly. But the position is
untenable in any event. At Chevron step one, we have already
explained that “misrepresentation” does not unambiguously
exclude inadvertent and negligent, factually untrue statements.
Nor does the legislative history to which Appellant directs us
demonstrate that Congress unambiguously intended to prohibit
only intentionally false statements. See H.R. REP. NO. 94-1086,
at 13 (1976). And at step two, we think that allowing the
Secretary to sanction schools for making substantial, negligent
or inadvertent, false statements is consistent with the HEA’s
goals.
Finally, Appellant argues that the Department has read
“substantial” out of the statute. Here too, the breadth of
Appellant’s position is unclear. In its narrowest form,
Appellant’s argument is that the Department impermissibly
“eliminat[ed] a regulation that expressly stated that the
Department would address ‘minor’ misrepresentations that could
be ‘readily corrected’ on ‘an informal’ and ‘voluntary’ basis.”
Appellant’s Br. at 44 (quoting 34 C.F.R. § 668.75(b) (2010)).
We find no merit in this argument. The fact that “substantial”
appears in the HEA does not mean that the Department must
39
have a specific regulation stating how it will respond to minor
misrepresentations; it means that the Department may not seek
to sanction schools for engaging in minor misrepresentations.
The Department claims that its decision to delete that provision
was administrative house keeping, see Final Regulations, 75
Fed. Reg. at 66,915, and that it will pursue enforcement taking
into account aggravating and mitigating factors, see id. at
66,914–15. We have no reason – beyond Appellant’s
speculation – to think otherwise, and such speculation cannot be
the basis for declaring the regulations facially invalid.
Appellant might instead be making the broader argument
that the regulatory definition of “substantial misrepresentation”
exceeds the HEA’s limits by omitting a “materiality or objective
reliance requirement.” Appellant’s Br. at 44. The
Misrepresentation Regulations use the same definition of
“substantial misrepresentation” that the Department has used
for over thirty years: “Any misrepresentation on which the
person to whom it was made could reasonably be expected to
rely, or has reasonably relied, to that person’s detriment.”
Compare 34 C.F.R. § 668.71(c) (2011), with 34 C.F.R. § 668.62(1981). Appellant claims that the definition should instead be:
any misrepresentation on which “a reasonably prudent person
would rely.” Appellant’s Br. at 45. This argument is
unpersuasive. It lacks entirely the hallmarks of Chevron
analysis – recourse to the plain meaning of text, legislative
history, context, etc. – and rests instead on speculation. To
prevail on its facial challenge, Appellant must demonstrate that
there is no set of circumstances under which the Department’s
interpretation of “substantial misrepresentation” can be applied
lawfully. Appellant cannot possibly satisfy this standard.
2. The Regulations Are Not Unconstitutional
Appellant argues that the Misrepresentation Regulations
impermissibly prohibit both core political speech and protected
commercial speech. We disagree.
40
• Noncommercial Speech
The Misrepresentation Regulations set forth that the
Department may sanction an institution for making a
misrepresentation “directly or indirectly to a student,
prospective student or any member of the public, or to an
accrediting agency, to a State agency, or to the Secretary.” 34
C.F.R. § 668.71(c) (2011). Appellant claims that the regulations
suppress core First Amendment speech, specifically by
authorizing the Department to sanction a statement made
“‘directly or indirectly to . . . any member of the
public’ . . . even if made with the best intentions and completely
outside of any advertising context.” Appellant’s Br. at 47 (first
and second alterations in original) (citation omitted). To
illustrate the breadth of the regulations, Appellant offers the
example that the Department could invoke section 668.71(c) to
sanction an institution for statements made by its president
during a public debate about education policy.
If Appellant were correct that the regulations apply to all of
an institution’s communications to “the public,” then we would
have some misgivings about the regulations’ constitutionality.
But we think that Appellant’s interpretation cannot be squared
with the regulations, when read as a whole and in context.
Furthermore, a law “must be construed, if fairly possible, so as
to avoid not only the conclusion that it is unconstitutional but
also grave doubts upon that score.” Weaver v. U.S. Info.
Agency, 87 F.3d 1429, 1436 (D.C. Cir. 1996) (citation omitted)
(internal quotation marks omitted). We therefore interpret the
regulations facially to reach only “commercial speech” – at least
insofar as statements to “the public” are concerned. And
because Appellant’s position is linked exclusively to the
potential application of the regulations to statements to the
public, we have no occasion to address the scope of the
regulations, insofar as statements to other entities, such as state
accrediting agencies or the Secretary, are concerned.
41
The Supreme Court has defined “commercial speech” to be
“expression related solely to the economic interests of the
speaker and its audience,” as well as “speech proposing a
commercial transaction.” Cent. Hudson Gas & Electric Corp.
v. Pub. Serv. Comm’n of N.Y., 447 U.S. 557, 561, 562 (1980).
This court has added that “material representations about the
efficacy, safety, and quality of the advertiser’s product, and
other information asserted for the purpose of persuading the
public to purchase the product” also can qualify as commercial
speech. United States v. Philip Morris USA Inc., 566 F.3d 1095,
1143 (D.C. Cir. 2009) (per curiam) (citations omitted). We
construe the regulations facially to apply to nothing more.
As a threshold matter, a number of contextual clues make
it clear that – at least with respect to communications to the
public – the regulations encompass only advertisements, direct
solicitations, and other promotional and marketing materials and
statements. For example, the only parties prohibited from
engaging in misrepresentation under the regulations are “the
institution itself, one of its representatives, or any ineligible
institution, organization, or person with whom the eligible
institution has an agreement to provide educational programs,
marketing, advertising, recruiting or admissions services.” 34
C.F.R. § 668.71(b) (2011) (emphasis added). Additionally, in
describing the forms of proscribed misrepresentations, the
regulations specifically list only those “made in any advertising,
promotional materials, or in the marketing or sale of courses or
programs of instruction offered by the institution.” Id.(emphasis added). And finally, the Department’s explanation
for adopting the regulations supports our reading. See Final
Regulations, 75 Fed. Reg. at 66,913–14 (documenting that the
regulations are a response to “overly aggressive advertising and
marketing tactics” and summarizing a study of “fraudulent,
deceptive, or otherwise questionable marketing practices”).
We understand that “[t]he mere fact that [statements] are
42
conceded to be advertisements clearly does not compel the
conclusion that they are commercial speech.” Bolger v. Youngs
Drug Prods. Corp., 463 U.S. 60, 66 (1983) (citation omitted).
However, when statements reference particular services or
products, and when they are offered to advance the economic
interests of the institution, they “constitute commercial speech
notwithstanding the fact that they contain discussions of
important public issues.” Id. at 67–68. “[A]dvertising which
links a product to a current public debate is not thereby entitled
to the constitutional protection afforded noncommercial speech.
[An institution] has the full panoply of protections available to
its direct comments on public issues, so there is no reason for
providing similar constitutional protection when such statements
are made in the context of” promoting a service or product. Id.
at 68 (footnote omitted) (citations omitted) (internal quotation
marks omitted). “Advertisers should not be permitted to
immunize false or misleading product information from
government regulation simply by including references to public
issues.” Id. (citation omitted).
As Appellant points out, commercial speech does not
“retain[] its commercial character when it is inextricably
intertwined with otherwise fully protected speech.” Riley v.
Nat’l Fed’n of the Blind of N.C., Inc., 487 U.S. 781, 796 (1988).
Thus, when the government seeks to restrict inextricably
intertwined commercial and noncommercial speech, courts must
subject the restriction to the test “for fully protected expression.”
Id. But even if the regulations create the possibility that the
Department could sanction an institution’s misrepresentations
made in the context of mixed commercial and noncommercial
speech – or contained in a purely informational pamphlet that
does not qualify as commercial speech at all – that possibility,
without more, does not require facial invalidation of the
regulations. See, e.g., Reno 507 U.S. at 301; Sherley, 644 F.3d
at 397. If the Department ever overreaches, schools will be able
to challenge particular applications as unconstitutional.
43
Lorillard Tobacco Co. v. Reilly, 533 U.S. 525 (2001) is not
to the contrary. There, on a facial challenge, the Supreme Court
invalidated state regulations of speech without expressly
following Reno’s no-set-of-circumstances test. But because the
regulations at issue were conceded facially to encompass purely
protected speech, see id. at 555, the state bore the burden of
demonstrating that the regulations were tailored to achieve the
state’s purpose, see id. at 561. The regulations were not so
tailored, hence their facial invalidation. See id. at 561–66.
Here, however, we face the inverse situation. The regulations
reach only commercial speech; and we have vacated the
regulations insofar as they reach anything other than false,
erroneous, or deceitful commercial speech. Therefore,
Appellant’s argument that the regulations could be applied
unlawfully is precisely the kind of argument that is disfavored
in the posture of a facial challenge.
Nor does the “overbreadth” doctrine save Appellant’s
challenge. At the outset, it is not clear that Appellant is entitled
to invoke the overbreadth doctrine here. That doctrine is
intended to prevent the chilling of speech by allowing a plaintiff
to challenge a restriction, even if the restriction could be
lawfully applied to that plaintiff. But the Supreme Court has
recognized that chilling is unlikely where, as here, the speech is
“the offspring of economic self-interest,” because such speech
“is a hardy breed of expression that is not ‘particularly
susceptible to being crushed by overbroad regulation.’” Cent.
Hudson, 447 U.S. at 564 n.6 (citation omitted).
But even were we to consider Appellant’s overbreadth
challenge, we would reject it. In bringing an overbreadth attack,
a plaintiff bears the burden of demonstrating that the challenged
law reaches a “‘substantial’ amount of protected free speech,
‘judged in relation to the [regulations’] plainly legitimate
sweep.’” Virginia v. Hicks, 539 U.S. 113, 118–19 (2003). The
Court established this high threshold because
44
there comes a point at which the chilling effect of an
overbroad law, significant though it may be, cannot justify
prohibiting all enforcement of that law – particularly a law
that reflects “legitimate state interests in maintaining
comprehensive controls over harmful, constitutionally
unprotected conduct.” For there are substantial costs
created by the overbreadth doctrine when it blocks
application of a law to constitutionally unprotected speech,
or especially to constitutionally unprotected conduct. To
ensure that these costs do not swallow the social benefits of
declaring a law “overbroad,” we have insisted that a law’s
application to protected speech be “substantial,” not only in
an absolute sense, but also relative to the scope of the law’s
plainly legitimate applications, before applying the “strong
medicine” of overbreadth invalidation.
Id. at 119–20 (citations omitted).
Appellant has failed to satisfy this standard. The
Misrepresentation Regulations clearly serve a legitimate state
interest: ensuring that schools receiving federal funds do not
deceive prospective students into accepting loans that they
cannot repay. And we have no basis to think that the
regulations’ potential application to noncommercial speech will
be substantial in either the absolute sense or relative to their
application to unprotected commercial speech.
• Commercial Speech
“[C]ommercial speech enjoys First Amendment protection
only if it . . . is not misleading.” Whitaker v. Thompson, 353
F.3d 947, 952 (D.C. Cir. 2004). Furthermore, misleading
commercial speech is not only subject to restraint; “[it] may be
prohibited entirely.” In re R. M. J., 455 U.S. 191, 203 (1982);
see also Cent. Hudson, 447 U.S. at 563 (“[T]here can be no
constitutional objection to the suppression of commercial
messages that do not accurately inform the public about lawful
45
activity. The government may ban forms of communication
more likely to deceive the public than to inform it . . . .”
(citations omitted)). Appellant argues that even if the
Misrepresentation Regulations reach only commercial speech,
they are still impermissible. But its position is predicated
entirely on the fact that section 668.71(c) interprets the HEA to
reach statements that have the “tendency or likelihood . . . to
confuse.” See Appellant’s Br. at 51–54. We have already
vacated that provision, insofar as it reaches merely confusing
statements. And since the regulations now facially reach only
false statements, erroneous statements, or statements that have
the likelihood or tendency to deceive, there can be no doubt that
the regulations are constitutional: They regulate speech that is
not entitled to protection in the first place.
D. The State Authorization Regulations
1. The School Authorization Regulation Is Valid
The school authorization regulation sets forth 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 specifically designated actions. 34 C.F.R. §
600.9(a)(1)(i)(A) (2011). The District Court held that Appellant
lacks standing to challenge these requirements. See Career
Coll. Ass’n, 796 F. Supp. 2d at 133 n.16. We reverse on that
point.
To have standing to seek injunctive relief,
[Appellant] must show that [it] is under threat of suffering
“injury in fact” that is concrete and particularized; the threat
must be actual and imminent, not conjectural or
hypothetical; it must be fairly traceable to the challenged
action of [Appellee]; and it must be likely that a favorable
judicial decision will prevent or redress the injury.
46
Summers v. Earth Island Inst., 129 S. Ct. 1142, 1149 (2009)
(citation omitted). Where, as here, the challenged regulations
“neither require nor forbid any action on the part of [the
challenging party],” – i.e., where that party is not “the object of
the government action or inaction” – “standing is not precluded,
but it is ordinarily substantially more difficult to establish.” Id.(citation omitted) (internal quotation marks omitted). In such
situations, the challenging party must demonstrate that
“application of the regulations by the Government will affect
[it]” in an adverse manner. Id.Appellant satisfies this standard. “If States bend to the
Department’s will, [Appellant’s] members are harmed because
they will face even greater compliance costs.” Appellant’s Br.
at 55. That injury is not speculative or conclusory; indeed, even
the Department implicitly recognized it. See Final Regulations,
75 Fed. Reg. at 66,859 (“Since the final regulations only
establish minimal standards for institutions to qualify as legally
authorized by a State, we believe that, in most instances, they do
not impose significant burden or costs.” (emphasis added)).
Alternatively, “[i]f the States ignore the regulations,
[Appellant’s] members will be barred from Title IV programs
through no fault of their own. Whatever States do in response
to the regulations, [Appellant]’s members will suffer cognizable
injury.” Appellant’s Br. at 55 (citation omitted).
• Statutory Authority
Appellant’s primary argument is that the Department lacked
authority to promulgate the school authorization regulation.
Appellant argues that
[t]he Department can point to nothing in the HEA that
empowers it to dictate to States how to “authorize”
institutions of higher education. Oversight of education has
long been a state prerogative, and it is well established that
agencies may not alter the allocation of power between
47
federal and state governments in a traditional area of state
concern unless Congress has clearly authorized them to do
so.
Appellant’s Br. at 56 (citing Gregory v. Ashcroft, 501 U.S. 452,
461 (1991)).
We find this argument unpersuasive for two reasons. First,
the school authorization regulation does not impose any
mandatory requirements on states. In Gregory, the Court
confronted whether the Federal Age Discrimination in
Employment Act (“the ADEA”) covered state judges, such that
they could challenge a state constitutional provision requiring
their retirement. See 501 U.S. at 455–56. The Court explained
that to interpret the law in such manner would interfere with a
“decision of the most fundamental sort for a sovereign entity.”
Id. at 460. Here, by contrast, the regulations merely establish
criteria for schools that choose to participate in federal
programs. See Final Regulations, 75 Fed. Reg. at 66,858 (“The
proposed regulations do not seek to regulate what a State must
do, but instead considers [sic] whether a State authorization is
sufficient for an institution that participates, or seeks to
participate, in Federal programs.”).
This difference is constitutionally significant, because in
Gregory the Court was concerned with congressional overreach
in an area of state concern pursuant to Congress’s powers under
the Commerce Clause. Congress unquestionably enacted the
ADEA pursuant to its commerce powers, see Gregory, 501 U.S.
at 464, and the Court in Gregory justified adopting a plain
statement rule on the basis that “[a]s against [those] powers . . .,
the authority of the people of the States to determine the
qualifications of their government officials may be inviolate.”
Id. (emphasis added) (citation omitted). In contrast, Congress
enacted the HEA pursuant to its spending power. “Incident to
[that] power, Congress may attach conditions on the receipt of
federal funds, and has repeatedly employed the power ‘to further
48
broad policy objectives by conditioning receipt of federal
moneys upon compliance by the recipient with federal statutory
and administrative directives.’” South Dakota v. Dole, 483 U.S.
203, 206 (1987) (emphasis added) (citations omitted).
We are not aware of any case in which a court has applied
Gregory to an exercise of Congress’s spending power. This
absence of authority is hardly surprising: The Supreme Court
has consistently maintained that more permissive limitations
apply when Congress acts pursuant to its spending powers than
when it acts pursuant to its commerce power. See id. at 209(“[T]he constitutional limitations on Congress when exercising
its spending power are less exacting than those on its authority
to regulate directly.”).
We understand that the Supreme Court’s spending power
case law is not directly apposite, because states are not the
recipients of federal funds under the HEA; schools are. But the
school authorization regulation’s requirements are more
analogous to conditions on federal grants to states than they are
to direct requirements on states, if for no other reason than that
the decision of whether to comply actually rests with the states.
And we have no basis to think that the Department’s presenting
states a noncoercive choice somehow “upset[s] the usual
constitutional balance of federal and state powers,” Gregory,
501 U.S. at 460.
Second, the Gregory rule is not inviolate, and we see no
reason to apply it here. This court has suggested that the rule
might apply in instances in which an agency regulates in an area
of state oversight – for example, the practice of law – without
plain authorization from Congress. See Am. Bar Ass’n v. FTC,
430 F.3d 457, 471–72 (D.C. Cir. 2005). But the Supreme Court
has also upheld federal regulation of activity in those same areas
of state concern. See, e.g., Milavetz, Gallop & Milavetz, P.A. v.
United States, 130 S. Ct. 1324, 1331–33 (2010) (holding that
Bankruptcy Abuse Prevention and Consumer Protect Action of
49
2005 plainly covers lawyers as “debt relief agencies”).
Moreover, Appellant’s claim that “[o]versight of education has
long been a state prerogative,” Appellant’s Br. at 56, is a non
sequitur in the context of a federal program in which the
Department has clear oversight responsibility. Cf. Sistema
Universitario Ana G. Mendez v. Riley, 234 F.3d 772, 778 (1st
Cir. 2000) (“This is a federal program, federal dollars are at
stake, and the most sensible reading of the statute is that the
Secretary has discretion to determine what is ‘legal
authorization’ in order to protect federal interests.”).
• Reasoned Decisionmaking
Appellant also argues that the school authorization
regulation is arbitrary and capricious – because it is “not a
solution to any problem” in the record, and because it
“penalize[s] schools and their students for the failure of States
to adopt compliant authorization regimes even though schools
and their students obviously cannot control States’ compliance.”
Appellant’s Br. at 58–59. As noted, our review of agency
regulations is deferential, especially where the administrative
action “involve[s] legislative-type policy judgments.”
EDWARDS & ELLIOTT 172 (citation omitted). During the
rulemaking, the Department identified three problems that the
regulation addresses. We can find no basis, and Appellant offers
none, to set aside the agency’s policy judgment.
First, the agency was concerned that the historical lack of
state oversight had prompted “movement of substandard
institutions and diploma mills from State to State in response to
changing requirements.” NPRM, 75 Fed. Reg. at 34,813. The
Department reiterated and amplified this concern in the final
rulemaking, describing that it had “anecdotally observed
institutions shopping for States with little or no oversight.”
Final Regulations, 75 Fed. Reg. at 66,859. This court has said
that while we “accord deference to a determination by [an
agency] that a problem exists within its regulatory domain, [that]
50
deference is not a blank check.” Alltel Corp. v. FCC, 838 F.2d
551, 561 (D.C. Cir. 1988). Furthermore, we have warned that
even plausible claims of “abuse” can fall short where an agency
offers no demonstration that “such abuse exists” or that a
challenged rule “targets [entities] engaged in such abuse.” Id.
at 560. But we think that, in this case, the Department has
offered more than a conclusory assertion of abuse. Furthermore,
the record certainly bears out that institutions have engaged in
other deceptive practices, and the Department was entitled to
adopt this regulation as a prophylactic response to burgeoning
forms of abuse.
Second, the Department was apparently concerned that the
absence of specific authorization requirements had “contributed
to the recent lapse in the existence of California’s Bureau for
Private Postsecondary and Vocational Education.” NPRM, 75
Fed. Reg. at 34,813. Commenters asked whether this “lapse”
had produced any actual harm to California’s students, and the
Department’s answer certainly leaves something to be desired.
The agency responded that it had been informed of at least one
instance of a school’s shutting down during the lapse, and it
asserted that “the absence of a regulation created uncertainty.”
Final Regulations, 75 Fed. Reg. at 66,859. It further suggested
that other problems might have occurred. See id. But the
Department also provided some explanation for why it believed
that such lapses could present risks to students in the future, and
why the regulation would likely prevent states from allowing
similar lapses, lest their institutions lose Title IV eligibility.
Those explanations are sufficient.
Third, the agency was concerned that states were “deferring
all, or nearly all, of their oversight responsibilities to accrediting
agencies,” thereby “[compromising] the checks and balances
provided by the separate processes of accreditation and State
legal authorization.” NPRM, 75 Fed. Reg. at 34,813. The
Department offered a similar explanation in the final
51
rulemaking. See Final Regulations, 75 Fed. Reg. at 66,864.
Here too, we understand the Department to be justifying the
regulation – and the dual authorization-accreditation
requirements – as a prophylactic component to a larger
regulatory regime. We are unwilling to second-guess the
Department’s policy judgment in that regard.
The Department also offered two justifications for its
decision to revoke schools’ eligibility for states’ failure to adopt
compliant authorization procedures. First, the agency claimed
that the HEA compels that outcome by requiring schools to be
legally authorized. It noted that the HEA separately requires
schools to be “accredited,” 20 U.S.C. § 1001(a)(5), even though
institutions lack control over accrediting agencies. The
Department therefore claimed that an institution in a state which
has not complied with the school authorization regulation is not
“any different than an institution failing to comply with an
accreditation requirement that results in the institution’s loss of
accredited status.” Final Regulations, 75 Fed. Reg. at 66,859.
Second, the Department explained why it is likely that
states will comply with the school authorization regulation’s
requirements, such that most schools will not lose their
eligibility. See id. at 66,863 (“States may meet this requirement
in a number of ways, and also with different ways for different
types of institutions. . . . We believe that the provisions . . . are
so basic that State compliance will be easily established for most
institutions.”). But the agency also concluded that “[u]nless a
State provides at least this minimal level of review, we do not
believe it should be considered as authorizing an institution to
offer an education program beyond secondary education.” Id.
This conclusion is precisely the type of policy judgment that an
agency is entitled to make.
2. The Distance Education Regulation Violates the APA
The distance education regulation establishes specific
52
requirements for schools that offer distance education. It sets
forth that a school offering education “to students in a State in
which it is not physically located . . . must meet any State
requirements for it to be legally offering postsecondary distance
or correspondence education in that State.” 34 C.F.R. § 600.9(c)
(2011). The District Court held that the regulation violated the
APA, because the Department had failed to provide adequate
notice of the rule to regulated parties. See Career Coll. Ass’n,
796 F. Supp. 2d at 133–35; see also 5 U.S.C. § 553(b)(3)
(requiring agencies to provide notice of proposed rulemaking
that includes “either the terms or substance of the proposed rule
or a description of the subjects and issues involved”). We agree.
This court succinctly summarized the governing standard
for the APA’s notice requirement in CSX Transportation, Inc. v.
Surface Transportation Board, 584 F.3d 1076 (D.C. Cir. 2009):
[T]he NPRM and the final rule need not be identical: “[a]n
agency’s final rule need only be a ‘logical outgrowth’ of its
notice.” A final rule qualifies as a logical outgrowth “if
interested parties ‘should have anticipated’ that the change
was possible, and thus reasonably should have filed their
comments on the subject during the notice-and-comment
period.” By contrast, a final rule fails the logical outgrowth
test and thus violates the APA’s notice requirement where
“interested parties would have had to ‘divine [the agency’s]
unspoken thoughts,’ because the final rule was surprisingly
distant from the proposed rule.”
Id. at 1079–80 (second and third alterations in original)
(citations omitted).
The Department does not point to anything in its Notice of
Proposed Rulemaking that specifically addressed distance
education. Nor did the Department solicit comments about the
adoption of such a rule. These failures cut against the
Department’s claim that the distance education regulation is a
53
logical outgrowth of the proposed rules. See id. at 1081. More
importantly, we find the Department’s claims that parties should
have anticipated the regulation wanting.
First, the Department emphasizes that whereas the previous
regulations required authorization “in the State in which the
institution is physically located,” 34 C.F.R §§ 600.4(a)(3),
600.5(a)(4), 600.6(a)(3) (2010), the proposed regulations stated
that the HEA requires authorization “from the States where
[institutions] operate to provide postsecondary educational
programs,” NPRM, 75 Fed. Reg. at 34,812. But, as Appellant
points out, the word “operate” is not a term of art that clearly
refers only to distance education providers; “[m]any brick-and-
mortar programs ‘operate’ in several physical locations.”
Appellant’s Reply Br. at 58. Appellant’s members thus had no
way of knowing that the Department was contemplating specific
requirements for distance education providers. The agency
counters that “if the proposed regulation gave fair notice that the
Department was considering changing its ‘physically located’
rule . . ., and such a change has obvious relevance to distance
education programs . . ., then it is irrelevant that the proposed
change might also have relevance for brick-and-mortar schools
as well.” Gov’t’s Reply Br. at 7. But the critical point is that
“operate” is, at best, an oblique – and hence, insufficient –
indication that the Department was considering the distance
education regulation.
Second, the Department claims that its repeated references
to “reciprocal agreements between appropriate State agencies,”
in the proposed regulations, NPRM, 75 Fed. Reg. at 34,813, and
during the negotiated rulemaking proceedings provided notice
that the Department was contemplating regulation of distance
and correspondence education. But this argument suffers from
the same shortcomings as the Department’s first argument. The
reason the reference to reciprocal agreements did not put parties
on notice of the eventual regulation is that such agreements
54
would be equally applicable to brick-and-mortar institutions
with locations in multiple states.
Third, the Department claims that “various commenters
took the proposed regulation . . . as contemplating a requirement
for state authorization beyond where a school is physically
located.” Gov’t’s Br. at 67 (citation omitted). This court has
made clear that “[t]he fact that some commenters actually
submitted comments” addressing the final rule “is of little
significance. . . . [T]he [agency] must itself provide notice of a
regulatory proposal.” Fertilizer Inst. v. EPA, 935 F.2d 1303,
1312 (D.C. Cir. 1991) (citations omitted) (internal quotation
marks omitted). The Department seeks to avoid this instruction
by expressly not arguing that interested parties received notice
from other parties’ comments; instead, it claims that the fact that
parties commented demonstrates that the Department provided
adequate notice. But at least some of the commenters that the
Department cites merely requested clarification as to the
Department’s new language without offering evaluations of the
final rule. See Letter from ITT Technical Inst. to Jessica Finkel
1–2 (July 30, 2010), J.A. 345–46. Therefore, we cannot
conclude that the “purposes of notice and comment have been
adequately served.” Fertilizer Inst., 935 F.2d at 1311 (citation
omitted).
Finally, the Department argues that in the proposed
regulations, it made clear its intent to impose, for the first time,
substantive requirements related to the legal authorization of
institutions by states. The Department urges that institutions
were therefore put on notice that authorization requirements for
distance education programs were possible. We agree that the
“final rule did not amount to a complete turnaround from the
NPRM.” CSX Transp., Inc., 584 F.3d at 1081–82. But the APA
simply requires more.
The Department does not challenge that its failure to
provide notice was prejudicial to Appellant, which never had the
55
chance to explain why, in its view, the rule exceeded the HEA’s
limits or was arbitrary and capricious. See id. at 1083 (finding
that parties “were prejudiced by their inability to persuade the
[agency] not to adopt the . . . rule in the first place”). We are
thus constrained to affirm that section 600.9(c) violates the APA
and must be vacated.
III. Conclusion
For the foregoing reasons, the judgment is affirmed in part
and reversed in part. The case is remanded to the District Court
with instructions to remand the challenged regulations to the
Department for reconsideration consistent with this opinion.
So ordered.