New For-Profit School Rules May Be Excessive

WASHINGTON (CN) - The D.C. Circuit handed a partial reprieve to for-profit colleges and universities that banded together against rules targeting their allegedly fraudulent practices.

The Association of Private Sector Colleges and Universities sued the U.S. Education Department and Education Secretary Arne Duncan in 2010, challenging dramatic new limits on recruiter compensation and deceptive advertising.

Although for-profit institutions had long been required to satisfy several statutory requirements before they could accept federal financial aid funds for student tuition, the department deemed the existing rules too lax in 2009.

New rules introduced in October 2010 included a new restriction on what qualified as a state's legal authorization for a school. The department said such authorization was possible only if that state had a process to review and act on complaints concerning the institutions, and if the state has authorized the specific school by name.

The new rules also required schools offering distance or correspondence education, including online courses, to obtain authorization from all states in which its students reside and that require such authorization.

A subsequent amendment to the regulations eliminated regulatory "safe harbors" that allowed schools to give recruiters incentives for successfully enrolling students who need financial aid. The Education Department also amended the definition of "misleading" statements to include "any statement that has the likelihood or tendency to deceive or confuse."

The association's lawsuit challenged the validity of the regulations under the Administrative Procedure Act.

In July 2011, a federal judge handed each side a partial victory at summary judgment.

Siding with the department, U.S. District Judge Rosemary Collyer in Washington upheld the regulations concerning compensation and misrepresentation, and said the association lacked standing to challenge the school authorization regulation.

But Collyer also granted the association summary judgment on its challenge to the distance-learning rule.

After a painstaking review, a three-judge appellate took issue with some of Collyer's findings.

The 55-page decision identifies three areas in which the department's new regulations on deceptive advertising exceed the Higher Education Act's limits. The rules allow the education secretary to take enforcement actions against schools without procedural protections; they proscribe misrepresentations in areas not covered by the act; and they forbid statements that are merely confusing, according to the D.C. Circuit.

From there, the decision follows a kind of win-some, lose-some pattern, laying the foundation for remand.

The court said Collyer properly upheld the new compensation regulations under the Higher Education Act, mostly rejecting the association's claim that the regulations were not based on reasoned decision-making.

But the appellate panel did reject two aspects of the compensation regulations on the basis of inadequate explanations.

Though the judges largely upheld the new state-authorization regulations, they found that the distance-education regulation was not a "logical outgrowth" of the department's proposed rules.

In its original complaint, the association had said it was effectively blindsided by the rule. The department countered that this simply was not true.

For the appeals judges, the argument rested on one word, "operate." Given its use in the proposed regulation, the association had no reason to expect its members would be the subject of a sweeping new authorization requirement, the ruling states.

"The critical point is that 'operate' is, at best, an oblique - and hence, insufficient - indication that the Department was considering the distance education regulation," Senior Circuit Judge Harry Edwards wrote for the court.

The panel also rejected the department's contention that the regulation was valid because other parties had commented on it during the mandatory administrative comment period.

"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," Edwards wrote.

Since the association apparently never had a chance to explain its objections to such a rule, that portion of the regulation clearly violated the Administrative Procedure Act and could not stand, the panel found.

The decision orders Collyer to remand the challenged regulations to the department for reconsideration.

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