Telling tales out of school: new regs on misleading ads upheld

Career College Ass’n v. Duncan, 2011 WL 2690406 (D.D.C.)

The Secretary of Education adopted new regulations to protect students from using federal money to sign up for classes that don’t help them and that end in loan default. The CCA, doing business as the Association of Private Sector Colleges and Universities, sued under the APA. I’ll omit a lot of the discussion, but the court upheld all the new regulations except for a requirement that distance educators obtain authorization from every state in which they have students, for which the court found that there had been no notice prior to adoption in the final regulations.

“In 2007 and 2008, 93.6% of full-time students at private, for-profit institutions, 56.6% at public institutions, and 70.0% at private, non-profit institutions received federal aid.” The plaintiff represents more than 1500 for-profit schools enrolling more than 1.5 million students.

The Department of Education already had a ban on incentive payments to recruiters based on enrolling students or on enrolling them in financial aid programs. It also banned "substantial misrepresentation of the nature of [a school’s] educational program, its financial charges, or the employability of its graduates." Concerned with insufficient monitoring of existing requirements, the Department issued a notice of proposed rulemaking and, after notice and comment, promulgated final regulations.

Congress was worried about incentives to recruiters because they might lead recruiters to enroll students regardless of qualifications or program success, leading to defaults that left taxpayers on the hook. Older regulations established various safe harbors allowing schools to pay compensation, including when salary adjustments weren’t based solely on the number of students recruited or awarded financial aid; when incentives were tied to students’ successful completion of a program; and when incentives were paid to managers who didn’t directly supervise employees immediately involved in recruiting, admissions, or financial aid. But the Department determined that the safe harbors did more harm than good, allowing unscrupulous parties to circumvent the intent of the law. Thus the amended regulations banned, among other things, pay adjustments based in any part, directly or indirectly, on enrollment or financial aid success. They also covered more people.

The law provides for penalties for a school making a "substantial misrepresentation of the nature of its educational program, its financial charges, or the employability of its graduates." If, "after reasonable notice and opportunity for a hearing," the Secretary determines that a school engaged in such a substantial misrepresentation, the Secretary may fine it, or suspend or terminate its eligibility for funding until the violation has been corrected. The law doesn’t define substantial misrepresentation, so the Department developed new regulations. (The court expressed doubt that concern over aggressive, misleading advertising was sufficient reason for federal action, because it’s the use of federal money to fund opportunities that were substantially misrepresented that allows federal intervention; that seems like slicing the sausage too thin to me.)

The new regs maintain the basic definition from prior regulations that a misrepresentation is a "false, erroneous or misleading statement." They further provide that a "misleading statement includes any statement that has the likelihood or tendency to deceive or confuse." They keep the existing definition of “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." The prior explicit safe harbor for minor misrepresentations, providing that the Department would notify the institution and endeavor to obtain an informal and voluntary correction in such cases, was eliminated. The new regs also cover misrepresentations not just by an eligible institution, but its representatives, and persons with whom the institutions have an agreement to provide educational programs, marketing, advertising, recruiting, or admissions services. And they cover misrepresentations not just to students and their families and the Secretary of Education, but also to any member of the public, an accrediting agency, or a state agency.

APSCU argued that it should be able to pay recruiters based on success in recruiting. But the problem the Department was targeting was “recruiters who sweet talk unqualified students into applications for courses and federal loans when there is no realistic chance that the student will gain from the coursework or be able to repay the loan.” Recruiters could be rewarded in other ways—seniority, job knowledge, or student evaluations. “While APSCU is understandably frustrated at its inability to provide merit-based pay increases to recruiters based on the easiest to measure and, arguably, most logical merit metric--numbers recruited--that does not mean the regulations are themselves impermissible interpretations of the HEA or otherwise unreasonable, especially in light of congressional concerns with recruitment practices and the administrative record.” The Department provided a reasoned basis for eliminating the prior safe harbors based on their use to evade the regs. For example, it eliminated the safe harbor for compensation based on students’ successful completion of coursework or graduation because of the "proliferation of short-time, accelerated programs," creating the potential for pay increases/bonuses without real student advancement, and “‘schools that have devised and operated grading policies that all but ensure that students who enroll will graduate, regardless of their academic performance’ allow manipulated graduation rates that lead to pay increases/bonuses based on false student achievement.”

APSCU didn’t like the new misrepresentation regulations, arguing that they impermissibly expanded the scope and types of statements that could be sanctioned. The basic statute barred a "substantial misrepresentation of the nature of [a school’s] educational program, its financial charges, or the employability of its graduates," while the regulation stated that a school could not make "a 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) (emphasis added).

The court found that APSCU put undue weight on “including.” The Department clarified that its enforcement authority only reaches statements concerning those three things.

APSCU also challenged the revised definition of “substantial misrepresentation” as including statements that are “factually correct, immaterial or minor, and made without an intent to deceive or confuse.” The regs defined misrepresentation as a "false, erroneous or misleading statement" and further defined "misleading statement" to mean "any statement that has the likelihood or tendency to deceive or confuse." Moreover, a “substantial misrepresentation” was any "misrepresentation on which the person to whom it was made could reasonably be expected to rely, or who has reasonably relied, to that person's detriment." APSCU didn’t like the new phrase that a misrepresentation includes any statement that "has the likelihood or tendency to deceive or confuse" because it could cover factually true statements made without the intent to deceive.

The court didn’t like the Secretary’s general reliance on FTCA cases, which treat “deceptive” and “likely to mislead” as related, and even interchangeable, concepts, and don’t require intent to deceive. The court found that the relevant statutory language--“substantial misrepresentation” about limited, specified topics—was significantly different from the FTCA’s “unfair or deceptive acts or practices” (not sure why the “limited, specified topics” are at all relevant here). But despite the overbreadth of the analogy, the court found that the actual definitions adopted by the Secretary were fine given the deference due to formal rule-making.

The definitions were not arbitrary or capricious. “It cannot be gainsaid that a factually correct statement may be misleading, in context, to the detriment of its listener and that many of the ‘listeners’ at issue are young adults. Similarly, since the Department's focus is on worthwhile education and the funding and repayment of federal monies, the Court cannot say the Secretary acted unreasonably by omitting an intention to deceive or confuse from its definition of misrepresentation, nor is an intent to deceive strictly required to comply with the statutory terms of the HEA.” Though unreasonable overapplication of these rules was possible, a facial challenge failed. The Department also explained that, for enforcement purposes, it would consider whether a misrepresentation was intentional or inadvertent.

APSCU also argued that the new regs eliminated materiality, in contravention to the prohibition on “substantial” misrepresentations. But the new regs continued the definition of 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." What was eliminated from the new regs was the prior statement that a minor, easily corrected misrepresentation should result in efforts at voluntary correction. The Department argued that the current regs still essentially required materiality because only statements about a school's programs, charges, and the employability of its graduates upon which a person could, or did, reasonably rely to his detriment are sanctionable. In addition, the Secretary noted that the Department would continue to consider the full facts and circumstances surrounding any alleged misrepresentation, and there was no record basis to dispute that commitment. The Department removed the prior safe harbor for minor misrepresentations because it had proved simply formulaic, and the court found that this was sufficiently explained.

APSCU argued that the new regs chilled its members’ free speech. “However, the speech targeted by the Department is limited to substantial misrepresentations about the nature of an institution's educational program, its financial charges, or the employability of its graduates, all limited to legitimate concerns with the integrity of a massive government program of financial loans for which repayment is expected.” The regs came from “documented” concern about deception and misleadingness that harmed the effectiveness of the federal loans and impaired their repayment.

The regs governed commercial speech: speech designed to persuade its targets to purchase the speaker’s products. The regs targeted “an institution's representations about facts inextricably linked with the commercial transaction with students for its services--the nature of such services, the costs of such services, and the results (employability) its services supposedly engender.” Inherently misleading commercial speech receives no constitutional protection and may simply be banned.

And here we hit a lacuna: advertising law and First Amendment law talk about deceptive speech differently. Advertising law doesn’t have a category for “inherently” misleading speech, and I have argued that the Supreme Court doesn’t know what it means either, just throwing the term around when it thinks (without ever having empirical support) that disclosure would be better.

The court here reacted by concluding that “false, erroneous or misleading” commercial statements were completely unprotected by the First Amendment. However, "any statement that has the likelihood or tendency to deceive or confuse" was “a weaker expression, and perhaps more worthy of constitutional protection, than one that is ‘inherently likely to deceive’ or ‘inherently likely to mislead.’” Fortunately for the court, this was a facial challenge, so it didn’t have to figure out what the difference was. (Here’s a thought: there isn’t one. If reasonable consumers are likely to be deceived, the statement is “inherently” likely to deceive. “Inherently” has to be understood with reference to the audience. Otherwise, a deceptive statement in English is not inherently likely to deceive because there are many non-English speakers who couldn’t possibly be deceived by it; speaking English is not inherent.) The court was not convinced that there was any actionable chill on protected speech simply “because the Secretary might find some future commercial statement so materially confusing and without mitigation that it is substantially misleading.”

Finally, APSCU argued that the regs were subject to heightened scrutiny because they were content-based regulations directed only at schools. That argument doesn’t work as applied to commercial speech. If the speech at issue is “fundamentally concerned with the nature of its educational program, its financial charges, or the employability of its graduates,” the Department can regulate its truth.