False educational promises, part 2

Association of Private Sector Colleges and Universities v. Duncan, --- F.3d ----, 2012 WL 1992003 (C.A.D.C.)

To participate in Title IV educational loans and grants, postsecondary schools have to satisfy several requirements.  The Association challenged three sets of recently imposed requirements in this case.  I will discuss only one: regulations implementing the statutory requirement that a school must not engage in “substantial misrepresentation of the nature of its educational program, its financial charges, or the employability of its graduates.”

In 2009, the Department of Education revised its regulations relating to these requirements based on experiences of abuse.  Final regulations issued in 2010.  The Association challenged them under the APA and the Constitution.  The court of appeals held that the misrepresentation regulations exceeded the Department’s statutory authority by allowing the Secretary to take enforcement actions against schools without procedural protections, by proscribing misrepresentations with respect to subjects that weren’t covered by the HEA, and by proscribing statements were are merely confusing.

Federal law prohibits schools from engaging in “substantial misrepresentation” regarding “the nature of its educational program, its financial charges, or the employability of its graduates.”  Congress was concerned about “false advertising” and manipulative “sharp practice.”  The agency may, after notice and opportunity for a hearing, suspend or terminate an institution’s ability to participate in Title IV if it finds that the institution engaged in substantial misrepresentation, or may seek a civil fine.  There was a record of misconduct, including misrepresentations to students, justifying the new regulations.

The prior 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.”  A “substantial misrepresentation ” was “[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 new regulations defined “misrepresentation” 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 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.

The new regs didn’t define “substantial misrepresentation.”

The old regulation also said 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.”  The new regulation changed the language to cover misrepresentation “regarding the eligible institution, including about the nature of its educational program, its financial charges, or the employability of its graduates,” and like the old one clarified what statements fell within those subject areas, but added an additional covered area: an institution's relationship with the Department.

The old regs said that for a minor, readily corrected misrepresentation, the Department would inform the institution and try to get an informal, voluntary correction, but for a substantial misrepresentation the Department would initiate a formal action.  The new regulation set out a menu of options for “substantial misrepresentation”: revoking the institution’s program participation, imposing limits on its participation, denying participation applications made on its behalf, or initiating a proceeding against it.  The new regs didn’t specify how the Secretary should treat a minor misrepresentation.

The Association claimed that the misrepresentation regulations exceeded the Department’s authority under the law, were arbitrary and capricious, and violated the First Amendment by imposing content- and speaker-based bans on core noncommercial and protected commercial speech.

The court of appeals first agreed that the regulations exceeded the statutory provisions by allowing the agency to revoke or limit certified schools’ participation without the required procedural protections, and remanded for clarification.

It then turned to the question of covered misrepresentations.  While the Higher Education Act 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,” the regs covered “substantial misrepresentation regarding the eligible institution, including about the nature of its educational program, its financial charges, or the employability of its graduates.”  An institution could make misrepresentations “regarding the institution” that didn’t fall within the HEA's three listed subject areas, which the regulation made clear by specifically mentioning misrepresentations about an institution’s relationship with the Department, a subject not proscribed by the HEA.  Thus, the regulation was too broad.

The regs had for a long time defined “misrepresentation ” to mean “[a]ny false, erroneous or misleading statement.”  The new regs kept that, but further defined “misleading” to include any statement that “has the likelihood or tendency to deceive or confuse.”  The court of appeals found that covering any statement likely to confuse exceeded the bounds of the statute, which covers only “false” and “misleading” statements.  The Association’s position was not entirely clear, but at its strongest argued for an intent-based interpretation of misrepresentation.  The Department rejoined that misrepresentations can be true (but misleading), and can be made without intent to deceive. 

The discussion gets a little confusing here, no pun intended, perhaps because the court doesn’t do anything to concretize these terms, but the court expressed some doubt that a misrepresentation can be “both truthful and nondeceitful” (which isn’t exactly the same thing that the Department said, unless the court meant intentionally deceitful; real precision would clarify whether it’s speaker intent or audience reception that matters, and the law I think is clearly on the side of reception, which is what I understand the Department’s position to be).  The court of appeals was certainly not going to accept the Department’s position in the context of the HEA’s “substantial misrepresentation” language.  (Except that it kind of did, because of the intent/audience muddle; wait for it.)

What the court really meant, I think, comes next: there is a difference between the merely confusing and the misleading.  To allow bans on the former “would raise serious First Amendment concerns—even with respect to commercial speech.”  A “substantial misrepresentation” must mean a statement that is merely confusing.  Again, the analysis here is complicated because a bunch of words are getting thrown around with little discussion of the distinctions.  In past work, I’ve offered a distinction between confusing and misleading: the difference is materiality.  Something that confuses reasonable consumers would not mislead them if it wouldn’t induce them to take any action: no leading, no misleading.  But confusion plus materiality is a good definition of misleadingness/deceptiveness.

And I don’t think this decision is to the contrary.  The court of appeals went on to say that the Association wasn’t challenging the interpretation that “misleading” included “any statement,” truthful or otherwise, “that has the likelihood or tendency to deceive.”  And if the Association did challenge that interpretation, Chevron allowed the Department to define a misrepresentation as a true but deceitful statement, and the regulations were based on known abuses borne out by the record.  (The court of appeals commented that “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, POLITICO (Feb. 2, 2011), does not call into question the Department's reasoning.”  Barr, of course, has his own for-profit axe to grind.)

The Association, as noted above, also apparently argued that the regulations needed an intent requirement.  The court of appeals found that the statute’s use of “misrepresentation” “does not unambiguously exclude inadvertent and negligent, factually untrue statements,” nor did the legislative history indicate an unambiguous intent to cover only intentionally false statements.  Allowing the Department to sanction schools for making substantial false statements, even negligent or inadvertent ones, was consistent with the HEA’s goals.

Finally, the Association argued that the Department ignored the limitation “substantial.”  Although the regs no longer explicitly stated how the Department would address minor misrepresentations, it didn’t have to have a regulation explicitly stating how it would respond to those.  If the Association was instead arguing that “substantial misrepresentation” needed a materiality or objective reliance requirement, that was also wrong. The regs used the same definition the Department had used for over 30 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.”  The Association wanted the definition to require that a “reasonably prudent person would rely” on the misrepresentation.  The court of appeals pointed out that the Association’s position lacked any basis in Chevron.

The Association also argued that the misrepresentation regulations unconstitutionally banned core political speech and protected commercial speech. As to regulating noncommercial speech, the regulations allowed the Department to sanction institutions 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.”  The Association challenged the “any member of the public” part, suggesting that the Department could sanction an institution for statements made by its president during a public debate about education policy.

If this were true, the court would have “misgivings” about the regulations’ constitutionality. But in context, the regulations only covered commercial speech, “at least insofar as statements to ‘the public’ are concerned.”  The Association didn’t challenge the scope of the regulations as to statements to other entities such as state accrediting agencies or the Department.  Commercial speech is expression related solely to the economic interests of speaker and audience, as well as speech proposing a commercial transaction.  “[M]aterial 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).  The court construed the regulations to apply to nothing more, given the context suggesting that the regulations covered only advertisements, direct solicitations, and other promotional and marketing materials and statements.

Ads might not always be commercial speech, but “when statements reference particular services or products, and when they are offered to advance the economic interests of the institution,” they’re commercial speech even if they also discuss important public issues.  Even if the regulations made it possible to sanction misrepresentations made in mixed commercial/noncommercial speech, that possibility didn’t require facial invalidation of the regs.  It wasn’t clear that overbreadth analysis was even appropriate, since the doctrine doesn’t apply to commercial speech, but even if it did, the Association hadn’t shown that the regs reached a substantial amount of protected speech in relation to their plainly legitimate sweep. 

As to the commercial speech itself, the First Amendment only protects nonmisleading commercial speech.  Once the “merely confusing” part of the regulations was gone, the remainder regulated speech that wasn’t entitled to protection in the first place: “false statements, erroneous statements, or statements that have the likelihood or tendency to deceive.”