The opinion of the court was delivered by: Rosemary M. Collyer United States District Judge
Enormous amounts of federal funding for students at colleges, universities and other post-secondary schools allow Uncle Sam to wield a heavy hand in regulating access to such funds. The Secretary of Education, Arne Duncan, has recently adopted a more intrusive approach promulgating regulations under the Higher Education Act of 1965. The Secretary wants to protect student applicants who might be film-flammed into signing up for worthless courses-and using federal monies for tuition which the students cannot then repay. The new regulations became effective on July 1, 2011. Plaintiff Career College Association d/b/a Association of Private Sector Colleges and Universities sues Secretary Duncan and the Department of Education, challenging the new regulations under the Administrative Procedure Act ("APA"), 5 U.S.C. §§ 553, 701--706, and the United States Constitution. While the current extent of regulation may not have been entirely foreseen by Congress, a point the Court does not reach, the terms of the Higher Education Act do not compel a more limited approach and the Secretary has explained his reasoning adequately. However, as to the one aspect of the new regulations that would require distance educators to obtain authorization from every State in which they have students, the Secretary gave no prior notice and its adoption in the final regulations violated the APA. Plaintiff's motion for summary judgment will be denied in part and granted in part, and Defendants' motion for summary judgment will be denied in part and granted in part.
Title IV of the Higher Education Act of 1965, as amended, 20 U.S.C. § 1070 et seq. ("HEA"), established several types of student aid programs administered by the Department of Education ("Department"), each with the aim of fostering access to higher education. Every year Title IV programs provide more than $150 billion in new federal aid to approximately fourteen million post-secondary students and their families. Students are expected to repay their loans. 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. Plaintiff Career College Association d/b/a Association of Private Sector Colleges and Universities ("APSCU") is an association of for-profit schools in the private sector education industry, representing more than 1,500 such schools. Every year, ASPCU members educate more than one and a half million students.
To participate in Title IV programs, a school must qualify as an "institution of higher education." 20 U.S.C. § 1001 (2011). An "institution of higher education" is an educational institution in any state that "is legally authorized within such State to provide a program of education beyond secondary education" (hereafter mainly referred to as "schools"). Id. § 1001(a)(2). The HEA also establishes that proprietary institutions of higher education and post-secondary vocational institutions qualify as institutions of higher education for purposes of federal student assistance programs. Id. § 1002. A qualifying school under the HEA must execute a program participation agreement with the Department to participate in federal financial aid programs. See id. § 1094. Through the program participation agreement, the school commits to a variety of statutory, regulatory, and contractual conditions.
Among these conditions is a general statutory ban on schools making incentive payments based on an employee's success in recruiting students and/or in enrolling students in financial aid programs. See id. § 1094(a)(20). A school is also precluded from engaging in a "substantial misrepresentation of the nature of its educational program, its financial charges, or the employability of its graduates." Id. § 1094(c)(3)(A). Concerned with the expenditure of federal funds that fail to educate students for jobs that allow them to repay their loans, which the Department believed was insufficiently monitored under prior regulations, the Department set out to improve program integrity.
According to his rulemaking authority under 20 U.S.C. § 1221e-3, Secretary Duncan first established a negotiated rulemaking committee in 2009 to garner public involvement in the development of proposed regulations, as he is statutorily required. See id. § 1098a. The negotiated rulemaking committee did not reach consensus on all points contained in the proposed regulations. See U.S. Department of Education, Program Integrity Issues; Final Rule, 75 Fed. Reg. 66832, 66833 (Oct. 29, 2010) ("Final Rule") [AR 1, 3].*fn1 On June 18, 2010, the Department issued a notice of proposed rulemaking on program integrity and commenced a period of notice and comment on the proposed regulations until August 2, 2010. Approximately 1,180 parties submitted comments. Id. The Department promulgated final regulations on October 29, 2010. The challenged regulations-including others not before the Court-became effective July 1, 2011. Final Rule at 66832 [AR 2].
APSCU challenges three parts of the Department's recently-promulgated regulations that affect a school's eligibility to receive Title IV financial aid: the compensation regulations, 34 C.F.R. § 668.14 (Final Rule at 66950--51 [AR 120--21]); the misrepresentation regulations, 34 C.F.R. § 668.71 (Final Rule at 66958--59 [AR 128--29]); and the State authorization regulations, 34 C.F.R. § 600.9 (Final Rule at 66946--47 [AR 116--17]).*fn2
A. Compensation Regulations
Under the terms of the program participation agreement, a school agrees 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 recruiting or admission activities or in making decisions regarding the award of student financial assistance." 20 U.S.C. § 1094(a)(20). Congressional concern behind this provision was the use of financial incentives to enroll students regardless of qualifications or program efficacy-a practice that led to student loan defaults, leaving the taxpayers on the hook.
In 2002, the Department issued "Clarifying Regulations," 34 C.F.R. § 668.14(b)(22)(ii)(A)--(L) (effective until July 1, 2011) ("Clarifying Regulations"), which established twelve "safe harbors" under which a school could pay compensation without it being considered an "incentive" payment and without fear of sanctions. Among other provisions, the Clarifying Regulations allowed biannual salary increases that would not be deemed impermissible incentive payments if the adjustments were "not based solely on the number of students recruited, admitted, enrolled, or awarded financial aid." Id. § 668.14(b)(22)(ii)(A) (effective until July 1, 2011) (emphasis added). Another safe harbor allowed for incentive compensation based on students' successful completion of an educational program, id. § 668.14(b)(22)(ii)(E) (effective until July 1, 2011); yet another permitted incentive compensation to managers who did not directly supervise those employees who were immediately involved in recruiting or admissions activities or the provision of financial aid. Id. § 668.14(b)(22)(ii)(G) (effective until July 1, 2011).
But by 2010, the Department decided that the safe harbors were doing "substantially more harm than good." U.S. Department of Education, Program Integrity Issues; Proposed Rule, 75 Fed. Reg. 34806, 34817--18 (June 18, 2010) ("Proposed Rule") [AR 147, 158--59]. This conclusion rested on the Secretary's finding that "unscrupulous actors routinely rely upon these safe harbors to circumvent the intent of section 487(a)(20) [20 U.S.C. § 1094(a)(20)] of the HEA." Final Rule at 66872 [AR 42]. Thus, the Department concluded that "the safe harbors have served to obstruct those objectives [of section 487(a)(20)] and have hampered the Department's ability to efficiently and effectively administer title IV, HEA programs." Id. By omitting the safe harbors, the Department intended to "better align [the regulations] with [the] HEA." Proposed Rule at 34818 [AR 159].
To change the perceived pattern of regulatory avoidance, the Secretary amended the compensation regulations, 34 C.F.R. § 668.14(b)(22), so that they now define "[c]ommission, bonus, or other incentive payment" as "a sum of money or something of value, other than a fixed salary or wages, paid to or given to a person or an entity for services rendered." Id. § 668.14(b)(22)(iii)(A). The compensation regulations expressly permit "[m]erit-based adjustments to employee compensation provided that such adjustments are 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). The ban on such incentive payments now extends to "any higher level employee with responsibility for recruitment or admission of students, or making decisions about awarding title IV, HEA program funds," id. § 668.14(b)(22)(iii)(C)(2), and to compensation that is based on retention, course completion, graduation, or placement rates. See Final Rule at 66874 [AR 44].
B. Misrepresentation Regulations
The HEA allows penalties for a school that makes a "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). 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 the school, or suspend or terminate the school's eligibility status for Title IV funding until the violative practice has been corrected. Id. § 1094(c)(3). The HEA does not define the term "substantial misrepresentation."
Secretary Duncan developed new misrepresentation regulations to protect students from misleading and aggressive advertising that "compromise[s] the ability of students to make informed choices about institutions and the expenditure of their resources on higher education."
Final Rule at 66913 [AR 83]; see also 66913--16 [AR 83--86].*fn3 The new regulations maintain the basic definition, from the prior regulations, of a misrepresentation as a "false, erroneous or misleading statement." 34 C.F.R. § 668.71(c). However, the new regulations further provide that a "misleading statement includes any statement that has the likelihood or tendency to deceive or confuse." Id.
Both the prior regulations and the new regulations define a "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. In contrast, while the prior regulatory scheme included an explicit safe harbor for minor misrepresentations,*fn4 this provision was eliminated by the challenged amendments.
The new regulations also further define the universe of speakers whose misrepresentations may subject an institution to sanctions, from simply "an eligible institution" to "an eligible institution, one of its representatives, or any ineligible 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." 34 C.F.R. § 668.71(c). Similarly, the new regulations expand the persons or entities to whom an enforceable misrepresentative statement may be made -- from an enrolled or prospective student, the family of such student, or the Secretary -- to add "any member of the public, or to an accrediting agency, [or] to a State agency." Id.
C. State Authorization Regulations
To participate in Title IV programs, a school must first qualify as an "institution of higher education." See 20 U.S.C. § 1001. The HEA defines the term "institution of higher education" to mean, inter alia, an "educational institution in any State that . . . is legally authorized within such State to provide a program of education beyond secondary education." Id. § 1001(a)(2), § 1002. The prior regulations never expanded on the statutory language and only required that an institution be legally authorized, however defined, in the States(s) in which they were physically located.
Under the new regulations, a school is "legally authorized by a State" only "if the State has a process to review and appropriately act on complaints concerning the institution including enforcing applicable State laws." 34 C.F.R. § 600.9(a)(1). Moreover, the school must be affirmatively "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." Id. § 600.9(a)(1)(i)(A). Further, schools providing distance education services, such as online courses, must obtain authorization from both the State(s) in which the school is located and the State(s) in which its students reside, but only if such authorization is required by the State(s) in which its students reside. Id. § 600.9(c).
Summary judgment should be granted only if the moving party has shown that there are no genuine issues of material fact and that the moving party is entitled to judgment as a matter of law. See Fed. R. Civ. P. 56(a); Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986); Waterhouse v. District of Columbia, 298 F.3d 989, 991 (D.C. Cir. 2002). In determining whether a genuine issue of material fact exists, the court must view all facts and draw all justifiable inferences in the nonmoving party's favor and accept the nonmoving party's evidence as true. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986).
The APA requires a reviewing court to set aside an agency action that is "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law." 5 U.S.C. § 706(2)(A); Tourus Records, Inc. v. Drug Enforcement Admin., 259 F.3d 731, 736 (D.C. Cir. 2001). In making this inquiry, a reviewing court "must consider whether the [agency's] decision was based on a consideration of the relevant factors and whether there has been a clear error of judgment." Marsh v. Oregon Natural Res. Council, 490 U.S. 360, 378 (1989) (internal quotation marks and citation omitted). At a minimum, the agency must have considered relevant data and articulated a satisfactory explanation establishing a "rational connection between the facts found and the choice made." Motor Vehicle Mfrs. Ass'n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983); see also Pub. Citizen, Inc. v. Fed. Aviation Admin., 988 F.2d 186, 197 (D.C. Cir. 1993) ("The requirement that agency action not be arbitrary or capricious includes a requirement that the agency adequately explain its result."). The Supreme Court has instructed that [a]n agency action will usually be found to be arbitrary or 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.
Motor Vehicle, 463 U.S. at 43; see also County of Los Angeles v. Shalala, 192 F.3d 1005, 1021 (D.C. Cir. 1999) ("Where the agency has failed to provide a reasoned explanation, or where the record belies the agency's conclusion, [the court] must undo its action.") (internal quotation marks and citation omitted). Failure of an agency to "respond meaningfully" to objections and comments and to "answer objections that on their face seem legitimate" also renders a decision arbitrary and capricious. PPL Wallingford Energy LLC v. FERC, 419 F.3d 1194, 1198 (D.C. Cir. 2005) (internal quotation marks and citations omitted).
A court may also set aside agency action if "contrary to constitutional right" or "in excess of statutory jurisdiction, authority, or limitations, or short of statutory right." 5 U.S.C. § 706(2)(B), (C). Review of an agency's interpretation of a statute proceeds according to certain principles enunciated in Chevron U.S.A. Inc. v. Natural Resource Defense Council, Inc., 467 U.S. 837 (1984). See Mount Royal Joint Venture v. Kempthorne, 477 F.3d 745, 754 (D.C. Cir. 2007). For the first step, a court looks to whether Congress has "directly addressed the precise question at issue" since a court must ensure that an agency gives effect to "the unambiguously expressed intent of Congress." Chevron, 467 U.S. at 842--43. If Congress did not unambiguously speak to the question at hand, under the second step of the Chevron analysis, a court shall not "disturb an agency rule unless it is 'arbitrary or capricious in substance, or manifestly contrary to the statute.'" Mayo Found. for Med. Educ. & Research v. United States, 131 S. Ct. 704, 711 (2011) (quoting Household Credit Services, Inc. v. Pfennig, 541 U.S. 232, 242 (2004)).
Under the second step of Chevron, a court must determine the level of deference due to the agency's interpretation of the laws it administers. See Kempthorne, 477 F.3d at 754. Generally, if an agency promulgates its interpretation through notice-and-comment rulemaking or formal adjudication, a court gives the agency's interpretation Chevron deference. United States v. Mead Corp., 533 U.S. 218, 230--31 (2001). "That is, we determine whether its interpretation is 'permissible' or 'reasonable,' giving 'controlling weight' to the agency's interpretation unless it is 'arbitrary, capricious, or manifestly contrary to the statute.'" See Kempthorne, 477 F.3d at 754 (quoting Chevron, 467 U.S. at 843--44).
An agency interpretation of its own ambiguous regulation, not subjected to formal rulemaking procedures, does not qualify for Chevron deference, but is nonetheless "entitled to a measure of deference because it interprets the agencies' own regulatory scheme." Coeur Alaska, Inc. v. Southeast Alaska Conservation Council, 129 S. Ct. 2458, 2473 (2009); see also Menkes v. U.S. Dep't of Homeland Sec., 637 F.3d 319, 345 (D.C. Cir. 2011). Thus, a court must "give substantial deference to an agency's interpretation of its own regulations," unless plainly erroneous or inconsistent with the regulation itself. Thomas Jefferson Univ. v. Shalala, 512 U.S. 504, 512 (1994); see also Chase Bank USA, N.A. v. McCoy, 131 S. Ct. 871, 880 (2011). However, not all agency interpretations are worthy of deference, such as those advanced by an agency as a "post-hoc rationalization" for agency action in litigation, or where there is no reason to suspect the interpretation reflects the agency's "fair and considered judgment on the matter in question." Chase Bank, 131 S. Ct. at 881 (quoting Auer v. Robbins, 519 U.S. 452, 462 (1997)). When a regulation is not ambiguous, however, no deference ensues because otherwise "adopting the agency's contrary interpretation would 'permit the agency, under the guise of interpreting a regulation, to create de facto a new regulation.'" Chase Bank, 131 S. Ct. at 882 (quoting Christensen v. Harris County, 529 U.S. 576, 588 (2000)).
A district court reviewing agency action sits as an appellate court and the entire case on review is a question of law which the court resolves on the administrative record. Am. Bioscience, Inc. ...