Recent Higher Education Cases: Program Integrity Regulations

1. Recent Higher Education Cases:Program Integrity Regulations Dennis M. Cariello DLA Piper

2. OVERVIEW • Overview • What were the Program Integrity Regulations? • APSCU v Duncan – Take 1 • APSCU v Duncan – Take 2 • What should we expect next? • Lessons Learned • Questions

3. What were the Program Integrity Regulations? • 14 topics related to “Program Integrity” • Two batches – State Authorization, Misrepresentation, Incentive Compensation, etc. published October 29, 2010 (75 FR 66832) • Gainful Employment – New Programs and Consumer Disclosures, also published October 29, 2010 (75 FR 66665) • Gainful Employment – Metrics (Debt to Income Ratio and Repayment Rate) published June 13, 2011 (76 FR 34385)

4. What were the Program Integrity Regulations? • Some very controversial rules: State Authorization – Regulation of Distance Education (34 CFR 600.9(c)) Schools required to obtain state approval of distance education programs if the state regulates such programs Incentive Compensation (34 CFR § 668.14) • Schools may not provide any commission, bonus, or other incentive payment based directly or indirectly on success in securing enrollments or financial aid to any individual or entity engaged in recruiting or admission activities or in making decisions regarding the awarding of FSA program funds. Misrepresentation (34 CFR § 668.71-.75) • Broadened the scope of misrepresentations to include and false, erroneous or misleading statement to any member of the public. Misleading statements included any statement that had the tendency to deceive or confuse. Also broadened the scope of topics over which a school could not make a misrepresentation. Gainful Employment (34 CFR § 668.7) • Created new measure for program eligibility; required programs that are designed to lead to gainful employment in a recognized profession to realize for former students a repayment rate of at lest 35% or a debt to income level for graduates of at least 12% of actual income or 30% of discretionary income. Also imposed new disclosure requirements and required the Department to review new programs.

5. APSCU v. DUNCAN – Take I • At issue: • State authorization • Misrepresentation • Incentive compensation • Guidance letter (March 17, 2011 – DCL GEN-11-05), issued a few days prior to submission of Department’s opposition brief, attempted to clarify issues and show some flexibility • District Court (Career Coll. Ass’n v. Duncan, 796 F. Supp. 2d 108 (D.D.C. 2011)) upholds the Department on all counts except the enactment of the State Authorization Rule – Distance Education • Publication Violated the Administrative Procedures Act (APA)

6. APSCU v. DUNCAN – Take I • On Appeal (Ass’n of Priv. Sector Colls. and Univs. v. Duncan, No. 11-5174 (D.C. Cir. June 5, 2012)) • Largely upheld the incentive compensation rule, but • Required the Department to better explain its decision to eliminate the safe harbor based on graduation rates and • Required the Department to offer a reasoned response to the comments suggesting that the new regulations might adversely affect diversity outreach • Generally upheld the validity of the state authorization rule but • Vacated the online education provisions of the state authorization rule as violating the APA

7. APSCU v. DUNCAN – Take I Appeal (cont’d): • Upheld in part the misrepresentation rule, Department must: • Revise 34 C.F.R. § 668.71(a) to add procedural protections for fully certified schools • Revise 34 C.F.R. §§ 668.71(b) (covering “misrepresentations regarding the eligible institution”) and 668.75 (covering misrepresentations related to an institution’s relationship with the Department) because those sections include subjects not covered by the HEA and • Revise 34 C.F.R. § 668.71(c), to exclude true statements that have the tendency or likelihood to confuse from the definition of misrepresentation

8. APSCU v. DUNCAN – Take 2 • In a July 5, 2012 decision, the District Court (Ass’n of Priv. Sector Colls. and Univs. v. Duncan, No. 11-5174 (D.C. Cir.)) overturned the gainful employment metrics and new program regulations • Broadly held the Department had the authority to enact the regulations • General authority or definition of “gainful employment”? • The Repayment Rate was “not based upon any facts at all” and, thus, was arbitrary and capricious • Because the Repayment Rate was so intertwined with the rest of the rule, the entire rule was stricken – including new programs regulations • Disclosure regime was left intact

9. What should we expect next? • Both APSCU and the Department may petition for a writ of certiorari in connection with the Court of Appeals decision • The Department has already given up on the state authorization rule • The Department may appeal the district court decision but, the decision broadly affirms the Department’s authority to enact the gainful employment regulations • Better course may be to just include a new GE rule in the planned negotiated rulemaking session

10. Lessons Learned • The Department has broad authority to regulate • Even in the face of legislative history • But, the Department must not go beyond the terms of the statute • The Department’s general authority may justify broader expansion of the gainful employment rules to other, non-”gainful employment” programs • The Department cannot justify new regulations on comments received in the comment period if the public had no notice that such a regulation was being contemplated

11. Questions? Dennis Cariello212-335-4816Dennis.Cariello@dlapiper.com