[00:00:01] Speaker 00:
Case number 18-7160, William Ludline College, balance versus Distance Education Accreditation Commission.

[00:00:10] Speaker 00:
Mr. Aurelio for the balance, Mr. Ruby for the abolition.

[00:00:52] Speaker 04:
Good morning, Your Honors.

[00:00:55] Speaker 04:
May it please the Court, excuse me.

[00:00:56] Speaker 04:
My name is Attorney Scott Aurelia.

[00:00:58] Speaker 04:
I'm from the law firm of Weston Heard, and I represent William Loveland College, the appellant in this matter.

[00:01:04] Speaker 04:
I've requested four minutes for rebuttal.

[00:01:09] Speaker 04:
Your Honors, this matter is on appeal from a decision of the District Court, disposing of the complaint of William Loveland College under 12b6 for failure of state acclaim.

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Specifically, the District Court ruled, amongst other things, that William Loveland College had failed to exhaust certain administrative remedies prior to seeking relief in the District Court.

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William Loveland College is a

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online college, which offers a MBA in logistical management.

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William Loveland College has a long history.

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It originally began in 1923 as a college of advanced traffic and academy of advanced traffic school.

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In 2001, it first became nationally accredited.

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In 2017, a series of events occurred leading to the matter that's before the court today.

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Specifically, the fact which underlies all of the claims is the issuance of a public show cause by the Distance Education Accrediting Commission.

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Specifically, the DEAC issued a public show cause order on its website identifying certain alleged deficiencies with the school's accrediting.

[00:02:34] Speaker 04:
Amongst the various problems with the DEHC's public show cause notice was the date of the show cause notice.

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Specifically, the show cause was issued in February of 2017.

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The DEHC, amongst getting many, many other things incorrect in the show cause notice, got the actual date of the show cause notice incorrect.

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And they predated it by approximately one year.

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The issuance of the show cause directive, of course, triggered various problems with our donors, with our students.

[00:03:11] Speaker 02:
Can I just ask a question about the arguments that we have before us?

[00:03:13] Speaker 02:
Sure.

[00:03:14] Speaker 02:
So the district court resolved the claims, at least put aside the state law claims for a second.

[00:03:19] Speaker 02:
Sure.

[00:03:21] Speaker 02:
what the meat of what you've raised on exhaustion grounds.

[00:03:25] Speaker 02:
Yes.

[00:03:25] Speaker 02:
On the ground that there is a failure to pursue administrative exhaustion and that on the assumption that that rubric, even though we're not dealing with the government actor, that that rubric applies here.

[00:03:34] Speaker 00:
That's correct.

[00:03:35] Speaker 02:
As I understand your argument, you don't, the argument you presented to us in your brief, you don't take issue with the applicability of the exhaustion framework.

[00:03:41] Speaker 02:
You don't take issue with the legal principles.

[00:03:43] Speaker 02:
At least I didn't see any

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argument to that effect in your brief.

[00:03:47] Speaker 02:
What you're taking issue with is the conclusion that it wouldn't have been futile to go through exhaustion.

[00:03:54] Speaker 04:
We take issue with the futility.

[00:03:56] Speaker 04:
Yes, we allege that exhausting would have been futile, as well as the adequacy of the procedures that were laid out in the DEAC's accreditation handbook.

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And that's why we believe that the district court erred for those two reasons.

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And if I may address the first,

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The issue has arisen as to whether or not this show cause notice is actually a final order or a final adjudication under 34 CFR 602.26 final orders.

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must be published and the DEAC as well as the district court maintain that because a show cause is equivalent to probation it is essentially a final order and the DEAC is required to publish it within 24 hours of the issuance of the show cause order.

[00:04:46] Speaker 04:
However, the DEAC's own administrative policies specified that a show-cause order is not actually a final order, that it's not an adverse decision, it's rather a statement of concern.

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So we have within these administrative policies

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inconsistencies and certainly inconsistencies with the regulations.

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And this is where we think a major problem lies in that under 34 CFR 602.25 F, prior to the issuance of any final decision, we have to be given, the college has to be given the opportunity to appeal, to correct the record, to let's get this right before it's published

[00:05:34] Speaker 04:
to the general public, we were never given that opportunity.

[00:05:40] Speaker 04:
If the court is going to presume that the show cause order is a final order or is a final determination which requires publication, we have to have the opportunity to appeal before that becomes public.

[00:05:52] Speaker 04:
And the damage and the danger that results is very evident in this case, which is one of the reasons why the case should be reversed and remanded, is because as soon as this show cause directive was issued and put on the DEA's website, the die was cast.

[00:06:11] Speaker 01:
How can a show cause order be a final action, since it specifically, even the name of the directive itself contemplates further action?

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by the college and by the DEAC.

[00:06:24] Speaker 04:
But it is a statement of determination.

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It's a statement to the general public.

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What the trial court calls it is it's akin to probation, which under the regulations is a final act.

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And in fact, the DEAC in its briefing beginning, I believe, page 23, does in fact argue that the show cause directive is a final order.

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But once that show cause directive is issued,

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The die is cast.

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The public is put on notice of all these various accrediting deficiencies, whether right or wrong, and then we're supposed to sort of unring that bell, if you will.

[00:07:07] Speaker 02:
Now, with the... But the die is not cast with respect to accreditation.

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The whole point of the show cause order is that there's still an opportunity.

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We don't yet know whether there's going to be accreditation at the time of the show cause order.

[00:07:21] Speaker 02:
So you're not talking about that die being cast.

[00:07:25] Speaker 04:
No, I would agree with you, Your Honor, that the accreditation had not been terminated at that point.

[00:07:30] Speaker 04:
However, for all practical purposes, it had been.

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Amongst other things, the error in the show cause order predating it by one year

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When this public show cause was made known, we got calls from our donors.

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We got calls from our students.

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We were accused of fraud.

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We had over $17 million in donations lined up to fund the future expansion of this college.

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Those donations were withdrawn.

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We were accused of not disclosing to our donors and to our students the fact that we had been on probation or under show cause for one year.

[00:08:09] Speaker 02:
I mean, I guess I'm not suggesting that the issues of a show cause order can't have practical effects because when something is published about anybody or anything, it can have practical effects.

[00:08:20] Speaker 02:
But in terms of what we're looking at, there was process yet to be had

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after the issuance of the show clause order that you chose not to, that your client chose not to avail itself of?

[00:08:33] Speaker 04:
I would agree with that to some extent.

[00:08:35] Speaker 04:
First of all, that's where I believe we get into the futility argument, which is, amongst other things, Executive Director Matthews recusing herself and appointing a law firm to undertake the remainder of the accreditation process, the continuing review of the accreditation.

[00:08:55] Speaker 04:
But, to circle back, for purposes of due process, under 602.25, the DEAC, the agency, must demonstrate that it afforded us ample due process by, amongst other things, giving us the right to appeal before a decision becomes final.

[00:09:18] Speaker 04:
And if we accept the trial court's decision that a show cause is final, if we accept the DEAC's position that the show cause is final, we should have been given that opportunity to appeal.

[00:09:33] Speaker 04:
And as you've indicated,

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There are practical ramifications.

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Those practical ramifications, even though we still are accredited, we're an institution now being accused of defrauding our donors and our students.

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I mean, that is, in fact, a denial of our due process.

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And that's why we stand here aggrieved, is that we needed the opportunity to come into court.

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We were not given this opportunity prior to publicizing to the world this series of events leading us to be accused of fraud, and the post

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show cause, the post-show cause remedies were not adequate, given the fact that, number one, Leah Matthews had already recused herself as the executive director.

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And number two, inclusive within the body of that show cause directive was a statement that reapply.

[00:10:27] Speaker 04:
You haven't lost your accreditation, but start over.

[00:10:32] Speaker 04:
Reapply as a new institution.

[00:10:35] Speaker 03:
The application... So the Department of Education interprets the regulations that govern accrediting institutions to mean that when a show cause order is issued, it's the equivalent of putting an organization at school on probation.

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And that's in their guidance.

[00:11:00] Speaker 03:
Do you disagree with that interpretation?

[00:11:04] Speaker 03:
And if so, where can I find the reasoning in your brief?

[00:11:08] Speaker 03:
Or do you just accept it?

[00:11:14] Speaker 04:
Well, I think we're caught in sort of a no man's land where the, I agree with you, that's what the Department of Education's guidelines do specify.

[00:11:25] Speaker 04:
However, the DEAC says, well, we're not going to abide by that, essentially, and we're going to call our show cause just notice of an adverse or concern.

[00:11:35] Speaker 04:
It's not an adverse action.

[00:11:37] Speaker 04:
It's just notice of concerns.

[00:11:40] Speaker 04:
So in our briefing,

[00:11:45] Speaker 04:
Where do we, in our briefing and in our underlying complaint, the issue was raised that we had inadequate procedures prior to the issuance of the public notice, if that answers your question.

[00:12:03] Speaker 03:
Well, I'm wondering what the reasoning is if you disagree.

[00:12:08] Speaker 03:
I didn't find in your brief a section that takes the Department of Education to task for its interpretation.

[00:12:19] Speaker 03:
If I understand you now, there isn't, but you haven't made that argument.

[00:12:24] Speaker 04:
I believe we have made that argument, Your Honor.

[00:12:27] Speaker 03:
Okay, when you get up for rebuttal, will you give me the pages on which I can find it?

[00:12:32] Speaker 03:
Absolutely.

[00:12:35] Speaker 02:
Okay, thank you.

[00:12:35] Speaker 02:
Thank you, Counsel.

[00:12:39] Speaker 05:
Thank you.

[00:12:39] Speaker 05:
Mr. Ruby.

[00:12:42] Speaker 05:
Good morning, Your Honors, and may it please the Court.

[00:12:44] Speaker 05:
Josh Ruby on behalf of the Distance Education and Training Council, doing business as the Distance Education Accrediting Commission.

[00:12:53] Speaker 05:
Your Honor, just simply put to refocus, what this case is about are rules.

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The rules that Congress and the Department of Education set for what institutions like the college are supposed to do when they get a result during the accrediting process that they don't like.

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Those are rules that are designed to ensure the college gets the due process it's entitled to and that the decisions of the accrediting commissions, like the DEAC, are fair and consistent.

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Those are rules the college agreed to follow each and every time it submitted an application for accreditation or for renewal of its accreditation.

[00:13:30] Speaker 05:
And those are rules the college broke when the show cause directive notice of which was put on the commission's website, when the college instead of following all the procedures that it still had in front of it, consideration of a new application,

[00:13:45] Speaker 05:
appeal of any adverse decision to an appeals panel, review by an independent arbitrator.

[00:13:50] Speaker 05:
The college skipped all those steps and went straight to this court with a lawsuit seeking, or excuse me, to the district court for the Southern District of New York with a lawsuit seeking $17 million in damages.

[00:14:02] Speaker 05:
The district court, applying a variety of legal theories, concluded that that was improper and dismissed the lawsuit with prejudice, and the commission respectfully submits that this court should affirm.

[00:14:13] Speaker 05:
I want to start with the exhaustion issue.

[00:14:18] Speaker 05:
And without taking issue with everything that my brother counsel said during his argument, one thing that he did not address is this court's standard for futility, the argument for futility exception to the exhaustion of administrative remedies.

[00:14:34] Speaker 05:
I point, Your Honors, to the communications worker's case, which says that in order to make out a case for exhaustion, the party that's claiming that exhaustion should be excused for futility has to show that each of the remaining steps would certainly have resulted in an adverse decision.

[00:14:53] Speaker 05:
Certainly have resulted in an adverse decision.

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And quite frankly, there's nothing in the complaint, nothing in the record where the argument is made that each of these steps that still lay ahead of the college, which again, consideration of a brand new application, not application as a new institution, mind you, because the college's accreditation would have remained in place.

[00:15:16] Speaker 05:
That's expressly stated in the show cause directive.

[00:15:19] Speaker 05:
But application, a new application for renewal of its accreditation, then

[00:15:24] Speaker 05:
If that application was unsuccessful, there would have been the opportunity to appeal to an independent appeals panel, the members of which cannot be the members of the commission.

[00:15:32] Speaker 02:
As I understand their argument, though, everything you say is right about accreditation, but it doesn't sound like they're even disputing that.

[00:15:39] Speaker 02:
What they're saying is, yeah, maybe accreditation would have been renewed or whatever the proper terminology is, and this is when you already are accredited.

[00:15:48] Speaker 02:
But there's nothing that you can do about the show cause order.

[00:15:51] Speaker 05:
And respectfully, Your Honor, that's inaccurate.

[00:15:54] Speaker 05:
What you can do is you can submit the invited new application.

[00:15:59] Speaker 05:
The show cause directive says we've, in effect, we've identified the... But what does that do for you?

[00:16:04] Speaker 02:
If you submit the... I'm not necessarily taking issue with your ultimate legal proposition.

[00:16:11] Speaker 02:
I'm just talking about on this aspect of the case.

[00:16:14] Speaker 02:
What does that do for you if you can resubmit?

[00:16:16] Speaker 02:
That allows you to remain accredited.

[00:16:19] Speaker 05:
What happened here is that the college remained accredited even though it never submitted that application.

[00:16:24] Speaker 05:
It remained accredited until the prior incarnation of its accreditation.

[00:16:29] Speaker 02:
But whatever process you just referred to, does that result in something like vacator of the show cause order or expungement of it or something like that?

[00:16:37] Speaker 02:
I assume not.

[00:16:38] Speaker 05:
Well, if the application were successful, then it certainly would.

[00:16:41] Speaker 05:
The show cause status would have been terminated.

[00:16:43] Speaker 05:
You can read the directive.

[00:16:44] Speaker 05:
and the handbook for the process that it sets forth, but what it says in the show cause directive.

[00:16:50] Speaker 05:
And I will just very quickly address the date issue.

[00:16:54] Speaker 05:
If you look carefully at the, I believe it's on page 65 of the appendix, the screen capture of the commission's website, it talks about the meeting of the commission taking place in January, although the letter is dated in February.

[00:17:09] Speaker 05:
And there is an error in the year, that's just a typographical error.

[00:17:12] Speaker 05:
But if you look at the show cause directive, what it says is that the college has one year from the January 2017 meeting to come into compliance with the accreditation standards.

[00:17:28] Speaker 05:
And so even that period can be extended for good cause.

[00:17:33] Speaker 05:
So the college has some amount of time to submit an application and then built into the process is a very long tail to consider the application, work through whatever the issues are that have been identified in the show cost directive, which are laid out in great detail.

[00:17:47] Speaker 02:
When you say to consider the application, that's the application for?

[00:17:51] Speaker 05:
Renewal of the accreditation.

[00:17:53] Speaker 02:
A renewed application for renewal of the accreditation.

[00:17:57] Speaker 02:
Again, I'm not suggesting that this necessarily ultimately is a problem for you, but just in terms of the argument that's being made, as I understand what they're saying, they're saying, look, okay, we can get accreditation renewed.

[00:18:09] Speaker 02:
I get that.

[00:18:10] Speaker 02:
That may well be the case that there was process to be had on that score, and maybe we would have prevailed on that.

[00:18:16] Speaker 02:
But what really hurt us was the issuance of the show cause order, period.

[00:18:20] Speaker 02:
And you just can't unring that bell once the show cause order was issued.

[00:18:23] Speaker 05:
And be that as a mayor, then the issue is with the Department of Education that issued the regulations that say that that has to be published.

[00:18:30] Speaker 05:
And I point back to the argument we made in the brief.

[00:18:32] Speaker 05:
Which is a different argument that it has to be published.

[00:18:35] Speaker 05:
And notice of it has to be published.

[00:18:38] Speaker 05:
And I think if you, I'll just also point back, if you look at the screen grab, it's evident from that screen grab, the letter itself wasn't published on the website.

[00:18:46] Speaker 05:
All that was published was notice.

[00:18:48] Speaker 05:
There's a click here notation, but all that says is you can look for the accreditation standards there.

[00:18:52] Speaker 05:
That's not the letter.

[00:18:53] Speaker 05:
That's something different.

[00:18:54] Speaker 05:
And that's plain from looking at the, again, the document that's in the record at page 65 of the appendix.

[00:19:01] Speaker 05:
But the point about

[00:19:04] Speaker 05:
whether this notice needed to be published at all.

[00:19:09] Speaker 05:
Again, the party with whom who is empowered to address that is the Department of Education.

[00:19:15] Speaker 05:
If you look at 34CFR 602.26B1 and B2,

[00:19:23] Speaker 05:
What the college's argument is, is that nothing in B1, which speaks in terms of probation, and which as Judge Randolph pointed out, the Department of Education's guidance says that show cause is a form of probation, or should be read within that phrase.

[00:19:38] Speaker 05:
The college's argument is nothing within B1 meets that standard, unless it also meets B2, which speaks in terms of final decisions on applications for accreditation to withdraw, terminate, et cetera.

[00:19:52] Speaker 05:
Under the college's interpretation, B1 might as well not exist because nothing can ever fit into the category of B1 because it's not final.

[00:20:01] Speaker 05:
That's simply impermissible.

[00:20:03] Speaker 05:
This court's one of the fundamental canons of statutory construction, or regulatory construction for that matter, or construction of a contract, any legal document, is that every word must be given a fact.

[00:20:14] Speaker 05:
And that's where the commission respectfully submits that that's so here.

[00:20:18] Speaker 05:
And so there must be something that fits into the category in 602.26b1.

[00:20:24] Speaker 05:
And that is precisely what happened here.

[00:20:31] Speaker 05:
With the courts leave, I'll proceed on here to just very quickly to the argument on rightness, which the district court also concluded was a basis for dismissing this claim.

[00:20:51] Speaker 05:
Because again, what happened here is that the institution was placed on show cows status, but given the opportunity to submit a renewed application, which was never submitted.

[00:21:04] Speaker 05:
And so everything that the college argues, argued below and argues in this appeal, is inherently speculation about contingent future events that might never happen.

[00:21:13] Speaker 05:
That's the classic description under this court's authority and Supreme Court authority of a case that's unright for consideration.

[00:21:19] Speaker 05:
And the district court relying on that basis as an alternative also dismissed on that basis.

[00:21:24] Speaker 05:
This court can also affirm on that basis.

[00:21:28] Speaker 05:
I want to briefly just talk about the state law claims as well.

[00:21:34] Speaker 05:
We submit that the district court's analysis of the defamation issue and the proximate causation issue was correct.

[00:21:44] Speaker 05:
Unless there are further questions on those points, I'll rely on our brief and the district court's opinion on those points.

[00:21:51] Speaker 05:
And then just finally get to the issue of preemption where

[00:21:57] Speaker 05:
What we have here is a comprehensive federal regulatory scheme set out by Congress and the Department of Education that has very specific standards for what accrediting institutions like the Commission must do.

[00:22:11] Speaker 05:
And so to plead state law claims, in particular, for example, this defamation claim that seeks to recover $17 million in damages for a publication required by the regulations.

[00:22:27] Speaker 05:
And the breach of contract claim, which in the reply brief, the college says that the basis for that claim is a breach of the implied covenant of good faith and fair dealing.

[00:22:36] Speaker 05:
In other words, doesn't rely on any specific provision of the handbook or any other document, but the implied covenant.

[00:22:43] Speaker 05:
In other words, common law duties, not stated in the regulations, not stated in the handbook, in some way apply to the commission's conduct.

[00:22:51] Speaker 05:
Our submission is that under the Armstrong case, that is necessarily applying standards to the Commission's conduct, not set by Congress and the Department of Education.

[00:23:02] Speaker 05:
That's contrary to the regulatory scheme, inconsistent with it, and therefore an alternative basis for affirming the result below is preemption.

[00:23:10] Speaker 05:
Unless there are any other questions, I rest on the brief.

[00:23:13] Speaker 05:
Thank you, Council.

[00:23:20] Speaker 02:
We'll give you two minutes.

[00:23:24] Speaker 04:
Thank you.

[00:23:25] Speaker 04:
And Judge Randolph, in response to your question, I think there are a couple different points in our briefing where we address the issue I was raising of our primary brief, pages 12 through 13.

[00:23:38] Speaker 04:
And then in the reply brief, I believe, under the analysis addressing

[00:23:45] Speaker 04:
Dr. David Ladey's consideration of Dr. David Ladey's affidavit, the issue is raised as to stating at no time did the defendants offer discussion.

[00:24:00] Speaker 03:
I thought you were going to say it was on page 19 to 20 of your

[00:24:10] Speaker 03:
The only problem with that is it doesn't mention the Department of Education's interpretation, and it does not argue that the Department of Education was incorrect in interpreting its own regulation.

[00:24:24] Speaker 03:
That was my question.

[00:24:28] Speaker 04:
And if you would restate your question, I'm not sure I followed it.

[00:24:32] Speaker 04:
I apologize.

[00:24:33] Speaker 03:
The Department of Education promulgates a regulation that says final decision

[00:24:38] Speaker 03:
probation or its equivalent or whatever it is, and then issues a guidance document saying that by that we mean you have to publish a show cause order.

[00:24:48] Speaker 03:
If the show cause order spells out serious deficiencies, right?

[00:24:57] Speaker 03:
And so my question to you was, did you argue that the Department of Education misinterpreted its own regulation?

[00:25:05] Speaker 03:
And if so, what was the argument?

[00:25:07] Speaker 03:
I don't find it.

[00:25:09] Speaker 04:
Yeah, I don't believe that at any point did we take exception with the Department of Regulations or the Department of Education's interpretation of its regulations.

[00:25:18] Speaker 04:
I believe our position is that in advance of that show cause order, interpreting it as a final order

[00:25:27] Speaker 04:
Under the regs, we have to be given an appellate process to... Got it.

[00:25:34] Speaker 04:
Yes, sir, to... And that's, I think, one of the main points of our argument is that before the show cause order becomes public, we have to be given the due process of correcting it.

[00:25:44] Speaker 04:
And correcting things that are very simple, like a date.

[00:25:47] Speaker 04:
A date which invoked our donors and our students accusing us of fraud.

[00:25:52] Speaker 04:
And if we were given that due process, we believe that

[00:25:57] Speaker 04:
that the date would have been corrected.

[00:25:59] Speaker 04:
Various items, our relocation from New Jersey to Colorado, that was approved.

[00:26:04] Speaker 04:
All of the items listed in the show cause order were in fact approved over a series of approximately six years.

[00:26:11] Speaker 04:
They would have all been addressed if we could have had that due process prior to the publication.

[00:26:16] Speaker 04:
And that's the college's position.

[00:26:20] Speaker 04:
Thank you.

[00:26:21] Speaker 02:
Thank you, Council.

[00:26:22] Speaker 02:
Thank you, Council.

[00:26:22] Speaker 02:
The case is submitted.