For-profit schools and other higher education companies face increased exposure for deceptive marketing practices as a result of the Federal Trade Commission’s (“FTC”) revised Guides for Private Vocational and Distance Education Schools (“Guides”), effective November 18, 2013. The Guides expand potential liability in two key ways. First, they contain more stringent restrictions on advertising, promotion, marketing, sales, and recruitment practices of for-profit private vocational schools by expanding the scope of activities the FTC considers deceptive. This may encourage students, class action lawyers, and states’ attorneys general to increase scrutiny of the practices of covered entities for non-compliance.1Second, the Guides make clear that under the FTC Act, 15 U.S.C. § 41 et seq., any for-profit corporation that provides postsecondary educational courses and programs (not just institutions offering vocational or distance education) may be subject to FTC enforcement actions to prevent deceptive or unfair practices.
Expanded Scope of Deceptive Practices. The Guides overlap with and expand the Department of Education’s (“ED” or the “Department”) broad restriction on misrepresentations regarding the nature of an educational program set forth in 34 C.F.R. § 668.72 (the “Misrepresentation Rule”). The Guides coincide with the Misrepresentation Rule in prohibiting schools from engaging in the following:
- misrepresentations regarding the accreditation, affiliations, or approval of the school and its programs;
- misrepresentations regarding the school’s facilities, services, or personnel; and
- misrepresentations regarding enrollment qualifications and the transferability of credit received at the school to other institutions.
Unlike the Misrepresentation Rule, however, which is a blanket prohibition on any visual, oral, or written communication regarding certain subjects that has the likelihood or tendency to deceive, the Guides provide specific detail regarding what constitutes a deceptive practice, including the following:
- any misrepresentation regarding completion/dropout rates, post-graduation job prospects and salaries;
- any representation without qualification that a school is accredited, unless all courses and programs are accredited;
- any representation that a program is approved without disclosing the nature, extent and purpose of the approval;
- any misrepresentation through pictures or any other medium about courses, books, facilities, training devices, training methods, or equipment;
- any misrepresentation regarding whether completion of a program will qualify students to take a licensing exam;
- misrepresentation regarding the likelihood of financial aid or help with language barriers or learning disabilities, or how much transfer credit students will receive;
- any misleading use of a trade name, label, or an insignia;
- any misrepresentation regarding security policies or crime statistics schools are required to maintain; and
- the use of misleading testimonials and endorsements.
What constitutes a “misrepresentation” is broad and may occur “directly or indirectly, expressly or by implication.” (See, e.g., 16 C.F.R. § 245.2.) Conduct inconsistent with the Guides may result in investigations and actions by the FTC seeking injunctive relief and consumer redress payments under statutory provisions. (See 15 U.S.C. § 45.) Perhaps most significantly, to the extent ED has not vigorously enforced its Misrepresentation Rule, the Guides provide an opportunity for states’ attorneys general and plaintiffs’ lawyers to fill the void.
Expanded Scope of Covered Entities. The Guides apply broadly to “persons, firms, corporations, or organizations engaged in the operation of privately owned schools that offer resident or distance courses, training, or instruction purporting to prepare or qualify individuals for employment in any occupation or trade.” (16 C.F.R. § 254.0(a).) According to the FTC, the Guides are intended to “advise proprietary businesses that offer vocational training courses, either on the school’s premises or through distance education, how to avoid deceptive practices in connection with the advertising, promotion, marketing, or sale of their courses or programs.” (Guides for Private Vocational and Distance Education Schools, 78 Fed. Reg. 68988 (Nov. 18, 2013).)
Two additional points are worth highlighting regarding who is regulated by the Guides. First, as currently written, the Guides would seem to apply not only to schools, but also to service providers that contract with a school to deliver support of a vocational education program. Second, although the FTC declined to expand officially the scope of the Guides to providers of degree programs (“resident primary or secondary schools or institutions of higher education offering at least a 2-year program of accredited college level studies generally acceptable for credit toward a bachelor's degree,” currently exempt under 16 C.F.R. § 254.0(a)), the FTC cautioned that the Guides “provide useful guidance to any for-profit colleges that engage in similar practices.” (78 Fed. Reg. 68989, n.10.) Notably, in a footnote to the Preamble of the new Guides, the FTC expressly reserved the authority to bring law enforcement actions to curb deceptive or unfair trade practices by any for-profit corporation “in [the education] area,” regardless of whether the institution is offering vocational programs. (Id.) Therefore, despite the purported exemption for certain types of higher education institutions, the FTC indicated that it “may use its enforcement authority to remedy deceptive acts and practices by [for-profit] schools, including deceptive conduct described in the Guides.”
Heightened Risk of Legal Exposure. As a result, for-profit schools and other businesses operating in the higher education sector face increased exposure not only to enforcement actions by the FTC but also to enforcement actions by state governments and to consumer and class actions. For example, the California State Attorney General recently filed a complaint against a for-profit institution alleging violations of the state’s Unfair Competition Law and Fair Advertising Law. The suit seeks both injunctive relief against the school and disgorgement of profits, restitution to stockholders, and substantial civil penalties. The State Attorney General for New York and other states are also aggressively pursuing institutions for alleged misrepresentations, and some of these cases are resulting in substantial monetary penalties and settlements.
The FTC Act does not create a private right of action, but many states use the FTC Guides as a model for their consumer protection statutes and state courts often defer to the FTC’s interpretations when enforcing their own consumer protection laws. This too increases exposure. In a recent case, a jury awarded a student several millions of dollars in punitive damages on claims that a school misled her regarding the scope of her educational program. Although the court reduced the award, the case illustrates the staggering sums a student may seek (and a jury may award) for a misrepresentation. In another case, a school paid $5 million to settle a class action alleging that the school had engaged in deceptive practices to enroll students.
Thus, while FTC scrutiny alone would certainly be unwelcome, a substantial corollary risk is that the Guides may expose institutions to additional private or state claims, which are significantly more costly to defend and may carry larger penalties or punitive damages. Therefore, we recommend that covered schools and service providers carefully review their promotional materials and marketing practices to ensure compliance with the Guides’ new restrictions.
The FTC release is available at: http://ftc.gov/opa/2013/11/vocschools.shtm.