2U Lawsuit Claims Looming Education Dept. Guidance Breaks the Law

The online-program manager 2U filed a lawsuit on Tuesday against the U.S. Department of Education, marking what appears to be the first legal challenge to controversial guidance, released in February, that has left many institutions in a state of limbo.

The guidance at the heart of 2U’s lawsuit — published as a Dear Colleague Letter — would update the department’s interpretation of “third-party servicers” to include entities that assist colleges’ Title IV-eligible programs by providing recruitment and retention services, certain software products, and “any percentage” of educational content.

The third-party-servicer designation has historically been reserved for entities that help institutions administer federal financial aid to students, and comes with numerous regulatory requirements, such as submitting independent annual compliance audits and agreeing to be held responsible, alongside a client institution, for any Title IV violations. The guidance is slated to go into effect on September 1.

The release of the guidance document followed pressure on the department to keep a closer eye on institutional partners like online-program managers, known as OPMs, which have played key roles in colleges’ growth, especially in regard to their online programs, but whose operations can be a metaphorical “black box.”

But in its lawsuit, which seeks to thwart the rollout of the guidance, 2U claims the department has asserted sweeping authority that will impose damaging regulatory and financial burdens on “tens of thousands of entities” like itself — even though the company structured its business “specifically not to perform any services related to the administration of Title IV funds.” And those burdens, 2U says, would trickle down to the hundreds of colleges it works with, too.


Further Reading

“2U will be pressured to renegotiate contracts and potentially offer fewer services to reduce the chances of making compliance errors,” the lawsuit reads. And as the guidance would also require third-party servicers to be based in the United States, the lawsuit says, 2U would have to “cut off” its South African subcontractor, Get Educated International Proprietary Ltd., which provides “a range of services to 2U’s institutional partners.”

The lawsuit further accuses the Education Department, in releasing the Dear Colleague Letter, of running afoul of federal laws.

The department violated both the Higher Education Act and the Administrative Procedure Act, it says, by posting guidance that “reads like a regulation” prior to offering a public-comment period and conducting a negotiated-rulemaking process.

“The negotiated-rulemaking process is mandatory unless the department determines and publishes in the Federal Register that such rulemaking ‘is impracticable, unnecessary, or contrary to the public interest,’” the lawsuit reads. “No such finding was made here.”

Even if the department had taken that step, the suit also states that only Congress can rewrite the Higher Education Act’s definition of third-party servicers.

Glenda Morgan, an analyst with Phil Hill & Associates with deep knowledge of OPMs and their arrangements with colleges, was struck by the “narrowness” of the lawsuit’s claims, which she thinks strengthens 2U’s case. “They’re not saying, ‘Hey, you’re putting us out of business,’” she said. “They’re saying, ‘You overreached here, and you didn’t follow your own regulations.’”

The online-program manager is asking for a pause in the rollout and/or enforcement of the updated guidance, pending adjudication of this case. The lawsuit, filed in the U.S. District Court for the District of Columbia, also asks a judge to “preliminarily and permanently” block the department from requiring 2U to operate as a third-party servicer under the current language in the Dear Colleague Letter.

Katherine Brodie, an education lawyer with Duane Morris LLP, isn’t sure if 2U’s argument meets the “irreparable harm” threshold needed to halt such guidance while a judge reviews the merits of the case. That call, she said, is commonly based on “a fact-specific balancing of interests,” which is tricky with the guidance not yet in effect.

Still, the “legal arguments that ED has overstepped its authority are strong,” she wrote in an email. Brodie noted that 2U is a recent client of Duane Morris for advice on related issues.

The department did not provide comment on the lawsuit by the time of publication. It previously told The Chronicle it would “carefully review” all comments it received from the public following its publication of the Dear Colleague Letter, and “may amend or clarify the guidance.” There is also an item on the negotiated-rulemaking agenda for later this year to “amend regulations on third-party servicers.”

A Mix of Reactions

It’s becoming increasingly common to challenge Education Department guidance if “it affects someone’s livelihood or, in this particular circumstance, threatens a sector,” said Farnaz Farkish Thompson, a partner with the law firm McGuireWoods LLP.

The fact that a behemoth in the OPM industry was the first to file a lawsuit isn’t particularly surprising to higher-ed watchers, either. The department explicitly called out OPMs in the Dear Colleague Letter, leaving little question that they are a primary target of increased oversight. OPMs, which collectively pull in more than $4 billion a year, help institutions jump-start or expand their online programs by providing a host of services, including learning technology, curriculum design, marketing services, and IT assistance.

Before filing the lawsuit, 2U had started pushing back against potential regulatory changes in other ways, including campaigning against the department’s recent decision to revisit 2011 guidance that has enabled many online-program managers’ revenue-share agreements with institutions.

Illustration shows figure at lecturn looking at dialogue balloons

Further Reading

Facebook’s ad library, for example, shows at least six active 2U advertising campaigns touting the importance of online education partnerships. The ads take readers to a website, apparently owned by 2U and titled “Online Education Is at Risk,” that warns of “new proposed regulations that would limit students’ access to high-quality, online education.” (No data presented on the site directly validates that claim.)

The online-program manager also appears to have hired a lobbying firm, Crossroads Strategies LLC, starting on March 1, according to a filing logged in a ProPublica database.

Among institutions, student advocates, and the broader public, the Dear Colleague Letter has stirred up a mix of passionate, split, and nuanced reactions.

Over all, there appears to be universal agreement that more transparency in private companies and the services they provide to colleges isn’t a bad thing. The OPM industry, in particular, has drawn scrutiny for cases of deceptive and aggressive recruiting practices.

For some, the latest guidance is the most sensible and efficient way to curtail that. Within the more than 1,000 written comments posted online in response to the guidance, groups like the Center for American Progress, Veterans Education Success, and the Student Borrower Protection Center thanked the department for taking “welcome and important steps toward protecting students and taxpayers.”

“OPMs have access to a lot of information,” including enrollment and attendance data, “that is connected to the administration of financial-aid programs … so given that, I think it’s appropriate that the department has a window into their operations,” said Stephanie Hall, a senior fellow at the Center for American Progress. She also noted that the department needs flexibility to be responsive to changes in the sector.

With existing regulations, “the list of things a third-party servicer might be engaged in is a non-exhaustive list,” she said. It “leaves an opening for the fact that the industry does evolve faster than laws and regulations can keep up.”

Still, others feel the guidance is too broad and risks entangling vendor services and partnerships that fall outside of what the department intended. Many of the commenters, including institutions like New York University and the University of Texas system and higher-education organizations like the American Council on Education, cited concerns that the guidance would impose administrative burdens and disrupt study-abroad programs, internships, clinical placements, and other important educational services for students.

In a recent Educause QuickPoll of nearly 200 members of the National Association of College and University Business Officers, 66 percent said they were in the midst of “seeking clarifications” on the guidance; 29 percent were actively reviewing their vendor contracts.

What’s bothered Morgan, the education lawyer, as well is that the Dear Colleague Letter doesn’t seem to be rooted in an understanding of what’s led colleges to rely on OPMs and related services to begin with.

“I’ve advised more than 100 universities on contracts about OPMs,” she said, and “they enter into these contracts willingly. Often quite willingly.”

Are More on the Way?

It’s not clear whether 2U’s case is the canary in the coal mine — or if it’s acting alone.

The Chronicle asked two other major players in the OPM industry, Academic Partnerships and Wiley University Services, whether they intended to file their own lawsuits. The former said it has no plans to do so. The latter went a step further, saying it “does not support this litigation.”

“While we believe the department’s guidance is overly broad and inconsistent with statutory intent, we recognize the department’s interest in understanding more about third-party relationships with institutions, and we look forward to continuing to engage with the department to find appropriate policy solutions,” a Wiley spokesperson wrote in an emailed statement.

Pearson, another well-known online-program manager, announced plans last month to sell its OPM business to Regent LP, a private-equity firm based in Los Angeles.

Thompson, the lawyer with McGuireWoods, said it’s more likely that organizations or companies will file briefs in support of the suit, instead of filing their own.

“The definition of third-party servicer changing would really affect the education-technology industry,” she said. “I think there will be more people who support the plaintiff’s position.”

Dan Bauman contributed to this report.

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