Antitrust Law Daily Wrap Up, CONSUMER PROTECTION—D. Ariz.: Court trims claims in deceptive marketing and illegal telemarketing suit against Grand Canyon University, (Aug 16, 2024)

By Donielle Tigay Stutland, J.D.

GCU’s challenged the FTC’s authority to assert claims against nonprofit entities under § 5 of the FTC Act.

The federal district court in Arizona granted in part and denied in part a motion to dismiss a suit brought by the FTC against Grand Canyon Education, Inc. (“GCE”), Grand Canyon University (“GCU”), and Brian E. Mueller (“Mueller”), who is GCU’s president and GCE’s CEO and chairman of the board. The suit claims the defendants were involved in a scheme which included: (1) making deceptive representations concerning GCU’s status as a non-profit institution; (2) making deceptive representations concerning GCU’s doctoral programs; (3) making both sets of deceptive representations in connection with the telemarketing of educational services; (4) initiating telemarketing calls to persons who requested that GCU not contact them; and (5) initiating telemarketing calls to persons registered on the national Do-Not-Call Registry. The court agreed with GCU’s argument that the FTC cannot bring the claims against a nonprofit entity under the FTC Act and the Telemarketing Act and granted a motion to dismiss GCU; however, the court granted the FTC leave to amend this claim. The court denied the motion to dismiss related to alleged misrepresentations, finding that the FTC adequately plead these claims (FTC v. Grand Canyon Education, Inc., No. 2:23-cv-02711-DWL (D. Ariz. Aug. 15, 2024)).

In January 2024, the FTC filed suit against Grand Canyon Education (GCE), Inc., Grand Canyon University (GCU), and Brian Mueller—the CEO of GCE and president of GCU—for deceiving prospective doctoral students about the cost and course requirements of its doctoral programs and about being a nonprofit, while also engaging in deceptive and abusive telemarketing practices. The FTC alleged that GCU and GCE told prospective students that the total cost of GCU’s “accelerated” doctoral programs was equal to the cost of just 20 courses (or 60 credits). In reality, the school requires that almost all doctoral students take additional “continuation courses” that add thousands of dollars in costs. The FTC’s complaint also says that, despite operating the school for the profit of GCE and its investors, the defendants deceptively marketed the school as a nonprofit. GCE telemarketers illegally contacted people who have specifically requested not to be called, as well as people on the National Do Not Call Registry. GCE has also made illegal calls to numbers it purchased from lead generators. (see Antitrust Law Daily, Jan. 5, 2024).

On February 9, 2024, GCU and Mueller moved to dismiss the Complaint (Doc. 27) and GCE filed a separate partial motion to dismiss.

Nonprofit status. GCU’s first challenge in the motion to dismiss is first predicated on an argument that the FTC does not have authority to assert claims against nonprofit entities under § 5 of the FTC Act. The court looked at the text to determine whether GCU would qualify as a “corporation” under the statute, if it is a (1) “company,” (2) “incorporated or unincorporated,” (3) “without shares of capital or capital stock or certificates of interest,” (4) “which is organized to carry on business for its own profit or that of its members.” The dispute over whether GCU, which under many filings was a nonprofit, qualifies as a “corporation” thus turns on the fourth requirement—whether GCU is also “organized to carry on business for its own profit or that of its members.”

The FTC alleged that GCU qualifies as a “corporation” because it “has been operated” to carry on business for its profit or the profit of its members. However, the court stressed that “the statute does not speak to how an entity has been operated in practice—it speaks to how the entity is ‘organized.’” The court noted that the FTC acknowledged that GCU was “chartered... under the Arizona Nonprofit Corporation Act” and that GCU’s “articles of incorporation... represent that it is organized and operated exclusively for charitable, religious, and scientific purposes within the meaning of Section 501(c)(3) of the Internal Revenue Code.”

The FTC argued that courts have found that formal organizational details are irrelevant because “its authority is not dependent on state corporation filings or IRS status” and because “a state charter does not control whether an entity is subject to FTC enforcement authority.” GCU’s argument was that even if it were permissible to look past an entity’s formal organizational status when evaluating whether that entity is “organized to carry on business for its own profit or that of its members,” the FTC has not made the necessary showing here. The court highlighted that GCU made a narrow argument to dismiss based on the Complaint’s allegation that GCU was “organized... to advance GCE’s for-profit business and advance Defendant Mueller’s interests as officer, chairman, director, stockholder and promoter of investment in GCE.” However, the defendant’s argument also stresses that neither GCE or Mueller is a member of GCU—GCU’s only member is the Grand Canyon Foundation.

The court agreed with GCU’s argument that “the FTC’s theory cannot be squared with the plain language of the statute.” Wrote the court, “if Congress had intended for § 4 to encompass nonprofit entities organized to carry on business for the profit of non-member “insiders,” “related businesses,” and “officers,” it could have said so.” Although there may be persuasive policy reasons why the FTC should be allowed to pursue claims against nonprofits that operate for the benefit of non-member insiders, related businesses, and officers, the Court must take the statute as written.

The court also concluded that because the FTC cannot assert claims against GCU under the FTC Act, it also cannot assert claims against GCU under the Telemarketing Sales Rule. The court did allow the FTC leave to amend its complaint.

Nonprofit claims. The court next turned to GCU and Mueller’s argument that “[t]he FTC’s claims that it was deceptive for Defendants to represent that GCU ‘transitioned back’ to being a ‘nonprofit institution,’ fail as a matter of law.” (Doc. 27 at 8, citation omitted.) They argue this statement was “truthful” because GCU is “organized as a nonprofit under Arizona law and recognized by the IRS as a 501(c)(3) tax-exempt entity.” Further, GCU and Mueller contend that “the FTC acknowledges that GCU ‘discontinued and removed most statements characterizing GCU as a nonprofit shortly after’ th[e] [DOE] made its determination” and that “[t]he FTC fails to explain how the [DOE]’s decision could retrospectively taint GCU’s prior general references to its nonprofit status, let alone provide a basis for prospectively barring GCU from ever referencing that status in the future.”

GCU and Mueller requested judicial notice of the IRS’s November 9, 2015 letter (Doc. 27-2) informing GCU that the IRS had classified it as a § 501(c)(3) public charity. GCE also asks the Court to take judicial notice of the IRS letter and additionally seeks judicial notice of GCU’s characterization as a “Domestic Nonprofit Corporation” in the records of the Arizona Corporation Commission. The court granted judicial notice but with caveats.

However, the court ultimately rejected the argument that the FTC’s misrepresentation claims concerning GCU’s nonprofit status should be dismissed, t The FTC’s complaint includes allegations that Mueller, speaking on behalf of GCU and GCE, “acknowledged that being able to market GCU as a nonprofit was a game changer for recruiting prospective students.” The court concluded that the FTC offered sufficient statements which raise a plausible inference of materiality when the Complaint is viewed in the light most favorable to the FTC.

Doctoral degree. The court here also agreed with the FTC that the Complaint adequately alleges that Defendants’ representations concerning GCU’s doctoral degree requirements were deceptive in a manner that is actionable under the FTC Act and the Telemarketing Sales Rule. While the court acknowledged that some statements were puffery, the FTC did offer “an array of marketing materials that contain assertions that can reasonably be viewed, at least in isolation, as suggesting that only 20 courses and 60 credits would be required to obtain a doctoral degree.” Concluded the court, “If, as the Complaint alleges, “GCU very rarely awards doctoral degrees to students upon completion of 60 credits, representing twenty courses” and “GCU required continuation courses for 98.5% of the doctoral students to whom it awarded degrees”, such challenged statements could, when all reasonable inferences are resolved in the FTC’s favor, qualify as deceptive representations.”

Other claims. The court denied the motion to dismiss with respect to fraud claims and claims against Mueller, GCU’s principal.

The Case is No. 2:23-cv-02711-DWL.

Judge: Lanza, D.

Attorneys: Brian Clifton Berggren for the FTC. Caroline Rawls Strumph (Alston & Bird LLP) for Grand Canyon Education Inc. Andrew C. Lawrence (Clement & Murphy PLLC) for Grand Canyon University.

Companies: Grand Canyon Education Inc.

Cases: ConsumerProtection Advertising ArizonaNews FederalTradeCommissionNews GCNNews