Fourth Circuit Recognizes Limited Federal Common-Law Due Process Review of Accreditation Decisions

limits of contracts
The Fourth Circuit recently recognized that higher-education accreditation agencies have a federal common-law duty to employ fair procedures when making accreditation decisions.  In reversing the U.S. District Court for the Eastern District of Virginia for its failure to show appropriate judicial deference to the accrediting agency’s denial of re-accreditation, the Fourth Circuit also emphasized the degree of judicial deference required when considering federal common-law challenges to such decisions and laid out a road map for what kinds of challenges might succeed in the future Although it did not reach the question whether the federal common law preempts state-law claims challenging accreditation decisions, the Fourth Circuit leaves little room for employing such claims to expand judicial review beyond the limited review afforded to federal common-law due-process claims. In Professional Massage Training Center, Inc. v. Accreditation Alliance of Career Schools and Colleges, No. 14-1086, slip op. at 13 (4th Cir. Mar. 24, 2015) (“PTMC v. ACCSC”), the Fourth Circuit joined the D.C., Third, Fifth, Sixth, and Eighth Circuits in recognizing a federal common-law duty on the part of private accrediting agencies to “employ fair procedures when making decisions that affect their members.”   This duty derives from the quasi-public function played by these private agencies as gatekeepers to a school’s participation in various federal-funding programs and the enormous power that this function gives such agencies over their member schools.  Although these private organizations are neither state actors subject to constitutional due-process requirements nor subject to any express private right of action under the Higher Education Act, Congress has given accrediting agencies “life-and-death” power over these schools by delegating to them decision-making power that affects student access to federal funding.  The Fourth Circuit recognized that this power comes with a corresponding due-process-like duty to employ fair procedures in the exercise of this power to avoid “allowing such agencies free rein to pursue personal agendas or go off on some ideological toot.”  Id. at 14. However, the federal common-law rights granted to higher-education institutions are severely circumscribed by the court’s emphasis on the limited nature of judicial review of accreditation decisions.  Based on principles of administrative law and judicial deference, the Fourth Circuit restricted judicial review of decisions by private accrediting agencies to whether the accrediting decision is “arbitrary and capricious” and is supported by “substantial evidence.”  Id. at 15-16.   The Fourth Circuit adopted this deferential standard based on the “quasi-public nature of accrediting institutions and their wide-ranging expertise in what may be highly technical and specialized fields of education.”  Id. at 16-17.  Because the accreditation process “operates as an instrument of quality control on educational institutions,” which Congress and the U.S. Department of Education have delegated to private accrediting agencies certified by the Department, the Fourth Circuit reasoned that generalist federal courts owed deference to the accrediting agency’s “expertise and knowledge” in not only the accreditation process and higher education, but also in the specialized fields under review.  Id. at 17-18 (citing Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837(1984)).  The court emphasized the relative importance of judicial deference by spending the greater weight of its opinion detailing the manner in which the district court was “remedially aggressive” and “conducted an impermissible de novo review” of the accreditation decision.  Id. at 20-40. PMTC v. ACCSC is significant not only for its recognition of the federal common-law rights of higher-education institutions and the deference due to decisions by accrediting agencies, but also because it clarifies the nature of these rights and provides a detailed road map into what sorts of challenges, if any, might be successful.  First, the Court defined the contours of the federal common-law right by reference to cases involving constitutional due-process claims against state actors. Second, the procedural opportunities that an accrediting agency provides an educational institution to “make its case” for accreditation is critically (if not conclusively) important to finding that these due-process standards have been satisfied.  Although the existence of discernible substantive standards used to measure performance is also important, the PMTC opinion makes it unlikely that any attack on the substantive adequacy of such standards would succeed in the Fourth Circuit, at least where the agency has provided the school with sufficient procedural opportunities to adequately respond to the agency’s reasons for denying or withdrawing accreditation. Third, the Fourth Circuit sent a very clear signal that the “substantial evidence” standard is satisfied as soon as the federal court finds in the record “anything ‘more than a mere scintilla’ provided that a ‘reasonable mind might accept [the evidence] as adequate to support’” the agency’s decision.  Id. at 26 (internal citations omitted).  Indeed, the Fourth Circuit appears to leave no room for a court to consider record evidence that an agency’s accreditation decision was wrong, as long as this there is some evidence to support the agency’s decision. Fourth, the court set a high bar for establishing “agency bias” that might justify a less deferential inquiry into the agency’s decision making.  Like their state-actor counterparts, private administrative decision makers are entitled to a presumption of honesty and integrity, absent a showing that a decision maker has a personal bias that “‘stem[s] from a source other than knowledge … acquire[d] from participating in a case.’”  Id. at 34 (internal citations omitted).  Absent evidence that the agency decision makers had this kind of personal bias or conflict of interest, the Fourth Circuit made it very difficult, if not impossible, for claims of agency bias to succeed.  The Fourth Circuit rejected the notion that agency staff expressions of frustration, or even dislike, anger, or dissatisfaction, regarding the school or its representatives was sufficient to support a claim that personal bias improperly influenced the creation of the agency record.  Absent evidence that information was improperly included in or omitted from the administrative record, evidence of what agency staff members may have thought or said about the school or its representatives appears to be irrelevant. Finally, although the Fourth Circuit avoided deciding “a serious question of cognizability” regarding the preemption of state-law challenges to accreditation decisions, id. at 40 n.3, it left little room for state-law claims to expand judicial review of such decisions.  After clarifying that an accrediting agency’s standards of accreditation do not constitute a contract between the agency and the accredited educational institutions, and that negligence claims are foreclosed by the economic-loss doctrine, the court relied on its analysis of the federal common-law claims to reject the state tortious-interference claims on the ground that the accrediting agency’s accreditation decisions were legally justified.  Id. at 42-43.
Disclosure:  Redmon, Peyton & Braswell, LLP served as counsel of record for Defendant Accreditation Alliance of Career Schools and Colleges in the District Court.

Implied Covenant Does Not Add to the Terms of a Contract under Virginia Law

Terms of contract
In a July 28th opinion, the Eastern District provided some much-needed clarity on whether an implied covenant of good faith and fair dealing alters or adds terms in a written contract.  Judge Gerald Bruce Lee held that “Virginia law does not recognize an independent cause of action” for a breach of the implied covenant and granted summary judgment against the party asserting the claim. In Middle East Broadcasting Networks, Inc. v. MBI Global, LLC, No. 1:14-cv-01207, 2015 WL 4571178 (E.D. Va. July 28, 2015), the Plaintiff was a news broadcaster that had operated a bureau in Baghdad, Iraq, since 2004.  In 2013, the Plaintiff solicited proposals to build a special Blast Resistant Building (“BRB”), with a delivery of no later than December 31, 2013.  The Defendant, billing itself as “an expert ‘in the construction of BRBs’ and an ‘expert in the delivery of BRBs to locations in the Middle East,’” accepted the challenge, and the parties entered into a contract.  The delivery date, however, slipped several times to the following summer due to the Defendant’s difficulty in paying a subcontractor.  The parties finally agreed to a contract amendment that required delivery by August 3, 2014, and that this deadline “‘would not be waived or excused for any reason whatsoever.’”  The Defendant then missed the August 3rd deadline and never delivered the BRB.  After the Plaintiff filed suit for breach of contract, the Defendant counterclaimed for breach of the contract’s implied covenant of good faith and fair dealing.  After discovery, the Plaintiff moved for Summary Judgment on the implied covenant counterclaim. Judge Lee granted the Plaintiff’s Summary Judgment motion on the breach of the implied covenant of good faith and fair dealing claim “because Virginia law does not recognize an independent cause of action for this claim.”  Judge Lee went on to cite prior Eastern District case law that recognized that while such an implied covenant does exist in every contract under Virginia law, the covenant “simply bars a party from acting in such a manner as to prevent the other party from performing his obligations under the contract.” Judge Lee then used this analysis to determine that the Defendant had failed to demonstrate a genuine issue of material fact as to whether the Plaintiff had done something to prevent the Defendant from performing under the contract.  Notably, Judge Lee implicitly rejected the Defendant’s argument that the implied covenant somehow adds obligations to the contract. This decision is useful guidance for practitioners who often see breach of contract claims paralleled with breach of implied covenant claims in commercial litigation.  Prior to this opinion, different Virginia courts had gone in different ways when facing the question of whether an implied covenant added to the express terms of a contract.  Judge Lee’s opinion adds much-needed clarity to the subject and essentially answers that question in the negative.  Business litigators can rest (somewhat) more easily by knowing that the four-corners of the contract will not be expanded by a nebulous, undefined, implied covenant.

Yelp! The Virginia Supreme Court Restricts Third-Party Discovery, Pushing Litigants to Federal Court

pushing litigants to court
After a recent decision of the Virginia Supreme Court, litigators facing the choice of whether to file in state or federal court must now consider the availability of third-party discovery.  The Virginia high court has significantly reduced the effective ability for a state court to enforce a subpoena on a party with a Virginia registered agent but headquartered outside of the Commonwealth.  Thus, practitioners who foresee the need for extensive third-party discovery on out-of-state parties will likely need to go to federal court. In past EDVa Updates, we have discussed amendments to FRCP Rule 45 (FRCP Rule 45 Amendment Take Effect on December 1, 2013), and have contrasted federal court third-party discovery with Virginia state court procedures (3rd Party Discovery Under FRCP Rule 45. v. Virginia Rule 4:9A: A Trap for the Unwary Means that Valid Objections Could be Waived).   In its April 2015 decision in YELP, Inc. v. Hadeed Carpet Cleaning, Inc., 770 S.E.2d 44 (Va. 2015), the Supreme Court of Virginia restricted a significant Rule 4:9A discovery avenue.  The Court held that Virginia state courts do not have subpoena power over third-parties that do not reside in Virginia, even if they have Virginia registered agents. On third-party discovery, it seems that the Virginia state courts are moving away from streamlined discovery, while federal courts, with the 2013 Fed. R. Civ. P. 45 amendments, are improving the discovery process.  For certain types of cases, the YELP decision’s limitations on Virginia state courts’ subpoena authority tilts the court-selection decision towards the federal courts. The Hadeed Claims and the Court’s Holding In the case, Alexandria-based Hadeed Carpet asserted defamation claims against three John Doe defendants.  The claims focused on anonymous negative reviews posted on YELP.  To identify the defendants, Hadeed served a Rule 4:9A subpoena on YELP’s Virginia registered agent.  (For a discussion of similarities and differences between Virginia Supreme Court Rule 4:9A and Fed. R. Civ. P. 45 practice, see here.)  Virginia has a specific statutory procedure at Va. Code § 8.01-407.1 for seeking otherwise anonymous internet information.  Hadeed complied with the statute, yet YELP balked, refusing to turn over any information.  The trial court issued an order enforcing the subpoenas, and still YELP refused.  Civil contempt followed.  On appeal, the Virginia Court of Appeals affirmed the trial court’s ruling.  YELP, Inc. v. Hadeed Carpet Cleaning, Inc., 62 Va. App. 678, 752 S.E.2d 554 (2014). The Supreme Court of Virginia reversed.  First, the Court held there is no statutory authority for such subpoenas (“the General Assembly has not expressly authorized the exercise of subpoena power over non-parties who do not reside in Virginia”).  The Court then nixed any notion that the Virginia Rules permit the discovery (“our Rules do not recognize the existence of subpoena power over nonresident non-parties”).  In sum, the Court held that the trial court had no authority to enforce the third-party subpoena to YELP.  (In a concurring opinion, Justices Mims and Millette concluded that Virginia’s statutes do authorize the exercise of subpoena power over non-resident, non-parties, but they arrived at the same result because they see this extension of subpoena power as a 14th Amendment Due Process violation.) Virginia State Court Practice v. EDVa Practice The case is significant in day-to-day practice because it limits an avenue to discover data maintained by companies such as Google, Facebook, Twitter, and Pinterest (who together filed as amici curiae in the YELP case).  These companies are out-of-state operations who have Virginia registered agents.  If they can be reached with Rule 4:9A subpoenas as non-parties in Virginia state court litigation, then there exists a fairly inexpensive discovery avenue for certain types of information.  But if this route is cut off, as the Yelp case holds, then a litigant will instead have to navigate the Uniform Interstate Depositions and Discovery Act (“UIDDA”). The UIDDA provisions were enacted in Virginia in 2009, and they require that a litigant obtain out-of-state discovery subpoenas from the courts of the other states.  For example, in Virginia state court litigation, a subpoena to a third-party Maryland entity would first have to be issued by the Virginia court, and then based on the Virginia subpoena the Maryland court would issue its own subpoena.  Any contest over the subpoenas would likely unfold in the Maryland courts.  The UIDDA is an improvement over the scattered procedures from before, but it still can be a maze to navigate. Contrast the YELP development for Virginia state courts with the 2013 amendments to Fed. R. Civ. P. 45.  Under Rule 45, an attorney may issue a third-party subpoena from the Eastern District of Virginia.  While enforcement of that subpoena likely begins in a foreign court, the Rule now includes procedures that potentially will send enforcement back to the issuing court.  Thus, a Rule 45 subpoena to a Florida company issued in EDVa litigation likely might be enforced by an EDVa magistrate judge. The differences in these third-party discovery procedures matter when the court-selection decision is made.  If a case will require significant third-party discovery from national players (who  may have Virginia registered agents but are not Virginia residents), then the YELP decision scores in favor of federal court selection and against choosing Virginia state courts. Possibility of Legislative Repair The Court’s 5-2 majority opinion leaves open the door to legislative repair.  If the General Assembly returns with a statutory amendment making clear that Virginia intends that its courts have subpoena power over nonresident non-parties, then for parties such as Plaintiff Hadeed Carptet in the YELP case, the state court avenue would become available.  The Mims/Millette position, however, in their concurring opinion would bar such a statutory amendment if the position prevails.  Under their analysis where they refer to the “state court’s coercive judicial power,” a Virginia court’s subpoena power is limited by the Due Process Clause of the Fourteenth Amendment, and extending subpoena power over nonresident third-parties would be a Due Process violation.  For the foreseeable future, therefore, federal courts will provide Virginia litigators more useful third-party discovery of out-of-state parties.