In a surprising ruling, a federal district court in Arizona has held that the Federal Trade Commission (FTC) cannot prosecute claims under the FTC Act against a nonprofit educational institution.

Late last year, the FTC filed a lawsuit against Grand Canyon University (GCU) and its president. Among other claims, the agency alleged GCU made deceptive representations concerning its status as a nonprofit institution and doctoral programs. GCU is owned by a corporate entity, Grand Canyon Education Inc. (GCE). GCE purchased GCU and operated it as a for-profit institution from 2004 to 2014. In 2014, GCE chartered GCU as an Arizona nonprofit institution. GCE executed a master services agreement with GCU that provided GCE would act as the sole provider for GCU’s operations.

Under Section 5 of the FTC Act, the FTC may sue a “person, partnership, or corporation.” The FTC argued GCU was a corporation. A “corporation” under the act is defined as:

• a company
• incorporated or unincorporated
• without shares of capital or capital stock or certificates of interest
• organized to carry on business for its own profit or that of its members

GCU argued that the act did not apply to its activities because it was not an institution organized to carry on for-profit activities. The FTC disagreed, arguing that GCU’s formal corporate status was irrelevant as long as it operated as a for-profit institution.

The court noted that while other courts have held that “a nonprofit corporation organized to benefit its members may qualify as a ‘corporation,’” the pertinent issue was that GCU’s only member is the Grand Canyon Foundation, not GCU or its president. At oral argument, the FTC contended that if the nonprofit entity benefits “insiders,” “related businesses,” or “officers” that are not members, it still is a “corporation” under the FTC Act.

Acknowledging that the issue was a “debatable call,” the court agreed with GCU and held that the FTC’s interpretation of the act could not be squared with its plain language:

Congress chose only to vest the FTC with authority to pursue claims against an entity organized to carry on business for its “own” profit or the profit of its “members.” 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.

Citing the Supreme Court’s recent Loper Bright decision that empowered courts to adjudicate whether federal agencies acted within their statutory authority without deference to the agency’s interpretation, the court dismissed the agency’s FTC Act claims against GCU and its president.

While likely to be appealed, potentially to the Supreme Court, this decision circumscribes the FTC’s ability to target entities organized as nonprofits and establishes a higher standard for the agency to show that these entities can be sued as “corporations” under the act. Whether other entities try to restructure their affairs to avail themselves of this loophole remains to be seen.

Earlier this month, we wrote that federal agencies would face difficulties prosecuting cases under Loper Bright. As demonstrated here, the decision continues to send shockwaves through the legal landscape as the federal government grapples with the new regulatory regime.