The Ghost of Loper Bright and the FTC’s Jurisdiction over Nonprofits

I have an abiding interest in a particular type of nonprofit: higher education institutions. Call it an occupational hazard. I’m also interested in the Federal Trade Commission’s (FTC) enforcement mechanisms. Chalk this one up to being a policy wonk. So, I have been following a case rather closely involving both of these interests.

In a recent ruling, a federal district court in Arizona has significantly narrowed the FTC’s ability to bring enforcement actions against nonprofit organizations. The case involved Grand Canyon University (GCU), which the FTC alleged had made deceptive claims about its nonprofit status and doctoral programs. This decision is notable because it constrains the FTC’s reach over nonprofit institutions and raises important questions about the scope of the FTC’s authority under the FTC Act.

The FTC’s Claims Against GCU

GCU, originally a for-profit higher education institution, became a nonprofit in 2014 after being purchased and rechartered by Grand Canyon Education, Inc. (GCE). Although GCE operates GCU under a master services agreement, GCU is recognized as a nonprofit entity. The FTC, however, argued that GCU operated as a for-profit institution in substance, even though it held nonprofit status on paper. The agency claimed that GCU’s financial and operational ties to GCE meant it was still engaged in profit-driven activities, and therefore subject to FTC oversight under Section 5 of the FTC Act.

The crux of the case centered on whether GCU could be considered a “corporation” under the FTC Act. The FTC Act allows the FTC to prosecute “persons, partnerships, or corporations,” defining a corporation as an entity organized for its own profit or the profit of its members. The FTC contended that GCU’s formal corporate structure was less important than its operational reality, suggesting that GCU acted like a for-profit entity due to its GCE parentage.

The Court’s Ruling

The court sided with GCU, holding that the FTC could not apply the definition of a “corporation” to GCU under the plain language of the FTC Act. The key issue was that GCU’s sole member is the Grand Canyon Foundation, not GCU itself or any individuals benefitting from its operations. So, the court concluded that GCU did not fall under the category of an entity organized for its own profit or the profit of its members as defined by the FTC Act.

Citing to the Supreme Court’s recent decision in Loper Bright, which curbed the power of federal agencies by limiting judicial deference to agency interpretations of statutes, the court rejected the FTC’s broader interpretation of its jurisdiction. The court emphasized that the FTC’s authority extends only to entities explicitly organized for profit, as defined by the statute. While the court acknowledged potential policy reasons for why nonprofits benefiting insiders or related businesses should fall under the FTC’s purview, it maintained that the statutory language did not support the agency’s claims.

Implications for Nonprofits

This ruling limits the FTC’s ability to pursue enforcement actions against nonprofit organizations unless the agency can demonstrate that these entities are organized for profit. The decision could have far-reaching implications. If nonprofits are anything like their for-profit cousins, one could expect them to behave strategically in the wake of this ruling. For instance, nonprofits with for-profit parentage could reexamine their organizational structures to ensure they fall outside the FTC’s jurisdiction. Likewise, the decision could encourage more nonprofits to enter into relationships with for-profit entities, knowing that they may still be shielded from FTC scrutiny.

The decision is expected to be appealed. But should this ruling stand, it could set a high bar for the FTC to prove jurisdiction over nonprofits.

Christopher J. Ryan, Jr.

Indiana University Maurer School of Law