FTC Forges Ahead in Court Battle on FTC Act’s Scope Over Nonprofit Institutions (And Loses)

With much of the administrative state in turmoil, the Federal Trade Commission (FTC) appears to be holding steady and continuing to litigate its current cases.

We previously discussed the FTC’s lawsuit against Grand Canyon University (GCU) and its president, in particular the court’s granting of GCU’s motion to dismiss, finding that the FTC could not bring claims against GCU because it was a nonprofit organization and not a “person, partnership, or corporation” within the FTC’s jurisdiction.

The court held that the FTC could bring claims against GCU only if it could establish that GCU was a “corporation,” which the act defines as either organized to carry on business for the profit of its “members” or organized to carry on business for its “own” profit. The court found the FTC had not pleaded facts to satisfy this burden, but gave the FTC leave to amend its complaint.

The FTC subsequently amended its complaint and added new factual allegations that were intended to establish that GCU was organized for its own profit and thus was subject to the FTC Act. The allegations included the following:

• GCU was organized to acquire, own, and operate portions of the University owned by Grand Canyon Education, Inc. (GCE), and use at least some of its earnings from this business to acquire property, secure loans, accumulate capital, and otherwise perpetuate and expand its business and to increase the assets of the corporation and their value
• GCU was organized for its own profit, and to advance GCE’s for-profit business and advance its president’s interests as officer, chairman, director, stockholder, and promoter of investment in GCE
• GCU’s revenue has generated profit for itself, for GCE, and for GCE’s investors

In a tentative ruling in advance of oral argument, the court did not find these allegations sufficient to show that GCU was organized or operated for its own profit and again granted GCU’s motion to dismiss, this time without leave to amend.

Noting that the FTC had conceded that activities that furthered legitimate educational purposes would not qualify as proof that GCU was operating for its own profit, the court also found that GCU could use its surplus revenue for activities such as acquiring property, securing loans, and accumulating assets while remaining within its charitable mission, i.e., providing educational services did not constitute the type of conduct that would give rise to FTC jurisdiction by causing GCU to be operated for the profit of the entity.

Last, the court also found that the FTC had failed to show that GCE, GCE’s investors, or GCU’s president were “members” of GCU. Thus, because the amended complaint failed to allege facts sufficient to find GCU a “corporation” under the FTC Act, the court held that the FTC Act did not allow the agency to pursue claims against GCU.

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