121 F.4th 717
9th Cir.2024Background
- Grand Canyon University (GCU), a private university in Arizona, sought recognition from the Department of Education as a nonprofit institution under the Higher Education Act (HEA).
- GCU restructured, establishing Gazelle University—a nonprofit entity—to acquire GCU from its for-profit parent, Grand Canyon Education (GCE), including service and credit agreements between Gazelle and GCE.
- The IRS granted Gazelle 501(c)(3) status, Arizona regulators approved the transition, and accreditation authorities endorsed Gazelle operating GCU as a nonprofit.
- The Department of Education denied GCU’s nonprofit status request, arguing the structure still substantially benefited GCE and failed the operational test.
- GCU challenged the denial as arbitrary and capricious under the Administrative Procedure Act (APA); the district court granted summary judgment for the Department, and GCU appealed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Correct statutory standard under HEA | HEA nonprofit test is narrower than IRS 501(c)(3) operational test | The Department’s regulations properly incorporate IRS standards | Department applied the wrong legal standard; HEA does not require "operated exclusively" for educational purposes |
| Application of no-inurement test | Only prohibits net earnings inuring to private benefit, not all private benefits | Structure confers substantial benefit on GCE, violating nonprofit requirements | Department failed to apply the correct no-inurement test under HEA |
| Denial based on operational control | GCU’s new structure made Gazelle the operator, limiting GCE’s roles | GCE retains too much control and benefit under service and loan agreements | Department did not properly evaluate actual operation under correct legal standard |
| Agency action as arbitrary and capricious | Department’s decisions are unsupported and based on incorrect legal standards | Agency properly applied law and considered relevant facts | Denial set aside; matter remanded for reconsideration under proper standards |
Key Cases Cited
- Baltimore Gas & Elec. Co. v. Natural Res. Def. Council, Inc., 462 U.S. 87 (standard for reviewing agency action as arbitrary and capricious)
- Dickinson v. Zurko, 527 U.S. 150 (substantial evidence standard for agency factfinding)
- National Fuel Gas Supply Corp. v. FERC, 468 F.3d 831 (multiple agency rationales—deficient rationale requires vacatur)