## F I L E D United States Court of Appeals Tenth Circuit 

### JUN 1 1998 

### PATRICK FISHER Clerk PUBLISH UNITED STATES COURT OF APPEALS

TENTH CIRCUIT

MISSION GROUP KANSAS, INC., Plaintiff - Appellee, v. RICHARD RILEY, Secretary of the United States Department of Education, in his official capacity, Defendant - Appellant. No. 96-3025

Appeal from the United States District Court

for the District of Kansas (D.C. No. 95-CV-2382)

Frank A. Rosenfeld (William Kanter with him on the brief), United States Department of Justice, Washington, D.C. for the Def endant - Appellant. Ronald L. Holt (Daniel R. Young with him on the bri ef), Bryan Cave, LLP, Kansas City, MO for the Plaintiff - Appellee.

Before LUCERO , MCWILLIAMS and MURPHY , Circuit Judges.

LUCERO , Circuit Judge.- 2 -

In 1992, Congress amended the Higher Education Act of 1965 (“HEA”),

see 20 U.S.C. §§ 1001-1146a, to improve the financial accountability and integrity of postsecondary educational institutions in receipt of federally-funded student financial aid provided under Title IV of th at Act. See H.R. Rep. No. 102- 447, at 10 (1992), reprinted in 1992 U.S.C.C.A.N. 334, 343. As a result of those amendments, for-profit postsecondary institutions a re statutorily barred from participating in Title IV programs unless they deri ve at least 15% of their gross revenues from sources other than Title IV. See 20 U.S.C. § 1088(b)(6). Nonprofit schools, however, are not statutorily requir ed to comply with this so-called “85/15 rule.” Mission Group Kansas, Inc. (“Mission”), the appelle e before us today, was established in 1994 as a non-profit educational ins titution. When it took over a number of for-profit business schools to convert th em to non-profit status, the Secretary of Education refused to exempt Mission’s schools from the 85/15 rule. Instead, he has conditioned their receipt of Title IV funds on their complying with the 85/15 rule for a provisional period—despite Mis sion’s non-profit status. See Appellant’s App. at 84. The questions before us ar e what level of deference is due an agency’s interpretation of its own regulatio ns and is the Secretary’s decision to impose the 85/15 rule entitled to such deference.- 3 - I
A Prior to Mission’s formation, its founders owned a for-profit corporation, Professional Training Institute, Inc. (“PTI”), whic h in turn owned three business schools, each named Wright Business School. The sc hools were located in Oklahoma City; Lenexa, Kansas; and Kansas City, Mis souri. After Congress passed the 1992 amendments, PTI’s directors realize d that the Wright Schools would shortly become subject to the 85/15 rule. Fo r the sole purpose of avoiding the application of that rule, see Appellant’s App. at 122, they formed a non-profit, Mission Group Kansas, Inc., and transferred ownersh ip of the schools from PTI to Mission. After Mission acquired ownership of the Lenexa scho ol in March 1995, it applied to the Department of Education, seeking to participate in Title IV student financial aid programs. The Department prepared a new program participation agreement for the Lenexa school, see 20 U.S.C. § 1094(a) (describing nature and requirements of program participation agreements), mandating compliance with the 85/15 rule, and which Mission was required to a ccept in order to obtain the Secretary’s provisional certification for Title IV participation. See 34 C.F.R. § 668.13(c)(4)(ii). Mission signed under protest, re serving the right to challenge the incorporation of the 85/15 rule into the progra m participation agreement and- 4 -

provisional certification process. Shortly thereaf ter, the Lenexa school took over the Kansas City and Oklahoma City schools, and Miss ion filed the present action claiming that the Secretary’s imposition of the 85/ 15 rule violates the Administrative Procedure Act, the HEA, and Mission’ s constitutional right to due
process. B When a school changes ownership, “the Secretary may provisionally certify [the] institution’s eligibility to participate in p rograms under [Title IV] . . . for not more than 3 complete award years . . . .” 20 U.S.C . § 1099c(h)(1)(B)(ii). Mission concedes the shift from profit to non-profi t status is a change in ownership, triggering the need for provisional cert ification. See 34 C.F.R. § 600.31(d)(7). According to the applicable regulati ons: “Provisional certification” means that the Secretar y certifies that an institution has demonstrated to the Secretary’s sat isfaction that the institution . . . [i]s able to meet the institution ’s responsibilities under its program participation agreement, including comp liance with any additional conditions specified in the institution’s program participation agreement that the Secretary requires the institution to meet in order for the institution to participate un der provisional certification. 34 C.F.R. § 668.13(c)(4)(ii) (emphasis added). All institutions receiving Title IV funds are requi red to enter into “program participation agreement[s]” that state the terms of their “initial and continued eligibility . . . to participate in a [Title IV] pr ogram.” 20 U.S.C. § 1094(a).- 5 -

Again, Mission concedes that it was required to ent er into a new program participation agreement as a result of the shift to non-profit status. See 34 C.F.R. § 668.14(h)(1). Paralleling the requirements for p rovisional certification, see 34 C.F.R. § 668.13(c)(4)(ii), a program participation agreement conditions the initial and continued participation of an eligible institution in any Title IV, HEA program upon compl iance with the provisions of this part, the individual program reg ulations, and any additional conditions specified in the program participation agreement that the Secretary requires the instituti on to meet. 34 C.F.R. § 668.14(a)(1) (emphasis added). It is o n the basis of the “any additional condition” language contained in 34 C.F. R. § 668.13(c)(4)(ii) and 34 C.F.R. § 668.14(a)(1) that the Secretary would requ ire Mission’s compliance with the 85/15 rule. And it is this reliance that Missi on insists is beyond the Secretary’s statutory authority.
C After a bench trial, the district court agreed with Mission that the Secretary’s action contravened the plain language o f the HEA, and granted the requested declaratory and injunctive relief against imposition of the 85/15 rule. The government appeals, arguing that the Secretary has several sources of statutory authority sufficient to justify impositio n of the 85/15 rule against a nonprofit like Mission. We exercise jurisdiction purs uant to 28 U.S.C. § 1291 and

reverse.- 6 - II The district court reviewed the Secretary’s action under the framework enunciated in Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc. , 467 U.S. 837 (1984). Under that framework, “[f]irst, always, is the que stion whether Congress has directly spoken to the precise question at issue. If the intent of Congress is clear, that is the end of the matter; for the court, as well as the agency, must give effect to the unambiguously e xpressed intent of Congress.” Chevron , 467 U.S. at 842-43. On the basis of this first Chevron step, the district court invalidated the Secretary’s action as beyond his authorization under the
HEA. See Mission Group Kansas, Inc. v. Riley , 909 F. Supp. 835, 842 (D. Kan. 1995). There are two errors in this analysis. A. Plain Meaning The district court ruled that imposition of the 85/ 15 rule on Mission’s nonprofit schools was contrary to the “express languag e of the statute, [under which] the 85/15 Rule only applies to proprietary institutions.” Id. at 842 (citing 20 U.S.C. §§ 1088(b) & 1141(a)(4)). We disagree. Eve n were we to accept the district court’s contention that 20 U.S.C. § 1088 “ defines the substantive eligibility requirements for both full and provisio nal certification” of non-profit educational institutions such as Mission, id. at 843, we still could not agree that- 7 -

Mission’s compliance with those minimum eligibility requirements mandates the Secretary’s certification. Eligibility is not enti tlement. The plain language of 20 U.S.C. §§ 1088(b) and 1088 (c) distinguishes between “proprietary institution[s] of higher educa tion” and “postsecondary vocational institution[s].” The two terms are mutu ally exclusive: a “proprietary institution of higher education” cannot be “a publi c or other non-profit institution,” see 20 U.S.C. § 1088(b)(3) (incorporating by reference § 1141(a)(4)), whereas a “postsecondary vocational institution” must be, see 20 U.S.C. § 1088(c)(2) (incorporating by reference § 1141(a)(4) ). Beyond that, in order to be a proprietary institution of higher education, a sc hool must satisfy a number of conditions, the last of which is compliance with the 85/15 rule. See 20 U.S.C. § 1088(b)(6). In contrast, there is no requirement t hat a postsecondary vocational institution comply with that rule. The listed cond itions simply do not mention it.
See § 1088(c); see also 20 U.S.C. §§ 1141(a)(1)-(2), 1141(a)(4)-(5) (stati ng requirements incorporated by reference at § 1088(c) (2)). Consequently, we are unable to discern the plain me aning identified by the district court. Section 1088 makes only two expre ss statements about the 85/15 rule: first, a school not in compliance with that r ule cannot be a proprietary institution of higher education; second, the determ ination of whether a school is eligible to apply as a postsecondary vocational ins titution to participate in Title1 We note that the Secretary did find that Mission met the definition of an eligible

postsecondary vocational institution under § 1088(c). SeeAppellee’s Br., tab. B, Plaintiff’s Ex. 10, at 1. - 8 - IV programs shall not be based on its compliance with the 85/15 rule. 1 The statute is silent on whether a postsecondary vocati onal institution may be subjected to the rule as an added condition of its participation. Consequently, imposing such a rule against a non-profit does not contravene the general presumption “that Congress acts intentionally and p urposely when it includes particular language in one section of a statute but omits it in another.” BFP v. Resolution Trust Corp. , 511 U.S. 531, 537 (1994) (quoting Chicago v. Environmental Defense Fund , 511 U.S. 328, 338 (1994)) (cited in Appellee’s Br

. at 13). Furthermore, we see no reason stated in th e statute why the inclusion of postsecondary vocational institutions within the st atutory definition of the term, “institution of higher education,” see § 1088(a)(1)(B), should make vocational institutions entitled, without more, to participate in Title IV programs. Standing alone, § 1088 does not plainly indicate that the Se cretary is without authority to impose the 85/15 rule against a non-profit such as Mission in addition to the minimum eligibility requirements. The plain language of the statute’s provisional cer tification and program participation provisions does not mandate a differe nt result. Contrary to the district court’s view, 20 U.S.C. § 1099c(i)(1) does not plainly contravene the- 9 -

Secretary’s action in this case. That provision st ates only that an eligible institution undergoing a change in ownership “shall not qualify to participate” in Title IV programs “unless it establishes that it me ets the requirements of section 1088 of this title . . . after such change in contr ol.” 20 U.S.C. § 1099c(i)(1). This plainly states only a necessary—rather than a suffi cient—condition of participation. The same is true of 20 U.S.C. § 1094(a), which pres cribes the contents of program participation agreements. Though an instit ution of higher education must comply with these statutorily-stated prescript ions in order to establish its “initial and continuing eligibility” to participate in Title IV programs, see 20 U.S.C. § 1094(a), that does not mean that complianc e confers entitlement to participate in such programs, nor that program participation agreements can only include the conditions listed in 20 U.S.C. §§ 1094( a)(1) through 1094(a)(22). Simply put, neither § 1099c nor § 1094(a) expressly prohibits the Secretary from conditioning Mission’s Title IV participation on co mpliance with the 85/15 rule. The District of Columbia Circuit has recently come to a closely analogous conclusion in Career College Ass’n v. Riley , 74 F.3d 1265, 1272-74 (D.C. Cir. 1996). In that case, the court was presented with a challenge to the regulatory “Cohort Default Rate Rule,” which states that an in stitution of higher education will be deemed “administratively incapable” of adeq uately administering Title IV- 10 -

programs if, for any of the three most recent fiscal years, more than 2 5% of the students in any given award year have defaulted on federally insured loans. See id. at 1273. The rule was promulgated pursuant to 20 U.S.C. § 1094(c), which, among other things, authorizes the Secretary to “‘e stablish[] reasonable standards of financial responsibility and appropriate institu tional capability for the administration by an eligible institution of [Title IV programs].’” See id. at 1273 (quoting 20 U.S.C. § 1094(c)(1)(B)). The Career College plaintiffs argued that the rule conflicted with the statutory eligibility requirements for participation in Title IV programs, which state in part that an inst itution of higher education may not participate in such programs if, for each of the three most recent fiscal years, more than 25% of the students in any given award ye ar have defaulted on federally insured loans. See id. at 1272-73 (citing 20 U.S.C. § 1085(a)(2)). The court rejected this claim principally on the ground s that the “statutory structure indicates that ‘eligibility’ is not synonymous with ‘administrative capability.’” Id. at 1274. Career College therefore stands squarely for the proposition that the statute’s threshold eligibility requirements do not exhaustively list the criteria that an institution must satisfy in order to participate in Title IV programs.
B. Standard of Review The district court’s second error was to rely only on Chevron in its evaluation of the Secretary’s action. To justify i ts action against Mission, the2 The Secretary’s reliance on 34 C.F.R. § 668.13(c)(4)(ii), the provisional

certification regulation, is more explicit than his reliance on 34 C.F.R. § 668.14(a)(1), the program participation agreement regulation. But we have little doubt that the Secretary’s express invocation of § 668.13(c)(4)(ii) effectively referenced § 668.14(a)(1). Where the former allows the Secretary to limit provisional certification for participation in Title IV programs to cases in which the institution has accepted “any additional conditions specified in the institution’s program participation agreement,” § 668.13(c)(4)(ii), the Secretary claims precisely the same authority in the latter to condition participation in Title IV programs on an institution’s accepting “any additional conditions specified in the program participation agreement,” § 668.14(a)(1). Mission itself apparently has no doubts on the matter, and refers to the two regulatory provisions as “counterpart[s].” See Appellee’s Br. at 20. - 11 - government has consistently placed reliance on both 34 C.F.R. §§ 668.13(c)(4)(ii) and 668.14(a)(1). 2 Thus, in imposing the 85/15 rule against Mission, the Secretary appears to have done no more than follow his own interpretation of the Department’s regulations, an interpretation clearly stated in the Federal Register.
See 59 Fed. Reg. 22,333-34 (1994). Where an agency pu rports to act pursuant to an interpretation of its own regulations, the court should generally undertake a two-step review of the government’s action to deter mine whether it was statutorily authorized. First, “provided an agency’s interpretation of its own regulations does not violate the Constitution or a federal statute, it m ust be given ‘controlling weight unless it is plainly erroneous or inconsistent with the regulation.’” Stinson v. United States , 508 U.S. 36, 45 (1993) (quoting Bowles v. Seminole Rock & Sand3 Some authorities suggest that—at least as used in Stinson—“plainly erroneous”

means “flatly inconsistent with a legislative rule, a statute, or the Constitution.” See Kenneth Culp Davis & Richard J. Pierce, Jr., I Administrative Law Treatise § 6.10, at 284 (3d ed. 1994) (“Davis & Pierce”). On that interpretation, Stinson“eliminate[s] all judicial power to reject an agency’s interpretation of its own rules through application of any version of the arbitrary and capricious test.” Id. at 284-85. But the weight of authority indicates that an agency’s interpretation of its own regulations is subject to challenge under 5 U.S.C. § 706(2)(A) for being arbitrary, capricious, or an abuse of discretion. See Allentown Mack Sales & Serv., Inc. v. NLRB , 118 S. Ct. 818, 828 (1998) (holding that § 706(2)(A) governs substantive review of agency’s interpretation of its own regulations); Martin v. Occupational Safety & Health Review Comm’n , 499 U.S. 144, 150-51 (1991) (reviewing agency’s interpretation of regulations for “reasonableness”); Edwards v. Califano , 619 F.2d 865, 868 (10th Cir. 1980) (holding that acknowledged deference to agency’s interpretation of own regulation does not preclude review under § 706(2)(A)); see alsoRobert A. Anthony, The Supreme Court and the APA , 10 Admin. L.J. Am. U. 1, 5 (Spring 1996) (noting that unless “plainly erroneous” as used in Seminole Rock “embraces reasonableness component . . . it is hard to conceive a meaning for that phrase that is not already comprehended in the ‘inconsistent’ test”). “‘Review under [§ 706(2)(A)] provokes inquiry [into] whether the administrative decisions were based on a consideration of all the relevant factors and whether there was a clear error of judgment.’” Edwards , 619 F.2d at 868 (quoting Sabin v. Butz , 515 F.2d 1061, 1066-67 (10th Cir. 1975) (citing Citizens to Preserve Overton Park v. Volpe , 401 U.S. 402, 416 (1971))). “The court’s function is exhausted where a rational basis is found for the agency action taken.” Id. There are some exceptions to the rule of Seminole Rockdeference. For example, when an agency’s interpretation of its own regulation is based not on its expertise in a particular field but on general common law principles, it is not entitled to great deference. SeeJicarilla Apache Tribe v. Federal Energy Regulatory Comm’n , 578 F.2d 289, 292-93 (10th Cir. 1978). - 12 - Co. , 325 U.S. 410, 414 (1945)). 3 But Seminole Rock review only establishes that the agency’s administrative action is a permissible construction of its own regulatory authority; it does not establish that th at regulation, as interpreted, is statutorily authorized. See Seminole Rock , 325 U.S. at 418-19 (noting that in holding administrative interpretation of regulation controlling, “[w]e do not, of4 This court’s decision in Headrick v. Rockwell Int’l Corp. , 24 F.3d 1272 (10th

Cir. 1994), is not to the contrary. That case stands only for the proposition that we owe no Chevrondeference to a statutoryinterpretation not reached through proper rulemaking procedures. See24 F.3d at 1282. Following the district court, seeMission , 909 F. Supp. at 844, Mission argues that the comment to the final regulations contained in the Federal Register is the onlybasis for the Secretary’s imposition of the 85/15 rule. As a purely interpretive rule, argues Mission, that comment is nothing to which we owe deference under Chevron . SeeAppellee’s Br. at 14-15 (citing Headrick , 24 F.3d at 1282). But Mission apparently does not challenge the Secretary’s claim to have acted pursuant to his own regulations, seeAppellee’s Br. at 23 (recognizing that “the Secretary rested his claim to authority . . on his own regulations”), so this objection misses the point. If the Secretary’s imposition of the 85/15 rule represents no more than a proper interpretation of his own regulations , then enforcing Mission’s compliance with the rule does not depend on any act of statutory interpretation beyond that advanced by the operative regulations, and cannot therefore fall afoul of Headrick ’s rule. - 13 - course, reach any question here to the constitution al or statutory validity of the regulation as we have construed it” (emphasis added )). Thus, if the agency’s interpretation of its regulat ions survives Seminole Rockreview, we then analyze the regulations as interpr eted under the framework established by Chevron . See United States v. LaBonte , 70 F.3d 1396, 1403-04 (1st Cir. 1995), overruled on other grounds by United States v. LaBonte , 117 S. Ct. 1673 (1997); see also Martin v. Occupational Safety and Health Review
Comm’n , 499 U.S. 144, 151 (1991) (“Because applying an ag ency’s regulation to complex or changing circumstances calls upon the ag ency’s unique expertise and policymaking prerogatives, we presume that the powe r authoritatively to interpret its own regulations is a component of the agency’s delegated lawmaking powers .” (emphasis added)). 45 These procedures include, most obviously, legislative rulemaking by agencies

granted policymaking authority by Congress. SeeI Davis & Pierce § 3.5, at 119. Adjudicative decisions may also serve this role, at least when made by bodies with rulemaking power. Seeid. at 120-21; see alsoMartin , 499 U.S. at 154 (“Within traditional agencies—that is, agencies possessing a unitary structure—adjudication operates as an appropriate mechanism not only for factfinding, but also for the exercise of delegated lawmaking powers, including lawmaking by interpretation.”); Southern Ute Indian Tribe v. Amoco Prod. Co. , 119 F.3d 816, 832 (10th Cir. 1997) (holding that Chevrondeference only applies to rules promulgated in full conformity with APA procedures and “‘adjudications that create binding precedents’” (quoting Amrep Corp. v. FTC , 768 F.2d 1171, 1178 (10th Cir. 1985))). - 14 - The above analysis notwithstanding, reviewing court s should not follow the Seminole Rock -Chevron two-step analysis when the disputed administrative action does not represent an actual interpretation of the agency’s own regulations. If the Secretary’s decision to impose the 85/15 rul e against institutions of higher education converting to non-profit status is not an interpretation of the regulations at issue here, deferential review under the Seminol e Rock -Chevron analysis will be inappropriate because, in such a case, the rule will have been adopted outside of the procedures Congress has authorized the Secre tary to use when giving binding meaning to the statute. See I Davis & Pierce § 3.5, at 119-23. 5 This distinction is easier to conceptualize than ap ply. Consider whether, by imposing the 85/15 rule against schools converting to non-profit status, the Secretary has merely interpreted the “any additiona l condition” language of 34 C.F.R. §§ 668.13(c)(4)(ii) and 668.14(a)(1). True, the rule is unquestionably an “additional condition.” But mere linguistic consis tency between the rule and the6 The regulations might therefore be open to challenge as unconstitutionally

vague. See, e.g. , Brennan v. Occupational Safety & Health Review Comm’n , 505 F.2d 869, 872 (10th Cir. 1974). Although Mission’s complaint broadly raised due process concerns, we see little argument to that effect in its trial brief. Because the district court’s opinion does not suggest that it either considered the issue abandoned below or not raised at all, we leave it to the discretion of the district court whether to consider vagueness objections to the regulations at issue here.

7 Although it is true that the regulations at issue here might otherwise be exempt from notice and comment requirements under the APA’s statutory exemption of matters “relating to . . . benefits,” see5 U.S.C. § 553(a)(2), the Department of Education has waived any such exemption, see36 Fed. Reg. 2532 (1971). - 15 - regulations cannot establish that the former is wit hin the interpretive scope of the latter. Because the plain language of both regulat ions is entirely unrestrictive, the Secretary could insert any condition into a program participation agreement, and claim authorization for that action under the plain terms of §§ 668.13(c)(4)(ii) or 668.14(a)(1). 6 Chevron deference to that condition would be inappropriate because, unless interested parties could reasonably anticipate the application of the regulation advanced by the agency such that the y had a meaningful opportunity for notice and comment on the condition s to be selected, the imposition of an additional condition would not act ually follow from an exercise of the agency’s delegated policymaking authority. 7 Cf. Southern Ute Indian Tribe v. Amoco Prod. Co. , 119 F.3d 816, 833 (10th Cir. 1997) (holding that Chevron deference does not apply to administrative actions “not promulgated with procedural protections attendant to” legislative ru les and adjudications); Atchison, Topeka & Santa Fe Ry. Co. v. Pena , 44 F.3d 437, 441-42 (7th Cir. 1994) (en- 16 -

banc) (administrative rules are only entitled to Chevron deference when agency follows APA’s rulemaking procedures, including noti ce and comment provision, 5 U.S.C. § 553). Stated another way, the dispositive question is whe ther imposition of the 85/15 rule is a new rule, in which case the agency may not give it bin ding effect in the absence of compliance with APA notice and co mment procedures, or an interpretation of an existing rule, in which case it is binding p recisely because it has, in effect, already been subject to the necessa ry procedural protections. Compare Director, OWCP v. Greenwich Collieries , 512 U.S. 267, 271 (1994) (refusing to uphold agency’s position when claimed regulatory authorization too vague to encompass even broad outlines of that position) with Thomas Jefferson Univ. v. Shalala , 512 U.S. 504, 517 (1994) (upholding agency’s inte rpretation of Medicare regulations on reimbursement of costs under Seminole where regulatory “language . . . speaks not in vague generalities bu t in precise terms about the conditions under which reimbursement is, and is not , available”). That determination must be made by examining the procedu ral passage of the operative regulations to establish whether potentially affect ed parties were given an opportunity to comment on the “interpretation” now advanced. Cf. Robert A. Anthony, The Supreme Court and the APA , 10 Admin. L.J. Am. U. 1, 8 (Spring 1996) (arguing that for an administrative action to be interpretive of a regulation- 17 -

there must be a “logical connection between the sub stantive content of the established regulation . . . and the substantive co ntent of the document that purports to interpret it, such that the latter flow s fairly from and is justified by the former”). Without such a safeguard, agencies could simply rep lace statutory ambiguity with regulatory ambiguity, thus creating Chevron deference for any administrative action that might be squeezed within the unrestricted terms of a promulgated regulation. Such a practice would make a mockery of Chevron , the APA, and judicial review because “the very purpose behind the delegation of lawmaking power to administrative agencies . . . is to ‘resol[ve] . . . ambiguity in a statutory text.’” Thomas Jefferson Univ. , 512 U.S. at 525 (Thomas, J., dissenting) (quoting Pauley v. BethEnergy Mines, Inc. , 501 U.S. 680, 696 (1991)). “‘An agency whose powers are not limited either by meaningful statutory standards or . . . legislative rules pose s a serious potential threat to liberty and to democracy.’” Id. (quoting II Davis & Pierce § 11.5, at 204). To resolve the case before us, we need not delineat e formal criteria for defining a regulation’s interpretive scope. Certai nly, to be interpretive of the operative regulations, the condition selected by th e Secretary need not be fully developed or examined in the notice of proposed rul emaking or in subsequent regulatory proceedings. Yet, regardless of the pre cise distinction employed, the8 This point has been made in a slightly different context by Judge Posner: “For a

rule to be interpretive it is not enough, I believe, that the rule is consistent with the purpose of the statute that it is interpreting; for that is equally true of any valid legislative rule. A valid interpretive rule must in addition be derivable from the statute that it implements by a process fairly to be described as interpretive; that is, there must be a path that runs from the statute to the rule, rather than merely consistency between statute and rule.” Richard A. Posner, The Rise and Fall of Administrative Law , 72 Chi.-Kent L. Rev. 953, 962 (1997). - 18 - administrative action taken by the Secretary here c annot be regarded as within the legitimate interpretive scope of the regulations up on which he purports to have acted. The plain language of the regulations is en tirely unrestricted, and the operative notice of proposed rulemaking and public statements of basis and purpose provide scant, if any, indication of how th e Secretary proposes to utilize that apparently unlimited regulatory discretion. M ere consistency between the rule and the regulation does not establish that the former is derived from the latter by a process fairly described as interpretive. 8 We cannot therefore view the Secretary’s actions as a proper interpretation of h is own regulations because it is no interpretation at all.

III Although we conclude the Secretary is entitled to n o deference under the Seminole Rock -Chevron standard, the agency’s action might represent an9 The appropriate degree of Skidmoredeference will also be affected by whether

the record “actually addresse[s] in any detail the statutory authorization” for the agency’s action. SEC v. Sloan , 436 U.S. 103, 117 (1978).

10 Interpretive rules of “general applicability” are subject to a notice requirement by the APA. See 5 U.S.C. § 552(a)(1)(D).

11 Mission argues that the only source of statutory authority on which the Secretary may rely is 20 U.S.C. § 1099c(h), which governs provisional certification of institutional (continued...) - 19 - interpretation of its governing statute adopted out side of administrative lawmaking channels. As a statutory “interpretive r ule,” it would then properly be reviewed under the less deferential standards enunciated in Skidmore v. Swift &
Co. , 323 U.S. 134 (1944), the stringency of judicial r eview varying with “the thoroughness evident in its consideration, the vali dity of its reasoning, its consistency with earlier and later pronouncements, and all those factors which give it power to persuade, if lacking power to control.” Id. at 140. 9 When Skidmore applies, Seminole Rock is necessarily inapplicable because the agency’s action no longer represents an interpretation of it s regulatory authority. Likewise, Chevron does not apply because, by the same token, no duly promulgated regulation actually informs the administrative acti on taken. And the APA’s notice and comment procedures do not apply because interpr etative rules are exempt from such requirements. See 5 U.S.C. § 553(b)(A). 10 Although not focused on Skidmore review, the Secretary points us to 20 U.S.C. §§ 1099c(a) and 1094(c)(1)(B) as authority for the 85/15 rule. 11 We11 (...continued)

eligibility, both because that is the provision relied on by the Secretary in advancing the rule’s application to non-profits such as Mission, seeAppellee’s Br. at 18, and because the government failed to cite §§ 1099c(a) and 1094(c)(1)(B) to the district court, see id. at 22-23; see alsoTele-Communications, Inc. v. Commissioner , 12 F.3d 1005, 1007 (10th Cir. 1993) (“[G]eneral rule is that an appellate court will not consider an issue raised for the first time on appeal.”). Neither claim has merit. As we have noted, the Secretary has consistently defended his application of the rule as being pursuant to his regulatory authority under 34 C.F.R. §§ 668.13(c)(4)(ii) and 668.14(a)(1). See supranote 2 and accompanying text. In addition, the district court addressed itself to both regulatory provisions without objection from Mission. SeeMission , 909 F. Supp. at 839-40. Consequently, the relevant question is which sources of statutory authority were claimed by the Secretary for the promulgation of these two controverted regulations. The record reveals that 34 C.F.R. § 668.13(c)(4)(ii) was promulgated pursuant to 20 U.S.C. § 1099c, and 34 C.F.R. § 668.14(a)(1) pursuant to 20 U.S.C. §§ 1085, 1088, 1091, 1092, 1094, 1099a-3, 1099c, and 1141. Moreover, the government’s trial brief, though not a model of legal clarity, argues that the 1992 amendments to the HEA provide the Secretary with broad legal authority to oversee and regulate the terms and conditions under which schools may be approved to participate in Title IV programs. SeeAppellee’s Supp. App. at 226 (“The 1992 HEA Amendments . . . contained many program integrity provisions that required new regulations to interpret and implement them.”). The government stressed to the trial court that the HEA was amended in order to “increase[] the monitoring by the Secretary and accountability of institutions participating in the student financial aid programs. The[] regulations implement many statutory requirements pertaining to the financial responsibility and administrative standards for schools that participate or seek to participate in the Title IV, HEA programs . . . .” Appellee’s Supp. App. at 230-31 (emphasis added). Finally, the Secretary cited to the regulations addressing certification and provisional participation agreements, seeid. at 231 (citing 34 C.F.R. §§ 668.13 & 668.14; 59 Fed. Reg. 9534-39), and specifically referenced 34 C.F.R. § 668.13(c)(4)(ii), seeid. at 232. As a result, the government’s arguments in reliance on 20 U.S.C. §§ 1099c(a) and 1094(c)(1)(B) are best viewed as a more detailed exposition of an issue already placed before the district court. They do no more than explain with particularity the general claim raised below that the Secretary’s actions are permissible because they proceed from a statutory “mandate . . . to improve the accountability and integrity of schools participating in the HEA programs through increased oversight and control.” Appellee’s Supp. App. at 226. As such, they are not “new.” Cf. Majors v. Housing Authority , 652 (continued...) - 20 -11 (...continued)

F.2d 454, 457 n.2 (5th Cir. 1981) (regulation cited by plaintiff on appeal is not “new issue” when it directly supports argument raised below that statute imposed specific obligation on defendant); see alsoFord v. Bernard Fineson Dev. Ctr. , 81 F.3d 304, 307 (2d Cir. 1996) (allowing appellate submission of “a new legal argument that concerns an issue already considered at some length by the district court”). We also see little merit to appellee’s claim that, because the Secretary’s grant of provisional certification also certified Mission’s administrative capability and financial responsibility, imposition of the 85/15 rule cannot proceed from the statutory requirements of 20 U.S.C. §§ 1099c(a) or 1094(c)(1)(B). SeeAppellee’s Br., tab B, Plaintiff’s Ex. 9, at 1. The Secretary stated only that the Wright Business School “meets the minimum requirements . . . of administrative capability, and financial responsibility.” Id. (emphasis added). Furthermore, the same communication to Mission explicitly conditioned provisional certification on acceptance of a provisional participation agreement that mandated compliance with the 85/15 rule. See id. at 2 (incorporating conditions in provisional participation agreement by reference); Appellant’s App. at 84 (conditioning certification in provisional participation agreement on compliance with 85/15 rule). We therefore agree with the Secretary that this communication need not be read to mean that Mission would have met its administrative capability and financial responsibility requirements even without compliance with the 85/15 rule. - 21 - cannot agree with the government’s assertion that t he 85/15 rule is merely an interpretation of 20 U.S.C. § 1094(c)(1)(B). Prope rly read, § 1094(c)(1)(B) only authorizes the Secretary to adopt regulations setti ng financial responsibility and administrative capability standards . In such a case, we must agree with the Seventh Circuit that [w]hen Congress authorizes an agency to create stan dards, it is delegating legislative authority, rather than itsel f setting forth a standard which the agency might then particularize through interpretation. Put differently, when a statute do es not impose a duty on the persons subject to it but instead authorizes (or requires—it makes no difference) an agency to impose a duty, th e formulation of that duty becomes a legislative task entrusted to t he agency. Provided that a rule promulgated pursuant to such a delegation is intended to bind, and not merely to be a tentative statement of the- 22 -

agency's view, which would make it just a policy st atement, and not a rule at all, the rule would be the clearest possibl e example of a legislative rule, as to which the notice and commen t procedure not followed here is mandatory, as distinct from an int erpretive rule; for there would be nothing to interpret. Hoctor v. United States Dep’t of Agric. , 82 F.3d 165, 169-70 (7th Cir. 1996) (citing American Mining Congress v. Mine Safety & Health Admin. , 995 F.2d 1106, 1109 (D.C. Cir. 1993); Robert A. Anthony, “Interpretive” Rules, “Legislative” Rules and “Spurious” Rules: Lifting the Smog , 8 Admin. L.J. Am. U. 1 (1994)). Thus, the imposition of the 85/15 ru le cannot be justified as an interpretation of § 1094(c)(1)(B). See id. at 170-71 (“When agencies base rules on arbitrary choices they are legislating, and so t hese rules are legislative or substantive and require notice and comment rulemaki ng, a procedure that is analogous to the procedure employed by legislatures in making statutes.”). And, in issuing the 85/15 rule, the Secretary made no at tempt to comply with the APA’s required procedures for legislative rulemakin g. Whether the 85/15 rule may be upheld as a statutory “interpretive rule” under 20 U.S.C. § 1099c(a) is unclear on this recor d. Under § 1099c(a), the Secretary is charged with “determin[ing] the admini strative capability and financial responsibility of an institution of highe r education in accordance with the requirements of this section.” Unlike the spec ific directive to develop “standards” in § 1094(c), the Secretary is charged with “determin[ing] whether an12 For instance, we note that the appellee submitted to the trial court two

depositions from the Acting Director of the Department’s Institutional Participation Division. SeeAppellee’s Supp. App. at 151 n.3. The briefs to the trial court suggest that some of this material may well bear on the “thoroughness” of the agency’s “consideration” in issuing the 85/15 rule, which matter is directly relevant to review under Skidmore . See, e.g. , id. at 153, 158-61; Skidmore , 323 U.S. at 140. - 23 - institution has the financial responsibility” to pa rticipate in Title IV financial aid
programs, see 20 U.S.C. §§ 1070 to 1099c-1, and federal work stu dy programs,

see 42 U.S.C. §§ 2751-2756b. Because the Secretary is charged merely with determining the financial responsibility of covered institutions, the government may have a legitimate argument that the 85/15 rule is a valid interpretation of § 1099c(c), even when evaluated under the less deferential Skidmore standard. The record before us, however, appears insufficient to evaluate properly whether the 85/15 rule survives Skidmore review as a valid statutory “interpretative rule.” 12
We therefore remand to the district court for furth er proceedings.
REVERSED and REMANDED for further proceedings consonant with the views herein expressed.