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Wards Corner Beauty Academy v. National Accrediting Commission of Career Arts & Sciences

United States District Court, E.D. Virginia, Norfolk Division

February 12, 2018

WARDS CORNER BEAUTY ACADEMY, Plaintiff,
v.
NATIONAL ACCREDITING COMMISSION OF CAREER ARTS & SCIENCES, Defendant.

          OPINION AND ORDER

          MARK S. DAVIS UNITED STATES DISTRICT JUDGE

         This Opinion and Order follows a two day evidentiary hearing/bench trial associated with Defendant's ("NACCAS") withdrawal of Plaintiff's ("Wards Corner") accreditation as a barbering and cosmetology academy. With the benefit of the trial transcript, the parties have submitted proposed findings of fact and conclusions of law. Therefore, the matter is ripe for review.

         I. Findings of Fact

         In November of 2014, Wards Corner submitted its 2013 Annual Report to NACCAS, self-reporting that its graduation rate was below the required threshold of 50%. In early December, 2014, Defendant informed Plaintiff that it was being placed on "low outcomes monitoring" and that Plaintiff had twelve months to bring its graduation rate into compliance. In the fall of 2015, within the twelve-month window, Plaintiff submitted its 2014 annual report to NACCAS. Upon review of such submission, NACCAS determined that Plaintiff failed to demonstrate a compliant 2014 graduate rate. NACCAS nevertheless allowed Plaintiff one opportunity to submit supplemental information in an effort to demonstrate an accurate and compliant 2014 graduation rate, and after requesting and receiving an extension, Plaintiff submitted a supplement in January of 2016. In February of 2016, NACCAS held a week-long "Commissioner's Meeting, " and at such meeting, Defendant determined that Plaintiff's accreditation should be withdrawn. The withdrawal decision was later affirmed through the NACCAS appeals process. While the instant lawsuit initially challenged several aspects of the withdrawal decision, the sole issue addressed at the evidentiary hearing was whether Plaintiff was denied its common law right to "fair procedure" in the accreditation review process as a result of the fact that Michael Bouman ("Mr. Bouman"), a NACCAS Commissioner that participated in such process, was an executive and part owner of a competitor cosmetology academy.

         NACCAS' Commission is made up of thirteen Commissioners, including seven Commissioners that are owners or administrators of schools in fields of training within NACCAS' scope (which includes cosmetology and barbering), as well as two Commissioners representing each of the following areas: "Professional Services, " "Academics, " and "Public Interest." During the relevant timeframe, Mr. Bouman was the "Chair of the Commission, " and he was one of the seven Commissioners in the school owner/administrator category as he is employed by Empire Education Group, Inc. (UEEG"), a privately held corporation that operates cosmetology schools in twenty-one states.

         NACCAS' written Code of Ethics states as follows:

1. INTEGRITY OF NACCAS - Each commissioner, officer and employee of NACCAS is expected to respect the integrity of NACCAS. Accordingly, no commissioner, officer or employee of NACCAS should be subject to influences, interests or relationships which conflict with the best interest of NACCAS and its objectives and purposes as set forth in its Articles of Incorporation and By-laws.
• • •
3. CONFLICT OF INTEREST - A conflict of interest exists when the duty of loyalty to NACCAS, including the furtherance of its objects and purposes as set forth in its Articles of Incorporation and By-laws, can be prejudiced by actual or potential personal benefit from another source. Each commissioner, officer, and employee is expected to avoid any investment, interest or association which interferes with the independent exercise of judgment in the best interest of NACCAS and those persons for whose benefit NACCAS was formed. Disclosures of personal interests or other circumstances which might constitute conflicts of interest are to be reported promptly by the commissioner, officer, or employee to the Chairman of NACCAS for resolution in the manner best suited to the interests of NACCAS and such individual.
6. ABUSE OF POSITION - No commissioner shall abuse his or her position to gain for himself, herself or others improper personal, material or pecuniary benefits.

         Joint Ex. 3. In addition to the above quoted excerpts, unquoted portions of the Code of Ethics provide specifically enumerated conflicts which exist, in order to control against both a conflict of interest and "the perception of such conflicts." Id. These additional provisions expressly preclude a Commissioner from participating in voting or discussion involving any school owned or operated by the Commissioner, any school in the state in which the Commissioner lives, and any school in the same state as the corporate headquarters of the Commissioner's institution. Id.

         Based on the NACCAS conflict of interest policy, Mr. Bouman was automatically disqualified from participating in voting or discussions involving any EEG school, as well as any schools in Montana or Pennsylvania. In addition to his automatic conflicts, Mr. Bouman would recuse himself on a case-by-case basis when he had some known interest or relationship with a school, such as when he had prior contact with a school regarding EEG's possible acquisition of such school.

         Turning to the facts surrounding the competitive "conflict" alleged by Plaintiff in this case, in 2013, EEG opened a cosmetology school in Virginia Beach, Virginia, approximately twelve miles from the Norfolk, Virginia location of Wards Corner's cosmetology and barbering academy. When identifying this location, and any other locations where EEG opens a new school, a key factor for EEG is accessibility to public transportation because 60-65% of EEG's students, companywide, rely on public transportation to commute to school. As described by Mr. Bouman, the average EEG student is between 19 and 24 years old, and the majority of students are single women with dependent children, a fact that can further complicate such students' ability to arrive to school on time through public transportation.

         When EEG first opened its Virginia Beach School, Wards Corner was operating both its long-established Norfolk school and a second more recently established school in Virginia Beach. Wards Corner's Virginia Beach school was approximately three miles from the location where EEG opened its school.[1] In December of 2014, Wards Corner closed its Virginia Beach location, with such closure due in part to the fact that Plaintiff's lease was expiring as the building where the school was located was being torn down and turned into residential housing. When Wards Corner closed its Virginia Beach location, most of the students transferred to the Norfolk School, a few decided to go to EEG's Virginia Beach school, and some just dropped out.[2] A former Wards Corner manager believed that those students that did not transfer to the Norfolk location had transportation issues because they rode the bus and it istta trek from Virginia Beach to Norfolk." Logan Depo. 13.

         Although the parties strongly dispute the degree of competition between Wards Corner and EEG, the evidence presented at the evidentiary hearing unquestionably established that Plaintiff's Norfolk school and EEG's Virginia Beach school are "competitors" at some level. The Hampton Roads area, including the contiguous cities of Norfolk, Virginia Beach, Chesapeake, Portsmouth, Suffolk, Hampton, and Newport News, is a single media market. Television, radio and local online advertising all extend across city lines into what, in some ways, resembles a single metropolitan area. That said, the socioeconomic factors impacting students that attend both Wards Corner's and EEG's schools have a substantial impact on the area from which each school can attract students, with many of the students lacking access to private transportation. Such students naturally favor a school in close proximity to their homes due to the constraints involved in relying on public transportation, particularly for those students with young children. Moreover, because the cosmetology education process also involves developing a clientele during the period of instruction, to include friends and family, there are additional benefits associated with attending a school near an individual's residence.

         During the timeframe most relevant to this case (2015 through February of 2016), there were five accredited cosmetology schools in the Hampton Roads area: Wards Corner (Norfolk), EEG (Virginia Beach), Regency Beauty Institute (Newport News), Rudy & Kelly Academy (located either in Chesapeake or Virginia Beach) and Suffolk Beauty Academy (Suffolk).[3] Plaintiff's Norfolk school was the only school operated by Wards Corner in 2015 and 2016, whereas EEG's Virginia Beach school was one of approximately ninety schools operated by EEG in numerous states.[4] Mr. Bouman estimated that EEG's Virginia Beach school accounted for slightly more than V6 percent of EEG's total revenue, with such school expected to generate a profit of approximately $50, 000 to $60, 000 a year.

         In early 2016 when Wards Corner's accreditation was being evaluated by the NACCAS Commission, Mr. Bouman was EEG's "President and COO" and earned an annual salary of approximately $260, 000. Additionally, Mr. Bouman owned a small fraction (less than 1%) of EEC s stock that he had acquired through an employee stock program. Mr. Bouman acquired his stock through executing a promissory note, and in 2016, the stock that Mr. Bouman owned was worth less than the balance owed on the note.[5] Although Mr. Bouman testified that, as of February 2016, he was confused/ignorant as to whether he was actually a legal "owner" of EEG (because he never paid out-of-pocket for the stock and never personally possessed the stock certificates), any such misconceptions do not change the fact that Mr. Bouman was in fact a partial "owner" of EEG. He therefore had at least some personal financial interest in EEG performing well because his gain or loss on the company stock would presumably be determined (at some point in the future) based on EEG's performance/value.

         In addition to his salary and small ownership interest, Mr. Bouman had in the past received bonuses from EEG. Specifically, he received an incentive bonus of over $137, 000 in September of 2013 based on company-wide performance for fiscal year 2012. See PI. Ex. 92. Also paid to Mr. Bouman in September of 2013 was a $10, 000 bonus representing a 2012 "Christmas" bonus. Id. Due to an overall decline in the cosmetology industry, Mr. Bouman did not receive any subsequent incentive/performance bonuses, although he did receive two additional Christmas bonuses of approximately $5, 000, paid in December of 2013 and December of 2014. Id. Mr. Bouman received no bonuses of any kind in 2015, and as of February 2016, being very familiar with EEG's performance and performance goals, Mr. Bouman was aware that it was very unlikely that he would receive a bonus in that year (and he ultimately did not receive a bonus in 2016) . Mr. Bouman credibly testified that EEG, and many other companies in the industry, had been less profitable for several years due primarily to changes in government policy regarding the issuance of student loans.[6]

         Turning to February 2016, Mr. Bouman was present and participated in the week-long NACCAS Commission Meeting where Wards Corner's accreditation was withdrawn. As Chairman of the Commission, Mr. Bouman presided over the full Commission meeting, which occurred late in the week, by calling the agenda items and moderating the discussion. He did not vote on any individual school actions at the meeting of the full Commission, but he was available to vote in the event there was a tie. After Mr. Bouman called the Wards Corner agenda item, another Commissioner presented the matter to the full Commission for discussion and voting, and at the conclusion of such discussion, the Commission unanimously voted (11-0) to withdraw Wards Corner's accreditation.

         Although Mr. Bouman did not "vote" to withdraw Ward Corner's accreditation, in the days leading up to the meeting of the full Commission, he personally participated in reviewing Wards Corner's file. As explained in detail in open court, the NACCAS annual meeting lasts for several days, and a day or two before the full Commission meets to vote on school actions, one of four NACCAS "File Review Teams" meets to review several upcoming agenda items. Each of the NACCAS File Review Teams is an established group of the same three Commissioners, who work together to investigate potential action items and develop a recommendation to present to the full Commission later that week. Members of a File Review Team do not know which school actions they will work on until they meet on the designated day of the multi-day Commission meeting (the files are assigned by NACCAS staff).

         As Chairman of the Commission, Mr. Bouman was not assigned to any of the four NACCAS file review teams. However, because File Review Team Two was missing one of its three members at the February meeting, Mr. Bouman filled in as a substitute member of such team. Wards Corner's file was assigned to File Review Team Two.

         Mr. Bouman does not have a clear recollection of any specific discussions that Team Two had about Wards Corner, but he acknowledges that he was present in the room for at least some part of the discussion. Additionally, Mr. Bouman signed the Wards Corner "Action Form, " a two page document that includes limited information, but does expressly recommend withdrawal of accreditation. Such form was signed by Mr. Bouman as a "School Owner Commissioner, " and was also signed by an "Academic Commissioner" a "Public Interest Commissioner, " as well as two NACCAS "Staff Members." Joint Ex. 17. During his time acting as a substitute member of File Review Team Two, Mr. Bouman was unaware of Wards Corner's proximity to EEG's Virginia Beach School, and he had no prior dealings with Wards Corner.[7]Tr. 251-52, 262, 264. Being unaware of the existence of a "conflict, " Mr. Bouman never even considered recusing himself from reviewing such file, and recommended withdrawal based on the merits of the file he examined.

         As noted above, after the full Commission voted to withdraw accreditation, Plaintiff unsuccessfully appealed such ruling through NACCAS' appeal procedures. Subsequent to the appeal, the instant lawsuit was filed. This Court previously granted partial summary judgment in favor of Defendant, but the disputed evidence and conflicting inferences associated with Mr. Bouman's interest in the outcome of Wards Corner's accreditation decision required an evidentiary hearing/bench trial.

         II. Conclusions of Law & Analysis

         A. Legal Standard for Judicial Review of an Accreditation Decision

         The Fourth Circuit's opinion in Professional Massage Training Center, Inc. v. Accreditation Alliance of Career Schools & Colleges, 781 F.3d 161 (4th Cir. 2015) provides the standard governing the instant accreditation action. As explained in Prof'l Massage, "[a]ccreditation agencies are private entities, not state actors, and as such are not subject to the strictures of constitutional due process requirements." Id. at 169. However, because such agencies are "quasi-public" and "wield enormous power over institutions-life and death power, some might say, " they owe a "common law duty ... to employ fair procedures when making decisions affecting their members." Id. at 169-70 (citations omitted). Distilled to the simplest terms, the right to "fair procedure" requires accreditation agencies "to play it straight." Id. at 170; see 2 William A. Kaplin & Barbara A. Lee, The Law of Higher Education § 15.3.2.2 (5th ed. 2013) (explaining that state or federal "common law" has been applied by various courts both to require an accreditation agency to "follow its own rules" and to follow "a variously described standard of fairness in their dealings with members, " and that the "primary 'fairness' requirement seems to be that the agency must provide institutions with procedural due process before denying, withdrawing, or refusing to renew their accreditation").

         In addition to establishing the legal duty owed by accreditation agencies, Prof'l Massage defines the scope of the Court's inquiry and the degree of deference that is owed to an accreditation decision. Importantly, "recognition that ... a common law duty exists does not authorize courts to undertake a wide-ranging review of decisionmaking by accreditation agencies." Prof'l Massage, 781 F.3d at 170. Rather, the proper scope of the fairness review authorizes reviewing courts "to consider only whether the decision of an accrediting agency such as [NACCAS] is arbitrary and unreasonable or an abuse of discretion and whether the decision is based on substantial evidence." Id. at 171 (internal quotation marks and citation omitted). A district court is therefore prohibited from substituting its judgment for that of the accrediting agency and may not "conduct a de novo review." Id. (citation omitted) .

         When performing the deferential review of an accreditation decision to determine whether it "was supported by substantial evidence, " a district court should generally confine itself "to the record that was considered by the accrediting agency at the time of the final decision."[8] Id. at 174-75.

         In light of the Fourth Circuit's admonition that a district court confine itself to the record considered by the accrediting agency, the discovery tools typically available to a civil litigant are either unavailable, or greatly circumscribed, in an accreditation action. See id. at 172. The Fourth Circuit, has, however, acknowledged that the scope of the Court's inquiry may be expanded if a plaintiff makes "a strong showing of bad faith or improper behavior." Id. at 177-78 (quotation marks and citation omitted). Such rule exists because "an impartial decisionmaker is an essential element of due process" regardless of whether a district court is addressing a constitutional due process claim or a claim grounded in the common law right to fair procedure. Id. at 177 (internal quotation marks and citations omitted). Therefore, in limited circumstances, a district court "may be justified in conducting a more searching inquiry into the motivations of administrative decisionmakers." Id. When performing such inquiry, "[a]n administrative decisionmaker is entitled to a presumption of honesty and integrity, " although such presumption can be overcome through evidence demonstrating that an adjudicator has a "personal bias." Id. (internal quotation marks and citation omitted). A long-recognized form of disqualifying personal bias occurs when an "adjudicator has a pecuniary interest in the outcome." Id. at 178 (quotation marks and citation omitted). Here, the Magistrate Judge assigned to this case concluded that there was sufficient evidence to support targeted discovery, and after discovery, Plaintiff presented sufficient evidence to warrant an evidentiary hearing/bench trial, having identified disputed material facts that were not adjudicated during the accreditation review process and that bore on whether Plaintiff was denied its right to an "impartial decisionmaker."[9] Cf. Simmons v. Jarvis, No. 8:13cv98, 2016 WL 4742256, at *9 (D. Neb. Sept. 12, 2016) ("The burden of proof required for supplementing the administrative record is lower than that required for demonstrating bad faith or bias on the merits." (quoting Pitney Bowes Government Solutions, Inc. v. United States, 93 Fed. CI. 327, 332 (2010))).

         B. A Disqualifying Pecuniary Interest must be "Direct" and "Substantial"

         While Prof'l Massage expressly recognizes both that the procedural right to an impartial decisionmaker extends to accreditation actions and that an adjudicator with a pecuniary interest in the outcome violates such procedural right, Prof'1 Massage does not clarify the contours of a disqualifying pecuniary interest because the case did not involve facts capable of supporting such a claim. Prof'l Massage, 781 F.3d at 178. Turning to other relevant case law on the subject, as explained by the United States Supreme Court long before Prof'1 Massage was decided:

It is sufficiently clear from our cases that those with substantial pecuniary interest in legal proceedings should not adjudicate these disputes. Tumey v. Ohio, 273 U.S. 510, (1927) . And Ward v. Village of Monroeville, 409 U.S. 57 (1972), indicates that the financial stake need not be as direct or positive as it appeared to be in Tumey. It has also come to be the prevailing view that "(m)ost of the law concerning disqualification because of interest applies with equal force to administrative adjudicators." K. Davis, Administrative Law Text § 12.04, p. 250 (1972), and cases cited.

Gibson v. Berryhill, 411 U.S. 564, 579 (1973) (emphasis added) (alteration and omission in original). In Gibson, the Supreme Court affirmed the district court's determination that the Alabama "State Board of Optometry was so biased by pecuniary interest that it could not constitutionally conduct hearings" addressing the potential revocation of licenses for a large block of corporate optometrists. Id. at 578. The district court's analysis of constitutional due process in Gibson did not turn on "whether the [Optometry] Board members were actually biased, " but rather, considered "whether, in the natural course of events, there is an indication of a possible temptation to an average man sitting as a judge to try the case with bias for or against any issue presented to him." Id. at 571 (quotation marks and citation omitted). Such objective temptation standard was met in Gibson because the Board was evaluating whether to revoke the licenses of "all optometrists in the State who were employed by business corporations, " a category of individuals that accounted for nearly half of all practicing optometrists in Alabama. Id. at 578. If such large-scale revocations occurred, "the individual members of the Board, along with other private practitioners of optometry, would fall heir to this business." Id. at 571 (emphasis added). On those facts, the Supreme Court found "no good reason" to overturn the district court's conclusion that the Board members had a disqualifying pecuniary interest due to the degree of likelihood that a successful revocation effort by the Board "would possibly redound to the personal benefit of members of the Board." Id. at 578-79.

         Subsequent to Gibson, in another case involving a constitutional due process analysis, as contrasted with the common law "fair procedure" analysis involved here, the Supreme Court clarified that a litigant is not denied an impartial decisionmaker when a judge or justice has "a slight pecuniary interest" in the outcome, as contrasted with an interest that is "direct, personal, substantial, [and] pecuniary." Aetna Life Ins. Co. v. Lavoie, 475 U.S. 813, 825-26 (1986) (alteration in original) (internal quotation marks and citations omitted). The Supreme Court went on to clarify that an interest that is "highly speculative and contingent" is not disqualifying, and that "at some point, ' [t]he biasing influence . . . [will be] too remote and insubstantial to violate the constitutional constraints.'"[10] Id. at 826 (alteration and omission in original) (quoting Marshall v. Jerrico, Inc., 446 U.S. 238, 243 (1980)). More recently, in Caperton v. A.T. Massey Coal Co., 556 U.S. 868 (2009), the Supreme Court summarized the facts and holdings of its earlier decisions in Tumey, Ward, and Lavoie, id. at 877-79, explaining that the Lavoie opinion stressed that the constitutional due process standard applicable to judges, and mayors sitting as judges, did not turn on whether the judge was actually influenced by the alleged pecuniary motivation, id. at 878. Rather, the standard turns on whether the judge's position/interest "would offer a possible temptation to the average . . . judge to . . . lead him [or her] not to hold the balance nice, clear and true." Id. at 879 (omissions in original) (quoting Lavoie, 475 U.S. at 825). The Caperton opinion further noted that although the "'degree or kind of interest . . . sufficient to disqualify a judge from sitting cannot be defined with precision, '" in the Supreme Court's view, it is "important that the test have an objective component." Id. (quoting Lavoie, 475 U.S. at 822); cf. Del Vecchio v. Illinois Dep't of Corr., 31 F.3d 1363, 1375 (7th Cir. 1994) (explaining, in the context of an allegedly biased judge presiding over a criminal case, that "[t]he question is not whether some possible temptation to be biased exists; instead, the question is, when does a biasing influence require disqualification, " further holding that "[d] isqualification is required only when the biasing influence is strong enough to overcome [the presumption of honesty and integrity], that is, when the influence is so strong that we may presume actual bias").

         Consistent with such Supreme Court precedent acknowledging the difference between a "direct" and "substantial" pecuniary interest and awremote" or "slight" pecuniary interest, the Fourth Circuit has held that, even under the stringent ethical rules applicable to federal judges, recusal is unnecessary/improper if the financial interest at issue is remote and contingent. In re Virginia Elec. & Power Co., 539 F.2d 357, 368 (4th Cir. 1976) . In that case, there was a "remote contingent possibility that [the judge] may in futuro share in any refund that might be ordered" to all customers of the plaintiff electric company if the plaintiff's success in such litigation led to a customer refund to adjust for incorrectly calculated fuel costs. Id. at 366. As a customer of the electric company, the judge's potential financial interest was between $70 and $100, although such sum could have been refunded over a period as long as forty years. Id. at 360. Although the district judge concluded that "existing legal authorities did not require recusal, " he determined that a recent amendment to 28 U.S.C. § 455, a statue governing judicial disqualification, did require recusal.[11]Id. at 363. Consistent with applicable federal canons of judicial ethics, the amended statute provided that a federal district judge is required to recuse himself if " [h] e knows that he . . . has a financial interest in the subject matter in controversy or in a party to the proceeding, or any other interest that could be substantially affected by the outcome of the proceeding, " with the statue further defining financial interest as "ownership of a legal or equitable interest, however small." Id. at 362 (emphasis omitted) (quoting 28 U.S.C. ยง 455). Even under such broad definition of "financial ...


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