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Insight PA Cyber Charter School v. Department of Education

Commonwealth Court of Pennsylvania

May 18, 2017

Insight PA Cyber Charter School, Petitioner
Department of Education, Respondent

          Argued: February 8, 2017



          P. KEVIN BROBSON, Judge.

         Insight PA Cyber Charter School (Insight) petitions this Court for review of the adjudication of the Pennsylvania State Charter School Appeal Board (CAB), which denied Insight's cyber charter school[1] application, because the CAB concluded that (a) the trustees of Insight will lack "real and substantial authority over the management of the cyber charter school, " and (b) "fundamental budgeting issues exist which affect the ability of Insight to provide a comprehensive learning experience to its students." (CAB Op. at 22-23, 30.) For the reasons set forth below, we now reverse and remand with direction that Respondent Pennsylvania Department of Education (Department) issue a charter to Insight.

         I. BACKGROUND

         On October 1, 2014, Insight, a Pennsylvania nonprofit corporation, filed an application with the Department, seeking to establish a cyber charter school serving grades kindergarten through 12. The application provides that pursuant to a September 29, 2014 Amended and Restated Educational Products and Services Agreement (Agreement), K12 Virtual Schools LLC (K12), a for-profit educational products and services company, would provide the school's curriculum, educational materials, and educational management services through June 30, 2020.

         On November 14, 2014, the Department held a public hearing on Insight's application. On January 17, 2015, Insight and K12 executed an amendment to the Agreement (2015 Amendment). On January 29, 2015, the Department issued a decision denying Insight's application for the following reasons: (1) Insight lacked real and substantial authority over the school's operations; (2) Insight failed to demonstrate compliance with technology requirements; (3) Insight failed to demonstrate an ability to meet the needs of special education students; (4) Insight failed to demonstrate an ability to meet the needs of students who are not fluent in English; (5) Insight failed to demonstrate a sufficient understanding of academic assessment and accountability; and (6) Insight failed to demonstrate necessary financial support and planning.

         On February 27, 2015, Insight appealed to the CAB. In an Opinion and Order entered on August 31, 2015 (Opinion), the CAB rejected most of the Department's asserted grounds for denial. Nonetheless, the CAB affirmed the denial of the charter, concluding that Insight's governing body, its Board of Trustees (Board), lacked real and substantial authority over the school's staffing, budget, and curriculum and that Insight failed to demonstrate the necessary financial support and planning to operate a cyber charter school.[2]Insight now petitions for review of the CAB's decision.[3]


         A. "Real and Substantial Authority" Test

         The first issue in this appeal relates to the contractual arrangement between Insight and its chosen service provider, K12. This Court first addressed the subject of charter school contracts with for-profit service providers in West Chester Area School District v. Collegium Charter School, 760 A.2d 452 (Pa. Cmwlth. 2000) (Collegium), aff'd, 812 A.2d 1172 (Pa. 2002).

         In Collegium, the CAB reversed a local school district decision and directed that the school district award a charter to Collegium Charter School (Collegium). On appeal, taxpayers and the school district complained that the CAB erred because Collegium was not an independent nonprofit entity. The petitioners argued that Collegium was, instead, "a mere shell for a for-profit entity rather than a non-profit corporation." Collegium, 760 A.2d at 468. That for-profit entity was Mosaica Education, Inc. (Mosaica). According to the charter school application, Collegium intended to enter into a management agreement with Mosaica under which Mosaica would provide the charter school with educational and administrative services, including access to its proprietary Paragon Curriculum. Id. at 455. The petitioners contended that the relationship between Mosaica and the charter school vested too much authority in Mosaica and divested Collegium's board of trustees of ultimate control over the major decisions affecting the school. Id. at 469.

         In evaluating the petitioners' challenge, this Court first looked to the Charter School Law (CSL).[4] We recognized provisions of the CSL that place the ultimate authority over the governance of a charter school in the hands of the school's board of trustees:

Clearly, . . . the legislature did not want to entrust the management and operation of the charter school itself to entities seeking to make money from the school's management and operation; rather, that power is granted to the charter school's board of trustees who, as public officials, [ ] have a single purpose to promote the interests of pupils.

Id. at 468 (footnote omitted). Section 1716-A(a) of the CSL, 24 P.S. § 17-1716-A, for example, vests the charter school's board of trustees with "the authority to decide matters relating to the operation of the school, including, but not limited to, budgeting, curriculum and operating procedures, subject to the school's charter." That provision also vests with the board "the authority to employ, discharge and contract with necessary professional and nonprofessional employees subject to the school's charter and the provisions of this article." Id. In Collegium, we also noted that the board of trustees has the power to set staff compensation and terms and conditions of employment. See Section 1724-A(a) of the CSL, 24 P.S. § 17-1724-A(a). Nonetheless, like the CAB, we recognized that the board of trustees also has the option to contract with for-profit entities for goods and services. See Section 1714-A(a)(3) and (5) of the CSL, 24 P.S. § 1714-A(a)(3), (5).[5]

         Reconciling these powers within the board of trustees, we adopted the CAB's articulation of the governing legal test:

"[N]othing in the [CSL] prohibits the involvement of for-profit entities in the establishment and operation of a charter school, so long as the school itself is not for-profit, the charter school's trustees have real and substantial authority and responsibility for the educational decisions, and the teachers are employees of the charter school itself."

Collegium, 760 A.2d at 468 (quoting CAB decision) (second alteration in original) (emphasis added). Applying this test, we agreed with the CAB and rejected the petitioners' challenge:

After a review of the record, we agree with the CAB that there is nothing to indicate that the arrangement between Mosaica and Collegium would deprive Collegium's trustees of ultimate control of the charter school, and we see nothing in the CSL to prevent a for-profit entity such as Mosaica from assuming the role that it will have here. Specifically, Collegium's articles of incorporation state that Collegium is organized as a non-profit corporation under Pennsylvania law. Further, Collegium's bylaws and its charter school [a]pplication both state that the board of trustees has full authority to operate the school, including determining general, academic, financial, personnel and other policies, as outlined in the CSL. In addition, Mosaica's agreement with the charter school in Bensalem, which was represented as a model for the agreement between Mosaica and Collegium, makes clear that the board of trustees is independent from Mosaica and that Mosaica can exercise no authority which may not be delegated by the [Public] School Code [of 1949, Act of March 10, 1949, P.L. 30, as amended, 24 P.S. §§ 1-101 to 27-2702, ] and other applicable laws and resolutions. Mosaica representatives also responded to concerns of the District Board, assuring the District Board that none of Collegium's board of trustees would have any financial interest in, or receive compensation from, Mosaica, and that the trustees retained the power to negotiate the terms of the contract with Mosaica and to terminate that contract.

Id. at 469-70. The Pennsylvania Supreme Court affirmed our decision in Collegium, observing:

The management agreement contracted for educational and administrative services to be performed by Mosaica. Contrary to Appellants' contentions, nothing in the management agreement supports the claim that Collegium was not an independent, nonprofit corporation or that Mosaica would retain the ultimate control over operation of the charter school. To the contrary, the agreement affords Mosaica all authority and power necessary to undertake its obligations under the agreement, "except in cases wherein such authority may not be delegated by the Code and other applicable laws and resolutions." Further, the agreement expressly clarifies that the charter school "is not a division or a part of [Mosaica], " and that neither party has the power to bind or legally operate the other. It goes on to state that Mosaica "will not have any role or relationship with the Charter School that, in effect, substantially limits the Charter School's ability to exercise its rights, including cancellation rights under this Agreement."

West Chester Area Sch. Dist. v. Collegium Charter Sch., 812 A.2d 1172, 1185 (Pa. 2002) (citations omitted) (emphasis in original) (Collegium II); see also Brackbill v. Ron Brown Charter Sch., 777 A.2d 131, 137 (Pa. Cmwlth. 2001) (applying Collegium and rejecting contention that management agreement stripped board of trustees of its authority over school operations), appeal denied, 821 A.2d 588 (Pa. 2003).

         We applied the "real and substantial authority" test in Carbondale Area School District v. Fell Charter School, 829 A.2d 400 (Pa. Cmwlth. 2003) (Fell), again affirming the CAB's award of a charter to a school that proposed to enter into a management agreement with Mosaica. Fell, 829 A.2d at 401. In Fell, the school district that denied that charter school application contended that the management agreement delegated too much responsibility to Mosaica, including, inter alia, responsibility for preparing budgets, supervision and discipline of school personnel, determining staffing levels at the school, and selection and employment of the school principal. Id. at 406. Engaging in a similar analysis to that in Collegium, we opined:

With regard to the specific responsibilities the District alleges will be transferred to Mosaica, our review of the record reveals that nothing in the charter would prevent the Board of Trustees from exercising ultimate control of the charter school. Fell's articles of incorporation list it as a non-profit corporation in Pennsylvania. Additionally, Fell's by-laws state that the Board of Trustees "has ultimate responsibility to determine general, academic, financial[, ] personnel and related policies deemed necessary for the administration and development of the Charter School in accordance with its stated purpose and goals." Further, the Management Agreement specifically provides that Fell's Board of Trustees is independent from Mosaica and that none of Mosaica's directors, officers or employees shall be members of the Board of Trustees. Because the evidence establishes that Fell is organized as an independent, non-profit school, the CAB did not err in determining that the Management Agreement between Fell and Mosaica is permitted under the Law.

Id. at 407-08 (citations omitted) (alteration in original).

         In School District of City of York v. Lincoln-Edison Charter School, 798 A.2d 295 (Pa. Cmwlth. 2002) (Lincoln-Edison), the CAB reversed a decision by a local school district and directed the school district to award a charter to Lincoln-Edison Charter School (Lincoln-Edison), notwithstanding the school district's contention that Lincoln-Edison's management agreement with Edison Schools, Inc. (Edison), a for-profit corporation, delegated too much authority to Edison over the management and operation of the charter school. The school district appealed. Pressing its case, the school district contended that

Lincoln-Edison's board of trustees does not have adequate control over the charter school because it is not free to establish rules, regulations and procedures, it did not maintain budgetary control of the charter school, and its power to terminate the agreement as a way to assure Edison's performance was an illusory and inadequate remedy.

Lincoln-Edison, 798 A.2d at 298-99. After discussing Collegium, this Court looked to the terms of the proposed management agreement and rejected the school district's challenge:

In this case, nothing in the Management Agreement would deprive Lincoln-Edison trustees of ultimate control of the charter school. Section 1.2 of the Management Agreement. Lincoln-Edison must approve any rules, regulations and procedures adopted by Edison for the day-to-day operations of the charter school. Lincoln-Edison must approve annual projected budgets submitted by Edison and must approve any material changes to the approved budgeted expenditures. Moreover, Lincoln-Edison has the authority to terminate the Management Agreement if Edison fails to make reasonable progress toward student achievement, provided Edison is allowed one academic year to remedy any such failures, or if Edison substantially breaches any material terms and conditions and fails to remedy the breach within 90 days.
Initially, in each of the provisions cited by the School District, although Edison is entrusted with the authority to make necessary decisions regarding the day-to-day operation of the charter school, the board of trustees, at all times, retains the authority to oversee and approve those decisions. Based upon our review of the Management Agreement, there is sufficient evidence to support the Board's finding that Lincoln-Edison's board of trustees retained ultimate control over the charter school, and, therefore, the Board did not err in granting Lincoln-Edison's appeal on that basis.

Id. at 300-01(footnotes omitted) (citations to record omitted).

         Applying this precedent here, we conclude that the CAB erred in its application of Collegium and its progeny. These opinions arose from a concern that for-profit entities might attempt to circumvent the CSL's requirements that all charter schools must be nonprofit corporations led by a board of trustees by setting up shell, or puppet, nonprofits. The for-profit entity would then control the nonprofit charter school in such a way that the focus would be on maximizing the for-profit service provider's revenues, rather than educating the enrolled students. The CAB and then this Court implemented the Collegium test to prevent this, recognizing the statutory authority of charter schools to contract with for-profit service providers, but requiring that the charter school board of trustees retain real and substantial authority over the charter school's operations.

         Under our precedent, the Collegium test requires examination of the corporate documents for the charter school as well as the (proposed) management agreement with the for-profit service provider to determine whether the charter school board of directors retains ultimate control over the direction of the school. In conducting this critical examination, however, the chartering authority (whether the Department or a local school district), the CAB, and this Court should be mindful not to interject ourselves into the role of a contract scrivener or negotiator. Under the CSL and Collegium, management agreements must be products of arms-length negotiations between separate and independent entities. In the absence of any express or specific provision in statute, regulation, [6] or precedent that requires or prohibits a specific term, the parties have the freedom to negotiate and to contract.

         The CAB in its Opinion and the Department in its brief raise fair points about the complexity of the proposed arrangement between Insight and K12, particularly with respect to reporting structures, rights of termination, and budgeting. Many provisions of the proposed Agreement, as amended by the 2015 Amendment, could be rewritten to reduce bureaucracy, add clarity, and streamline the operations of the charter school. The same can probably be said of many government contracts or government agency reporting structures. Nonetheless, based on our reading of the Agreement and the 2015 Amendment, the Insight bylaws, and the above precedent, we conclude that the arrangement satisfies the Collegium test and does not violate any express provisions of the CSL. The CAB, therefore, erred in affirming the Department's denial of Insight's application.

         The first Collegium factor is not in dispute. Insight is, itself, a nonprofit corporation. Unlike the allegations in Collegium, there is no contention here that Insight, or its Board, is a mere shell of a nonprofit, existing to do the bidding of K12, and thus incapable of negotiating and entering into a management services agreement that is both commercially reasonable and consistent with the Board's duty to promote the interests of the students that Insight will serve. The third Collegium factor also is not in dispute. All teachers at the charter school will be employees of Insight and not K12.

         The sticking point is the second factor-that being whether Insight's Board will have real and substantial authority and responsibility for the educational decisions at Insight. As noted above, this factor does not preclude K12's involvement in any or even all aspects of the management and operation of the charter school. Lincoln-Edison, 798 A.2d at 300-01. Instead, this factor requires us to consider whether Insight's Board, in executing the Agreement and 2015 Amendment, ceded ultimate control over the charter school to K12. See Fell, 829 A.2d at 407-08.

         The Bylaws for Insight (Bylaws) provide:

The Board . . . shall have the ultimate responsibility to determine general, academic, financial, personnel and related policies deemed necessary for the administration and development of [Insight] in accordance with its stated purposes and goals.

(R.R. 52a.) Similarly, Section 2.2 of the Agreement provides:

The Board, pursuant to the Charter, is fully responsible for all governance of [Insight] and the employment of [Insight] employees, including certified teachers, the Chief Executive Officer and a Chief Financial Officer. Accordingly, the Board is ultimately responsible for overseeing all of [Insight's] management, policy and budgeting decisions impacting [Insight] and its Students, as detailed herein.

(R.R. 5a (emphasis added) (Insight Br. Appendix F).) Notwithstanding these provisions, the CAB identified three areas in its Opinion where it believes that the Insight Board has abdicated control to K12 in violation of the CSL and, more specifically, the Col ...

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