The CARES Act Carousel: States and LEAs Sue to Enjoin Implementation of Interim Final Rule Governing Distribution of COVID-19 Funds

By Kristopher L. Caudle

On July 7, 2020, several states and boards of education around the country filed a federal lawsuit in the Northern District of California challenging the U.S. Department of Education’s (“Department”) new Interim Final Rule (34 C.F.R. § 76.665) governing distribution of funds provided by Congress under the Coronavirus Aid, Relief and Economic Security Act (“CARES” Act).[1]

The CARES Act was enacted in March of 2020 to, among other things, provide emergency relief to states and local government entities, including Local Education Agencies (“LEAs”) impacted by the COVID-19 pandemic. The CARES Act requires that LEAs receiving funds under the CARES Act provide equitable services “in the same manner” as provided under section 1117 of the Elementary and Secondary Education Act (“ESEA”).[2]

The lawsuit was filed on the heels of nationwide backlash to the Department’s April 30, 2020, Guidance outlining the criteria that LEAs should use to calculate “equitable services” under the CARES Act to non-public elementary and secondary schools. Rather than rescinding the Guidance, the Department issued an Interim Final Rule to “clarify the provision of equitable services” under the CARES Act.[3] The Interim Final Rule became effective on July 1, 2020 and was issued outside of the ordinary 30-day notice and comment period due to “the pressing need for States and LEAs to have clear guidance on the use of funds” provided under the CARES Act.”[4]

Under the Department’s Interim Final Rule, LEAs may calculate their proportionate share for equitable services in one of the following ways:

Option #1:  An LEA may choose to distribute all of its CARES Act funds only to Title I schools. If an LEA chooses Option #1, it can calculate its proportionate share under either method listed below:

1. By using the same amount set aside for Title I, Part A funds in the 2019-20 school year; or
2. By calculating the total number of children (ages 5 through 17), who attend each non-public school in the LEA that will participate under a CARES Act program and are from low-income families compared to the total number of children, ages 5 through 17, who are from low-income families in both Title schools and participating non-public elementary and secondary schools in the LEA.[5]

Option #2: An LEA may choose to distribute its CARES Act funding among schools that received Title I assistance in the 2019-20 school year and schools that did not receive Title I assistance. However, under Option #2, the LEA must determine its proportionate share based on total enrollment in participating non-public elementary and secondary schools in the LEA compared to total enrollment in both public and participating non-public elementary and secondary schools in the LEA.

In their Complaint, Plaintiffs seek both declaratory and injunctive relief vacating and suspending the implementation of the Department’s Interim Final Rule as well as the Department Guidance governing implementation of CARES Act funds. The Complaint alleges five causes of action: violation of separation of powers; ultra vires action; spending clause violation; and three violations of the Administrative Procedures Act (“APA”), described below.

Separation of Powers

The Plaintiffs’ first cause of action alleges that the Department’s Final Rule violates the U.S. Constitution’s separation of powers principle by requiring distribution of federal funds based on conditions not grounded in the plain language of the CARES Act.[6]  To that end, Plaintiffs argue that the Department did not have any inherent power to alter the terms of distribution for CARES Act funds nor did Congress grant the Department any discretion to do so through its own rulemaking authority. Ultimately, the Plaintiffs’ central claim is that by unilaterally imposing the Department’s own interpretation onto the distribution of CARES Act funds, the Department “usurped” Congress’ power to legislate in this area in violation of the Separation of Powers.[7]

Ultra Vires

Plaintiffs’ second cause of action alleges that the Department exceeded the statutory authority granted by Congress by imposing requirements on the calculation of the proportionate share not based in the CARES Act or Title I.  Specifically, the Complaint alleges that nothing in the CARES Act requires LEAs to use the calculation method prescribed by the Department’s Interim Final Rule to determine proportionate share for equitable services.[8]

Spending Clause

Plaintiffs’ third cause of action alleges violations of the spending clause. Plaintiffs argue that under Supreme Court precedent, the spending clause grants Congress the constitutional authority to pass laws to “promote the general welfare of the United States,” but that conditions may not be placed on the receipt of federal funds that are “ambiguous” “retroactive,” or “unrelated to the federal interest in a particular program.”[9] Under their first theory, Plaintiffs claim that the Department’s interpretation of the CARES Act is unrelated and contrary to the plain language of the CARES Act, which requires only that LEAs follow Section 1117 of the ESEA when determining proportionate share for equitable services.[10] Second, the Complaint alleges that the Department violated the unambiguous requirements of the spending clause in its interpretation of the CARES Act, in that Congress did not “unambiguously” impose requirements on LEAs in the CARES Act to calculate equitable services under a formula enacted solely by the Department.[11]  Finally, Plaintiffs allege that the Interim Final Rule places conditions on the acceptance of CARES Act funds that were implemented “post-acceptance” by LEAs. Thus, the conditions imposed by the Interim Final Rule are null and void given that LEAs were not “knowingly informed” of all restrictions or consequences to their acceptance of funds under the CARES Act.[12]

Violations of the APA

Counts 4, 5 and 6 of the Complaint set forth violations of the APA’s rulemaking process. Plaintiffs allege that the Interim Final Rule was adopted without sufficient statutory authority in the CARES Act, that its terms are “arbitrary and capricious” under long-standing administrative law precedents and that the Department lacked sufficient authority to depart from ordinary rulemaking procedures for the implementation of final rules.[13]

A federal judge is scheduled to hear arguments on the preliminary injunction by the end of August. Although the scope of the Plaintiffs’ proposed injunction would only be binding in the states and schools districts listed in the lawsuit, the outcome could prove to be influential in all states moving forward.

Kris Caudle is the Vice-Chair of the Education Section of the North Carolina Bar Association and an Associate Attorney at Campbell Shatley, PLLC.