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Insight PA Cyber Charter School v. Dept. of Education
Citations: 162 A.3d 591; 2017 WL 2190681; 2017 Pa. Commw. LEXIS 240Docket: Insight PA Cyber Charter School v. Dept. of Education - 1866 C.D. 2015
Court: Commonwealth Court of Pennsylvania; May 18, 2017; Pennsylvania; State Appellate Court
Original Court Document: View Document
Insight PA Cyber Charter School (Insight) petitioned the Commonwealth Court of Pennsylvania for review of the Pennsylvania State Charter School Appeal Board's (CAB) decision that denied its cyber charter school application. The CAB determined that Insight's trustees would lack "real and substantial authority" over the school's management and identified fundamental budgeting issues affecting Insight's capacity to provide a comprehensive educational experience. Background details include Insight's application, filed on October 1, 2014, to establish a cyber charter school for grades K-12, with K12 Virtual Schools LLC providing necessary educational services through a contractual agreement. Following a public hearing on November 14, 2014, the Department of Education denied Insight's application on January 29, 2015, citing several deficiencies, including lack of operational authority, noncompliance with technology requirements, inadequate support for special education and non-English fluent students, insufficient understanding of academic accountability, and poor financial planning. Insight appealed to the CAB, which, in its August 31, 2015 Opinion, dismissed most of the Department's reasons for denial but upheld the decision based on the Board's lack of authority over key operational aspects and insufficient financial planning. The Commonwealth Court reversed the CAB's decision and directed the Pennsylvania Department of Education to issue a charter to Insight. The "Real and Substantial Authority" test addresses the contractual relationship between Insight and its service provider, K12, highlighting a precedent established in *West Chester Area School District v. Collegium Charter School*. The Commonwealth Court previously ruled on charter school contracts with for-profit entities, affirming that charter school boards must maintain ultimate authority over governance and operations to protect student interests. Insight was found compliant with technology requirements and capable of meeting special education needs; however, the CAB did not assess its understanding of academic assessment as the Department did not raise this issue. The CAB's review is limited to constitutional violations, legal errors, and substantial evidence support. In the *Collegium* case, taxpayers argued that Collegium functioned as a front for the for-profit Mosaica Education, which would manage the school under a management agreement. The court emphasized that the Charter School Law grants governance authority to the board of trustees, ensuring that control is not ceded to profit-driven entities, thereby mandating the board's role in critical operational decisions, including budgeting and staff management. The board of trustees has the option to contract with for-profit entities for goods and services, as outlined in Section 1714-A(a)(3) and (5) of the Charter School Law (CSL). The governing legal test, adopted from the Charter Appeal Board (CAB), stipulates that while for-profit entities can be involved in charter school operations, the charter school itself must remain non-profit, the trustees must retain substantial authority over educational decisions, and teachers must be employees of the charter school. In reviewing the arrangement between Mosaica and Collegium, it was concluded that this partnership would not undermine the trustees' control over the charter school. Collegium is established as a non-profit corporation, and its governing documents affirm that the board of trustees has complete operational authority. Furthermore, the management agreement with Mosaica ensures that the trustees are independent and maintain the power to negotiate and terminate contracts with Mosaica. The Pennsylvania Supreme Court upheld this decision, clarifying that the management agreement does not negate Collegium’s status as an independent non-profit corporation or grant Mosaica ultimate control over its operations. The agreement explicitly states that Mosaica cannot legally bind or operate Collegium and does not limit the charter school’s rights. This interpretation was supported in subsequent cases, affirming that management agreements do not strip the board of trustees of their authority. The school district in Fell opposed the charter school application, arguing that the management agreement with Mosaica assigned excessive responsibilities to them, such as budget preparation, personnel supervision, staffing decisions, and principal selection. The review indicated that the charter does not restrict the Board of Trustees from maintaining ultimate control over the school. Fell is established as a non-profit corporation in Pennsylvania, and its by-laws affirm that the Board holds ultimate responsibility for the school's policies. The Management Agreement explicitly states that the Board of Trustees operates independently of Mosaica, with no Mosaica personnel serving on the Board. Consequently, the CAB correctly concluded that the Management Agreement is lawful. In a related case, School District of City of York v. Lincoln-Edison Charter School, the CAB reversed a local district's decision against Lincoln-Edison, whose management agreement with the for-profit Edison Schools, Inc. was challenged for allegedly delegating too much authority. The school district claimed Lincoln-Edison lacked control over the school, but the court found that the board retained ultimate authority over rules, budgets, and the ability to terminate the agreement if Edison failed to meet performance standards. The case reaffirmed that while Edison managed day-to-day operations, Lincoln-Edison's board maintained oversight. This precedent suggests that the CAB misapplied the Collegium decision, which raised concerns about for-profit entities circumventing charter school regulations by using non-profit fronts. A for-profit entity would control the nonprofit charter school, emphasizing revenue generation over student education. The CAB and the Court established the Collegium test to ensure charter school boards maintain substantial operational authority when contracting with for-profit service providers. This test requires a review of the charter school's corporate documents and management agreements to confirm that the board retains ultimate control. The chartering authority must avoid overstepping into contract negotiation roles. Management agreements should arise from arms-length negotiations. The CAB and the Department noted complexities in the proposed arrangement between Insight and K12, suggesting improvements for clarity and efficiency. However, after reviewing the Agreement, the 2015 Amendment, and Insight's bylaws, it was determined that the arrangement meets the Collegium test and complies with the CSL. Insight is a nonprofit corporation, and there are no allegations of it merely serving K12’s interests. The second Collegium factor is critical, focusing on whether Insight’s Board retains meaningful authority over educational decisions. The Insight Bylaws affirm that the Board holds ultimate responsibility for policy decisions, and the Agreement explicitly states that the Board governs Insight and employs its staff, indicating that control has not been ceded to K12. The Board holds ultimate responsibility for overseeing management, policy, and budgeting decisions affecting Insight and its students. The Charter Advisory Board (CAB) identified three areas where the Insight Board allegedly ceded control to K12, violating the Charter School Law (CSL) and the Collegium test: staffing, budgeting, and curriculum. 1. **Staffing**: The CAB criticized the reporting structure for Insight's teachers as excessively bureaucratic, creating a disconnect between the teachers and the Board, thereby diminishing the Board's managerial authority. The CAB also found that Insight's Board lacked sufficient control over K12 employees regarding their employment status, compensation, and discipline. However, the CAB's claims are deemed unsupported by any specific statutory or regulatory standards, only citing two provisions from the CSL—Sections 1716-A(a) and 1724-A(a)—which grant the Board authority over operational matters and employee compensation. The Board is empowered to hire employees and set their compensation according to these provisions. The Insight Board has chosen to employ teachers, counselors, a CEO, and a CFO, and plans to hire additional staff within two years. Furthermore, the Board has opted to contract with K12 for certain support staff roles, including an executive director and principals. The Insight Board meets the Collegium requirement that teachers be direct employees of the charter school, without a legal obligation for all positions to be filled by direct employees rather than contracted service providers. The dissent argues for upholding the CAB’s decision, claiming that having the charter school’s principal as an employee of a contracted service provider violates Section 1716-A(a) of the CSL. This interpretation, according to the dissent, undermines the board of trustees' authority to contract for services, as established under Section 1714-A(a)(5). The CAB did not endorse this view in its Opinion, nor did the Department support the dissent's legal conclusions. Insight’s CEO is tasked with overseeing daily operations and ensuring compliance with laws and the charter, while the CFO manages fiscal affairs. K12 will employ an executive director and other staff only with the Board’s consent, and all K12 personnel must report to both K12 and Insight’s CEO. The CAB raised concerns about the reporting structure, suggesting a lack of control by Insight’s Board due to an organizational chart showing teachers reporting to K12 principals. However, when considering the actual Agreement terms, it is evident that Insight maintains substantial authority over its teachers via the CEO. A referenced case, Lincoln-Edison, illustrates that the charter school’s board retained final authority over personnel decisions even when granting some employment powers to the service provider, which this Court affirmed. Compensation for employees is a budget matter, with the board of trustees holding final authority per the management agreement, leading the Court to reject the school district’s challenge. The supervisory level of the board in Lincoln-Edison set a legal precedent applicable here, as the Agreement between Insight and K12 does not grant K12 significant supervisory power over Insight’s employees, unlike the delegation seen in Lincoln-Edison. The Agreement clearly states that the Board retains full governance and employment responsibilities for Insight and its employees, including teachers, with K12 only assisting in evaluations upon request. The CEO, as a direct Board employee, oversees daily operations, encompassing teacher management. The CAB's argument that Insight's teachers report solely to school principals and the K12 chain is legally irrelevant for several reasons: principals will eventually become Insight employees, the CEO will supervise daily operations, and K12 has no employment-related responsibilities for Insight teachers. Additionally, Insight contracts K12 for educational products, justifying K12's oversight of curriculum implementation without infringing on the Board's control. The CAB's claim that the Board lacks authority over K12's employees is dismissed, as the Agreement allows K12 standard employer powers, including compensation and hiring. The Court rejects the CAB's assertion that a charter school must require a service provider to relinquish employment rights to obtain a charter, affirming that such a requirement would undermine the statutory purpose of charter schools to contract services. Contracting for services involves oversight of the service provider's overall performance rather than the individual performance of its employees. The Agreement assigns "ultimate responsibility" for charter school policy to Insight’s Board, which K12 and its employees must follow. Insight and the Board operate independently of K12, with their relationship defined by the Agreement as a result of arms-length negotiations, establishing them as independent contractors without a partnership or joint venture. The Agreement grants the Board oversight powers over K12, including monitoring compliance and performance according to applicable law. If K12 fails to meet its obligations, Insight can terminate the Agreement for cause. Insight exercises considerable control over K12’s employees through its oversight role, which includes provisions that allow Insight to influence K12’s hiring, supervision, and discipline processes. K12 staff at the charter school must report to Insight's CEO for operational purposes, reinforcing Insight's authority over daily operations. Additionally, the Agreement allows Insight to demand the removal of K12 employees whose actions jeopardize student safety and provides Insight with a structured process to address performance issues. If internal resolutions fail, Insight can escalate concerns to K12, and if unresolved, pursue mediation and binding arbitration to determine the outcome for K12 employees. Overall, Insight has significant control over K12’s performance and, by extension, over its employees at the charter school. Assuming a charter school board has authority over disciplinary actions concerning contracted service provider employees, the Agreement grants Insight significant control over discipline for K12 employees, including the ability to refer disciplinary decisions to an arbitrator, contradicting the CAB's conclusion. Regarding budgeting, the CAB determined that Insight's control over the school budget is constrained by K12’s financial demands, suggesting that if Insight's budget does not meet K12's fee requirements, K12 could terminate the Agreement, leaving Insight without necessary services. The CAB criticized the lack of provisions for reducing K12’s fees or alternative dispute resolution for budget disagreements, which it found problematic. Despite these concerns, the legal standard for real and substantial control indicates that Insight does not cede ultimate budgetary control to K12, as the Agreement stipulates that the Insight Board retains the authority to adopt the annual school budget and make modifications, ensuring Insight’s financial stability is prioritized over K12’s interests. The CAB noted the significance of a provision in the Agreement that permits K12 to terminate the Agreement if Insight does not pass a budget that ensures payment for K12's services. Typically, non-payment would lead to a "for cause" termination in service contracts. However, the CAB suggests that a charter authority may deny a charter application if the service provider is not obligated to perform regardless of payment, a stance that undermines the statutory option for charter schools to contract for services. Additionally, the CAB criticized the absence of a dispute resolution process for budget disputes in Section 8.6 of the Agreement, but it was pointed out that the Charter School Law (CSL) does not mandate such a process. The courts are deemed sufficient venues for resolving contractual disputes. Furthermore, the Agreement contains a comprehensive alternative dispute resolution process in Part 21, which the CAB overlooked. The Department had argued that Insight could not terminate the Agreement due to lack of financial resources, but the CAB did not adopt this concern as a basis for its decision. Part 4 of the Agreement requires Insight to collaborate with K12 on the annual budget, allowing Insight's Board to adjust the budget if financial sustainability is in question. Ultimately, the Agreement gives K12 the option to terminate if the budget indicates non-payment that increases financial risk, affirming the right of Insight’s Board to make budget decisions reflective of the school's fiscal situation. K12 has the option to revise the level of products and services provided under the Agreement if it chooses not to terminate it, considering applicable laws and the Board’s anticipated nonpayment of fees. The CAB expressed concerns about the impact of K12's potential termination for nonpayment, which could leave Insight with minimal operational capacity, relying solely on its CFO, CEO, and teaching staff. Although the CAB considered the termination scenario as potentially detrimental to Insight's ability to function as a cyber charter school, it also suggested that Insight should have the right to terminate the Agreement at will without acknowledging the operational consequences of such a decision. The document highlights that while schools can fail, the focus should remain on the well-being of the students. The Agreement contains provisions to minimize disruptions to students in case of budget issues, including a requirement for K12 to provide a 30-day notice before terminating the Agreement, allowing time to resolve funding disputes. Additionally, a 90-day notice is required before the start of a new school year for any termination to be effective, providing Insight with at least 120 days to find alternative services. If K12 fails to give the full 90-day notice, Insight could have up to a full school year to secure new arrangements. Ultimately, while K12 retains the right to terminate for nonpayment, the Agreement includes significant protections for both Insight and its students, ensuring that the Board maintains control over budgeting decisions. The management agreement grants the Insight Board full and final authority over the school budget, reflecting "ultimate control" similar to that recognized in Lincoln-Edison. The agreement allows sufficient time for Insight to find alternative service providers or staff if K12 chooses to terminate the contract. Additionally, even if Insight cannot secure these alternatives, students would still have opportunities to enroll in other schools within their district, mitigating operational concerns. The Charter Appeal Board (CAB) incorrectly asserted that Insight lacks substantial authority over the curriculum. The Agreement permits Insight to terminate its relationship with K12 if students do not meet academic standards, contrary to CAB’s claim. Under Section 1729-A(a)(2) of the Charter School Law (CSL), chartering authorities can revoke charters for insufficient student performance. The Agreement acknowledges this risk and includes provisions ensuring K12's financial interests align with student success. K12 is incentivized to maintain student achievement, and Section 2.8 outlines collaborative efforts to meet academic performance standards, including compliance with various educational laws and accountability measures. The SPP facilitates schools in accessing resources to enhance achievement, mandating that [Insight] adhere to specific Annual Measurable Objectives. These objectives include metrics for Test Participation Rate, Graduation/Attendance Rate, and closing achievement gaps for all students and historically underperforming students. [Insight's] charter will incorporate academic achievement goals outlined in its application as well as any amendments or renewals. Non-compliance with academic performance standards may lead to revocation or nonrenewal of the charter. If [Insight] fails to meet Academic Goals in any year after the first year of operation, a mutual agreement on a corrective action plan is required, which may involve additional support, intervention programs, and resources funded by K12 at no cost to [Insight], unless the failure is due to actions or inactions by [Insight]'s Board, CEO, or CFO. If one party fails to fulfill obligations under the corrective action plan, the other may terminate the Agreement per Section 11.2. The Agreement outlines risks associated with not meeting academic standards, proposes corrective measures, and allows [Insight] to terminate the Agreement for cause if K12 does not perform its obligations. Section 2.8 of the Agreement, negotiated with the Department, has been a point of contention regarding control over curriculum and termination rights based on student academic progress. The Court expresses concern over the Department's claim regarding a specific provision in the Agreement that it drafted, which the Department dismisses as "irrelevant." The Department monitors adequate yearly progress (AYP) under the No Child Left Behind Act but fails to cite any legal authority mandating that service provider agreements with charter schools must be terminable after one year of AYP failure. The Court emphasizes the freedom of charter schools and service providers to negotiate their agreements. It contrasts the current Agreement with a prior case (Lincoln-Edison), highlighting that the current Agreement promotes collaboration between Insight's Board and K12 to improve academic performance, rather than imposing immediate termination. The Court also clarifies that under the Charter School Law (CSL), a charter cannot be revoked or not renewed based solely on a single year's academic performance. It asserts that the CAB’s concerns about Insight's ability to change management companies due to budget constraints are unfounded, as Insight's Board retains full budgetary authority. If K12’s services become unaffordable, Insight can select a different provider. Furthermore, the Court finds no legal issues with Section 9.4 of the Agreement, which grants K12 a right of first refusal for additional services or products. The CAB's interpretation that this provision restricts Insight's ability to procure better or cheaper alternatives is rejected, with the Court stating that it does not empower K12 to dictate pricing. K12 is obligated to provide goods or services to Insight only if it is able and willing to do so at a price Insight can afford. If K12 cannot meet this condition, Insight is free to seek alternatives. The Insight Board retains powers regarding academic performance and the right to terminate its service provider, similar to the arrangement upheld in Lincoln-Edison. In that case, the charter school was found to have substantial control, including the right to terminate its service provider for failure to achieve academic progress or for material breaches of contract. Insight has similar contractual rights to terminate its agreement with K12 if the school underperforms or if K12 materially breaches the contract. The Agreement mandates that both Insight and K12 share the risk of losing the school’s charter due to unmet academic standards and requires cooperative corrective actions under oversight from the Department. Failure by K12 to fulfill its obligations constitutes a material breach, allowing Insight to terminate the Agreement. The CAB's conclusions regarding Insight's control are therefore incorrect. Regarding financial support, the CAB deemed that Insight lacked necessary financial planning to operate a cyber charter school, citing Section 1719-A(9) of the Charter School Law (CSL). This section requires a financial plan and audit provisions but does not impose strict requirements or demand a detailed budget. The CAB acknowledged that the CSL's expectations are not rigorous, meaning Insight does not need to provide extensive financial details to meet this criterion. The Charter School Law (CSL) does not grant the chartering authority or the Charter Appeal Board (CAB) the power to approve or disapprove a charter school's budget plan, nor can perceived deficiencies in budget items be grounds for charter denial. A budget plan must merely demonstrate that the applicant can provide a comprehensive learning experience, as established in Central Dauphin School District v. Founding Coalition Infinity Charter School. The CAB failed to apply this standard, showing confusion over budget items and the role of Insight's Chief Financial Officer, rather than addressing whether Insight could secure necessary operating funds. Consequently, the CAB's denial of Insight's charter must be overturned. In its appeal, Insight argued that the CAB dismissed several reasons for denial but should have rejected all of the Department's objections. The Collegium test concerns the control of charter operations by for-profit providers, which must remain with the school's board of trustees. No evidence indicated that Insight's Board lacked independence from K12, and the board should be allowed to exercise its judgment in negotiations with service providers. The objections raised by the Department and CAB appear to reflect a desire to impose their judgment over that of Insight's independent Board rather than being rooted in specific CSL provisions. Their decisions not only conflict with established legal standards but could undermine the authority of charter schools to contract for services. Insight's Board maintains substantial control over its operations, as reflected in the terms of the amended Agreement and application. Interpretation of contract terms is a legal question reviewed de novo, with a plenary scope. The deficiencies identified by the Charter School Appeal Board (CAB) regarding the relationship between K12 and Insight PA Cyber Charter School do not constitute legal grounds to deny Insight a charter. The CAB misapplied the legal standard under Section 1719-A(9) of the Charter School Law (CSL). Consequently, the CAB's August 31, 2015 Opinion and Order is reversed, and the matter is remanded for the Pennsylvania Department of Education to issue a charter to Insight. Judge Joseph M. Cosgrove dissents, arguing that the Board of Trustees lacks the authority over necessary professional staff as mandated by Section 1716-A of the CSL, which grants the Board the power to employ and contract staff subject to the school’s charter. The Amended and Restated Educational Products and Services Agreement specifies that K12, not the Board, is responsible for hiring student support staff, which the dissent views as a violation of the CSL. The dissent also emphasizes that while the majority claims Insight will eventually employ its principals, the current structure allows K12 to supervise instructional staff, undermining the Board's authority.