When Unsuccessful Applicants Sue, Part II

This is the second article in a two-part series that addresses common claims and defenses involving organizations related to the professional licensing process. The first article focused on common claims and defenses for state-created licensing boards and their unique governmental status. This post will explore common claims and defenses for nongovernmental organizations that oversee professional credentialing and specialization.

For purposes of this article, we refer to private standard-setting bodies as organizations that (1) serve as a step in licensure (e.g., national testing that is required for entry into a profession) or (2) provide accreditation or certification to licensed professionals. Typically, these organizations are not-for-profit and have a public mission. Some of these organizations ensure that applicants have the basic competence needed to perform the work of a licensed professional safely. Other organizations allow licensed professionals to distinguish themselves from their peers by applying for a certification or accreditation that demonstrates professional excellence to the public.

Not all applicants can satisfy the high standards that govern these professional badges of honor. When applicants fail to meet the application requirements of a standard-setting organization, some disappointed applicants sue those organizations.

As private entities that also serve a public function, standard-setting bodies face unique challenges in litigation. Unlike state-created licensing boards, standard-setting bodies are generally private and self-created. Because of their public-serving mission, however, standard-setting bodies can face constitutional claims and due-process-like claims by unsuccessful applicants. Nevertheless, as explained below, standard-setting entities are well positioned to defend against these legal challenges because of the entities’ nongovernmental status and the deference that courts give these entities.

Constitutional Claims

Unsuccessful applicants sometimes bring federal and state constitutional claims to challenge the decisions and procedures of standard-setting organizations. The applicants claim that the organizations must provide elaborate procedures and satisfy constitutional due-process protections. These claims, however, usually fail.

An initial requirement for these constitutional claims is that the organization must be a state actor or engage in state action. One common type of claim is a claim under 42 U.S.C. § 1983, the private right of action for federal constitutional violations. In a Section 1983 claim of this type, a plaintiff alleges that a private actor acting under color of law has violated a constitutionally protected right.

In this context, a finding of state action requires that one or more of the following circumstances applies: (1) the private actor acted with the help of or in concert with state officials; (2) the private actor was delegated a power traditionally reserved to the state; or (3) there was a sufficiently close nexus between the state and the challenged action by the private actor.

Claims against standard-setting bodies usually fail these standards. That failure occurs because the role of these bodies is generally attenuated from government authority. After all, even if states rely on a private organization’s testing, certification or accreditation decision to issue a professional license, the state ultimately decides who gets a license. Standard-setting bodies only certify a professional’s level of skill and achievement.

Courts generally recognize, moreover, that standard-setting organizations are not managed by the state. Instead, they independently develop the standards and criteria for their own certification or accreditation. They also approve or deny applications without involving the state in their decision-making processes.

These points usually allow standard-setting organizations to defeat constitutional claims requiring state action or the involvement of a state actor.

Due-Process-Like Claims

Unsuccessful applicants sometimes also pursue due-process-like claims under state common law. These claims allege that standard-setting organizations owe applicants a common-law duty of procedural fairness.

Under many states’ common law, a due-process claim involves an initial inquiry into whether the private entity serves a public function. In some states, the starting point is whether membership in, or certification from, the organization is an economic necessity for the applicant’s livelihood.

For example, in a 2014 case in Michigan, a doctor of osteopathic medicine brought a common-law due-process claim against the American Osteopathic Association and American Osteopathic Board of Family Physicians. The doctor successfully argued that board certification was an economic necessity for him because many health insurance companies made board certification a requirement for participation in insurance networks. In contrast, in 1993, an Illinois district court held that board certification for a plaintiff-psychiatrist was not an economic necessity because mere economic benefits from the certification, such as a 7.8% salary increase, did not amount to an economic necessity. 

Depending on the state’s common law, the second part of the due-process inquiry generally asks whether: (1) the entity failed to follow its own governance documents; (2) the entity’s action was influenced by prejudice or lacked good faith; or (3) the entity’s action violated other fairness principles. Because the last of these theories is the most open-ended one, plaintiffs often lean on it.

In cases involving non-passing applications, courts consider whether the entity’s decision-making procedures were arbitrary in substance and whether they were applied arbitrarily.

In contrast, in cases involving revocations of membership, courts focus on the procedures used in the proceedings against the member — specifically, whether the member had a meaningful opportunity to be heard. Here, courts tend to apply a deferential analysis to an organization’s internal decision-making processes because courts try to avoid interfering with the internal operations of private actors. Courts are also reluctant to substitute their judgment for the professional judgment of standard-setting entities. Thus, standard-setting bodies generally face a low bar to satisfy the fairness or arbitrariness inquiry.

One case that illustrates these points is an independent-medical-review provider’s 2018 lawsuit against a nonprofit accrediting body. The accrediting body revoked the provider’s accreditation. The provider argued that the revocation was unfair because the accrediting body allegedly failed to use reasonable processes to consider the evidence in the case and failed to give the provider a meaningful opportunity to respond to the revocation decision. The accrediting body, like most standard-setting organizations, satisfied the fairness standard because it demonstrated that it followed its written protocol and gave the applicant the opportunity to be heard.  

However, in some cases, disappointed applicants have shown that the decision-making procedures of standard-setting organizations were in fact unfair. For example, in 2019, a federal district court in Pennsylvania found that an applicant had a viable claim that the applicant did not have a fair opportunity to be heard. In that case, the organization held a disciplinary hearing for the applicant but ended the hearing without giving the applicant a chance to speak.

To avoid this type of outcome, standard-setting bodies have many ways to show that their decision-making processes are fair in substance and in application:

• They can have an internal appeal process that allows a disappointed applicant to be heard before a decision is finalized.
• They can also document their communications with an applicant, ensuring compliance with a written internal procedure.
• Organizations can also implement procedures for an unbiased review of an applicant’s appeal. These procedures will vary based on the organization’s mission and structure.

Conclusion

Private standard-setting bodies face unique litigation challenges. Because of these bodies’ unique status as private, nonprofit entities with a public purpose, they are often in a strong position to defeat lawsuits that attack their decisions.

The Regulated Professions Practice Group at Robinson Bradshaw can help standard-setting bodies and related organizations prevent — or navigate — claims from disappointed applicants. We are here to advise on complaints, policies for handling complaints and internal investigations.