November 4, 2014
This is our most recent update of significant developments relating to qui tam and other lawsuits and investigations involving schools, especially private-sector schools. This edition features an in-depth discussion of what we believe to be the first ever trial in a False Claims Act case based on alleged incentive compensation violations at a school, a discussion of several district court and circuit court rulings relevant to the sector, and a rundown of the expanding government activity.
This past quarter saw the conclusion of a bench (i.e., non-jury) trial in the False Claims Act (“FCA”) case of U.S. ex rel. Christianson v. Everglades College, Inc., No. 12-60185-CIV (S.D. Fla.). In this case, in which the government did not intervene, the relators alleged that admission counselors at two of the fourteen locations of Everglades College (also known as Keiser University) were given “gift cards, token days, and meals” as incentives for enrollment numbers. ECF No. 318 ¶¶ 10-11. Relators alleged this resulted in a knowing violation of the Higher Education Act’s compensation provision, resulting–according to relators–in a violation of the federal FCA (which imposes treble damages, per claim penalties of up to $11,000 for each false claim, and attorneys’ fees on anyone held liable). After a four-day trial, the judge handed the relators in Christianson a victory, but an extremely hollow one: the court found liability under the FCA but no damages and only $11,000 in penalties.
In reaching this decision, the court made several interesting rulings. Starting with potentially the most significant–the damages ruling–the court properly explained that it “should calculate damages by first determining the amount the government paid because of a defendant’s false claims and then subtracting the value the government nonetheless received from the defendant.” Id. ¶ 39. Applying this standard, the court came to the conclusion that the government suffered no damages. But the court did not come to this conclusion for the reason one would expect (and that we believe is correct)–i.e., that the government has suffered no damages in these cases because the students have received the education for which the government paid. Instead, the court focused on the fact there was no evidence that the government would have withdrawn funding or sought reimbursement from the school had it known about the alleged token gifts at issue. Id. ¶¶ 48, 51-55. In our view, this evidence is most relevant to the issue of materiality, as discussed below, but the court here also relied upon it to determine there were no damages.
The court’s ruling on scienter was also interesting. In its findings of fact, the court held that although “some employees had knowledge” of the purported token gifts before November 20, 2009, Keiser–the defendant at issue–only had knowledge as an organization after “Dr. Keiser and Keiser’s top policymakers became . . . aware.” Id. ¶ 14. This is a correct ruling in our view: there must be some distinction between the knowledge of any one of thousands of line-level employees and the corporation itself, which is sued for “fraud” under the FCA, because otherwise the corporation would be liable for corporate “fraud” for everything any rogue employee did, no matter the employee’s role, position, or level of authority. This is why the D.C. Circuit has thoroughly rejected the so-called collective knowledge theory, which would impute to the corporation the “collective knowledge” of all of its employees’ individual pieces of knowledge, United States v. Science Applications International Corp., 626 F.3d 1257, 1275 (D.C. Cir. 2010)*, and why other circuits, including the Eleventh, also have looked askance at the viability of such a theory, see, e.g., McGee v. Sentinel Offender Services, LLC, 719 F.3d 1236, 1244 (11th Cir. 2013). While we believe that the court got it right–finding that there could be no liability prior to the top policymakers becoming aware of the alleged conduct–we are concerned that the court seems to embrace the collective knowledge theory, in both its opinion and in its decision denying Keiser’s motion for summary judgment. It will be interesting to see how this issue develops in the recently filed cross appeals.
The court’s ruling on materiality also raises interesting questions. On materiality, the court did not examine the actual evidence, but instead appears to have assumed arguendo that any violation of the Higher Education Act would be material to the government because the program participation agreements, electronic certifications, and compliance audits are prerequisites to funding. ECF No. 318 ¶ 28. But this contradicts the court’s prior ruling on summary judgment that held that the issue of materiality would depend on the evidence itself. ECF No. 894 at 12. And it contradicts the court’s finding that the government would not have revoked or sought reimbursement of its funding based on alleged illegal gifts. Perhaps the court believed that this materiality ruling would not make a difference given its damages ruling. But, for government contractors, there is certainly a huge difference between a finding of no liability (which would be the case if the analysis is applied to the materiality element) and a finding of liability, but no damages (as occurred in Christianson). A finding of FCA liability, after all, can result in various other collateral consequences, including most severely exclusion or suspension and debarment proceedings.
Last, but not least, the court’s ruling that Keiser submitted false claims to the government is also curious. As mentioned, the court limited relators’ lawsuit to false certifications occurring after November 20, 2009, because Keiser did not have the requisite corporate knowledge of the token gifts before then. ECF No. 318 ¶ 14. As a result, there were only two alleged “false claims” at issue: (i) an audit submitted on February 9, 2010, and (ii) an electronic certification of compliance submitted on March 5, 2010. Id. ¶ 17. Yet neither of these documents is actually false. The audit only states that Keiser complied with the eligibility requirements “in all material respects.” Id. ¶ 8. It seems entirely reasonable for the auditor to have considered this to be true–token gifts amounting to only a few thousand dollars would seem to be non-material, if even a technical violation. And the March 5, 2010 electronic certification never even requests information about compliance, but instead asks for mundane information like where the schools are located and who is the chief financial aid director, and then demands assurance that the “information in this document is true and correct.” OMB Form No. 1845-0012, available at http://www.eligcert.ed.gov/ows-doc/eapp.pdf. There is no basis in either of these documents to conclude, as the court does, that “past indiscretions” in regard to the token gifts “should have been revealed to the Government” in these two documents. ECF No. 318 ¶ 17.
Both sides have now appealed the case to the Eleventh Circuit. And relators have filed motions for attorneys’ fees and costs, requesting over a million dollars in attorneys’ fees and over $150,000 in costs, despite only recovering $11,000 at trial. We will, of course, keep a close eye on the post-judgment motions and the appeal, and keep you informed of key developments.
Over the past year, we have been reporting on the recent trend of FCA cases against schools surviving pleadings challenges, but faltering when the relators are forced to actually provide evidence of fraud in response to a summary judgment motion. See, e.g., U.S. ex rel. Gillespie v. Kaplan Univ., No. 09-20756-CIV, 2013 WL 3762445 (S.D. Fla. July 16, 2013)*; Miller, et al. v. Weston Educ., Inc., No. 4:11-CV-00112-NKL, 2014 WL 1292407, at *1 (W.D. Mo. Mar. 31, 2014). The trend continued this quarter with a decisive win on summary judgment for Career Education Corp. in U.S. ex rel. Powell v. American Intercontinental University, Inc., No. 1:08-CV-02277-RWS, 2014 WL 4829206 (N.D. Ga. Sept. 29, 2014). In that case, the relators alleged that American Intercontinental University fraudulently obtained accreditation, and thus knew it was ineligible to receive federal funds, resulting in FCA liability. Id. at *12. While the court accepted this theory of liability as a theoretical matter (relying in large part on the government’s statement of interest), the court granted summary judgment nonetheless because it held there was no reliable evidence that the accreditor actually would have revoked the school’s accreditation based upon the purported misconduct at issue. Id. at *18. This was especially true, according to the court, because the evidence showed that the “accreditation process was a complex and even subjective inquiry” and thus a “jury could do no more than speculate as to what” the accreditor might have done had it known about the alleged violations. Id.
Going forward, this analysis may prove helpful in limiting the recent trend of FCA cases against schools based on alleged violations of regulatory or accreditation rules. We believe it will be difficult for relators or the government to show that the accreditor or the United States would have necessarily revoked funding or even punished the school had it known of the purported misconduct at issue.
In the last few updates, we have reported on the increasing amount of activity relating to private-sector schools by a wide array of government agencies. Like prior quarters, this quarter has seen a continuation of that trend.
On August 7, 2014, ITT Educational Services, Inc. (“ITT”) received a notice from the Securities and Exchange Commission (“SEC”) notifying ITT that the SEC staff had made a preliminary determination to recommend that the SEC file an enforcement action against the company (a “Wells Notice”).* According to the staff, the enforcement action would allege violations of Sections 10(b), 13(a) and 13(b)(2) of the Securities Exchange Act of 1934, as well as several rules promulgated under the Exchange Act. The Wells Notice stated that the staff’s recommendation may involve a civil injunctive action, public administrative proceeding, and/or cease-and-desist proceedings against ITT; and seek remedies that include an injunction, a cease-and-desist order, and monetary relief, including civil monetary penalties. A Wells Notice is neither a formal allegation nor a finding of wrongdoing. Instead, it is a preliminary determination by the staff to recommend that the SEC file a civil enforcement action or administrative proceeding against the recipient. Under the SEC’s procedures, a recipient of a Wells Notice has an opportunity to respond in the form of a Wells submission that seeks to persuade the SEC that such an action should not be brought. ITT has made such a submission.
In addition, on July 22, 2014, a federal court in the Southern District of New York granted in part and denied in part ITT’s motion to dismiss the amended complaint in a putative class action.* The amended complaint alleges, among other things, that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by misleading the investing public about various issues relating to ITT’s student loan programs. ITT’s motion was granted as to plaintiffs’ claim that ITT misled the investing public by saying it was optimistic about making new Risk Sharing Agreement deals when this prospect was very unlikely. The court found that plaintiffs failed to plead that these statements were false when made. The remaining claims in the amended complaint survived ITT’s motion.
We previously reported on the battle between the Illinois Attorney General and Alta/Westwood Colleges in which the Attorney General filed a Second Amended Complaint (“Complaint”), adding counts relating to alleged violations of the federal Consumer Financial Protection Act (“CFPA”). People v. Alta Colls., No. 12 CH 1587 (Cir. Ct. of Cook Cnty. Ill. May 12, 2014). In its Complaint, the Attorney General alleged that Westwood runs a student loan program, known as “APEX,” that issues “institutional financing loans” directly to students and induces them to “sign Defendants’ institutional financing contracts” through a variety of allegedly fraudulent, unfair, and abusive means. Complaint ¶¶ 89-90.
On May 22, 2014, Defendants removed the case to federal court. People v. Alta Colls., No. 14-cv-3786 (N.D. Ill.). The Attorney General subsequently filed a motion to sever its Illinois Consumer Fraud and Deceptive Business Practices Act counts and to remand the state law claims back to Illinois state court. On June 16, 2014, defendants moved to dismiss all claims.
On September 4, 2014, the court denied both the motion to dismiss as well as the motion to sever and remand, resulting in all claims remaining, but in federal court. People v. Alta Colls., No. 14-cv-3786 (N.D. Ill.), ECF No. 53. This is the first ruling we are aware of that addresses the issues of statutory jurisdiction and vagueness under the CFPA as applied to an educational institution. Westwood argued that the CFPA claims should be dismissed because the Attorney General did not allege that Westwood is an entity subject to the statute. However, the court found that the Attorney General had adequately alleged that Westwood was subject to claims under the CFPA by pleading that Westwood itself originated the allegedly unfair and abusive student loans and provided them directly to its students. As the court reasoned, “Plaintiff alleges that Westwood operates an in-house student loan program called APEX, which places Westwood squarely within the definition of ‘covered person'” under the CFPA. ECF No. 53 at 2-3.
The opinion also rejected Westwood’s challenge that the CFPA’s prohibition of “unfair, deceptive, or abusive act[s] or practice[s]” is unconstitutionally vague, stating that as an economic regulation, the CFPA is subject to a lenient vagueness test, which it passes. Id. at 7.
We previously reported on the agreement between Corinthian Colleges and the Department of Education in which Corinthian agreed to sell or close the vast majority of its campuses and the Department agreed to release $35 million in student financial aid to Corinthian.
Notwithstanding this agreement, government scrutiny of Corinthian continues. In late August 2014, Corinthian received a civil investigative demand from the Department of Justice, as part of a False Claims Act investigation concerning allegations related to student attendance and grade record manipulation, graduate job placement rate inflation, and non-Title IV funding source misrepresentations. The civil investigative demand requires Corinthian to provide written answers to interrogatories, documents, and testimony.
Further, in August and September 2014, Corinthian received three grand jury subpoenas from the United States Attorney’s Offices for the Central District of California, the Northern District of Georgia, and the Middle District of Florida. The California subpoena seeks records relating to job placement, graduation rates, transferability of credits, advertisements and marketing materials, and representations regarding financial aid. The Georgia subpoena seeks similar records for the Everest Jonesboro and Everest Decatur campuses including those relating to job placement, graduation rates, admissions, attendance, and student and employee information. The Florida subpoena seeks records relating to an internal investigation of a former employee’s misconduct at the Everest Brandon campus and the Company’s return of Title IV funds as a result of the investigation.
In addition, Corinthian has been hit with multiple lawsuits by government agencies. On September 16, 2014, the Consumer Financial Protection Bureau (“CFPB”) filed a lawsuit in the Northern District of Illinois against Corinthian alleging violations of the Consumer Financial Protection Act and the Fair Debt Collections Practices Act due to purported misrepresentations regarding placement and alleged improper debt collection practices. Consumer Fin. Prot. Bureau v. Corinthian Colls., Inc., No. 1:14-cv-07194 (N.D. Ill. Sept. 16, 2014). The complaint seeks permanent injunctive relief, rescission of certain loans allegedly issued by Corinthian to students, restitution, civil penalties, disgorgement of profits, damages, costs, and such other relief as the court may order. Surprisingly, this lawsuit followed Corinthian’s August 28, 2014 commitment to substantially comply with the CFPB’s preconditions to engage in settlement discussions.
The complaint against Corinthian is remarkable in that it attempts to police activity unrelated to the school’s lending activity, the only arguable basis the CFPB might have for asserting claims against the school. For example, the complaint makes broad-ranging allegations regarding the alleged cost of the school, high-pressure sales tactics used by admissions representatives, and inflation of job placement rates. Also interesting is the CFPB’s choice of the Northern District of Illinois as the forum for this action, given that Corinthian has schools across the country. One can only speculate that the CFPB was perhaps influenced by the denial of Westwood’s motion to dismiss in the very same jurisdiction.
Then, on October 27, 2014, the Wisconsin state Attorney General filed suit against Corinthian for alleged violations of Wisconsin’s consumer protection laws for engaging in unfair, false, misleading, and deceptive trade practice including with respect to representations about the availability of externships and job placement rates. Wisconsin v. Corinthian Colls., Inc., No. 2014 CX 00006 (Wis. Cir. Ct., Milwaukee). Like the CFPB complaint, this complaint goes beyond allegations relating directly to the claims at issue and asserts a variety of allegations regarding student enrollments.
As some readers may be aware, Massachusetts Attorney General Martha Coakley has been particularly aggressive in her crusade against the for-profit education industry. Indeed, last June, Attorney General Coakley issued new regulations relating to for-profit education (940 Mass. Code Regs. 31.00) purporting to require all for-profit and occupational schools in Massachusetts to provide accurate information to the public, prohibit misleading advertising practices, and address unfair lending practices. In response, on September 25, 2014, the Massachusetts Association of Private Career Schools (“MAPCS”) sued the Attorney General in the United States District Court of Massachusetts claiming that the new regulations are unconstitutional and in conflict with already extensive federal law. Mass. Ass’n of Private Career Schs. v. Coakley, No. 1:14-cv-13706 (D. Mass. Sep. 25, 2014). MAPCS’ complaint alleges that the new regulations unfairly target career-oriented educational institutions and are unenforceable because they (1) violate the free speech guarantees of the First Amendment to the United States Constitution; (2) violate Due Process through vague or otherwise unenforceable prohibitions; and (3) exceed the Attorney General’s statutory authority, while conferring on herself unlimited discretion to impair the mission of private career schools to provide education and training to non-traditional students.
On July 10, 2014, Apollo Education Group, Inc. announced that the Department of Education informed it that the Department intends to conduct an ordinary course program review of the University of Phoenix’s administration of Title IV programs. The review, which was scheduled to commence August 4, 2014, will cover federal financial aid years 2012-2013 and 2013-2014, as well as compliance with the Jeanne Clery Disclosure of Campus Security Policy and Campus Crime Statistics Act, the Drug-Free Schools and Communities Act and related regulations.
Finally, the Assistant Attorney General for the Criminal Division in Washington D.C. announced a new procedure at the Department of Justice, in which the criminal division will now review every qui tam case for potential criminal liability. This directive affects all civil FCA cases filed by relators, not just those affecting schools. Nonetheless, the potential for criminal exposure is something every defendant in a civil FCA case will need to assess at the outset.
With the recent explosion of FCA cases, the circuit courts have increasingly been called upon to evaluate new theories of liability and specify just how detailed the pleadings need to be to survive a motion to dismiss. This past quarter, the Seventh and Eighth Circuits respectively took up these issues, with a clear win for defendants in the Seventh and a mixed result in the Eighth.
The Seventh Circuit’s decision in U.S. ex rel. Absher v. Momence Meadows Nursing Center, Inc., — F.3d —-, 2014 WL 4092258 (7th Cir. 2014)*[1] drew a line in the sand regarding the increasingly popular theory of FCA liability known as “worthless services.” The crux of this theory of liability is the proposition that the government has been defrauded if it pays for goods or services that were “worthless.” Id. at *7. Utilizing this theory, the relators in Absher secured a $9 million jury verdict based on evidence that the defendant nursing home had violated regulations to the point of providing “woefully inadequate care.” Id. at *2-3. The Seventh Circuit vacated the judgment and handed the defendant a complete victory. Id. at *14. The court explained that “[s]ervices that are ‘worth less’ are not ‘worthless.'” Id. at *7. Thus, even assuming that the “worthless services” theory of liability was viable (an issue the court chose not to decide), the court explained it would be “absurd” to claim that Momence’s services were “truly or effectively ‘worthless'” in light of evidence showing that the government regulators did not shut down the facility despite regular inspections, and one of the relators testified that her own mother received good care at the facility. Id. at *8.
This decision could have helpful implications for schools facing FCA liability. Relators and the government often argue that the proper measure of damages in FCA cases involving schools is all financial aid received by the school. But this theory appears to conflate allegations that the services were “worth less” with the idea that they are “worthless,” precisely what the Seventh Circuit rejected in Absher.
The Eighth Circuit’s decision in United States ex rel. Thayer v. Planned Parenthood of the Heartland, — F.3d —-, 2014 WL 4251603 (8th Cir. 2014) was less defense friendly. In Thayer, a former employee alleged that the defendant had fraudulently billed the United States for medical services that were not actually performed or were not reimbursable under Medicaid. The district court dismissed the complaint because the pleading rules require specificity, yet the relator had failed to provide even a single representative example of a false claim actually submitted to the United States. Id. at *1. The Eighth Circuit reversed in part, holding that a relator need not provide a specific example of a false claim if the relator provides specific facts about the underlying fraud and an “indicia of reliability” to support the “strong inference” that false claims were actually submitted. Id. at *4. Applying this standard, the court held that some of the relator’s theories were viable because she had alleged “particular details” about the underlying fraud, and had “personal knowledge” of the “submission of false claims” even though she had not alleged an example. Id.
On the one hand, this decision is troubling as it appears to continue a trend of recent decisions that provide relators with a ticket to expensive discovery based on suspect allegations that fail to address directly the heart of the statute–preventing the submission of false claims to the United States. On the other hand, the Eighth Circuit’s clear indication that, at the very least, the underlying fraud must be pleaded with particularity (names, dates, methods, etc.), should continue to provide some teeth to pleading rules that require specifics when making allegations of fraud.
We will continue to keep you informed on these and other related issues as they develop.
[*] The asterisks indicate matters in which Gibson Dunn is involved.
[1] Gibson Dunn represented the defendants in the successful appeal, but not as trial counsel.
Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding the issues discussed above. Please contact the Gibson Dunn lawyer with whom you usually work, or any of the following:
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James Zelenay (213-229-7449, [email protected])
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Wayne Smith (949-451-4108, [email protected])
Nick Hanna (949-451-4270, [email protected])
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Charles J. Stevens (415-393-8391, [email protected])
Washington, D.C.
Douglas Cox (202-887-3531, [email protected])
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