Recent Developments Related to Litigation Against the Educational Sector

This is our first of what we anticipate will be quarterly updates of significant developments relating to the array of qui tam, securities, fraud, and other lawsuits and investigations involving schools, especially private sector schools.  As you are well aware, private sector schools over the past several years have been frequent targets of opportunistic plaintiffs and their attorneys and, unfortunately, there is no reason to believe that this trend will change anytime soon.  With these factors in mind, Gibson Dunn provides the following update on recent litigation developments involving the educational sector.

A.   Court Orders Sanctions of Nearly $395,000 Against Three Law Firms Who Brought a False Claims Act Lawsuit Against ITT.*[1]

Declaring that “some type of monetary sanction is necessary to deter [the Plaintiff’s attorneys] from engaging in this type of conduct going forward,” the United States District Court for the Southern District of Indiana on March 26, 2012, awarded $394,988 in sanctions against one plaintiff attorney individually and three law firms in connection with a False Claims Act (“FCA”) case filed against ITT Educational Services, Inc. (“ITT”).  United States ex rel. Leveski v. ITT Educ. Servs., Inc., No. 1:07-cv-0867-TWP-MJD, 2012 U.S. Dist. LEXIS 40646 at *13, *18 (S.D. Ind. March 26, 2012).  In the 31-page opinion, Judge Pratt admonished the behavior of the plaintiff’s counsel, Timothy Matusheski, whose website domain is www.mississippiwhistleblower.com, stating his “tactics are far worse than the garden-variety ‘ambulance chasing’–seen in movies and read about in John Grisham novels.”  Id. at *13.

As discovery revealed, Debra Leveski–the named relator in the case–was originally contacted by a private investigator working for Mr. Matusheski.  (Ms. Leveski had previously filed a personnel action against ITT, and it appeared that Mr. Matusheski found her information by searching court dockets for former ITT employees).  Deposition testimony from Ms. Leveski revealed that she never even contemplated filing a qui tam action under the FCA until she spoke with Mr. Matusheski and, in fact, did not believe that ITT was in violation of the FCA until she spoke with Mr. Matusheski.  Moreover, Ms. Leveski admitted that the entire basis for her FCA claims came from Mr. Matusheski and public materials.  Ms. Leveski’s case was a lawyer-driven lawsuit based upon publicly disclosed materials and therefore clearly barred by the FCA’s public disclosure provision, 29 U.S.C. 3730(e)(4).

The egregiousness of Mr. Matusheski’s conduct was made worse by the fact that he previously had cases against other private sector schools (DeVry and Strayer) dismissed on these exact same grounds, and–in order to avoid sanctions in one of them–filed a public apology with the court.  Leveski, 2012 WL 1028794 at *5.  Despite this experience and a warning from ITT that they would be subject to a motion for attorneys’ fees if they continued with the meritless lawsuit, Mr. Matusheski and Ms. Leveski decided to proceed.

ITT thereafter filed a motion to dismiss based on the public disclosure bar of the FCA, which the court granted on August 8, 2011.  Ms. Leveski and her counsel sought reconsideration of this decision, which the Court denied.

On August 22, 2011, ITT filed a motion for sanctions and attorneys’ fees.  On March 26, 2012, the Court granted that motion, finding that the case lacked any valid basis and was intended merely “to extract a large settlement from ITT.”  Id. at *12.  The Court issued sanctions against Mr. Matusheski as an individual as well as the Law Offices of Timothy Matusheski, the law firm of Plews Shadley Racher & Braun, and the law firm of Motley Rice, LLP.  Finding a “public shaming” to be “inadequate,” the Court held Mr. Matusheski and the three law firms to be jointly and severally liable for $394,998.33 in sanctions.  Id. at *13.

B.   Court of Appeals Hears Argument On APSCU’s Challenge to New Compensation, Misrepresentation, and State Authorization Regulations.*

On February 21, 2012, the United States Court of Appeals for the District of Columbia Circuit heard oral arguments relating to the Department of Education’s new compensation, misrepresentation, and state authorization regulations.  Both the Association of Private Sector Colleges and Universities (“APSCU”) and the United States had appealed the district court’s decision that struck down a key provision of the state authorization regulations and held that the compensation and misrepresentation regulations were lawful.  The judges were well prepared and through their questions seemed to challenge both sides with regard to various issues raised in the appeal.  The Court of Appeals has yet to issue its ruling.

C.   Class-Action Lawsuits Filed Against 15 Law Schools.

Over the last year, class-action lawsuits have been filed against fifteen law schools,[2] and similar suits are possible.  Each of these suits is premised on allegations that the schools misrepresented employment statistics in order to attract prospective students to enroll.

On March 21, 2012, a New York court dismissed a complaint by nine graduates of New York Law School.[3]  In the dismissal order, the court held that “the Plaintiffs could not have reasonably relied on NYLS’s alleged misrepresentations . . . because they had ample information from additional sources and thus the opportunity to discover the then-existing employment prospects” throughout their time at the school.  Gomez-Jimenez v. New York Law School, 2012 N.Y. Misc. LEXIS 1225 at *50 (Sup. Ct. New York County March 21, 2012).  Counsel for the plaintiffs has indicated that they will appeal the decision.  These cases demonstrate what we have all known for some time–that the type of claims that have become all too prevalent against private sector schools can also be brought against traditional schools–and that traditional and private sector schools should be working together to fight unfair regulations that create a more fertile environment for these sorts of meritless actions.

D.   Westwood College Settles With Colorado Attorney General.

On March 13, 2012, Westwood College entered into an agreement with Colorado Attorney General John Suthers to resolve a two-year investigation into allegations that the school violated the Consumer Protection Act by misleading prospective students, engaging in deceptive advertising and failing to comply with Colorado’s consumer lending laws.  Under the terms of the agreement, Westwood did not admit any liability and will pay the State of Colorado $2 million in penalties, restitution, and attorney fees and costs and will credit an additional $2.5 million in restitution to students.  Additionally, the Attorney General’s office will continue to monitor Westwood’s admissions and recruitment activities for a three-year period.

E.   EDMC’s Motion to Dismiss Fully Briefed.*

On October 5, 2011, Education Management Corporation (“EDMC”) filed a motion to dismiss an FCA complaint lodged against the school in the United States District Court for the Western District of Pennsylvania asserting alleged violations of the incentive compensation provision.  Although these types of allegations are not uncommon, it is noteworthy that the United States intervened in this case (for what is believed to be the first time in an incentive compensation case).  The motion to dismiss argued, among other things, that EDMC’s compensation plan complied with the safe harbor provision in effect at the time and that the plan as implemented did not violate the incentive compensation provision.  The briefing on the motion to dismiss is complete and the parties await a decision by the court.

F.   Supreme Court Denies Writ of Certiorari to Resolve Circuit Split Regarding the Standard for False Certification.*

In United States ex rel. Hutcheson v. Blackstone Med., Inc., 647 F.3d 377 (1st Cir. 2011), the First Circuit “reject[ed] the argument that, in the absence of an express legal representation or factual misstatement, a claim can only be false or fraudulent if it fails to comply with a precondition of payment expressly stated in a statute or regulation.”  Id. at 379.  This decision deepened a pre-existing split among the federal circuit courts of appeal regarding the liability standard that applies to a claim of false certification brought under the FCA.  This is the theory on which most, if not all, of the qui tam actions brought against private sector schools have been based (and were dismissed prior to the Seventh Circuit’s decision in Main expanding the theory of liability).  APSCU filed an amicus brief in support of Blackstone Medical’s petition for certiorari to the Supreme Court.  However, the Court denied the petition on December 5, 2011, leaving the circuit courts split on the appropriate standard.  We believe that at some point, the Supreme Court will have to decide this important issue relating to the scope of the FCA, and that the sector (and all participants in government programs) will benefit if the Court finds that Congress intended there to be reasonable limits regarding the type of certifications that are actionable under the FCA.

G.   DOJ Intervenes In FCA Suit Against American Commercial Colleges.

On March 19, 2012, the United States intervened in a FCA suit filed against American Commercial Colleges, Inc. (“ACC”) in the United States District Court for the Northern District of Texas (Case No. 5:10-cv-00129-C).  The original complaint alleged FCA violations based on failure to comply with the 90/10 rule, misrepresentation of employment rates, and falsification of other Title IV documentation.  The United States chose to intervene only on the claims based on the 90/10 rule alleging that “ACC orchestrated a system whereby short-term sham loans were issued to unwitting ACC students for the sole and deliberate purpose of manipulating ACC’s revenue calculations and disguising ACC’s violations of the . . . 90/10 rule.”  The fact that DOJ intervened in this action may well indicate that DOJ is going to take a more proactive approach to qui tam actions brought against private sector schools.

H.   Securities Class-Actions Against Private Sector Schools Dismissed.

In the wake of the Senate Health, Education, Labor, and Pensions (HELP) Committee’s investigation into private sector schools, a number of securities class-actions–all involving alleged nondisclosures of a more hostile environment as reflected by the HELP hearings and the Gainful Employment regulations–were filed against individual schools and their parent companies.  To date, cases involving the Apollo Group (University of Phoenix), Washington Post Company (Kaplan), Educational Management Corporation, Lincoln Educational Services Corporation, Corinthian Colleges, DeVry, and ITT have been dismissed without being permitted to proceed to discovery.  Three of these dismissals were granted in the last quarter.  On January 30, 2012, the United States District Court for the Central District of California dismissed a complaint against Corinthian Colleges on grounds that the plaintiffs had failed to set forth facts showing a false or misleading statement, failed to allege particularized facts supporting scienter, and failed to adequately plead loss causation.  Karam v. Corinthian Colleges, Inc., CV 10-6523 GHK (PJWx), 2012 U.S. Dist. LEXIS 44153 at *39 (C.D. Cal. Jan. 30, 2012).  On March 27, 2012, the United States District Court for the Northern District of Illinois dismissed a securities class-action complaint against Devry on similar grounds.  See Boca Raton Firefighters’ and Police Pension Fund. v. Devry, Inc., Case No. 10 C 7031, 2012 U.S. Dist. LEXIS 41305 (N.D. Ill. Mar. 27, 2012).  Most recently, on March 30, 2012, the United States District Court for the Southern District of New York dismissed a securities class action suit brought against ITT pursuant to §§ 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5.  In re: ITT Educational Services, Inc. Securities and Shareholder Derivatives Litigation, Case No. 10 Civ. 8323, Dkt. 60 (S.D.N.Y. Mar. 30, 2012).  The class action complaint alleged that ITT’s financial results and statements regarding future business prospects were misleading because the school failed to disclose allegedly improper recruiting and financial aid lending practices.  In its motion to dismiss, ITT argued that the complaint failed to adequately plead any alleged securities violations.  The court granted ITT’s motion to dismiss in its entirety.  A full opinion detailing the court’s findings, reasoning, and conclusions is forthcoming.  We hope this trend will continue.

I.   Kentucky Legislature Passes Legislation Establishing Stronger Oversight over For-Profit Colleges.

A bill that would create additional oversight over for-profit educational institutions passed through the Kentucky state legislature on March 29, 2012.  The bill would establish an 11-member Kentucky Commission on Proprietary Education made up of member representatives of private sector colleges, individuals with backgrounds in education and business, and state officials.  Additionally, private sector colleges would be required to publicly disclose various information, including job placement rates.  Kentucky Attorney General Jack Conway has focused considerable resources toward private sector educational institutions, including bringing suit against Daymar College based on alleged violations of the Kentucky Consumer Protection Act.  The increased focus on the sector in Kentucky has the potential of resulting in additional litigation.[4]

Conclusion

We will continue to inform you on these and other related issues as they develop.

[1]   The asterisks in the headings indicate matters in which Gibson Dunn is involved.

[2]   The first of these class-action suits was filed against Thomas Jefferson School of Law in California Superior Court on May 26, 2011.  A class-action suit against New York Law School was filed in the Supreme Court of New York – County of New York on August 10, 2011.  On the same day, a third suit, against Thomas M. Cooley Law School, was filed in the United States District Court for the Western District of Michigan.  On February 1, 2012, complaints were filed against twelve additional schools:  Brooklyn Law School, California Western School of Law, Florida Coastal School of Law, IIT Chicago-Kent College of Law, John Marshall Law School, Southwestern Law School, and the law schools of DePaul University, Golden Gate University, Hofstra University, Union University, the University of San Francisco, and Widener University.

[3]   Thomas Jefferson School of Law filed a demurrer seeking to dismiss the complaint filed against the school, but that demurrer was subsequently withdrawn.

[4]   Kentucky does not have its own version of the False Claims Act.

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 work, or any of the following: