Recent Developments Related to Litigation Involving the Education Sector (April 2013)

This is the latest update of significant developments relating to qui tam, securities, fraud, and other lawsuits and investigations involving schools, especially private-sector schools.  The beginning of 2013 was a busy period, with several important court decisions, interesting developments at the state level, and continued political attacks on private-sector schools.

A.   Court Denies Department of Education’s Attempt to Revitalize the Gainful Employment Regulations

As reported in earlier alerts, on June 30, 2012, the United States District Court for the District of Columbia vacated the Department of Education’s “gainful employment” regulations, finding that they were “arbitrary” under the Administrative Procedure Act.*[1]  Among other things, these regulations would have tied schools’ eligibility to participate in Title IV programs to certain, previously unseen measures of students’ post-graduation debt and income and their federal loan repayment activity.

On March 19, 2013, the same court denied the Department’s motion to revitalize those regulations by requiring schools to disclose their performance on the debt related metrics.  Ass’n of Private Sector Colls. & Univers., No. 1:11-cv-01314-RC, ECF No. 35, at 1, 18-19 (D.D.C. Mar. 19, 2013).  The court held that the Higher Education Act, specifically 20 U.S.C. § 1015c, prohibits the Department from collecting the type of data needed to calculate schools’ performance under the metrics.  Id.

B.   Ninth Circuit Courts Allow False Claims Act Cases to Go Forward, at Least on the Grounds of Whether a False Claim Has Been Pled

Two recent decisions–one from the Ninth Circuit Court of Appeals and one from the United States District Court for the Eastern District of California–show an apparent willingness by some courts (at least, or perhaps especially, in the Ninth Circuit) to find that relators in qui tam actions have adequately pled False Claims Act (“FCA”) violations against schools, allowing them to proceed to discovery.

In the first such decision, the Ninth Circuit Court of Appeals, on February 13, 2013, held that the district court below had erred in dismissing a qui tam relator’s case against the school by requiring the relator to identify a specific false claim in support of his False Claims Act case.  U.S. ex rel. Jajdelski v. Kaplan, Inc., No. 11–16651, 2013 WL 520418, at *2 (9th Cir. Feb. 13, 2013).*  The Ninth Circuit held that the court could infer a false claim because the relator had provided details of an alleged “phantom student scheme” in which Heritage College, a school that Kaplan had acquired, allegedly enrolled and then prepared diplomas for phantom students in order to obtain financial aid funding.  Id. at *1-2.  The Court held that the relator in the case did not need to go the “next step,” and specifically identify any students for whom false claims were actually allegedly submitted.  See id. at *2.  The Court noted that the other circuit courts were divided on this issue and followed the minority view that a specific claim was not necessary.  See id.  Interestingly, the short opinion from the Ninth Circuit was accompanied by a vigorous dissent from Judge Callahan, arguing that “Jajdelski’s complaint relies too much on innuendo, ultimately failing to lend the requisite specificity–the who, what, when, where, and how.”  Id. at *3 (Callahan, J., dissenting) (internal quotation omitted).

The Jajdelski decision is unpublished and thus of limited precedential value.  Nevertheless, it is an unfortunate example of the approach taken by some courts to stretch the False Claims Act beyond its normal scope (not even requiring the specific identification of an actual false claim).

The second decision was made by the United States District Court for the Eastern District of California on April 11, 2013 in U.S. ex rel. Capriola v. Brightstar Education Group., Inc., No. 1:11-CV-00135 AWI GSA, 2013 WL 1499319 (E.D. Cal. Apr. 11, 2013).  There, the relators–all former employees of the Institute of Technology, Inc.–alleged that the school falsely reported job placement rates and violated the incentive compensation ban by holding weekly and annual competitions based exclusively on enrollments numbers.  Id. at *1-2.  The court ruled that the relators had pleaded sufficient factual details to survive a motion to dismiss.  Id. at *5-9.

C.   The Public Disclosure Bar Flexing Its Muscles

Although some courts have found that relators have adequately pled claims in False Claims Act cases to survive motions to dismiss, defendants have had success dismissing certain meritless claims on other grounds.  On March 15, 2013, the United States District Court for the Central District of California dismissed the case of U.S. ex rel. Lee v. Corinthian Colleges, No. 2:07-cv-01984-PSG-MAN, ECF No. 224 (C.D. Cal. Mar. 15, 2013), on “public disclosure” grounds.  Id. at 6-18.  The “public disclosure” bar prohibits relators from filing lawsuits that are based upon earlier “public disclosures” of the allegations, provided that they are not the “original source” of the allegations.  Upon motions filed by both defendant Corinthian and its auditors, Ernst & Young, the district court held that the relators’ allegations of violations of the incentive compensation provision had been previously publicly disclosed and that the relators were not original sources of the information.  Id. at 14-15.  The relators were not original sources, according to the court, because they had no personal knowledge of the compensation schemes at Corinthian and did not know how Corinthian allegedly violated the incentive compensation ban.  Id. at 15-18.

The decision in Lee comes on the back of a similar decision in U.S. ex rel. Leveski v. ITT Educational Services, No. 1:07–cv–0867–TWP–MJD, 2011 WL 3471071 (S.D. Ind. Aug. 8, 2011).*  In that case, the district court held that the relator was “not a true whistleblower” because she had no independent knowledge of ITT’s employment evaluation and compensation programs, and no knowledge of facts suggesting the necessary element of scienter.  Id. at *6-7.

The Leveski case is now up on appeal with the Seventh Circuit.  The Seventh Circuit heard oral argument on January 17, 2013.

D.   Non-Profit Schools Facing Similar Allegations

As we have mentioned before, non-profit schools are beginning to come under the same scrutiny as for-profit schools.  This trend continued over the last quarter, when Tulane University’s Freeman School of Business announced that it had misreported test scores of its incoming class and the number of admission applications.  This came after disclosures by Claremont McKenna, Bucknell University, Emory University, and George Washington University that they had inflated test scores or provided inaccurate information about the class rankings of incoming students.

E.   The Importance of an “Advice of Counsel Defense”

One of the more important decisions in False Claims Act litigation is whether–and how–a school intends to rely upon prior advice of legal counsel in defending against an FCA case.  For instance, when schools are faced with allegations of violations of the incentive compensation provision, powerful evidence in defeating any claim that the school committed a “knowing” violation is that the school sought and obtained legal counsel’s blessing of its compensation plan.

On March 14, 2013, Magistrate Judge Frank J. Lynch, Jr. issued a ruling showing the importance of a school making a decision early on in a case about how prior legal advice will be used.  In that matter, U.S. ex rel. Matheny v. Medco Health Solutions, No. 08-14201-CIV-Graham/Lynch, ECF No. 258 (S.D. Fla. Mar. 14, 2013), Magistrate Lynch ruled that the defendants’ production of materials potentially relating to this “advice of counsel” argument three days before the discovery deadline was untimely, and therefore barred the defendant from asserting this argument.  See id. at 8, 12-13.  This ruling shows the critical importance of early planning as to whether–and how–the argument will be raised, and what will be the potential scope of waiver.  It is also a reminder to in-house counsel that their communications may in the end be subject to discovery–and will not always be cloaked with the privilege–as some lawyers often assume.

F.   Fourth Circuit Decision Tolls the FCA Statute of Limitations During “Wartime”

On March 18, 2013, the Fourth Circuit issued a ruling in U.S. ex rel. Carter v. Halliburton Co. — F.3d —-, 2013 WL 1092732 (4th Cir. 2013), that the usual 6-year statute of limitations under the False Claims Act is tolled during wartime under the relatively unknown Wartime Suspension of Limitations Act (“WSLA”), 18 U.S.C. § 3287.  Id. at *4-8.  In that case, the Fourth Circuit held that the relator’s claim was tolled because the nation is currently at war and the WLSA’s tolling provisions applied to the qui tam case at issue.  Id.  As Judge G. Steven Agee pointed out in his dissent, this allows the relator Carter until at least 2019 to file his FCA claim, “nearly fourteen years after his claims accrued.”  Id. at *21 (Agee, J., dissenting).

How far this decision will go is unclear.  Carter involved a government contractor providing war-related services to the government.  Although there are good arguments that the holding should be limited to these facts, we could imagine creative relators’ counsel attempting to argue that a similar holding should apply with respect to, for instance, GI funds.

G.   State FCA Developments

On February 19, 2013, a California appellate court held that a qui tam relator may contact current employees of the defendant in a California False Claims Act case.  Contreras v. First Student Inc., 213 Cal. Rptr. 3d 583, 601-05 (Cal. Ct. App. 2013).  When directed by an attorney, this type of activity is generally recognized as prohibited by the ethical rules of various jurisdictions.  But, here, the court found that the relator’s attorney had not directed the contact, and thus was not in violation of those rules.  Id. at 601-03.  The court, however, then went beyond that narrow ruling and suggested that the policy goals of California’s False Claims Act and the principles of the First Amendment could be in tension with the ethics prohibition altogether.  See id. at 604-05.  “[T]he policies inherent in the False Claims Act would be seriously undermined if the individual plaintiffs could not approach employees who might have knowledge of fraudulent conduct by the employer.”  Id. at 605.

This latter ruling, particularly if construed broadly without appropriate limits, is quite disturbing.  The reasoning could suggest that attorneys in a California False Claims Act case, perhaps even in a federal FCA case, could direct the relators to contact current employees of the defendant to gather evidence and potentially find sympathetic witnesses without regard for the longstanding ethical rules barring an attorney from contacting a represented party.

In another state law development, New York recently considered a troubling addition to its FCA law.  New York law previously gave the court discretion in awarding attorney’s fees to a prevailing relator.  Last month, a proposed bill was debated that could have had the effect of making an award of fees mandatory, even if the relator lost the lawsuit.  Thankfully, the version enacted into law does not extend this far, and makes the award fees mandatory only when the relator prevails.

Finally, on April 10, 2013, the attorney general of Massachusetts, Martha Coakley, published an op-ed column in the Boston Globe that was highly critical of private-sector schools.  In the column, Attorney General Coakley attempts to analogize private-sector schools to the sub-prime mortgage industry, and promises to bring enforcement actions.  And she is following through with her promise:  her office recently filed suit against Sullivan & Cogliano Training Centers, Inc.  According to the press release, Massachusetts alleges that the Sullivan & Cogliano Training Centers misrepresented its job placement rates.  The one time senatorial candidate’s recent attack continues the wave of attacks by politicians on the for-profit education sector, and is certainly something to keep an eye on.

Conclusion

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