April 22, 2014
This is our most recent update of significant developments relating to qui tam, securities, fraud, and other lawsuits and investigations involving schools, especially private-sector schools. This past quarter was an incredibly active one, with the Consumer Financial Protection Bureau filing a lawsuit against a for-profit school, fourteen state attorneys general issuing Civil Investigative Demands to four schools, two state attorneys general bringing actions against schools, the Federal Trade Commission’s first large-scale effort to investigate a for-profit school, two significant actions or investigations by the Department of Education, as well as other developments. These are all discussed below.
On February 26, 2014, the Consumer Financial Protection Bureau (CFPB) filed a lawsuit against ITT Educational Services, Inc. under the Consumer Financial Protection Act of 2010, accusing ITT of predatory student lending during the time period from July 21, 2011 through December 2011. Consumer Fin. Prot. Bureau v. ITT Educ. Servs., Inc., No. 1:14-cv-292 (S.D. Ind. Feb. 26, 2014), ECF No. 1.*  Although the actual claims asserted by the CFPB appear quite narrow, the CFPB complaint is remarkable in that it nevertheless makes broad-ranging allegations against ITT that mirror the Harkin Report and touch on numerous areas that are largely irrelevant to the claims asserted in the complaint, such as the cost of education, the backgrounds of ITT’s students, recruitment tactics, and other issues. Also noteworthy is the fact that the CFPB’s complaint relies heavily on reports from ITT’s “mystery shopper program”–a quality-control program that ITT uses to identify and rectify issues. This type of program should be applauded as an effort of compliance; yet, the CFPB uses selected, out of context results from this program to suggest wrongdoing.
ITT has vigorously denied the CFPB’s allegations, and ITT’s response to the CFPB complaint is due later this month.
This quarter also witnessed numerous state attorneys general becoming more involved in investigating or litigating cases against schools in the for-profit sector.
First, in January 2014, fourteen different state attorneys general (from the states of Arkansas, Arizona, Colorado, Connecticut, Idaho, Iowa, Kentucky, Missouri, Nebraska, North Carolina, Oregon, Pennsylvania, Tennessee and Washington) issued Civil Investigative Demands (CIDs)–similar to subpoenas–to Corinthian Colleges, Inc., Career Education Corporation, Education Management Corporation (EDMC), and ITT Technical Institute* as part of a coordinated investigative effort. The CIDs seek documents and answers to interrogatories that cover almost all aspects of the schools’ operations, including student recruitment, costs, placement, accreditation, student loans, and other matters.
Second, on March 3, 2014, the Massachusetts Attorney General filed an action against Corinthian Colleges, Inc. alleging that Corinthian misrepresented placement and earnings statistics. Massachusetts v. Corinthian Colls., Inc., 14-1093C (Mass. Super. Ct., Suffolk). Much like the CFPB complaint against ITT, this complaint reads more like a broad-based and unjustified attack against the entire sector and its business model, asserting a variety of allegations regarding loan tactics, recruitment tactics, and financial aid practices. And, like the CFPB complaint against ITT and the complaint that the California Attorney General filed against Corinthian several months ago, much of the complaint is based on the mere existence of some student complaints and efforts by the school to correct and remedy issues that it uncovers. Schools should not, of course, be punished for having robust and effective compliance programs.
Third, on February 27, 2014, the New Mexico Attorney General filed suit against ITT.* This lawsuit, similar to the CFPB complaint, alleges unfair loan tactics relating to ITT’s nursing program. In addition, this complaint makes various allegations relating to accreditation, the terms of ITT’s enrollment agreement, the curriculum, changes to the grading policy and graduation requirements, admissions and retention policies, and course flexibility. ITT has removed the action to federal court. King v. ITT Educ. Servs., Inc., 1:14-cv-00321-KBM-LAM (D.N.M. Apr. 4, 2014).
All of this recent activity is in addition to the previously reported ongoing activity by state attorneys general, including the lawsuit brought by the California Attorney General against Corinthian and the lawsuit brought by the Illinois Attorney General against Westwood College that is proceeding through discovery. People v. Alta Colleges, No. 12 CH 1587 (Cir. Ct. of Cook Cnty. Ill.). It is no exaggeration to say that this last quarter has involved the most activity by state attorneys general against the for-profit sector seen to date.
In addition to this increased activity from state attorneys general, more and more agencies of the federal government are getting involved in investigating (or apparently attempting to regulate) schools. We have already mentioned the CFPB’s lawsuit against ITT, and have earlier reported on the CFPB’s investigation of Corinthian. On January 28, 2014, the Federal Trade Commission (FTC) jumped into the mix as well. On that date, the FTC served DeVry Education Group Inc. with a compulsory request to provide documents and information relating to the advertising, marketing, or sale of secondary or postsecondary educational products or services or educational accreditation products or services.*
To our knowledge, this is the FTC’s first effort to investigate a for-profit college and only further demonstrates how numerous federal agencies are asserting some form of jurisdiction over the for-profit education sector. Indeed, earlier this month a bill was proposed in the Senate to create an “oversight committee” for the for-profit college industry, whose members would come from the Internal Revenue Service, Department of Defense, CFPB, Department of Education, Department of Justice, Securities and Exchange Commission, FTC, Department of Veterans Affairs, and Department of Labor. This bill was passed on to a Senate committee, but has not yet been reported on by the committee.
With all of this oversight and all of these investigations from various agencies, one might forget that there is actually an agency dedicated to and responsible for post-secondary education–the Department of Education (DOE). But the DOE certainly hasn’t forgotten. The University of Phoenix announced that on March 21, 2014, it received a subpoena from the Office of the Inspector General of the DOE (OIG) seeking documents and information relating to marketing, recruitment, enrollment, financial aid, fraud prevention, student retention, personnel training, attendance, academic grading, and various other matters.
The DOE has also taken action against Corinthian. In a January 23, 2014 letter to Corinthian posted by the Huffington Post, the DOE denied approval to Corinthian for new programs and locations until Corinthian provides more information on its students and where they land jobs after graduation. According to the DOE, this was because Corinthian “admitted to falsifying placement rates and/or grade and attendance records at various institutions and because of ongoing state and federal investigations . . . .” According to Corinthian, this refers to “isolated instances over a four-year period when [Corinthian] detected false or erroneous information.” Yet again it seems that corrective action–for which schools should be applauded–is being used as alleged evidence of wrongdoing. This is a very disturbing trend and bad government policy.
One might ask why the sudden increase in government actions and investigations, especially in light of all of the changes designed to help and protect students that have been made by and imposed on schools over the past few years? Although the government has not publicly acknowledged the connection, a skeptic might well believe it has to do with the effort by the DOE to promulgate the new gainful employment regulation, after the previous version was invalidated.* Indeed, in connection with the new proposal released on March 25, 2014, the DOE stated that part of the justification for the new rules is because “[w]e [at the DOE] are also concerned about the growing evidence, from Federal and State investigations and qui tam lawsuits, that many GE programs are engaging in aggressive and deceptive marketing and recruiting practices.” Of course, the opening of an investigation or the filing of a lawsuit does not make the concerns being investigated or alleged in the lawsuit true.
A skeptic might also ask whether the DOE and other federal and state authorities that are investigating the for-profit sector will be equally zealous in connection with representations that are increasingly being made by traditional schools with regard to their outcomes and the value of their degrees. These representations are often more aggressive than the type of representations made by for-profit schools, including a recent advertisement placed in national newspapers by a prominent private institution in the Boston-area of a 90 percent placement rate and a website by a prominent public institution in the Midwest claiming that a degree from the school allows its graduates to earn many hundreds of thousands of dollars more in a lifetime.
As in previous quarters, lawsuits filed under the False Claims Act (FCA) against educational providers have continued to be a hotbed for activity.
As previously reported, the U.S. District Court for the Southern District of Florida granted Kaplan University’s motion for summary judgment in U.S. ex rel. Gillespie v. Kaplan University, No. 09-20756-CIV, 2013 WL 3762445 (S.D. Fla. July 16, 2013).* In Gillespie, the plaintiff/relator sought to hold Kaplan liable under the FCA for allegedly falsely certifying that it was in compliance with the Rehabilitation Act to be eligible to receive federal student aid funds. The case went up to the Eleventh Circuit on appeal, and on April 2, 2014, the Eleventh Circuit entered a dismissal of the plaintiff/relator’s appeal “because the appellant Jude Gillespie has failed to file an appellant’s brief and appendix within the time fixed by the rules.” Gillespie v. Kaplan Univ., No. 13-13672-DD (11th Cir. Apr. 2, 2014).* The plaintiff/relator has moved to set aside the dismissal and remedy the default, but in doing so, he faces a heavy burden of showing “extraordinary circumstances” warranting such relief.
In another lawsuit emanating out of FCA litigation, the Superior Court of San Diego County sustained Kaplan’s demurrer to the plaintiff’s first amended complaint (FAC), without leave to amend, for failure to state a claim under the whistleblower protection provisions of the California False Claims Act (CFCA). This case went up on appeal, and on February 24, 2014, the California Court of Appeal affirmed the lower court’s judgment. Jajdelski v. Kaplan, Inc., No. 37-2011-00095912-CU-WT-CTL, 2014 WL 261121, at *1 (Cal. Ct. App. Feb. 24, 2014).* The Court agreed with Kaplan that in “order to allege protected activity under the CFCA, an employee must state facts showing that his or her activity was in furtherance of a CFCA action, i.e., an action predicated on funds wrongfully claimed from the state or a political subdivision thereof.” Id. at *5. And because the only allegations in the plaintiff’s FAC that could potentially support a CFCA whistleblower cause of action were disregarded as inconsistent with the plaintiff’s prior pleading, his claim could not stand. Id.
Another District Court Grants Summary Judgment to a School
On March 31, 2014, the U.S. District Court for the Western District of Missouri granted defendant Weston Education’s motion for summary judgment as to relators’ claims in an FCA case. U.S. ex rel. Miller, et al. v. Weston Educ., Inc., No. 4:11-CV-00112-NKL, 2014 WL 1292407, at *1 (W.D. Mo. Mar. 31, 2014). In this action, relators alleged that Heritage College administrators changed student grades or awarded students unearned attendance hours, which resulted in the improper disbursement or retention of Title IV funds. In a positive development, the court affirmed that the materiality element required in an FCA case means the plaintiff/relator must show a causal link between the false statement or record and the government’s payment of a false claim. Id. at *4. The court’s analysis is potentially very helpful in limiting and defining FCA claims that survive motions to dismiss, and limiting relators’ ability to seek massive damages based on vague false certification theories of liability.
There is one caveat with regard to the decision, however. The court’s analysis and discussion of Main could be used by relators to argue that in compensation qui tam cases, materiality and damages are to be presumed. We do not believe that this is correct (either as a matter of practice or as a way of reading the Main decision), and continue to believe that the language in Main relating to “some” unwarranted enrollments and “some” unjustified federal disbursements strengthens rather than weakens the argument that relators have the burden of proving damages and must prove damages on a student-by-student basis.
Supreme Court Inaction
There was some hope at the writing of our last alert that the Supreme Court would step in and add much needed clarity to some issues posed by FCA cases–most particularly, what level of detail a plaintiff must plead at the beginning of the case to get past a motion to dismiss. Unfortunately, during this last quarter, the Supreme Court declined the opportunity. On March 31, 2014, the Supreme Court, after requesting input from the Department of Justice, denied certiorari in U.S. ex rel. Nathan v. Takeda Pharmaceuticals North America, Inc., No. 12-1349 (U.S. Mar. 31, 2014). The issue in Takeda was the level of particularity a plaintiff must provide at the beginning of the case and whether it is enough for a plaintiff to describe a scheme that strongly suggests false claims were submitted, as opposed to identifying actual false claims. The Supreme Court declined to resolve the circuit split over this issue. Also, of note, that same day, the Supreme Court denied certiorari in U.S. ex rel. King v. Univ. of Texas Health Science, No. 13-927 (U.S. Mar. 31, 2014), in which the Fifth Circuit had held that the University of Texas Health Science Center-Houston could not be sued under the FCA because it was an “arm of the state.”
Government Cannot Dodge Discovery Obligations
In our past three quarterly updates, we have discussed the discovery disputes between the United States and EDMC in the FCA case filed by the United States against EDMC in Pennsylvania. As our readers likely remember, broad discovery was allowed both ways in this case (from both EDMC and the United States) and the government has been attempting to challenge the discovery requested of it every step of the way.
This quarter, the Special Master’s Report & Recommendation Nos. 5, 6, and 7 recommended that the Court deny the government’s motions to quash the depositions of DOE attorney Russell Wolff, the 30(b)(6) deposition of the DOE pertaining to the government’s responses to defendant’s interrogatories, and the 30(b)(6) deposition of the DOE relating to the United States’ and the Massachusetts Attorney General’s investigation of defendant. On April 9, 2014, the Court did just that, stating that “EDMC has been subject to a tremendous burden in discovery. The United States made a knowing and informed decision to voluntarily intervene in this qui tam litigation. In that light, the United States’ concerns with the burden of reciprocal discovery by EDMC ring hollow.” United States v. Educ. Mgmt. LLC, No. 2:07-cv-00461-TFM (W.D. Pa. Apr. 9, 2014), ECF No. 368, at 6.* This is a strong statement in support of what should be the obvious fact that the U.S. government is not immune from discovery, especially in cases in which it intervenes.
In a previous quarterly update, we discussed a complaint filed by Professional Massage Training Center, Inc. (PMTC) against the Accrediting Commission of Career Schools and Colleges (ACCSC) in the U.S. District Court for the Eastern District of Virginia. The complaint alleged that ACCSC improperly terminated the accreditation of PMTC. In an interesting ruling, the district court judge mandated that the accreditor renew the school’s accreditation. Further, the court fined the agency $429,000 for the school’s lost profits. Prof’l Massage Training Ctr., Inc. v. Accreditation Alliance of Career Schs. and Colls., No. 1:12-cv-00911-LO-IDD (E.D. Va. Jan. 17, 2012), Dkt. 353, at 5. The case serves as a reminder to higher education quality assurance agencies that their decisions must be based upon objective fact, not other factors (such as undue pressure from the DOE).
As our regular readers may recall, we reported on the battle between the Institute for College Access & Success (TICAS) and the DOE OIG for documents relating to Robert Shireman, who allegedly violated federal ethics laws when he was deputy undersecretary for the DOE. The OIG’s investigation of Shireman is related to a broader inquiry of how the DOE handled the contentious fight over the Administration’s gainful employment regulation. The Magistrate Judge in this matter originally blocked the government’s demand for these documents. However, on appeal, the U.S. District Court for the District of Columbia declined to adopt the Magistrate Judge’s conclusion and ordered TICAS to comply with the subpoena. United States v. The Inst. for Coll. Access and Success, No. 13-mc-81 (ABJ-AK), ECF No. 20 (D.D.C. Mar. 19, 2014). The forthcoming document production should be interesting.
We will continue to keep you informed on these and other related issues as they develop.
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