Recent Developments Related to Litigation Involving the Education Sector (February 2015)

February 10, 2015

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 we saw the government confirm the existence of the long-suspected interagency task force overseeing for-profit schools, several notable rulings in cases involving the sector, informative settlements, as well as other developments.  These are all discussed below.

A.        Department of Education Formalizes Interagency Task Force Dedicated to the Oversight of the For-Profit Sector

In the last few updates, we reported an increase in scrutiny of private-sector schools by a wide array of government agencies, including not only the Department of Education ("ED"), but also the Securities and Exchange Commission ("SEC"), the Consumer Financial Protection Bureau ("CFPB"), the Federal Trade Commission ("FTC"), the Department of Justice ("DOJ"), and states attorneys general.  On October 30, 2014, ED confirmed that it was coordinating and collaborating with other agencies that are investigating schools, announcing an interagency task force dedicated to the oversight of for-profit higher education institutions.  ED stated this interagency task force formalizes and strengthens an already existing working group, which has been collaborating over the past year in several reviews and investigations.  The task force is to be composed of both federal agencies (including ED, DOJ, Treasury, Veterans Affairs, CFPB, FTC, and SEC) and state agencies (including states attorneys general).  ED stated the task force will meet as often as necessary, but at least once a quarter.  For-profit educational institutions can thus expect greater coordination and scrutiny from this interagency task force, and should be aware that multi-agency investigations may be the new norm, rather than the exception.  There is a potential advantage to this increased coordination.  As more and more agencies that are not directly involved in education policy begin to investigate schools and propose remedies, the Department of Education can serve a very helpful role in educating these agencies on existing rules and policies and ensuring that any proposed remedies are not inconsistent with existing requirements and are in the best interests of the students.   

B.        One Lawsuit Bites the Dust, but Securities Lawsuits Continue to Impact the Sector

As bad press and government scrutiny of the sector have continued, we have seen an uptick in derivative actions and investor lawsuits filed against publicly traded for-profit schools.  This past quarter saw two newsworthy developments on that front. 

First, the University of Phoenix’s parent company, Apollo Group, won a significant victory at the Ninth Circuit in Oregon Public Employees Retirement Fund v. Apollo Group Inc., —F.3d —, 2014 WL 7139634 (9th Cir. 2014).  Following a period of volatile movement in Apollo’s stock price, plaintiffs’ attorneys filed several putative class actions alleging the company made misleading statements about enrollment and revenue growth and omissions about its student recruitment practices.  Id. at *4-5.  In affirming the dismissal of the consolidated cases on the pleadings, the Ninth Circuit explained that the allegations at best amount to a few "isolated instances of faulty recruitment," not widespread deception.  Id. at *6. 

On January 15, 2015, the United States District Court for the Southern District of California issued a contrary order as to Bridgepoint Education, certifying a class of shareholders based on claims that its largest school, Ashford University, misstated that it would remain accredited despite concerns about student retention and tracking.  In re Bridgepoint Edu. Inc. Secs. Litig., No. 12-cv-1737 (S.D. Cal. Jan. 15, 2015).  Bridgepoint had argued that, at a minimum, the class period should end by July 9, 2012, when the company notified investors in an SEC filing that an accreditor had denied its application for initial accreditation.  Id. at 3, 11.  Although the court rejected this argument and certified a broader class, the court did recognize that this truth-on-the-market defense could defeat materiality and that the class period may need to be narrowed at a later point.  Id. at 11.  Additionally, Bridgepoint’s defenses as to the merits of the claims (or lack thereof) remain.

C.        Know-Nothing Relators, Copycat Lawsuits, and the Purpose of Specificity in FCA Pleadings

Three notable decisions involving schools facing False Claims Act ("FCA") lawsuits were issued this quarter, with wins for two schools, and a loss for another.

First, in the long-running case, U.S. ex rel. Hoggett v. Univ. of Phoenix, the University of Phoenix won a dismissal with prejudice last quarter based on the public disclosure bar and the decision was reaffirmed in November.  2014 WL 3689764, at *5 (E.D. Cal. July 24, 2014), reconsideration denied, 2014 WL 6473794 (E.D. Cal. Nov. 18, 2014).  As readers of this update will recall, the public disclosure bar prohibits the so-called whistleblower, a.k.a. the relator, from filing a lawsuit based upon earlier "public disclosures" of the allegations unless the relator is an "original source" of the allegations.  After examining the disclosures both specific to the University of Phoenix and for-profit schools generally, the court held that the public disclosure bar applied because the disclosures were sufficient to give the government notice of the alleged fraud and an opportunity to investigate if it so desired.  2014 WL 3689764, at *7.  The court further held that the two relators did not qualify for the original source exception because their entry-level positions as recruiters neither gave them access to, nor knowledge about, the creation and implementation of the allegedly fraudulent recruitment practices that were the focus of the lawsuit.  Id. at *11-12.

This ruling should be helpful for defendants fighting these claims given the increasing number of FCA lawsuits based on alleged company-wide frauds that supposedly reach the highest levels of executives, yet are brought by entry-level employees with presumably little-to-no knowledge.  It is also helpful because it comes at a time when courts, particularly within the Ninth Circuit, have been examining the contours of the public disclosure bar and who qualifies as an original source.  The Ninth Circuit currently has at least three cases on its docket related to the public disclosure bar.  We’ve previously reported on the U.S. ex rel. Lee v. Corinthian Colleges, which remains on the court’s docket and focuses on how similar the previous public disclosure must be to the allegations in the case in order to invoke the bar.  Then in August of 2014, the Ninth Circuit granted a petition for permission to appeal, agreeing to examine what exactly a relator’s pre-filing disclosure must include if the relator wishes to qualify as an original source. Amphastar Pharmaceuticals Inc. v. Aventis Pharma S.A., Case No. 14-56382 (9th Cir. 2014).*  Finally, in December, the court voted to hear en banc (with 11 judges instead of the usual 3) a case that likely will turn on whether the relators in that matter qualify as original sources.  U.S. ex rel. Hartpence v. Kinetic Concepts Inc., Case No. 12-55396 (9th Cir.).

Second, the United States District Court for New Jersey dismissed an FCA case against Premier Education Group on first-to-file grounds.  U.S. ex rel. LaPorte v. Premier Educ. Grp., No. 11-3523 (RBK/AMD), 2014 WL 5449745 (D.N.J. Oct. 27, 2014).  Like the public disclosure bar, the first-to-file rule aims to eliminate copycat lawsuits.  Thus, the rule provides that once a qui tam lawsuit has been filed, "no person other than the Government may intervene or bring a related action based on the facts underlying the pending action."  31 U.S.C. § 3730(b)(5).  In the case against Premier Education, the court held that a previous lawsuit with "remarkably similar[]" but not identical allegations about the school’s accreditation status and eligibility for financial aid had already been filed and thus precluded the current one brought by LaPorte.  LaPorte, 2014 WL 5449745, at *8.  In doing so, the court joined an increasing number of courts that have held that it does not matter whether or not the previous case is technically "pending" at the time the latter case is filed to bar the latter case.  Id.  As readers of the July 2014 update will recall, the meaning of the word "pending" in the first-to-file bar is currently before the Supreme Court, with oral argument having occurred on January 13, 2015 and a decision expected by the summer.

Third, the United States District Court for the Northern District of Illinois issued a two-page order on November 17, 2014, allowing the relators in U.S. ex rel. Munoz v. Computer Systems Institute, Inc., No. 11-cv-07899 (N.D. Ill.)* to amend their complaint to add allegations that the school violated the so-called 90/10 rule.  That rule requires for-profit colleges to obtain at least ten percent of their revenues from sources other than Title IV student aid programs.  The relators in Munoz had survived a motion to dismiss in January 2014, which allowed them to proceed, including on a novel misrepresentations-to-students theory.  The court allowed the relators to add the 90/10 allegations despite the school’s arguments that the pleading lacked specific facts, as required in an FCA case, because the court concluded that the school had notice of the allegations.  What makes this ruling particularly alarming is that the case law is well-established that allegations in an FCA case must be particularly pled, not only to give defendants notice of the allegations, but also to serve as an important gatekeeping function to prohibit the filing of frivolous suits.  As the Eleventh Circuit explained, "when a plaintiff does not specifically plead the minimum elements of their allegation, it enables them to learn the complaint’s bare essentials through discovery and may needlessly harm a defendants’ goodwill and reputation by bringing a suit that is, at best, missing some of its core underpinnings, and, at worst, are baseless allegations used to extract settlements."  See U.S. ex rel. Clausen v. Lab. Corp. of Am., Inc., 290 F.3d 1301, 1310 (11th Cir. 2002).  Yet, in this case, the trial court explicitly allowed the case to proceed so that "[d]iscovery will flesh out whether Defendant violated the ten percent rule."  This is contrary to the pleading principles in FCA cases. 

D.        Million Dollar Fees Request Shot Down as Unreasonable for Nominal Win

Last quarter, we reported on the first FCA trial involving alleged recruiter compensation violations.  The relators won at trial, but recovered no compensatory damages and only $11,000 in penalties.  Nonetheless, following their "successful" verdict, relators’ attorneys requested more than a million dollars in attorneys’ fees and more than $150,000 in costs.  U.S. ex rel. Christianson v. Everglades College, Inc., No. 12-60185-CIV (S.D. Fla. Dec. 15, 2014).  On December 15, 2014, the magistrate judge rejected that request, issuing a report and recommendation that the court had discretion to award no attorneys’ fees at all given the "nominal recovery obtained by the Relators."  Id. at 12.  In a thoughtful and thorough opinion, the judge eventually settled on $60,000 in attorneys’ fees as an appropriate award given the limited recovery and the fact that relators’ attorneys’ contingency agreement with the relators would only entitle them to $5,000.  See id. at 12.  The court separately dismissed a number of the costs as unreasonable and limited the cost award to $27,037.33. 

On January 29, 2015, the District Court adopted the magistrate’s recommendations in full, holding that the magistrate judge "appropriately applied" Supreme Court authority that allows for the reduction of attorneys’ fees when the party only obtained "limited relative success" in the case.  U.S. ex rel. Christianson v. Everglades College, Inc., No. 12-60185-CIV (S.D. Fla. Jan. 29, 2015).           

E.        Gainful Employment Regulation–Still Arbitrary and Capricious

On November 6, 2014, the Association of Private Sector Colleges and Universities ("APSCU"), which represents over 1,400 educational institutions, filed suit in United States District Court for the District of Columbia challenging the ED’s new gainful employment regulation.  The lawsuit challenges ED’s second attempt to link a school’s eligibility to receive federal student loan funding to the debt, earnings, and debt repayment of a program’s former students.  The first attempt was struck down for being arbitrary and capricious.  APSCU v. Duncan, 870 F. Supp. 2d 133, 152-55 (D.D.C. 2012).*  APSCU contends that the revised, new regulation is worse, with ED now imposing a single test (debt-to-earnings) which would cut off federal funds to programs whose recent graduates have not attained a particular level of earnings relative to the amount of debt they incurred to attend the program.  APSCU v. Duncan, No.14-01870-JDB (D.D.C. Nov. 6, 2014), ECF No. 1.*  This test, according to APSCU’s lawsuit, will "impose massive disincentives" on schools from recruiting "low-income, minority, and other traditionally underserved student populations, because, as an historical matter, those demographics are widely recognized as most at risk of failing the Department’s arbitrary test."  Id. ¶ 9.

The APSCU lawsuit also challenges ED’s attempt to require schools to certify that their programs–e.g., cosmetology or culinary arts–meet the applicable accreditation requirements and licensure standards.  According to APSCU, this requirement oversteps Congress’s decision to only require institution-level, not program-level, accreditation.  Id. ¶ 195.  And as a practical matter, this provision is particularly troubling because we have already seen this issue–i.e., did my school sufficiently help me get licensed as a beautician, nurse, or lawyer?–as the supposed hook for an increasing number of False Claims Act lawsuits.  

In addition to the APSCU lawsuit, the Association of Proprietary Colleges, which represents 23 schools in New York, filed a similar challenge to the new ED regulations in the Southern District of New York.  Ass’n of Proprietary Colleges v. Duncan, No. 14-cv-8838A (S.D.N.Y. Nov. 6, 2014), ECF No. 1.  One interesting component of that lawsuit is the organization’s allegation that the new regulations usurp the authority of the state of New York to regulate its own schools.  Id. ¶ 6.

F.         The Settlement Trend Continues

This quarter we saw three notable settlements, one of which involved the largest public community college district in the United States. 

Maricopa County Community College District Settlement

On December 1, 2014, DOJ announced that the largest community college district in the United States has agreed to pay $4.08 million to resolve allegations that it submitted false claims to obtain AmeriCorps state and national grants.  Maricopa County Community College District ("MCCCD") operates all community colleges in Maricopa County, Arizona, and is based in Phoenix.  DOJ alleged that the community college district improperly certified that students had completed a required number of service hours–when they had not–so they would receive an AmeriCorps education award, and had mismanaged grant funds when administering a program that offered students an opportunity to volunteer.  By entering into the settlement, the community college district did not admit to any liability or wrongdoing. 

This settlement provides another example that for-profit higher educational institutions are not the only educational institutions at risk under the FCA.  Increased scrutiny by governmental agencies affects all schools, not just private-sector ones. 

Kaplan Higher Education Settlement

Kaplan Higher Education entered into a $1.3 million settlement with DOJ, on behalf of ED, earlier this month to resolve allegations that Kaplan College employed unqualified instructors to teach medical assistant courses at two of its campuses in Texas.  In DOJ’s press release, the government noted that Kaplan fully cooperated with the government’s investigation and that of the $1.3 million settlement, approximately $1 million will be paid to students in the form of tuition refunds.  In addition, the government noted in the settlement that it "did not encounter evidence of harm to Kaplan students."  And similar to the community college district discussed above, Kaplan agreed to the settlement to avoid the expense of litigation and did not admit to any liability or wrongdoing.

Massachusetts Attorney General Settles with Salter Schools

On December 11, 2014, Salter Schools, a Massachusetts for-profit group of schools owned and operated by Premier Education Group, L.P., entered into a $3.75 million settlement with the state’s attorney general, Martha Coakley, to resolve allegations that the school misrepresented job placement rates and used deceptive enrollment tactics.  This is the largest settlement to date that Attorney General Coakley has obtained in her ongoing battle against the sector.  It is notable, however, that this settlement still includes no determination of liability.  In the consent judgment, Salter Schools deny all allegations of wrongdoing and any liability for the claims alleged by the Massachusetts Attorney General, and explain they agreed to the settlement to avoid the time, burden, and expense of contesting such liability.

The bulk of the settlement will be used to pay down student federal loans.  The Salter Schools, as part of the settlement, also agreed to provide several disclosures for all of their Massachusetts locations on their website pertaining to job placement services, admission standards, and certification, and to exclude particular positions of employment in calculating placement percentages.

Implications

As noted in previous updates, these settlements further emphasize the leverage the government possesses when investigating schools for purported wrongdoing.  None of the schools discussed above admitted to any liability or wrongdoing, yet each school decided it was in its best interest to settle the claims.  In the current environment, and in light of the interagency task force led by the ED, it is likely that settlements will become even more prevalent.

G.        For-Profit Schools Continue to Face New Lawsuits

We also learned of two new lawsuits against private sector schools this past quarter.

First, on December 3, 2014, the U.S. government and the state of Florida filed a civil complaint in the Southern District of Florida accusing FastTrain College and its owner and CEO, Alejandro Amor, of violating both the federal and state False Claims Acts by allegedly submitting fraudulent documents on behalf of students so it could receive millions in financial aid.  FastTrain closed in the summer of 2012, but at its peak, it operated seven Florida campuses.  The government alleges in its complaint that FastTrain submitted false information relating to the eligibility of students to receive Title IV program assistance, when it certified that students had high school diplomas or a recognized equivalent when they did not.  FastTrain admission personnel also allegedly coached certain prospective students who were ineligible to misstate information on the Free Application for Federal Student Aid ("FAFSA") so FastTrain could secure more federal funding.  In addition to the civil complaint, FastTrain, Amor, and three other employees face criminal charges of conspiracy to steal government funds and theft of government funds.  The criminal investigation was already underway when a FastTrain admissions officer filed an FCA qui tam suit against FastTrain, within which the federal and state governments then intervened.       

Second, on December 16, 2014, an FCA qui tam lawsuit against Education Management Corp. ("EDMC") was unsealed in the United States District Court for the Western District of Pennsylvania.  United States v. Art Inst. Online, Inc., No. 11-00601-TFM (W.D. Pa. May 6, 2011).  Originally filed in 2011 under seal, EDMC faces allegations in this lawsuit that are very similar to those brought in another qui tam lawsuit alleging illegal recruiting practices, United States v. Educ. Mgmt. LLC, No. 07-00461-TFM (W.D. Pa. Apr. 5, 2007), which we have discussed in prior updates.  Here, relators allege that EDMC lied on student financial aid applications to collect more money under the GI Bill and that EDMC utilized deceptive recruiting practices to target veterans who qualify for aid under the GI Bill.  In recruiting prospective students, EDMC allegedly misrepresented post-graduate employment prospects, misled students about education costs, and lowered income and assets on financial aid applications to increase the amount of money students received.  Unlike in United States v. Educ. Mgmt. LLC, the U.S. government declined to intervene in this case.

Conclusion

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

__________________________

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

Los Angeles
Timothy Hatch (213-229-7368, [email protected])  
Marcellus McRae (213-229-7675, [email protected])
Eric D. Vandevelde (213-229-7186, [email protected])
James Zelenay (213-229-7449, [email protected])

Orange County
Wayne Smith (949-451-4108, [email protected])
Nick Hanna (949-451-4270, [email protected])

San Francisco
Charles J. Stevens (415-393-8391, [email protected])

Washington, D.C.
Douglas Cox (202-887-3531, [email protected])
Michael Bopp (202-955-8256, [email protected])
Jason J. Mendro (202-887-3726, [email protected])
Amir C. Tayrani (202-887-3692, [email protected])

© 2015 Gibson, Dunn & Crutcher LLP