Recent Developments Related to Litigation Involving the Education Sector (January 2014)

January 30, 2014

This is the latest update of significant developments relating to qui tam, securities, and other lawsuits and investigations involving schools, especially private-sector schools.  This past quarter, there were significant developments in the Ninth Circuit and Fifth Circuit; two more federal district courts allowed qui tam cases to proceed to discovery; purported “whistleblowers” continued to expand their theories of liability; some interesting and potentially significant guidance was provided by a court regarding the parties’ discovery obligations in a False Claims Act (“FCA”) action in which the government intervened; and much more.

A.    Binding Arbitration Clauses in Enrollment Agreements

The implications of the Supreme Court’s 2011 decision in AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011) regarding the Federal Arbitration Act (“FAA”) continue to reverberate through the lower courts, including recently in a published Ninth Circuit decision involving the education sector.  In Ferguson v. Corinthian Colleges, Inc., 733 F.3d 928 (9th Cir. 2013), two former students had brought a putative class action against Corinthian under California’s various consumer protection statutes based on allegations that Corinthian deceptively enticed enrollment at its schools.  Id. at 931.  Because both of the students had signed binding arbitration clauses in their enrollment agreements, Corinthian moved to compel arbitration.  Id. at 930.  The United States District Court for the Central District of California granted the motion with respect to the monetary relief, but held that the request for injunctive relief was incompatible with arbitration based on a state law rule that carved out an exception for injunctive relief that benefited the “general public.”  Id. at 933.  The Ninth Circuit reversed that latter decision, and ruled in Corinthian’s favor, holding that Concepcion made clear that the FAA displaces any contrary state law that “prohibits outright” a particular claim or remedy.  Id. at 934-35.  “[E]ven where a specific remedy has implications for the public at large, it must be arbitrated under the FAA if the parties have agreed to arbitrate it.”  Id. at 935.

The Ninth Circuit’s ruling reinforces that every school should examine whether it wishes to have arbitration agreements in its student enrollment agreements.  With its decision in Conception, the Supreme Court has eliminated many of the exceptions that had previously reduced the effectiveness of such agreements.

B.    Why File An Amicus Brief on a Seemingly Irrelevant Issue?

The Ninth Circuit has another case involving the sector on its docket: the relators in U.S. ex rel. Lee v. Corinthian Colleges appealed the district court’s decision that the public disclosure bar precluded their lawsuit.  The “public disclosure” bar strikes a balance between encouraging citizens to root out fraud against the government while barring “parasitic” lawsuits based on publicly available information.  Graham Cnty. Soil & Water Conserv. Dist. v. U.S. ex rel. Wilson, 559 U.S. 280, 296 n.16 (2010).  The district court in Lee concluded that the basic allegations in the lawsuit were publicly disclosed in congressional hearings, in a previous securities class action filed against Corinthian, and in lawsuits filed against other schools based on similar allegations.  U.S. ex rel. Lee v. Corinthian Colls., No. 2:07-cv-01984-PSG-MAN, ECF No. 224, at 8-10. (C.D. Cal. Mar. 15, 2013).

In a strange move, the United States filed an amicus brief, or friend of the court brief, with the Ninth Circuit in this matter arguing a single legal issue: that the lawsuits with similar allegations filed against other schools would not trigger the public disclosure bar.  This move by the government is interesting because it is not clear that this is a decisive issue in the case.  As mentioned above, there were also specific disclosures of the allegations about Corinthian in congressional hearings and in the securities lawsuit filed against Corinthian.  The decision to file an amicus brief also seems odd because the version of the public disclosure bar at issue in the Lee case is no longer the law for cases filed in the future.  Now, if the United States objects to a dismissal on public disclosure ground, it has veto power to prevent that decision.  31 U.S.C. § 3730(e)(4)(A).

Simultaneous with this, Corinthian is also pursuing its portion of the $1.5 million sanctions award imposed by the district court against relators’ counsel.  On January 7, 2014, Corinthian filed a petition in Texas state court to enforce the $984,457.50 judgment it secured against Houston-area attorney Scott D. Levy.

C.    The Flexible Analysis that Governs Whether a Public School Is Subject to the FCA

On November 4, 2013, the Fifth Circuit Court of Appeals issued an important decision holding that the University of Texas Health Science Center-Houston was an “arm of the state” and thus immune to an FCA lawsuit and an FCA retaliation claim.  U.S. ex rel. King v. Univ. of Tex. Health Sci. Center-Houston, — F. App’x —-, 2013 WL 5881083, at *8-9 (5th Cir. 2013).  Applying a multi-factor test, the Fifth Circuit reasoned that the Health Center was an arm of the state because Texas state law treated the Health Center as a state agency, the state provided substantial funding to the Health Center, the Health Center was subject to that state’s control, and the Health Center addressed both local concerns in Houston and state-wide issues.  Id. at *5-8.  The only factor that cut against immunity was that the Health Center has sued and been sued directly, without requiring the University of Texas be substituted in its place.  Id. at *8.  That factor though was not enough under the flexible analysis used by the court to change the result when all of the other factors cut in favor of immunity.  See id.

The Fifth Circuit’s decision correctly reiterates that public schools are generally not subject to the FCA.  However, it also warns schools that immunity from the FCA is not a simple yes/no proposition based on a categorical rule, but a flexible analysis that often depends on legal decisions made well before the filing of an FCA lawsuit.  Thus, public universities and other public schools should consider potential exposure under the FCA when making decisions about organizational structures and even legal positions in other non-FCA cases.

D.    Boilerplate Promise to Comply with the Law Triggers Potential FCA Liability?

On October 25, 2013, the United States District Court for the Northern District of Illinois granted in part and denied in part Computer Systems Institute’s (“CSI”) motion to dismiss in U.S. ex rel. Munoz v. Computer Systems Institute, Inc., No. 11-cv-07899, 2013 WL 5781810 (N.D. Ill. Oct. 25, 2013).*[1]  Two former employees of CSI filed a wide-ranging complaint under the FCA against CSI that included the now fairly common claims of alleged violations of the compensation rules and the prohibition on unsupported advertisements about job placement.  Id. at 4-5.  Despite what CSI argued were the relators’ lack of facts to back up these allegations, the court allowed the incentive compensation theory and the false advertisement theory to proceed to discovery.  Id.  This continues the trend, discussed in more detail below, of district courts relaxing the requirements of Federal Rules of Civil Procedure 8 and 9 in cases against private sector schools (as well as other cases).

What makes the Munoz case unique is that the relators included an FCA claim based on allegations unconnected to any explicit requirement of the program participation agreement (“PPA”).  Id. at *6.  The PPA is the hook that these cases usually depend on: the relator alleges that the defendant falsely certified compliance with one of the host of specified statutes and regulations included in the PPA and claim that, as a result, the funding received under the PPA was falsely obtained.  But in Munoz, the relators sought to impose FCA liability based on allegations not only of violations of specific provisions in the PPA, but also based upon misrepresentations about the nature and quality of the education untethered to any specific requirement of the PPA.  Id.

In a short decision, the court in Munoz held that the relators did not need to identify a specific promise or requirement in the PPA; rather, the generic statement in the PPA requiring general compliance with the law (including laws relating to misrepresentation) was sufficient to proceed past a motion to dismiss.  Id.  The court recognized that the relators will have to “prove scienter and materiality; in other words, they must show that the [alleged] false statement [of general legal compliance] was material to the government’s decision to pay and that CSI knowingly or recklessly ignored that it was violating the regulation in question.”  Id.  But that could wait until after discovery, according to the court, because the allegations involved “key issues related to a prospective students’ decision to go to school.”  Id.

What makes this decision surprising is that such an expansive scope of FCA liability–where statements of general legal compliance can provide a basis for an FCA suit–has been repeatedly rejected by the courts, including just recently in a decision from the Fifth Circuit.  In U.S. ex rel. Stephenson v. Archer W. Contractors, L.L.C., — F. App’x —-, 2013 WL 6225221 (5th Cir. Dec. 2, 2013), the relator sought to hold several construction companies involved in the rebuilding of the New Orleans levees liable under the FCA for overloading trucks with clay, sand, and other building materials.  Id. at *1.  The relator claimed that the fraud on the U.S. government stemmed from the contract’s “boilerplate language stating that the company would follow the law.”  Id. at *2.  The Fifth Circuit held that this boilerplate language was insufficient: “Absent a more specific certification of compliance, for example with traffic or roadway regulations, the FCA would here become a general enforcement device for traffic infractions.”  Id.

We will continue to follow this development in the case law.  But schools should be mindful that at least one court has found that a general statement of compliance with the law found in the PPAs may provide a sufficient hook to sue a school under the FCA for a violation of any potentially applicable law.  In our view, this expansive view is without support or justification.

E.    Another District Court Denies a Motion to Dismiss

Continuing the trend of relaxed pleading standards, the United States District Court for the Southern District of California recently denied Bridgepoint Education’s motion to dismiss in U.S. ex rel. Carter v. Bridgepoint Education Inc., No. 10CV1401 JLS (WVG), ECF No. 41, at 1 (S.D. Cal. Jan. 8, 2014).*  The relators’ complaint focused on alleged violations of the compensation rules, which at the relevant time, prohibited a school from paying recruiters solely based on enrollments.  Id. at 3.  Bridgepoint argued that the relators’ complaint was insufficient because the relators’ own allegations and the documents they referenced in the complaint undermined any allegations that the salaries were based solely on enrollments.  Id. at 8-9.  The court acknowledged the “ambiguous terms” included in the complaint and the relators’ own evaluations appear “inconsistent” with the allegations that enrollments were the sole factor.  Id. at 11-12.  Nonetheless, the court held that the documents did not “refute” the idea that all that really mattered was enrollment numbers.  Id. at 12.

This decision continues the trend of district courts allowing claims to proceed past a motion to dismiss even though the factual allegations appeared quite sparse.  Munoz, 2013 WL 5781810, at *4-5; U.S. ex rel. Sobek v. Educ. Mgmt., LLC, No. CIV.A. 10-131, 2013 WL 2404082, at *6 (W.D. Pa. May 31, 2013)*; U.S. ex rel. Christianson v. Everglades College, Inc., No. 12-cv-60185-WPD, ECF No. 40, at 7 (S.D. Fla. May 10, 2013); U.S. ex rel. Miller v. Weston Educ., Inc., No. 4:11-CV-00112-NKL, 2012 WL 6190307, at *10 (W.D. Mo. Dec. 12, 2012).  What is perhaps most striking from a legal standpoint about these decisions is that they come at a time when the Supreme Court has tightened the pleadings standards.

F.    A Focus on State Funding of Public Elementary and High Schools

Some of the creative theories of FCA liability that have become all too common in the area of post-secondary education are also being advanced in a case that involves K through 12 education.  The United States District Court for the District of Minnesota recently unsealed a case against DeVry Inc. and its subsidiary Advanced Academics, Inc. (“AAI”), after the United States and the State of Minnesota declined to intervene.  U.S. ex rel. Bachmann v. Minn. Transitions Charter Schs., No. 12-cv-01359 DWF-JSM (D. Minn.).  The former employees turned relators bring claims under both the federal and Minnesota FCAs based on allegations that several online elementary and high school charter schools manipulated enrollments, attendance records, and special education procedures to improperly collect public education funding from the state.  The connection to DeVry and AAI is that the charter schools contract with AAI for educational programming and support.

DeVry and AAI filed a motion to dismiss on December 16, 2013.  They argued that a claim under the Minnesota FCA is a nonstarter because the law did not become effective until after the alleged wrongdoing.  Moreover, they argued that the relators cannot state a claim under either the federal or state FCA because there are no allegations that DeVry or AAI ever submitted a false claim or purposefully caused the charter schools to submit a false claim.  The relators’ opposition is due on February 10, 2014.

We will of course keep an eye on this case.

G.    Thomas Jefferson School of Law Defeats Class Certification

For the past couple of years, we have been following the lawsuits pending against several law schools based on allegations that the schools misrepresented their job placement statistics.  The case filed against Thomas Jefferson School of Law was one of the few that survived a motion to dismiss.  But the plaintiffs could not survive the all-important class certification stage.  On October 23, 2013, the Superior Court of San Diego denied class certification because individual students of Thomas Jefferson may or may not have relied on the statistics provided by the school to U.S. News & World Report, the information available to the students differed, and the calculation of monetary relief required individual proof.  Alaburda v. Thomas Jefferson Sch. of Law, No. 37-2011-0091898, at 4-13 (Super Ct. San Diego Oct. 21, 2013).  Moreover, the court held that the class members could not be easily identified (in legal lingo, the class was not ascertainable) because there was no way to reliably determine which students viewed the statistics in U.S. News & World Report before enrolling.  Id. at 3-4.

H.    Securities Lawsuits Continue to Impact the Sector

On September 13, 2013, the United States District Court for the Southern District of California dismissed in part a securities lawsuit filed against Bridgepoint Education.  The plaintiff alleged that Bridgepoint had made a series of misrepresentations or omissions about the school’s efforts to retain and track the progress of students, quality of education, accreditation status, and financial projections.  In re Bridgepoint Educ., Inc. Sec. Litig., No. 3:12-CV-1737 JM WMC, 2013 WL 5206216, at *17 (S.D. Cal. Sept. 13, 2013).  In a significant victory for Bridgepoint, the court dismissed all of these theories, except the alleged misstatements about the school’s efforts to retain and track the progress of students.  Id. at *29.

Career Education Corp. was also facing several securities lawsuits before it settled the matters in late October.  As part of the settlements, Career Education will receive $20 million from its insurers and agreed to institute reforms that would strengthen the independence, competence, and oversight responsibilities of its board of directors.  Career Education also agreed to pay shareholders $27.5 million to settle allegations that the school inflated its job placement rates.

Both of these developments remind the sector that publicly traded for-profit schools are susceptible to derivative actions and investor lawsuits that can be sparked by investigations by the government, politicians, or the news media.

I.    The Investigations Continue

On the topic of investigations, there is a lot to report.  The Consumer Financial Protection Bureau notified both ITT and Corinthian Colleges in December that the office of enforcement is considering recommending that that the bureau take legal action against the schools.  This is not an actual filing of a lawsuit or a determination that the schools violated any laws, but a preliminary step that provides the schools with an opportunity to persuade the bureau not to file a lawsuit.

On the state level, the Iowa Department of Justice requested executive approval of the retention of outside counsel at a cost of $5,000 a month to “provide advice and assistance in a multi-state investigation into the practices of certain for-profit colleges and universities.”  According to a letter submitted as part of the approval process, the Iowa Attorney General “is leading a group of state attorneys general investigating marketing and other representations made by certain for-profit colleges and universities.”

J.    State Law Developments

There were also three noteworthy developments on the state law front this past quarter.  First, the Colorado Attorney General’s Office announced a consent judgment with Education Management Corporation (“EDMC”) to settle allegations that the school misled students about its doctorate of education in counseling psychology degrees.  Without admitting liability, EDMC agreed to pay approximately $3.3 million in restitution and fines, and promised, among other things, to limit some of its advertising, provide additional written information about its programs, and hire an independent auditor to oversee compliance.

Second, Corinthian Colleges and several of its subsidiaries filed an answer in California v. Heald College, No. CGC-13-534793 (S.F. Cnty. Super. Ct.).  As we reported last quarter, the Attorney General of California filed a lawsuit against Corinthian without notice after the school had extensively cooperated with the government’s investigation.  In both its complaint and its widely distributed press release, the government highlighted a number of quotes purporting to show that Corinthian “describes its target demographic as ‘isolated,’ ‘impatient,’ individuals with ‘low self-esteem,’ who have ‘few people in their lives who care about them’ and who are ‘stuck’ and ‘unable to see and plan well for future.'”  Addressing this head on, Corinthian explained in its answer that the government’s allegations are “built on a foundation of misquoted, deceptively excerpted, and–at best–misunderstood materials.”  Corinthian further stated that it is “passionately dedicated to providing quality career education” to a large population of students “who have not succeeded in a traditional academic environment” and thus need the support that Corinthian’s schools are able to provide.

Third and finally, Westwood College and the Attorney General of Illinois have been battling over discovery as the heavily litigated case moves closer towards trial.  In August 2012, the Circuit Court of Cook County rejected Westwood’s motion to dismiss.  People v. Alta Colls., No. 12 CH 1587, at 3-8 (Cir. Ct. of Cook Cnty. Ill. Aug. 17, 2012).  The allegations in the case center on whether the college provided misinformation about its criminal justice programs.  See id. at 6.

K.    Discovery Is a Two-Way Street that Requires Diligence

In the last two quarterly updates, we have discussed the discovery disputes between the United States and Education Management Corporation (“EDMC”) in the FCA case pending in Pennsylvania.  The outcome of those disputes can be boiled down to a simple phrase: discovery is a two-way street.  The court ordered both the government and EDMC to produce substantial amounts of discovery that has already resulted in the production of more than 6.6 million pages of documents.

This quarter, the special master resolved disputes over the timing, sequence, and methodology of the productions.  United States v. Educ. Mgmt. LLC, No. 2:07-cv-00461-TFM, ECF No. 314, at 21-22 (W.D. Pa. Nov. 24, 2013).*  Based on complaints that the parties (especially the government) were dragging their feet in discovery, the special master recommended that the court impose a deadline of December 31, 2013, for both parties to produce particularly responsive materials already in their possession.  Id. at 21.  The special master also provided guidance on the use of search protocols and on how to log and protect privileged and confidential information.  Id. at 21-22.  Neither party objected to the recommendations, and the district court adopted them on December 10, 2013.  United States v. Educ. Mgmt. LLC, No. 2:07-cv-00461-TFM, ECF No. 319, at 1-2 (W.D. Pa. Dec. 10, 2013).

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.


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