January 25, 2016
This is the latest update of significant developments relating to qui tam, securities, and other lawsuits and investigations involving schools, especially private-sector schools. Below, we take an in-depth look at Education Management Corporation’s ("EDMC") historic settlement with the Department of Justice and 39 states (and the District of Columbia), as well as the Supreme Court’s decision to grant certiorari to decide whether the implied certification theory of liability under the False Claims Act ("FCA")–which so often has been leveled against schools–is viable. We also examine developments in cases and agency actions involving schools, including notable successes for Aveda Inc. and Career Education Corporation.
On November 16, 2015, EDMC announced that it had settled a series of federal FCA cases with the Department of Justice ("DOJ") and investigations by attorneys general from 39 states and the District of Columbia into alleged consumer protection violations in a universal settlement, the first of its kind in the for-profit education sector. The settlement–which actually consists of a variety of coordinated agreements–contains much to discuss. Indeed, the settlement could provide the subject of an article of its own, but we set forth the critical points below.
First, the FCA component of the settlement resolves four FCA matters alleging that the school violated the compensation regulation, prior to the amendment effective in 2011, and calls upon EDMC to pay the sum of $95 million. This is now the largest ever settlement of an FCA case by a for-profit educational institution, and yet United States Attorney General Loretta Lynch indicated the DOJ would have demanded more if not for EDMC’s "ability to pay." As readers of this alert well know, the FCA case against EDMC was one of the few compensation cases in which the government opted to intervene–showing the very real effect that the government’s intervention decision has.
Second, to settle the 40 attorneys general investigations into alleged consumer protection violations, EDMC agreed to more than $102 million in private debt relief for students who attended EDMC between 2006 and 2014 and withdrew within 45 days of the first day of their first term. EDMC also agreed to have consent judgments entered against it in each of the jurisdictions from which the 40 attorneys general hail. These consent judgments read more like legislation or regulation, than settlement terms. Each contains 40 to 50 pages of detailed conduct terms, covering everything from the content of new, required educational disclosures; to a newly required financial aid disclosure tool to be developed with the U.S. Consumer Financial Protection Bureau; to new rules about how placements are to be calculated and reported; to mandating free orientation sessions for students; to setting dates by which students may drop without any financial obligation; to requiring that EDMC monitor and punish the activities of lead generators. The consent judgments also appoint an administrator (commonly called a "monitor") to monitor and enforce EDMC’s compliance with the consent judgments for three (up to five) years. (The administrator, as well as some other elements of the consent judgment, will be paid for with $8.75 million of the $95 million paid to settle the FCA cases). We expect (as discussed further below) that the state attorneys general will now view these terms as the new "floor" for compliance.
Third, the DOJ and the state attorneys general have indicated they are just getting started. In fact, even as to EDMC, a number of state attorneys general refused to sign onto the agreement, claiming it was too lenient, and Senator Dick Durbin has called for the federal government to hold individual employees accountable. Moreover, unlike similarly coordinated investigations and settlements in other industries (such as banking and tobacco), this settlement is with only one industry member. These same attorneys general continue to actively and publicly investigate other schools, including ITT Technical Institute and Career Education Corporation, according to filings with the Securities and Exchange Commission. This is important to keep in mind, as we anticipate many schools will soon be approached by the attorneys general to determine if the school will agree to the same terms as EDMC. (Indeed, the EDMC agreement itself requires EDMC to assist in developing an industry-wide "Code of Conduct" for lead generators.)
If and when a school is approached by the attorneys general to determine if the school will agree to terms similar to those in the consent judgments, there are obviously many considerations the school must analyze, but we believe chief among them are the following:
In short, the EDMC settlement truly was "historic" in that it is the first large, coordinated settlement by a school with both federal agencies and numerous states. But as indicated above, it leaves many questions open, and only time will tell the effect it actually has on the sector.
In November 2015, Alta Colleges / Westwood Colleges announced that it settled a long-running consumer protection suit filed against it by the State of Illinois. This settlement provides an interesting point of comparison with EDMC. While there are obvious differences between the two matters (including the number of states at issue and the size of the schools), Alta agreed to settle its matter with the State of Illinois on arguably much better terms–no out of pocket payments (instead agreeing to institutional financing forgiveness in an amount of approximately $15 million); conduct terms less onerous than those imposed upon EDMC; no administrator; and in the form of an assurance of voluntary compliance, not a consent judgment. A potential contributor to the difference? Alta battled the Illinois Attorney General through pleadings and discovery and up until the eve of trial, at which point the Illinois Attorney General apparently became much more reasonable in its settlement demands. This reinforces our views that allegations are easy to make but difficult to prove and that the more the attorneys general are forced to be put to their proof, the much less aggressive (and more reasonable) they may become. But there is a sobering reality here as well. Following the settlement, Alta and Westwood announced in November 2015 that they will be closing Westwood’s doors and teaching out its programs.
Perhaps rivaling these settlements in terms of newsworthiness was the Supreme Court’s decision to grant certiorari in Universal Health Services v. U.S. ex rel. Escobar.* The Supreme Court grants certiorari in less than one percent of petitions presented, and the issues presented by Escobar squarely address what is front and center in many FCA cases against schools: is the so-called implied certification theory of liability (whereby a school or contractor is deemed to "impliedly certify" compliance with laws by accepting federal funds) viable, and if so, what is the scope of the doctrine?
A favorable decision in Escobar could be a game changer for the sector. Indeed, although Escobar is a Medicaid case, the split in the lower courts on the viability of this theory was cemented earlier this year in the Seventh Circuit’s seminal decision in a case brought against Sanford-Brown College, U.S. ex rel. Nelson v. Sanford-Brown Ltd., 788 F.3d 696 (7th Cir. 2015). As discussed in July, the premise of that case–like the majority of other FCA cases involving schools–was that the school had falsely and "impliedly" certified compliance with the statutes and regulations in the Program Participation Agreement ("PPA") that all schools must enter into with the Department of Education to participate in Title IV programs when it requested federal financial aid. Id. at 710. The Seventh Circuit wholeheartedly rejected this theory of liability, explaining that it is "unreasonable" to "hold that an institution’s continued compliance with the thousands of pages of federal statutes and regulations incorporated by reference into the PPA are [all] conditions of payment for purposes of liability under the FCA." Id. at 711.
The First Circuit in Escobar (like several other courts in cases against schools), however, accepted precisely the same theory of liability with a tweak to fit the Medicaid context: i.e., instead of submitting requests for Title IV funds, the defendant was seeking reimbursement from Medicaid. According to the First Circuit, "each time [defendant] submitted a claim, [it] implicitly communicated that it had conformed to the relevant program requirements, such that it was entitled to payment." 780 F.3d 504, 514 n.14 (1st Cir. 2015) (emphasis added).
If the Supreme Court agrees with the Seventh Circuit that the implied certification theory is not viable, it has the potential for returning some semblance of reason to this area of the law that has expanded so greatly over the last ten to fifteen years. As the Seventh Circuit persuasively explained, the implied certification theory of liability can lead to "boundless FCA jurisdiction on any recipient of government subsidies" and has "the potential to impose strict liability" for regulatory noncompliance. Nelson, 788 F.3d at 711 & n.6. It simply cannot be that a violation of any provision in the "thousands of pages of federal statutes and regulations incorporated by reference into the PPA" has the potential to turn a mere regulatory violation into an FCA case alleging fraud on the United States. Id.
And even if the Supreme Court accepts the implied certification theory, the Court may significantly narrow its scope in Escobar. The courts that accept the implied certification theory are divided over whether the regulation must expressly state it is a condition of payment (e.g., "no payment may be made under the statute . . . ."), or whether that, too, can be implicit to support FCA liability. This is a critically important issue for schools because many of the regulations identified in the PPA are not express conditions of payment. Indeed, ITT successfully argued to the Fifth Circuit back in 2004 that the incentive compensation provision in the PPA was not a condition of payment, and thus could not support FCA liability. U.S. ex rel. Graves v. ITT Educ. Servs., Inc., 111 F. App’x 296 (5th Cir. 2004).* Had the Ninth Circuit and Seventh Circuit agreed with that decision, the numerous lawsuits that followed U.S. ex rel. Main v. Oakland City University, 426 F.3d 914 (7th Cir. 2005) and U.S. ex rel. Hendow v. University of Phoenix, 461 F.3d 1166 (9th Cir. 2006)* may never have materialized.
In sum, the Escobar case has the potential to transform the FCA landscape, and thus the liability risks faced by schools. We will follow this one closely and keep you posted.
In further FCA news, Magistrate Judge John H. England, III of the United States District Court for the Northern District of Alabama determined in December that the plaintiff-relator had failed to cure the defects in her FCA lawsuit brought against an independently operated and owned Aveda beauty school in Birmingham, Alabama, and Aveda Inc. (along with its parent company and an affiliated company) that licenses the curriculum and products. U.S. ex rel. Rutledge v. Aveda, No. 2:14-cv-00145-JHE, ECF No. 56 (N.D. Ala. Mar. 25, 2015).* Back in April, Judge England had recommended, and the district court agreed, that the former beauty school teacher turned relator had failed to adequately plead every element of an FCA claim: (1) falsity, (2) materiality, (3) scienter, and (4) presentment. Rutledge, 2015 WL 2238786. In response, the relator filed a motion to amend her complaint, and submitted a verbatim copy of the original complaint with additions highlighted in bold.
Judge England found the additional allegations to be inadequate, explaining that "for the most part, the additions are merely irrelevant or conclusory allegations that cannot save her claims." ECF No. 56 at 3-4. The court concluded that the "proposed amended complaint does not allege facts to support all of the elements of any of her claims" and therefore recommended the case be put to rest. Id. at 13. On January 15, 2016, the district court adopted the recommendation in full.
Following up on a case discussed in our October 2013 update, Career Education Corp. has now fully prevailed in a lawsuit filed against the institution regarding its decision to stop paying bonuses to admission representatives on February 29, 2011, in advance of the new compensation regulation that would go into effect in July 2011. Wilson v. Career Education Corporation, No. 11 C 5453, 2015 WL 9259453 (N.D. Ill. Dec. 18, 2015). One admission representative, Riley Wilson, sued, claiming that he and other admission representatives were entitled to the bonuses for students enrolled before the cutoff date, but who had not yet completed a year of education, a necessary trigger for the representative’s bonus under the previous compensation plan. At the pleading stage, the district court and the Seventh Circuit agreed that Wilson could not bring contract and unjust enrichment claims because the employment contract specifically permitted the school to terminate the bonus program at any time. Wilson v. Career Education Corp., 729 F.3d 665, 672, 677 (7th Cir. 2013). The Seventh Circuit, however, in a deeply divided opinion held, contrary to the district court, that Wilson had a plausible claim that Career Education Corp. violated the implied covenant of good faith and fair dealing by abusing its discretion to terminate the bonus program early. Id. at 671.
On December 18, 2015, that theory failed on the evidence. Wilson, 2015 WL 9259453. In a thorough opinion, the United States District Court for the Northern District of Illinois held that a reasonable jury could not find that Career Education Corp. "exercised its discretion to terminate the Plan in violation of its obligation of good faith and fair dealing." Id. at *8. The evidence did not support the plaintiff’s allegation that Career Education Corp. "chose February 28 as the date to end the Plan bonuses for the purpose of keeping the admissions representatives’ bonuses for itself." Id. at *10.
In October, the Consumer Financial Protection Bureau ("CFPB") filed a petition in the United States District Court for the District of Columbia to enforce a civil investigative demand against the nation’s largest accreditor, the Accrediting Council for Independent Colleges and Schools ("ACICS"). The CFPB issued the demand in August after ACICS’s president and CEO, Dr. Albert C. Gray, was subjected to questioning in July by Senators Al Franken, Elizabeth Warren, and Chris Murphy in a hearing on the reauthorization of the Higher Education Act. The CFPB’s demand seeks information to "determine ‘whether any entity or person has engaged or is engaging in unlawful acts and practices in connection with accrediting for-profit colleges.’" ACICS’s Opp’n to CFPB’s Pet. to Enforce at 8, ECF No. 4, CFPB v. Accrediting Council for Independent Colleges and Schools, No. 15-cv-1838-RJL (D.D.C. Dec. 2, 2015).
ACICS is opposing the petition in court, arguing that the agency’s demand falls "well outside the scope of the agency’s authority" because accreditors like ACICS are not subject to any of the consumer financial laws that the bureau enforces. Id. at 1. According to ACICS, the Department of Education, not the CFPB, is the agency Congress by statute has tasked with supervising accreditors.
As further support, ACICS points to a recent letter from current-Senator and former Secretary of Education Lamar Alexander and Congressman John Kline to the CFPB, requesting that the agency "immediately rescind" the investigative demand because it constituted an "unprecedented overreach" by the agency that exceeds its "limited enforcement authority that does not in any way include the higher education accreditation process." According to the lawmakers, "determining the role of accreditors for federal purposes is a congressional responsibility," not one for the agency.
The CFPB filed a reply in support of their petition on December 11, 2015. A decision is expected soon.
As we previously reported in our November 2014 update, the CFPB commenced an action against Corinthian Colleges, Inc. on September 16, 2014, alleging violations of the Consumer Financial Protection Act and the Fair Debt Collections Practices Act due to purported misrepresentations regarding placement and alleged improper debt collection practices. Consumer Fin. Prot. Bureau v. Corinthian Colls., Inc., No. 1:14-cv-07194 (N.D. Ill. Sept. 16, 2014). The complaint included broad-ranging allegations regarding the high-pressure sales tactics used by admissions representatives, the alleged cost of the school, and inflation of job placement rates.
On August 28, 2015, the United States Bankruptcy Court for the District of Delaware entered an order confirming a liquidation plan for Corinthian that would result in Corinthian’s dissolution. Corinthian then notified the court on September 9, 2015 that due to the anticipated dissolution of the school, Corinthian would no longer be able to continue its defense aside from the filing of an answer to the CFPB complaint. A month later, the CFPB filed for an entry of default judgment against Corinthian pursuant to Federal Rule of Civil Procedure 55(a). And despite the dissolution of Corinthian (and its subsequent inability to put forth a defense), the court not only granted the CFPB’s request on October 27, 2015, but also issued a judgment with several pages of factual "findings," citing only to the CFPB complaint. Corinthian Colls., Inc., No. 1:14-cv-07194, Dkt. 58, at 4-12. The court found that the CFPB "has established, [through] competent evidence, that 115,111 affected consumers were harmed by being deceived into taking out the Genesis loans," and that the "amount owed by Corinthian to pay redress to affected consumers is $531,224,267." Id. at 12. The court further ordered that the dissolved Corinthian is permanently enjoined from "committing any future violations of the CFPA’s prohibition on unfair, deceptive, and abusive acts and practices," as well as "future violations" of the FDCPA. Id. at 14-15.
The $531 million default judgment, however, is nothing other than symbolic, given that Corinthian has dissolved. Nonetheless, this decision may have far-reaching consequences for former Corinthian students insofar as the Department of Education could rely on this ruling as a basis for providing more comprehensive debt relief.
Indeed, on November 17, 2015, the Department of Education expanded its April 2015 findings against Corinthian-owned Heald College, announcing that hundreds of programs at Corinthian-owned Everest and WyoTech campuses in California, as well as Everest University online programs based in Florida, misled students about post-graduation job placement. Although this finding would not impact the now-dissolved Corinthian, it holds significance for approximately 85,000 former Corinthian students who could now be eligible for loan forgiveness under the Department’s debt-relief process.
On November 27, 2015, the Department of Education issued new guidance in response to the lawsuit filed by the Association of Private Sector Colleges and Universities ("APSCU") challenging the Department’s Program Integrity regulations. 80 Fed. Reg. 73991, 73992 (Nov. 27, 2015) (citing APSCU v. Duncan, 70 F. Supp. 3d 446 (D.D.C. 2014)*; Ass’n of Private Sector Colls. & Univs. (APSCU) v. Duncan, 681 F.3d 427 (D.C. Cir. 2012)*).
First, the Department recognized that it "lacks sufficient evidence to demonstrate that schools are using graduation-based or completion-based compensation as a proxy for enrollment-based" compensation. 80 Fed. Reg. at 73992. This admission closely resembles the district court’s finding in APSCU v. Duncan, 70 F. Supp. 3d 446 (D.D.C. 2014), and forced the Department to no longer "interpret the regulations to proscribe compensation for recruiters that is based upon students’ graduation from, or completion of, educational programs." 80 Fed. Reg. at 73992. Although this is clearly a move in the right direction, the Department did include a caveat: "[A]lthough compensation based on students’ graduation from, or completion of, educational programs is not per se prohibited, the Department reserves the right to take enforcement action against institutions if compensation labeled by an institution as graduation-based or completion based compensation is merely a guise for enrollment-based compensation, which is prohibited." Id.
Second, the Department reiterated that a school cannot financially reward recruiters for enrolling minority students. Although it recognized that its current ban on incentive compensation "may result in some negative impact on minority recruitment and enrollment," it concluded that an exception for the recruitment of minority students could not be justified. 80 Fed. Reg. at 73995.
On October 7, 2015, the U.S. Department of Defense ("DoD") notified University of Phoenix, Inc. that the University had been placed on probation with respect to the school’s participation in the DoD’s Tuition Assistance Program for active duty military personnel, and that the DoD was weighing the possibility of terminating the University’s participation in the program. While on probationary status, students already enrolled at the University of Phoenix continued to participate in the Tuition Assistance Program, but newly enrolled or transfer students were no longer eligible. Further, the University of Phoenix was prohibited from engaging in various activities at military bases, including job training, career fairs, and other sponsored events.
In its notice of probation, the DoD cited several reasons for its actions, including compliance problems identified in July and August 2015 regarding the use of official military seals and trademarks, as well as the school’s alleged failure to give notice to the proper officials before going on military bases. The letter did, however, acknowledge that the University was taking the appropriate corrective action regarding these compliance problems. The DoD notice further pointed to the civil investigative demand issued by the U.S. Federal Trade Commission and the investigative subpoena issued by the California Attorney General’s office in August 2015 to the University of Phoenix as grounds for its decision to place the University on probation.
Then, on January 15, 2016, the DoD lifted the temporary ban on the University’s participation in the DoD’s Tuition Assistance Program, crediting the University’s cooperation and response to the Department’s concerns. Following the removal of probationary status, the University of Phoenix will be subject to a heightened compliance review by the DoD for a two-year period.
Although temporary, the initial probation decision by the DoD nonetheless illustrates a troubling trend where misconduct is assumed when an investigation is opened against a for-profit school.
In November, a federal jury convicted Alejandro Amor, the owner of the for-profit college FastTrain, of 12 counts of theft of government money, and one count of conspiracy. A FastTrain admissions representative was also convicted of conspiracy to steal government money. The theft charges each carry a maximum penalty of 10 years in prison, while the conspiracy charge has a maximum of five years. Amor awaits sentencing on February 3, 2016.
Before being raided by the FBI in 2012, FastTrain allegedly fraudulently obtained approximately $6.5 million in Pell grants and student loans for students who allegedly were enrolled without high school diplomas. At trial, the government argued that FastTrain admissions representatives recruited students from low income neighborhoods and enrolled students when they had not graduated from high school or earned a GED, coaching them to lie on their applications to the Department of Education for federal student aid. The government also argued that FastTrain admissions representatives falsely promised students that they could earn their high school diplomas or GEDs at FastTrain and in some cases, created fictitious high school diplomas on FastTrain computers.
This quarter we saw four putative securities settlements involving Corinthian, Bridgepoint Education, Inc. and ITT Educational Services, Inc.
First, Bridgepoint Education, Inc. agreed to pay $15.5 million in November to resolve a shareholder class action accusing the company of making false and misleading statements in 2012 about the likelihood of Ashford University being accredited by the Western Association of Schools and Colleges. On December 14, 2015, the court issued an order preliminarily approving the settlement and set the settlement hearing for April 25, 2016. In re Bridgepoint Educ., Inc. Secs. Litig., No. 3:12-cv-01737, Dkt. 99 (S.D. Cal. Dec. 14, 2015).
Second, the $16.9625 million settlement agreed to by ITT Educational Services, Inc. was preliminarily approved by a federal judge in the Southern District of New York on November 23, 2015, and resolved securities fraud claims asserted under Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934. Plaintiff pension funds alleged that ITT made material misrepresentations and omissions concerning the company’s liabilities under certain agreements it had entered into with third-party lenders of ITT student loans. The court set a hearing on March 8, 2016 to determine whether the settlement should be given final approval. In re ITT Educ. Servs., Inc. Secs. Litig., No. 13-cv-1620-JPO, Dkt. 83 (S.D.N.Y. Nov. 23, 2015).*
Third, a few weeks earlier, ITT settled another securities action on November 2, 2015 that alleged similar claims of securities fraud asserted under Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934. This $12.5375 million settlement was preliminarily approved on November 4, 2015 with a hearing set on March 10, 2016 to determine whether the settlement should be given final approval. In re ITT Educ. Servs., Inc., No. 1:14-cv-01599-TWP, Dkt. 98 (S.D. Ind. Nov. 4, 2015).*
Finally, this past November, Corinthian agreed to pay $3.5 million to settle a shareholder suit in California federal court that accused the school of concealing predatory enrollment practices and misrepresenting job placement statistics. The plaintiff requested that the court approve the settlement, arguing in his motion for preliminary approval of settlement that the $3.5 million agreement was appropriate given Corinthian’s dissolution and its current entanglement with several lawsuits by students and government agencies. Erickson v. Corinthian Colls., Inc., No. 2:13-cv-07466, Dkt. 92, at 6 (C.D. Cal. Nov. 20, 2015) ("[T]he chance of obtaining a higher recovery for the Class is slim to none given that Corinthian is bankrupt and undergoing liquidation, and is subject to numerous claims from various parties."). The court, however denied the plaintiff’s motion on December 22, 2015, citing several concerns: (1) the plaintiff failed to provide the court with "any information about the potential value of the Class’s claims"; (2) the plaintiff failed to provide "sufficient information for [the court] to determine whether the $3,500,000 gross settlement amount . . . is fair, reasonable, and adequate," and the explanation that Corinthian is undergoing liquidation and faces numerous claims from other parties is insufficient; (3) the plaintiff "fail[ed] to provide an estimate of the Claims Administrator costs"; and (4) the plaintiff failed to provide the court with the confidential Supplemental Agreement detailing Corinthians’ option to terminate the settlement. Id., Dkt. 94, at 2-3. The court then ordered that the plaintiff may file a new motion addressing the concerns outlined in its order within 30 days.
We will continue to keep you informed on these and other related issues as they develop.
 The asterisks indicate matters in which Gibson Dunn is involved.
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 usually work, or any of the following:
Timothy Hatch (213-229-7368, email@example.com)
Marcellus McRae (213-229-7675, firstname.lastname@example.org)
Julian W. Poon (213-229-7758, email@example.com)
Eric D. Vandevelde (213-229-7186, firstname.lastname@example.org)
James Zelenay (213-229-7449, email@example.com)
Jeremy S. Smith (213-229-7973, firstname.lastname@example.org)
Douglas Cox (202-887-3531, email@example.com)
Michael Bopp (202-955-8256, firstname.lastname@example.org)
Jason J. Mendro (202-887-3726, email@example.com)
Amir C. Tayrani (202-887-3692, firstname.lastname@example.org)
Lucas C. Townsend (202-887-3731, email@example.com)
Additional education-sector alerts are available at the following URL:
© 2016 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.