Recent Developments Related to Litigation Involving the Education Sector (January 31, 2013)

January 31, 2013

This is the latest update of significant developments relating to the array of qui tam, securities, fraud, and other lawsuits and investigations involving schools, especially private-sector schools.  In addition to a summary of recent case developments, this update addresses emerging topics impacting litigation involving the sector.  These issues and others are discussed below.

A.        DOJ Declines to Intervene in Qui Tam Suit Against Bridgepoint Education.*[1]

In December, 2012, the Department of Justice (“DOJ”) declined to intervene in two qui tam suits brought against Bridgepoint Education, Inc. (“Bridgepoint”).  Bridgepoint announced that DOJ was investigating its compensation practices for admissions personnel in October 2012, and that it was cooperating with that investigation.

The complaints assert that Bridgepoint violated the False Claims Act by purportedly engaging in illegal recruiting tactics, particularly by allegedly violating the incentive compensation provision.  One of the complaints also includes a claim for unlawful business practices under California law, which is premised on purportedly false and misleading statements made in the recruitment of students, as well as violations of the California Private Postsecondary Education Act of 2009.

Over the past year, DOJ has become more active in qui tam cases, intervening in cases brought against EDMC and ATI.  DOJ’s decision to not intervene in the Bridgepoint cases is a positive sign for the sector and suggests that although DOJ has become more interested in qui tam actions involving the sector, DOJ can be persuaded not to intervene.

B.        Missouri School Sues Accrediting Commission of Career Schools and Colleges.

On August 16, 2012, Professional Massage Training Center, Inc. (“PMTC”), a massage-therapy school located in Springfield, Missouri, filed a complaint against the Accrediting Commission of Career Schools and Colleges (“ACCSC”) in the United States District Court for the Eastern District of Virginia.  The complaint alleges that ACCSC improperly terminated the accreditation of PMTC.  On September 17, 2012, the court granted a preliminary injunction in favor of PMTC, requiring ACCSC to reinstate PMTC’s accreditation.  The court held that “[t]he record does not demonstrate that ACCSC had a rational basis for reversing its earlier decisions to accredit PMTC.”  Professional Massage Training Center, Inc. v. Accreditation Alliance of Career Schools and Colleges, Case No. 1:12-cv-00911-LO-IDD, Dkt. 52, at 5 (E.D. Va. Sept. 17, 2012).

PMTC’s complaint serves as a reminder that it is not only institutions that are facing pressure.  Accreditors are also under significant new scrutiny.

C.        New York Institute of Technology and Cardean Learning Group Settled Incentive Compensation Case for $4 Million.

On December 27, 2012, the United States Attorney for the Southern District of New York announced a settlement in a lawsuit brought against New York Institute of Technology (“NYIT”) and Cardean Learning Group, LLC (“Cardean”).  NYIT is a private, non-profit school, which operated an online program in conjunction with Cardean.  Under this arrangement, Cardean provided NYIT with graduate business and management programs, including an online MBA program.  Cardean was also responsible for student recruitment services for these programs.

The original qui tam complaint, which was filed in October 2007, alleged violations of the False Claims Act premised on improper incentive compensation.  DOJ subsequently intervened in the action.  The settlement was reached before the relator’s complaint or the United States’ complaint in intervention had been unsealed.

In the settlement, NYIT and Cardean admitted violating the incentive compensation ban.  The total settlement was for $4 million, with Cardean paying $1.5 million and NYIT paying $2.5 million.  The settlement was approved by the United States District Court for the Southern District of New York on December 26, 2012.

D.        Suit Against Albany Law School is Dismissed.

On January 3, 2013, a New York Supreme Court dismissed a case filed against Albany Law School that was premised on purported misrepresentations related to employment data.  The plaintiffs had sought class action status for all Albany Law School students from February 2006 until February 2012.  The court ruled that there was nothing false regarding the employment statistics provided by the school, which used an aggregated statistic that included individuals who were not employed full-time and whose employment did not require a law degree.

Despite the fact that fifteen separate suits have been filed against law schools throughout the country, only one suit–against Thomas Jefferson Law School–has survived a motion to dismiss.  Several of the court decisions dismissing these lawsuits include analyses that are relevant to and might be helpful in defending lawsuits making similar claims brought against private-sector schools.

E.        Courts Have Yet to Clearly Define the Boundaries on When Phased Discovery Is Appropriate.*

With the rise in cases surviving motions to dismiss, educational institutions are reasonably concerned about the costs of and disruption caused by discovery.  One possible solution is conducting phased discovery–enabling discovery on discrete, case-dispostive issues in an early phase to avoid unnecessary and costly discovery.  However, courts have yet to clearly outline the boundaries for where phased discovery is appropriate.  In United States ex rel. Lee v. Corinthian Colleges, et al., Case No. 07-cv-1984-PSG (MANx) (C.D. Cal.), the court allowed discovery to proceed in phases, with the first phase focused on depositions of the relators and written discovery relating to the Court’s jurisdiction under the FCA.  In contrast, in United States v. Education Management Corp., 2:07-cv-00461-TFM (W.D. Pa), the court denied EDMC’s request to have an initial phase of discovery involving salary data and the presentation of experts demonstrating why that data should be dispositive in the case, instead granting conventional, unlimited discovery.  Thus, while jurisdictional issues appear to be appropriate for phased discovery, it is unclear how far (or if) the possibility of phased discovery extends beyond those issues.

F.         To Date, We are Not Aware of Any Cases Based on the New Compensation Regulations.

In what should be viewed as a surprising development, it does not appear that, to date, any qui tam complaints have been filed against schools based on the Department of Education’s (“DOE”) new compensation regulations, which went into effect in July 2011 and were upheld in significant part by the United States Court of Appeals for the District of Columbia in June 2012.  These regulations have the potential for significantly changing the landscape of defending incentive compensation lawsuits, with qui tam relators likely arguing that they limit arguments for dismissal, and altering the school’s burden in defending against claims.  The revised compensation regulations could also impact decisions by DOJ with regard to intervention.

Given the FCA’s first-to-file rule, it was anticipated that the new regulations would cause a race to the courthouse by relators and their counsel to file claims based on the new provisions.  While these cases may still be under seal, there is nothing to suggest that any cases relating to conduct after the effective date of the new regulations have been filed.  Given the increasing willingness of plaintiffs’ attorneys to target the sector, it seems likely that cases based on the new regulations are on the horizon (if not already filed and still under seal).

Relators and their counsel might also be encouraged to file new lawsuits by the recently promulgated DOE OIG audit priorities for 2013 which include, as the first listed priority, to “assess FSA’s oversight of and schools’ compliance with recent changes to requirements for incentive compensation and misrepresentation.”

G.        Potential Helpful Cases Relating to Damages and Materiality.

Critical issues remaining in FCA cases include what damages might be imposed by courts, and what types of violations courts find “material” to the government’s funding decision, potentially leading to FCA claims.  Not surprisingly, qui tam relators and their counsel have pursued extremely aggressive positions on these issues, arguing that all funding received by a school’s students under a program participation agreement should constitute the damages imposed for any violation of that agreement.  Relators and their counsel take this position regardless of whether the students benefit from the government’s funding and no matter how minor the alleged violation.

Thankfully, courts are rejecting these aggressive arguments with greater frequency.  In the first of two recent decisions from courts of appeals, United States ex rel. Davis v. District of Columbia, 679 F.3d 832 (D.C. Cir. 2012), the D.C. Circuit Court curbed the damages that relators might seek under the FCA.  There, the relator argued that the District of Columbia and its schools violated Medicare documentation requirements and should be held liable for damages in the full amount of Medicare payments received (trebled under the FCA), even though the beneficiaries of the program actually received the intended benefit.  The D.C. Circuit rejected this argument, finding that because FCA damages are intended to put the government in the same position as it would have been had the defendant’s claim not been false, in order to demonstrate damages, the relator or government must show not only that the government would have withheld payment had it known the true facts, but also that the performance that the government received was worth less than what it believed it had purchased.  This case should aid defendants in the education sector being charged with technical violations in arguing that damages should not consist of all funds received under a program participation agreement when the beneficiaries of the government’s program (i.e., the students) received the intended benefit (i.e., education).  Importantly, the Davis court noted that although there may not be “damages” in cases such as these, there may still be per-claim penalties.

In United States ex rel. Williams v. Renal Care Group, Inc., 696 F.3d 518 (6th Cir. 2012), the Sixth Circuit adopted arguments that we have long been advocating that not every violation of an alleged condition of participation in a government program (such as each item listed in a school’s program participation agreement) should be considered “material” to the government’s funding decision, potentially leading to an FCA case.  Rather, in Williams, in the Medicare context, the court found that only those regulations where compliance with that regulation is truly a condition of government payment may constitute a violation “material” to the government’s funding decision.  The court commented that the FCA is not a vehicle for policing technical compliance with complex federal regulations, and it concluded that even though the regulations at issue were a condition of participation, their violation did not result in FCA liability.  Defendants in the sector may find cases like Williams helpful in battling arguments from relators and their counsel that any and every violation of the program participation agreement may provide the basis for an FCA case.

H.        Updated List of Qui Tam Cases Involving Schools.

We have attached to this communication an updated list of qui tam cases that have been brought against schools.  Since the last time we circulated this list a couple of years ago, it appears that the pace of new cases remains relatively constant; DOJ has begun to intervene in some but not all cases; more cases are getting by motions to dismiss and proceeding to discovery; and there have not been any additional significant recoveries by relators.  Please let us know if you are aware of any cases that are not on the list so that we can add them to the list.

Qui Tam Educational Cases

I.          Conclusion.

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