July 24, 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–like recent quarters–has been a busy one, with several notable rulings at the district court and appellate levels, four newsworthy settlements, and more signals that government agencies are increasingly focused on the sector.
We’ve previously discussed the battle between the United States and Education Management Corporation (“EDMC”) in the False Claims Act (“FCA”) case filed by the United States against EDMC in the United States District Court for the Western District of Pennsylvania.* [1] This case involves allegations that EDMC violated the FCA by allegedly violating the incentive compensation provision of the Higher Education Act. On April 10, 2014, before the close of discovery, EDMC filed a motion for summary judgment based on a robust statistical analysis showing that the compensation of its employees was not based solely on student enrollments and, therefore, complied with the law. The court denied EDMC’s motion.
In its ruling, the court borrowed negative language about the for-profit education sector from the Harkin report. However, the court also acknowledged that the core issue in this case is not whether EDMC exploited a poorly designed government program, but rather whether EDMC’s conduct was lawful. United States v. Educ. Mgmt. LLC, No. 2:07-cv-00461-TFM (W.D. Pa. Apr. 9, 2014), ECF No. 390, at 3. The court further acknowledged that the United States faces a difficult burden in an FCA case based upon alleged violations of the incentive compensation provision. The government must provide evidence of a “top-down, corporate-wide fraud–not merely isolated instances of inadequate evaluations by supervisors.” Furthermore, the court stated that “[p]ressure on recruiters to increase enrollments, without more, will not suffice.” Id. at 9.
However, despite these statements, the court rejected EDMC’s argument that the statistical evidence was sufficient to do away with the United States’ “as implemented” claim, which alleges that in practice, non-enrollment factors did not affect compensation. Id. at 8-10. The court focused on the lack of proof that the data used in the statistical analysis was accurate, stating that EDMC’s expert “did not conduct any analysis to verify whether that data reflected the honest and accurate evaluation of each supervisor regarding the performance of each ADA on each quality factor.” Id. at 7. The court did suggest, however, what types of evidence might be sufficient to succeed on summary judgment, including evidence of “robust internal controls to ensure compliance with the Incentive Compensation Ban . . . [;] executive-level directives . . . [;] corporate-wide standards and definitions for application of the quality factors; training materials and guidance memoranda for all levels of management . . . [;] documentation of individual ADA performance on the quality factors . . . [; and] reports from internal and/or external auditors.” Id. at 9-10.
The court also denied EDMC’s separate jurisdictional motion to dismiss the same day. United States v. Educ. Mgmt. LLC, No. 2:07-cv-00461-TFM (W.D. Pa. Apr. 9, 2014), ECF No. 403, at 6. EDMC had argued that the relator plaintiffs were not entitled to participate in the litigation as their claims are subject to the “public disclosure” bar and they are not original sources of the allegations. The court disagreed, stating that there was no public disclosure as to EDMC despite “reports documenting a significant rate of false claims by an industry as a whole.” Id. at 3.
On June 13, 2014, the United States District Court for the Eastern District of Wisconsin dismissed an FCA action against Sanford-Brown on summary judgment. U.S. ex rel. Nelson v. Career Education Corporation, No. 2:12-cv-00775-JPS (E.D. Wis. June 13, 2014), ECF No. 241, at 14. Relator’s claims, which included alleged violations of the incentive compensation ban, proffered an express false certification theory, an implied false certification theory, and a fraudulent presentment theory. The court quickly disposed of the express false certification theory stating that relator pointed to nothing on the record regarding Stanford-Brown’s mental state when it entered into its program participation agreement (“PPA”). For the same reason, the court flatly rejected the government’s argument, set forth in its supplementary briefing, that there were “unquestionably express” representations “set forth in writing” in the PPA. Id. at 9.
Turning to the implied false certification theory, the court noted that neither relator nor the government cited to any controlling authority endorsing the view that nondisclosure of a violation of a prior promise is equivalent to an express false certification. Accordingly, the court followed the Seventh Circuit’s 2011 decision in U.S. ex rel. Yannacopoulos v. General Dynamics, 652 F.3d 818 (7th Cir. 2011), which requires “actual and particularly-identified false representations.” Nelson, ECF No. 241, at 11. This holding appears to represent an important carve out from the Seventh Circuit’s earlier decision in U.S. ex rel. Main v. Oakland City University, 426 F.3d 914 (7th Cir. 2005) that a knowing violation of the incentive compensation ban could trigger liability under the FCA. Id. at 916.
The relator’s final claim of fraudulent presentment required that the certification of compliance be a condition of, or prerequisite to, government payment. The court looked to the Title IV implementing regulations, which state that a “program participation agreement conditions the initial and continued participation of an eligible institution” on compliance with certain rules. 34 C.F.R. § 668.14(a)(1) (emphasis added). The court agreed with the Tenth Circuit’s distinction between “conditions of payment” and “conditions of participation” and found no clear intent of the government to condition payment of Title IV funds on compliance with the allegedly violated Title IV restrictions.
On May 5, 2014, the United States District Court for the Southern District of Florida denied the relators’ and Keiser University’s cross-motions for summary judgment. U.S. ex rel. Christianson v. Everglades College, Inc., No. 12-60185-CIV (S.D. Fla. May 5, 2014), ECF No. 194, at 1. In doing so, the court addressed–we believe for the first time–the question of how damages should be calculated in an FCA education case. In a ruling potentially helpful to defendants, the court determined that the correct calculation of damages is the amount that the government paid due to the false claims reduced by the value the government received. Id. at 13. The court further suggested that relators would have to show that the government received no value from the education in order to recover the entire amount that the government paid. Id. (“[T]he government will sometimes be able to recover the full value of payments made to the defendant, but only where the government proves that it received no value from the product delivered.”). We believe relators will have a very hard time showing that the government received no benefit from the bargain it struck with schools; after all, the paid-for education was provided. Finally, the court suggested that the alleged false claim was the PPA itself, not each request for a student loan. Id. at 12 n.9. Although the Court made this distinction in its discussion of materiality, it is also important for damages because the FCA imposes a civil penalty up to $11,000 for each false claim.
The court also addressed the issue of scienter, and rejected the argument that the requisite knowledge must be of the individual signing each PPA. Id. at 8. The court instead took the view that knowledge of one or more individuals acting on behalf of Keiser University could be combined together to represent Keiser’s knowledge of “gift card, token day, and free meal practices.” Id. at 8-9. This holding is inconsistent with a number of other courts, including the D.C. Circuit, that have decided this issue in the FCA context and firmly rejected any notion of the “collective scienter” approach to the knowledge element of FCA cases.
With regard to materiality, the court’s decision is mixed. While the court did not grant summary judgment on the issue, it also did not presume materiality as some courts have mistakenly done.
Following these rulings, there have been a number of interesting developments in the case as it moved closer to trial. First, there was a flurry of motions in limine. Of particular note, Keiser moved to exclude reports from the U.S. Government Accountability Office and Senator Harkin. Surprisingly, the court found these reports “to be relevant, if admissible,” stating that a curative instruction would be sufficient should the reports be deemed inadmissible. Keiser also moved to exclude evidence of adverse employment actions against employees due to enrollments. Although the court agreed that nothing in the incentive compensation ban prevents adverse employment decisions, the court still found the evidence could be admissible. Keiser also moved to exclude evidence of other counselors at other campuses, but the court felt that this issue would be best resolved at trial and that if admissible, this evidence would be relevant as circumstantial evidence of Keiser’s overall policy.
Then, after lengthy briefing on proposed jury instructions, both sides submitted a joint stipulation withdrawing their demands for a jury trial. The bench trial began July 21, 2014.
On May 2, 2014, the Department of Justice intervened in its second incentive compensation FCA case. U.S. ex rel. Brooks v. Stevens-Henager College, Inc., Case No. 1:13-CV-00009-BLW (D. Ind. May 2, 2014), ECF No. 41. The complaint alleges that Stevens-Henager College provided retention or completion bonuses. Although these bonuses could be permissible under the “retention” safe harbor in existence during the relevant timeframe, the complaint alleges that in reality the completion bonuses were based on enrollments. The complaint goes on to allege that because these completion bonuses never provided for a fixed rate or hourly wage and because these bonuses were paid throughout the year, these completion bonuses also do not fall within the purview of the “fixed salary” safe harbor.
On May 12, 2014, the Illinois Attorney General’s office in People v. Alta Colleges, No. 12 CH 1587 (Cir. Ct. of Cook Cnty. Ill.) filed a Second Amended Complaint (“Complaint”), adding counts relating to violation of the federal Consumer Financial Protection Act. The Complaint alleges that defendants’ student financial aid program known as APEX is offered in violation of the Consumer Financial Protection Act because the defendants provide misleading information to students about the program and know and expect that a majority of students will default on the financing. As we’ve seen in other complaints relating to private-sector schools, the Illinois Attorney General’s Complaint contains a number of inflammatory allegations that have nothing to do with the underlying merits of the claims.
On May 22, 2014, Defendants removed the case to federal court, People v. Alta Colleges, No. 14-cv-3786 (N.D. Ill.). The Attorney General subsequently filed a motion to sever its Illinois Consumer Fraud Act counts and remand back to Illinois state court. Defendants filed their opposition to remand on July 8, 2014.
As many of you know, the Incentive Compensation Regulation was amended in 2011 to eliminate the previous “safe harbors” and include additional restrictions on incentives and compensation of all types. These amendments went into effect July 1, 2011. And yet, to date, we are not aware of any FCA cases based on the post July 1, 2011 rules. There are, however, recent unconfirmed reports of program reviews, audits, and investigations relating to the new regulation. This may be a signal that qui tam actions have been filed, but are presently under seal.
In the last few updates, we have been reporting on the increasing number of investigations of schools by a wide variety of government agencies. This quarter we saw several notable settlements related to those investigations.
First, earlier this month, Corinthian Colleges entered into a highly publicized settlement with the Department of Education, agreeing to sell 85 schools and close 12 others. The settlement came on the heels of the Department of Education’s decision to put a 21-day hold on Corinthian’s access to federal student loans purportedly due to the Department’s unhappiness with the school’s efforts to respond to its document requests. That 21-day hold resulted in Corinthian announcing in a filing with the Securities and Exchange Commission on June 20, 2014 that it may need to seek the protection of bankruptcy due to the lack of cash. Just two days later, on Sunday, June 22, the Department and Corinthian signed a memorandum of understanding to avoid the immediate closure of Corinthian Colleges, according to a Department press release. The final agreement was hashed out over the next two weeks, culminating in Corinthian agreeing to sell or close the vast majority of its campuses and the Department agreeing to release $35 million in student financial aid. Corinthian also agreed to have an independent Department-approved party monitor compliance with the agreement and the company’s finances.
Second, Kaplan Higher Education entered into a settlement with the Attorney General of Florida in June to resolve allegations related to its marketing practices without admitting any wrongdoing. As part of the settlement, Kaplan agreed to set up a $350,000 scholarship fund for former students and reimburse the cost of the Attorney General’s investigation. The school also agreed to adopt and continue with a number of the Attorney General’s “best practices” related to disclosures about the cost of education, graduation and placement rates, professional and trade licensing requirements in Florida, and other topics.
Third, EDMC entered into a settlement with the City Attorney of San Francisco. The City Attorney had been investigating the marketing practices of EDMC’s California Art Institutes, with a particular focus on the school’s representations regarding the cost of attending the school and job placement statistics. To resolve the investigation and avoid litigation, EDMC agreed to pay the City of San Francisco $1.95 million, endow a $1.6 million scholarship fund for returning students, and offer $850,000 in scholarship funds to new students. EDMC also agreed to calculate graduation and employment statistics in the manner specified by the settlement agreement (in addition to the manner required by the applicable regulators and accreditors). Like the Kaplan settlement, EDMC did not admit any wrongdoing.
Fourth, and finally, Ashford University and its parent company, Bridgepoint Education, entered into a settlement with the Iowa Attorney General in May to resolve allegations regarding the school’s marketing practices. Like Kaplan and EDMC, Bridgepoint did not admit any wrongdoing. Bridgepoint agreed to pay $7.25 million to the Iowa Attorney General, who stated that approximately $7 million will go to former and current students and the remaining $250,000 will be allocated to administration of the reimbursement program. Bridgepoint also agreed to have an independent settlement administrator oversee its compliance for three years.
The immediate takeaway from these four settlements must be the recognition (or a less-than-friendly reminder) that the government has enormous leverage when it investigates alleged wrongdoing. None of the four schools admitted any wrongdoing, yet each school determined it was in their best interests to resolve the investigations. As a recent editorial in the Wall Street Journal explained, Corinthian was “put[] out of business . . . for a dilatory response to document requests,” and had “been found guilty of nothing.” Op-Ed, Obama’s Letters to Corinthian: How to destroy a for-profit college company without due process, Wall St. J., July 6, 2014.
These settlements also raise an important question moving forward–will all of the recent focus on reporting of graduation and job-placement rates lead to less or more confusion for prospective students? As schools of all types have pointed out, there are no set methodologies to calculate these statistics. Indeed, many of the non-profit schools use studies and statistics that their for-profit peers could never get away with. For example, a prominent private university in the Midwest recently compiled and publicized statistics on its 2013 graduating class by apparently aggregating data from two surveys that in total only accounted for less than half of the class. A for-profit school could never publicize numbers based on such a flawed methodology.
Accrediting bodies like ACICS have been appropriately stepping in to attempt to provide some degree of uniformity. But with the various accrediting bodies across the country, plus the numerous local, state, and federal agencies all requiring their own, specific methodologies for calculating and reporting placement and completion rates, uniformity seems a long way off. The losing party in all of this is almost certainly the prospective student who will likely see a dizzying array of government-mandated statistics purporting to answer the same question–what are my chances of obtaining employment in my field–but all in different and likely confusing ways.
One of the key mechanisms for limiting the “opportunistic” lawsuits that proliferate under the FCA is the first-to-file bar. The first-to-file bar 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 an attempt to save lawsuits filed after someone else beat them in the race to the courthouse, relators typically rely on two arguments to try to avoid the first-to-file bar. First, they argue that their lawsuit, although similar to the earlier filed lawsuit, is not sufficiently “related” to trigger the bar. Second, relators often argue that the phrase “pending action” used in the statutory text means that an earlier case only has preclusive effect if it is still active at the time their case is filed. Thus, if the lawsuit that was filed first is resolved and thus is no longer “pending,” relators argue that they can now proceed with an identical, subsequent lawsuit. This past quarter saw both of these arguments lose considerable traction.
First, the D.C., First, and Fifth Circuits decisively rejected arguments by relators that attempted to move the pendulum away on the “related case” point from the well-established “material facts” standard and towards an “identical facts” test. U.S. ex rel. Johnson v. Planned Parenthood of Hous. and Se. Tex., Inc., No. 13-20206, 2014 U.S. App. LEXIS 10604 (5th Cir. June 4, 2014); U.S. ex rel. Shea v. Cellco P’ship, 748 F.3d 338 (D.C. Cir. 2014); U.S. ex rel. Wilson v. Bristol-Myers Squibb, Inc., 750 F.3d 111 (1st Cir. 2014). In each case, there were differences between the underlying factual allegations in the earlier lawsuit compared to the later suit. For example, in the First Circuit case, although both the earlier and later suits concerned the same defendants’ promotion of off-label uses for prescription drugs, the two cases differed as to which off-label uses the defendants allegedly promoted. Wilson, 750 F. 3d at 119. The First Circuit, like the D.C. and Fifth Circuits, reiterated that the bar is not so narrow that it makes minor factual differences decisive; the rule’s purpose is to ensure that the government learns enough about the fraudulent scheme from the first case so that it could uncover what is alleged in the second case through its investigation. Id. The government does not need to know every detail to uncover the broader fraud. See id.
Second, as for the “pending action” issue, the D.C. Circuit squarely rejected the relator’s argument that the “pending action” means an earlier action is preclusive only if still “active,” holding that the first-to-file rule bars new suits “even if the initial action is no longer pending.” Shea, 748 F.3d at 343-44. Recognizing that the Fourth, Seventh, and Tenth Circuits have arguably come to the opposite conclusion, the D.C. Circuit explained that the better reading was that “pending” distinguishes the two cases (the one filed first from the one filed second) and does not require an inquiry into whether the first action is “active” or not. Id. As part of its rationale, the court particularly stressed the policy objectives of the first-to-file bar, recognizing that whether or not the first suit is settled or dismissed, the government was put on notice of the alleged fraud. Id. at 344. Allowing “duplicative suits” because the earlier one was resolved prior to the latter one being filed “would contribute nothing to the government’s knowledge of fraud.” Id.
The D.C. Circuit’s well-reasoned decision may lead to a decisive ruling on this issue by the Supreme Court. On July 1, 2014, the Court granted a petition of writ in the Fourth Circuit’s case that came to the opposite conclusion, United States ex rel. Carter v. Halliburton Co., 710 F.3d 171 (4th Cir. 2013). Readers of this update may recall that the Fourth Circuit not only ruled in favor of the relator on the meaning of the word “pending” in the first-to-file bar, but also held that the FCA’s statute of limitations was tolled during the war in Iraq. Given the importance of both of these issues to FCA litigation generally and particularly against schools, we will, of course, keep an eye on the Supreme Court’s review of Carter.
As some of you may know, the securities litigation against DeVry, Inc. that was pending in the Northern District of Illinois was dismissed on March 27, 2013. Boca Raton Firefighters’ and Police Pension Fund v. DeVry, Inc., No. 10 C 7031 (N.D. Ill.). The thrust of the first amended complaint was that DeVry had a “predatory” business model, which included violations of the incentive compensation ban, that put profits ahead of education. The second amended complaint instead focused more narrowly on DeVry’s alleged illegal recruiter compensation policy. On May 23, 2013, DeVry filed a motion for sanctions against plaintiffs and their counsel for DeVry’s fees and expenses. On May 8, 2014, the court held that plaintiffs had violated Rule 11(b), which triggers the presumption that defendants are entitled to fees and expenses. However, before DeVry filed its fee petition, the parties entered into an agreement and the action was finally terminated as of June 13, 2014.
We will continue to keep you informed on these and other related issues as they develop.
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