July 23, 2015
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 quarter was particularly noteworthy for the number of relevant decisions in the False Claims Act sphere, a significant change in direction from the Department of Education, and more.
This past quarter, the United States Court of Appeals for the Seventh Circuit issued an important decision in a False Claims Act ("FCA") case involving Sanford-Brown College that significantly alters the legal landscape for schools within the Seventh Circuit, and could have far-reaching effects across the country. U.S. ex rel. Nelson v. Sanford-Brown Ltd., — F.3d —, 2015 WL 3541422 (7th Cir. 2015). The premise of the case against Sanford-Brown College, like so many of the other FCA cases involving schools, was that the school had violated a handful of the many specified 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. Id. at *2. Using the PPA as his hook, the former director of education at Sanford-Brown College (for just eight months in 2008) turned plaintiff-relator presented two theories of liability under the FCA.
First, the relator argued that the school had presented "false records" to the government and thus violated 31 U.S.C. § 3729(a)(1)(B) because the school had "agreed to comply with all Title IV regulations by entering into the PPA," and then "fraudulently used it when [the school] made–or caused students to make or use–applications for federal subsidies with knowledge that they were not in compliance with the Title IV Restrictions." Id. at *9. Put differently, the "false records" were the applications for federal grants and loans, and were implicitly "false" according to the relator and the government because the school was allegedly not in perfect compliance with the PPA at the time the applications were submitted. See id. The Seventh Circuit explained that this was a viable theory, but critically, only if the school had "knowingly entered into the PPA to defraud the government (thereby creating a ‘false record’) and then planned to ‘use’ the PPA thereafter to submit poisoned (and therefore, false) claims for payment." Id. at 10 (emphases in original). The relator could not prove that the school "entered the PPA in bad faith" and thus the Seventh Circuit upheld the district court’s grant of summary judgment. Id.
Attempting to save his claim even if the school originally entered into the PPA in good faith, the relator presented a second theory: that the PPA serves as a continuing condition of payment such that "an institution must remain in compliance with all of the PPA’s conditions in order to remain lawfully eligible to continue receiving federal subsidies." Id. at 10. Specifically, the relator and the government argued that because the school had previously promised to comply with the PPA, "continued lawful receipt of the federal subsidies depends on continued compliance with the PPA" and thus any bills submitted to the United States when the school was not in compliance with any of the thousands of pages of statutes and regulations incorporated into the PPA were implicitly false. Id. Known as an "implied false certification," this theory basically pretends that each bill submitted by the school has an unwritten promise that the school has complied and continues to comply with the relevant regulations.
Departing from the First, Third, Sixth, Ninth, Tenth, and D.C. Circuits, the Seventh Circuit joined the Fifth Circuit and wholeheartedly rejected the "so-called doctrine of implied false certification." Id. at *12. Writing for the unanimous court, Judge Manion bluntly explained 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 conditions of payment for purposes of liability under the FCA." Id. at *12. "[U]nder the FCA, evidence that an entity has violated conditions of participation after good-faith entry into its agreement with the agency is for the agency–not a court–to evaluate and adjudicate." Id.
With this decision, the Supreme Court now has a clear split between the Circuits on the implied false certification theory of FCA liability. And by carefully explaining how this theory can lead to "boundless FCA jurisdiction on any recipient of government subsidies" and has "the potential to impose strict liability" on them, the Seventh Circuit has presented a compelling case why the majority of circuits are wrong about the viability of this theory. It seems now only a matter of time before the Supreme Court agrees to take up this issue.
In contrast to the helpful precedent set by the Seventh Circuit, the Eighth Circuit in April issued a curious decision in U.S. ex rel. Miller v. Weston Educational, Inc., 784 F.3d 1198 (8th Cir. 2015). The relator in Miller exclusively pursued a traditional false certification (a.k.a., fraudulent inducement) theory–i.e., the school, Heritage College, allegedly falsely promised to the government in the PPA that it would comply with all of the numerous statutes and regulations listed, including the requirements for accurate grade and attendance records. Id. at 1203. The district court granted the school summary judgment because the relators had "failed to present evidence that Heritage violated a material requirement of the PPA or the applicable regulations." 10 F. Supp. 3d 1046, 1057.
The Eight Circuit reversed, and in the process made three key holdings. First, in a positive development, the court held that "Relators must show that Heritage, when signing the PPA, knew accurate grade and attendance records were required, and that Heritage intended not to maintain those records." Id. at 1204 (emphasis added). This ruling is helpful because it narrows the relevant time period for the critically important question of scienter and aligns with the recent authority from the Seventh and Eleventh Circuits on the same point. Second, the court held that the relators had raised a material issue of fact on scienter based on evidence showing the school (i) knew accurate records were necessary, (ii) had a pattern of altering records before and after the signing of the PPA, and (iii) "aimed to maximize Title IV funds." Id. at 10-11. Third, the court held that the recordkeeping requirement was material because it was in the PPA, the statute (20 U.S.C. § 1094), and the applicable regulation (34 C.F.R. 668.14). This third ruling is particularly troubling because one could read it as suggesting that any one of the "thousands of pages of federal statutes and regulations incorporated by reference into the PPA" is material for FCA purposes.
In addition to the newsworthy opinions issued by the Seventh and Eighth Circuits, there were four other FCA decisions worthy of inclusion in this update.
First, in the closely followed case of Kellogg Brown & Root Services Inc. v. U.S. ex rel. Carter, 135 S. Ct. 1970 (2015), the Supreme Court of the United States provided some much needed clarity on the Wartime Suspension of Limitations Act, holding that the statute only suspends the statute of limitations on specific criminal statutes during wartime. Id. at 1978. This is significant because the Fourth Circuit decision that was reversed could have been read to toll the statute of limitations in all FCA cases whenever Congress had authorized military actions.
In addition to its ruling on the Wartime Suspension of Limitations Act, the Supreme Court also clarified that the first-to-file bar only bars a copycat lawsuit if the original case remains "pending" —i.e., "undecided." Id. (emphasis added). The Court recognized that this interpretation may discourage settlement because a second, copycat lawsuit could potentially be brought against the same defendant once the original suit is settled and thus no longer "pending." Id. at 1979. But the Court concluded the plain text of the statute must rule the day because "the False Claims Act’s qui tam provisions present many interpretive challenges, and it is beyond our ability in this case to make them operate together smoothly like a finely tuned machine." Id.
Second, the D.C. Circuit also examined the first-to-file bar just weeks after the Supreme Court’s decision, and ruled that the bar is not jurisdictional. U.S. ex rel. Heath v. AT&T, Inc., — F.3d —-, 2015 WL 3852180, at *6 (D.C.Cir., Jun 23, 2015). This is a surprising decision not only because there was previously near unanimity that the bar was jurisdictional, but also because the panel based its decision in part on the Supreme Court’s silence. The panel noted that "nothing in the Court’s analysis" in Kellogg Brown & Root Services "sounded in jurisdictional terms." Id. at *6 n.4.
Third, the Ninth Circuit issued an en banc decision in U.S. ex rel. Hartpence v. Kinetic Concepts Inc., — F.3d —-, 2015 WL 4080739, at *6 (9th Cir., Jun 23, 2015) on the requirements to qualify as original source under the public disclosure bar. The "public disclosure" bar prohibits a relator from filing an FCA case based upon earlier "public disclosures" of the allegations unless he is an "original source" of the allegations. In a decision many had expected, the Ninth Circuit overturned its prior rule requiring that the relator had a "hand in the public disclosure" to qualify as an original source. Id. at *1. The burden though remains heavy in the Ninth Circuit and elsewhere: Relators seeking to qualify as original sources still must prove "that they have direct and independent knowledge of the information on which their allegations are based and that they voluntarily provide that information to the Government before filing." Id. at *7.
Finally, the United States District Court for the District of Arizona dismissed an FCA case involving four non-profit schools and a for-profit company, HotChalk, Inc., that provides internet-based degree programs to the schools. Calisesi ex rel. U.S. v. Hot Chalk, Inc., No. CV-13-01150-PHX-NVW, 2015 WL 1966463 (D. Ariz. May 1, 2015). Three former enrollment specialists at HotChalk brought the case based on allegations of improper incentive compensation, misrepresentations, and violations of the third-party servicer obligations. After carefully reviewing the allegations, the court held they lacked the specificity and plausibility required by the pleading rules. Id. at *9-15.
The Colorado Court of Appeals also provided some guidance on calculating, reporting, and disclosing placement rates, when it overturned a trial court’s denial of Westwood College’s request to modify a consent judgment with the Colorado Attorney General so that Westwood could comply with the Accrediting Council for Independent Colleges and Schools’ (ACICS) new methodology for reporting placement data to ACICS. The Court of Appeals held that Westwood must comply with the ACICS’s new methodology when reporting placement data to that agency, and that, for all other disclosures, Westwood must provide placement data based on both the Consent Judgment and the new ACICS methodology. Although it is odd that the school now has two mandated methods of calculating placement rates that may well confuse prospective students, the decision does provide clarity for the school and, more importantly, overturned a court decision that, if allowed to remain in force, substituted the Consent Judgment methodology for that of ACICS, potentially jeopardizing Westwood’s accreditation status.
In the last update, we reported that the Office of Inspector General for the Department of Education confirmed that the "Hansen Memorandum," which stated that incentive compensation violations should be viewed as a compliance matter–not a violation–for which a fine was the proper remedy, has been Department of Education policy since 2002. Just a few months later, on June 2, 2015, the Department of Education has now rescinded that policy in a memorandum written by Under Secretary Ted Mitchell.
The new memorandum now instructs Department of Education employees to view incentive compensation violations as violations resulting in monetary loss to the Department, for which "the appropriate response is to recover that loss." The new memorandum then further instructs:
In administrative enforcement actions, the Department should calculate the amount of the institutional liability based on the cost to the Department of the Title IV funds improperly received by the institution. This would include the cost to the Department of all of the Title IV funds received by the institution over a particular time period if those funds were obtained through implementation of a policy or practice in which students were recruited in violation of the incentive compensation prohibition.
This power to "claw back" Title IV funds already expended will likely be challenged in the coming months. While Title IV does grant the Department of Education the power to "limit, suspen[d], or terminat[e]" an institution’s participation in any Title IV program or "impos[e] a civil penalty," 20 U.S.C. § 1094(c)(1)(F), it does not expressly authorize the return of funds already expended. In fact, Title IV has specific claw back provisions elsewhere that generally relate to situations where a student has failed to matriculate or was otherwise ineligible to receive the monies at issue. See, e.g., id. at §§ 1091b (authorizing recovery of Title IV funds where a student does not matriculate or where aid was improperly calculated), 1011k (providing for recovery of funds where a facility is constructed with grant money but ceases to be of public benefit), 1070a-25(e)(4) (recovery of unused scholarship funds). Congress clearly understood that there was a need for the Department of Education to have the authority to seek return of funds in specific situations. But notably, violations of the incentive compensation ban were not one of the situations for which Congress determined claw back of funds was the proper response.
On May 12, 2015, the Securities and Exchange Commission ("SEC") filed civil fraud charges against ITT Educational Services, Inc. and two of its top executives in a federal court in Indiana. This is the second lawsuit filed against ITT by a federal agency. SEC v. ITT Educ. Servs., Inc., No. 1:15-cv-00758 (S.D. Ind. May 12, 2015), ECF No. 1.* As we reported previously, the Consumer Financial Protection Bureau brought suit in the United States District Court for the Southern District of Indiana, accusing ITT of driving students into high-cost private student loans they could not afford. On March 9, 2015, the court granted in part and denied in part ITT’s motion to dismiss in Consumer Financial Protection Bureau v. ITT Educational Services, Inc., 1:14-cv-00292 (S.D. Ind. Mar. 9, 2015), ECF No. 49.* ITT is currently appealing the partial denial of its motion to dismiss in the Seventh Circuit Court of Appeals.
The SEC’s allegations are markedly different from those alleged by the Consumer Financial Protection Bureau. The SEC claims that the company and two of its executives concealed from ITT’s investors the poor performance of student loans that ITT had financially guaranteed. More specifically, the SEC alleges that the defendants omitted to disclose, among other things, that the company regularly made payments on delinquent student borrower accounts to keep certain loans from defaulting and triggering ITT’s guarantee obligations, counted anticipated guarantee payments against future recoveries, and misled, and/or withheld information from, its auditor. ITT is vigorously contesting these charges.
On May 26, 2015, Ashworth College agreed to settle the Federal Trade Commission’s charges that it deceptively marketed that a number of Ashworth degree and certificate programs met requirements set by state licensing boards, and that the course credits students earned would transfer to other schools.
As part of the agreement, Ashworth is prohibited from making unfounded claims that it provides all the training and credentials necessary to switch careers, that its programs qualify students to obtain vocational licenses without additional training, and that its students’ course credits are generally accepted by other schools. The FTC also included an $11 million judgment against Ashworth in the settlement, but agreed to suspend the financial penalty due to the company’s inability to pay.
Ashworth denied any liability or wrongdoing. The company stated that it settled the matter to avoid a lengthy legal battle in spite of its disagreement with the FTC’s allegations.
The FTC’s scrutiny of the for-profit industry has increased in recent years. For example, DeVry Education Group, Inc. has been under investigation since early 2014, according to filings with the SEC. Needless to say, we expect FTC scrutiny to continue.
On May 6, 2015, an Ohio federal judge unsealed a False Claims Act suit accusing Ohio State University of falsifying the results of a fitness study to obtain $273 million in National Institute of Health grants. The complaint was filed by Mitchell Potterf and centers on a study focused on the health effects of CrossFit, a popular workout regime. In its results, the study noted that nine participants failed to complete the 10-week study due to injury or overuse. But Potterf alleges that this is false: the nine individuals dropped out for personal reasons, and not because of injury or overuse.
This lawsuit provides another example that for-profit higher educational institutions are not the only educational institutions at risk under the FCA. All educational institutions, not just private-sector ones, face lawsuits alleging FCA violations.
On June 23, 2015, Judge John D. Bates of the United States District Court for the District of Columbia dismissed the suit filed by the Association of Private Sector Colleges and Universities ("APSCU") on November 6, 2014, that challenged the Department of Education’s new gainful employment regulation as at odds with existing law as well as arbitrary and capricious. APSCU v. Duncan, No. 1:14-cv-01870 (D.D.C. June 23, 2015), ECF No. 31.* As we previously reported, that lawsuit challenged the Department of Education’s second attempt to tie a school’s eligibility to receive federal student loan funding to the earnings, debt, and debt repayment of a program’s former students. The first attempt failed when a federal court struck the proposed regulation down for being arbitrary and capricious. APSCU v. Duncan, 870 F. Supp. 2d 133, 152-55 (D.D.C. 2012).*
Judge Bates decided in favor of the Department of Education, upholding the entirety of the gainful employment regulation and ruling for the Department in the second of two lawsuits challenging the regulation’s implementation. Judge Bates held that the term "gainful employment" was ambiguous and the Department’s interpretation was reasonable. APSCU, ECF No. 31 at 15. Further, the Court held that the record showed that the Department engaged "in a thorough rulemaking process before promulgating its debt-to-earnings regulations." Id. at 16. APSCU has filed a notice of appeal with the D.C. Circuit.
This decision followed a decision issued one month before in APC v. Duncan, No. 14-08838-LAK (S.D.N.Y. May 27, 2015), in which Judge Lewis Kaplan of the United States District Court for the Southern District of New York dismissed a similar challenge to the new rules but on a different basis. Judge Kaplan held that there could be no due process issues as for-profit colleges do not have a "vested right" to participate in federal student aid programs. Id. at 23-24.
Following these decisions, the new gainful employment rule took effect on July 1, 2015. Under the new rules, a career training program has to show that the estimated annual loan payment of a typical graduate does not exceed 8 percent of her total earnings or 20 percent of her discretionary income. Programs whose recent graduates have not attained this particular level of earnings relative to the amount of debt incurred to attend the program then risk losing access to federal funds. The Department estimated based on 2012 data that more than 1,400 programs that serve more than 840,000 students will not satisfy this rigid debt-to-earnings test, and thus are at risk of losing eligibility for financial aid, which would result in almost a million students not being able to use their federal financial aid dollars to complete those programs.
At the same time, the Senate Appropriations Committee approved a fiscal 2016 spending bill for the U.S. Department of Education in late June that would enact $1.7 billion in cuts and block the Department from implementing the gainful employment regulation.
On June 8, 2015, Secretary of Education Arne Duncan announced that the Department of Education would forgive the federal loans of tens of thousands of students who attended Corinthian Colleges. In total, the Department estimated that if all 350,000 Corinthian students from the last five years applied for and received debt relief, the cost to taxpayers could be as much as $3.5 billion. Moreover, this would be the largest pool of students the government has ever opened debt relief to.
A special master has been appointed to determine the process for Corinthian students to obtain relief, as well as develop a broader system that will support similarly situated students at other educational institutions. The potential ramifications of the process that is established could be significant.
We will continue to keep you informed on these and other related issues as they develop.
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