Recent Developments Related to Litigation Involving the Education Sector (October 2013)

October 24, 2013

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 interesting, as we saw a notable summary judgment decision, three federal appellate decisions involving the sector, and a smattering of other newsworthy developments.  Let’s dive in.

A.  A Welcome Return to the Basics on Scienter, but Also a Missed Opportunity

On July 16, 2013, the United States District Court for the Southern District of Florida granted Kaplan University summary judgment in U.S. ex rel. Gillespie v. Kaplan University, No. 09-20756-CIV, 2013 WL 3762445 (S.D. Fla. July 16, 2013).*[1]  The relator, Jude Gillespie, sought to hold Kaplan liable under the False Claims Act for allegedly falsely certifying that it was in compliance with the Rehabilitation Act, a federal disability law, in order to be eligible to receive federal student aid funds.  Id. at *1.  After the close of discovery, Kaplan argued that summary judgment was appropriate because Gillespie “cannot establish that:  (1) Kaplan actually violated the Rehabilitation Act and, thus, made a false statement; (2) Kaplan acted with the requisite scienter; and (3) any false statement was material to the Government’s decision to release Title IV funds to Kaplan students.”  Id. at *5.

The district court agreed with the scienter argument, and chose not to address the other arguments.  Id. at *5 & n.9.  Recognizing that the False Claims Act (“FCA”) only applies to situations in which a defendant has at a minimum “buried his head in the sand and failed to make basic inquiries” or acted in “an extreme version of ordinary negligence,” the court explained there was no evidence of such conduct by Kaplan.  Id. at *6 (internal quotations omitted).  Rather than sticking its head in the sand, Kaplan had appropriately delegated to “outside counsel and inside counsel” the task of developing and implementing training, policies, and procedures that complied with the Rehabilitation Act.  Id. at *7.  And when the Department of Education’s Office of Civil Rights (“OCR”) contacted Kaplan about Gillespie’s previously filed OCR complaint, the school “worked with OCR throughout the investigation and worked with OCR to meet the obligations of the Resolution Agreement.”  Id.  “Thus, Gillespie has failed to establish scienter, a necessary element of his claim.”  Id. at *8.

The upshot of the Gillespie decision is clear—the FCA is a fraud statute that is “not meant to punish honest mistakes or incorrect claims submitted through mere negligence.”  Id. at *6.  However, the court did not address what kind of evidence a relator needs to establish the materiality of a false statement—a potential missed opportunity.  As readers of our last update may recall, one district court recently construed this element of the FCA as involving a fact-intensive “defense.”  U.S. ex rel. Sobek v. Educ. Mgmt., LLC, No. CIV.A. 10-131, 2013 WL 2404082, at *3 (W.D. Pa. May 31, 2013).*  Eventually, the courts will have to wrestle with the fact that there are numerous regulations with which a school agrees to comply or to which a school is subject, and not all of them can truly be material to the government’s decision to release federal financial aid funds.  Otherwise, a “knowing” violation of any one of the thousands of rules and regulations applicable to schools could potentially lead to FCA liability.

B.  EDMC Secures Important Decisions to Mount a Challenge to Materiality

In the United States’ case against Education Management Corporation (“EDMC”), there have been two important developments since our last update.  First, the United States District Court for the Western District of Pennsylvania overruled both the United States’ and EDMC’s objections to the special master’s discovery rulings.  United States v. Educ. Mgmt. LLC, No. 2:07-cv-00461-TFM, ECF No. 291, at 13 (W.D. Pa. July 23, 2013).*  The district court held that the United States could obtain discovery beyond the narrow issue in the case (whether the school’s compensation plan as implemented violated the ban against bonuses and commissions paid solely for enrollments).  Id. at 5.  Nonetheless, the court did recognize that there are limits to the scope of discovery, even for the United States.  The court explained that “direct evidence of this alleged fraud could only be possessed by a select number of top EDMC executives.”  Id.  And the court recognized that evidence of EDMC’s “focus on maximizing enrollments, in accordance with the Safe Harbor [regulation allowing for the payment of salaries that are not adjusted based solely on enrollments], is not probative of fraudulent intent.”  Id. at 6.

The district court also affirmed that EDMC could discover information regarding what the government knew about EDMC’s practices before the government’s involvement in the lawsuit.  Id. at 11-13.  Additionally, EDMC could demand information about the government’s general enforcement of the incentive compensation provision.  Id.  The court explained that EDMC may be able to use this information to “avoid liability by showing that the United States would not have refused payment even if it had known of EDMC’s alleged violation of the [incentive compensation ban].”  Id. at 13.  This, of course, is the core of the materiality analysis—if the government would not have refused payment, then the alleged violation should not be “material” to that payment decision under the FCA.

The issue of materiality was also the key issue behind the second development in the EDMC case:  the court granted EDMC’s motion to unseal some seventy-seven previously filed documents in the case, and twenty-two documents in a related case.  United States v. Educ. Mgmt. LLC, No. 2:07-cv-00461-TFM, ECF No. 291, at 1-2 (W.D. Pa. Aug. 28, 2013).  This ruling, in conjunction with the discovery ruling, may help EDMC present evidence that the United States did not consider the incentive compensation provision material to its decision to release funds to the school.

C.  Two Wins for the Thomas M. Cooley Law School in the Sixth Circuit

In another case we have been following—MacDonald v. Thomas M. Cooley Law School, 724 F.3d 654 (6th Cir. 2013)—the Sixth Circuit issued an important win for the Michigan-based law school.  Twelve graduates of the school sought to litigate a class action under the Michigan Consumer Protection Act and the common law, alleging that the school misrepresented the employment prospects of its graduates.  Id. at 657-58.  In a published opinion, the Sixth Circuit affirmed the district court’s holding that the students could not state a claim under the Michigan Consumer Protection Act because the Act only protects consumers, not law students who purchase their education for career enhancement—i.e., a business purpose.  Id. at 661.  The court also affirmed the dismissal of the misrepresentation and fraudulent omission claims because one of the employment statistics was literally true, and the other, although objectively untrue according to the court, could not reasonably be relied upon.  See id. at 663-65.

In another case filed against the Thomas Cooley Law School, a former student had alleged the school violated “due process” when the school dismissed him for alleged honor code violations.  Ghoshal v. Thomas M. Cooley Law Sch., No. 12-2341 (6th Cir. Sept. 9, 2013).  In a short, unpublished opinion, the Sixth Circuit held that the law school is not a state actor, and thus the Due Process Clause of the U.S. Constitution does not apply.  Id. at 3.

D.  Complying with the Law Versus a Contract:  A Catch-22?

On September 4, 2013, a deeply divided Seventh Circuit panel revived a putative class action lawsuit filed against Career Education Corp.  Wilson v. Career Educ. Corp., — F.3d —-, 2013 WL 4647302 (7th Cir. 2013).  After the Department of Education announced new rules prohibiting the payment of any bonuses for the enrollment of students, Career Education announced that it would no longer pay any bonuses to admission representatives as of February 29, 2011, in advance of the new regulations that would go into effect in July 2011.  Id. at *3.  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.  Id.  The district court agreed with Career Education that Wilson had failed to state a claim because the employment contract specifically permitted the school to terminate the bonus program at any time.  Id.  However, the Seventh Circuit reversed, with two members of the court agreeing that even though Career Education had the right to terminate the bonus program, Wilson had a plausible claim that Career Education violated the implied covenant of good faith and fair dealing by abusing its discretion to terminate the bonus program early.  Id.; id. at *7-8 (Darrow, J. concurring); id. at *13 (Hamilton, J. concurring).

E.  Almost $19 Million in Settlements

There were three notable settlements this quarter involving schools.  First, Richmond School of Health and Technology, which is now known as Chester Career College, agreed to pay $5 million to a putative class of students to settle allegations that the school violated the Virginia Consumer Protection Act and the federal Civil Rights Act.  The basic allegation in the over 100-page complaint was that the school targeted African-American students who would need federal loans, and then provided inadequate training.  Morgan v. Richmond Sch. of Tech. and Health, Inc., No. 3:12-cv-00373-JAG, ECF No. 21 (D.C.D.C.).  Although filed in June 2011, the class action was still in its infancy—the court had not ruled on either of the school’s pending motions to dismiss—when the parties informed the court of the settlement and sought approval in April 2013.

Second, the United States announced a settlement in U.S. ex rel. Aldredge v. ATI Enterprises, Inc., No. 3:09-cv-01313-G (N.D. Tex. 2009).  The ATI case was the first, and perhaps only, FCA case in which the United States intervened on a broad range of claims against a school, including allegations that ATI misrepresented its placement rates, made a variety of misrepresentations to induce students to enroll, caused the award of financial aid to ineligible students, and fabricated documents to conceal students’ ineligibility.  To settle these allegations, ATI agreed in August to pay $3.7 million to the United States.

Third, New York Attorney General Eric T. Schneiderman announced a $10.25 million settlement with Career Education Corp. on August 21, 2013.  The state of New York had alleged that Career Education misrepresented its employment statistics and failed to disclose that some of its programs in New York lacked accreditation.  The settlement includes $9.25 million to compensate students, a $1 million penalty, and an agreement to hire an independent company to verify placement rates.

F.  Bridgepoint and TICAS Each Fight Government Subpoenas

On July 14, 2013, the office of the Attorney General of California filed a petition to enforce an investigative subpoena against Bridgepoint Education as part of its ongoing investigations of alleged consumer fraud.  The point of contention with regard to the subpoena appears to be whether Bridgepoint must turn over data regarding communications with current and prospective students, even though everyone seems to agree that the state seeks a significant amount of information and Bridgepoint would have to provide notice to all of the students and potential students who had expressed interest in the school.  The parties are currently contemplating a possible resolution to the dispute, and thus the court postponed the court hearing until January 9, 2014.

In another subpoena controversy involving the education sector, the Office of the Inspector General of the Department of Education (“OIG”) recently failed in its attempt to enforce a subpoena against the Institute for College Access and Success (“TICAS”).  United States v. The Inst. for Coll. Access and Success, No. 13-mc-81 (ABJ-AK), ECF No. 12 (D.D.C. July 26, 2013).  OIG is currently investigating Robert Shireman for allegedly violating federal ethics laws when he was deputy undersecretary for the Department of Education by sharing information with TICAS, the organization he founded.  See id. at 2.  OIG sought a broad range of documents from TICAS, including all communications between Shireman and TICAS and all documents that contain the phrase “Robert Shireman” and “negotiated rulemaking.”  Id. at 3.  The magistrate judge held that the latter request was so broad that it “can only be categorized as a fishing expedition.”  Id. at 6.  Moreover, the OIG lacked authority for both requests, according to the magistrate judge, because TICAS is “a third party wholly unaffiliated with the federal government.”  Id. at 8.  The OIG has since filed objections to the magistrate’s order, and the issue has been fully briefed for the district court.

G.  California Files Suit Against Corinthian Colleges

The Attorney General of California filed suit against Corinthian Colleges and several of its subsidiaries on October 10, 2013.  The complaint alleges that Corinthian misrepresented job placement rates, unlawfully used military seals in its advertising, and inserted invalid release clauses into its enrollment agreements with students.  California v. Heald College, San Francisco Cnty. Super. Ct., No. CGC-13-534793.  In its press release, the Attorney General highlighted her allegation 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.'”  The state brings claims under California’s Unfair Competition Law, False Advertising Law, securities law, and the Business and Professions code.  Importantly, although Corinthian had been cooperating with the Attorney General’s office for some time, the Attorney General filed this lawsuit against Corinthian without any preview to Corinthian.

H.  The Trend in FCA Sanctions Continues

Coming on the heels of an almost $1.5 million dollar award of fees in U.S. ex rel. Lee v. Corinthian Colleges, No. 2:07-cv-01984-PSG-MAN, ECF No. 275 (C.D. Cal. June 6, 2013), and the overturning of a sanctions award in Leveski v. ITT Educational Services, Inc., 719 F.3d 818 (7th Cir. 2013),* Kaplan University recently secured attorneys’ fees in Diaz v. Kaplan University, No 1:11-cv-23394-PAS, ECF No. 326 (S.D. Fla. Sept. 16, 2013).*  On September 16, 2013, the court ruled that the plaintiff had frivolously pursued a retaliation claim under the FCA when he had previously lost a different retaliation claim against Kaplan University.  Id. at 12.  The court held that there is “simply no meaningful way to reconcile a judicial determination that Diaz was terminated for legitimate reasons [in the first lawsuit] with the continued litigation of a claim premised [again] on a wrongful termination.”  Id.  Despite granting the award of attorneys’ fees, the court postponed setting the amount until later this year to allow Kaplan to submit redacted billing records.  Id. at 14.

I.  Retaliation Jury Verdict

Finally, on August 15, 2013, a Minnesota jury awarded a former dean of Globe University $205,000 in lost wages and $190,000 for emotional distress based on her claim that she was fired for making good-faith reports about false job-placement rates, inadequate training, and a compensation system that paid bonuses for enrollments.  The school faces a similar lawsuit under the Minnesota Whistleblower Act by its former dean of the business school.

Conclusion

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