October 21, 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. In this edition, we look at developments in, and the likely future of, cases alleging violations of the so-called incentive compensation provision of the Higher Education Act, as well as the expanding scope of federal and state investigations into private-sector schools.
A. A Number of Significant Developments Relating to Compensation Cases
As readers of this update well know, much of the litigation affecting the sector over the last decade has related to schools’ compliance with the Higher Education Act’s so-called incentive compensation provision, which prohibits schools from paying "commissions, bonuses, or other incentive payments" to employees based upon the number of students they enroll. 20 U.S.C. § 1094(a)(20). The highlights from this last quarter are discussed below.
1. Bridgepoint Obtains Dismissal of Compensation Case on Public Disclosure Grounds*
Lawsuits relating to the compensation provision have generated significant publicity, providing a critical defense for any school facing a False Claims Act ("FCA") suit based upon an alleged violation of the compensation provision. Specifically, the FCA’s "public disclosure" bar provides that a qui tam relator’s lawsuit should be dismissed "if substantially the same allegations or transactions as alleged in the action or claim were publicly disclosed" in certain places before the lawsuit was filed, including "in a Federal . . . civil . . . hearing," a "Federal report, hearing, audit, or investigation," or "the news media." 31 U.S.C. § 3730(e)(4). The only exceptions to this bar are if the government intervenes and opposes dismissal or the relator shows she is an "original source" under the statute. Id. Given the litigation and publicity surrounding schools’ compliance with the compensation provision, the FCA’s "public disclosure" bar provides a key opportunity to obtain an early dismissal of an FCA lawsuit.
Bridgepoint Education is the latest school to use this provision successfully. In United States ex rel. Carter v. Bridgepoint Education, Inc., No. 10-CV-1401, 2015 WL 4892259 (S.D. Cal. Aug. 17, 2015), two employees of Ashford University sued Bridgepoint Education and Ashford, claiming that from 2005 to the present, the school paid employees in violation of the compensation provision. Id. at *1. The defendants, after obtaining concessions from the relators during their depositions that effectively precluded them from claiming that they were "original sources," filed a motion to dismiss based upon the public disclosure bar. Id. at *2, *3. The motion argued that there were a series of substantially similar public disclosures prior to the FCA lawsuit, most prominently the defendants’ own disclosure in a filing with the Securities and Exchange Commission of an Office of Inspector General ("OIG") review relating to the school’s compensation practices. Id. at *4-5. The defendants also pointed to press and news reports about this review as additional prior public disclosures. Id.
On August 17, 2015, the court granted Bridgepoint and Ashford’s motion to dismiss, finding that the allegations at the core of the relators’ complaint had been previously publicly disclosed. Id. at *6. The court rejected the relators’ arguments that the prior disclosures did not sufficiently describe "fraud" as a result of the purported non-compliance, finding instead that the disclosures demonstrated "there was ample information in the public sphere to enable the government to pursue an investigation" if it so desired. Id. Relators appealed the decision to the Ninth Circuit on September 21, 2015.
This case provides a good example of why it is important for defendants in FCA cases to scour prior public filings and materials–even their own–to determine if there were prior public disclosures of the allegations in the case. The case also shows an additional advantage of publicly disclosing events such as OIG reviews, audits, or investigations, as such disclosure may provide the basis for a later motion to dismiss an FCA claim under the public disclosure bar. And the case demonstrates the importance of obtaining discovery from relators early in the litigation.
2. Seventh Circuit Denies Further Review of Important Sanford-Brown Decision
As we previously reported in June, the Court of Appeals for the Seventh Circuit issued an important decision in United States ex rel. Nelson v. Sanford-Brown, 788 F.3d 696 (7th Cir. 2015). In that case, the court made clear that although its prior decision in U.S. ex rel. Main v. Oakland City University, 426 F.3d 914 (7th Cir. 2005), allows FCA cases based upon purported violations of the compensation provision to survive a motion to dismiss, plaintiffs likely will face tough scrutiny at the later summary judgment stage. Sanford-Brown, 788 F.3d at 709. In particular, the court in Sanford-Brown held that to survive summary judgment, a qui tam relator must produce actual evidence showing that at the time the school signed its program participation agreement with the Department of Education, the school had no intent to comply with the compensation provision. Id. And the court rejected an argument that a relator could establish intent and a violation of the FCA merely by showing a violation of the provision while the program participation agreement was in effect. Id. at 710.
On August 4, 2015, the Seventh Circuit denied the relator’s and the United States’ separate requests for panel rehearing and rehearing en banc. This is a significant victory for schools. Following the Sanford-Brown decision, a relator seeking to survive a summary judgment motion (at least in the Seventh Circuit) must produce actual evidence of a knowing fraud at the time the program participation agreement was signed.
3. Lawsuits Brought Under the New Compensation Regulation
As we have stated before, it was only a matter of time before relators began filing FCA lawsuits based upon the new version of the compensation regulation put in place by the Department of Education in 2011 that rescinds the safe harbors and effectively prohibits adjustments to compensation based in any part on the number of students enrolled. Because relators’ FCA lawsuits are initially filed under seal, giving the Department of Justice an opportunity to investigate, we knew it would take some time before these cases began to percolate to the surface. Over the past several months, we have started to see some bubbling–there are now to our knowledge several investigations or reviews under way relating to schools’ compliance with the new version of the regulation.
4. The Mitchell Memo Makes It Easier for Relators to Establish Materiality Going Forward But Also Confirms that the Hansen Memo Was an Official Statement of Department Policy Which Provides Compelling Evidence that Violations Were Not Material
This past June, the Department of Education announced that it has revoked the 2002 document known as the "Hansen Memo." The Hansen Memo stated that in the ordinary course a violation of the compensation provision did not result in loss to the government and would not result in a school or student becoming ineligible to receive financial aid. Rather, the memo stated, such a violation should typically result in a fine. For years, schools have argued that the Hansen Memo proves that alleged violations of the compensation provision should not result in FCA liability–since FCA liability (with its treble damages and per claim penalties) requires that the violation be "material" to the government’s decision to pay financial aid. While schools have argued that the Hansen Memo was an official statement of Department policy, relators and the Department of Justice have argued that it was not and, in Main, the Seventh Circuit stated that–at least at the pleading stage–"the memorandum has no legal effect; it was not published for notice and comment and does not authoritatively construe any regulation." 426 F.3d at 917.
In June of this year, the Department of Education repealed the Hansen Memo, issuing a new memo, signed by Under Secretary of Education Ted Mitchell. See Mitchell, June 2, 2015 Memorandum (available at https://www.documentcloud.org/documents/2095024-mitchell-incentive-compensation-memo.html). The "Mitchell Memo" importantly recognizes that the Hansen Memo was prior Department policy. But it also does a 180-degree turn from the Hansen Memo, and now–in direct contradiction of what was Department policy for over ten years–claims that the Department’s "damages" from a violation of the incentive compensation provision include "all of the Title IV funds received by the institution over a particular time period if those fund were obtained through implementation of a policy or practice in which students were recruited in violation of the incentive compensation provision." The Mitchell Memo also states: "The Department may also, of course, impose a fine upon an institution, or take an administrative action to limit, suspend, revoke, deny, or terminate the institution’s eligibility to participate in the Title IV programs . . . ."
At least going forward, the new compensation regulation and the Mitchell Memo certainly make defendants’ job more difficult in FCA cases. As we have stated, with the new regulation, schools will often be in the position of trying to prove a negative–that they did not compensate employees in any way, based directly or indirectly, or in any part, on enrollments. And the Mitchell Memo will likely make defendants’ materiality arguments more challenging, at least in cases relating to conduct subsequent to the memo.
Ironically, the Mitchell Memo will be of great help to schools that are defending compensation cases relating to the time period that predates the Mitchell Memo. This is because the Mitchell Memo essentially concedes that the Hansen Memo was an official statement of Department policy between 2002 and 2015. This should help schools convince courts that alleged violations of the compensation rules during that time period were not material to the government’s decision to provide Title IV funds.
5. The Numbers Don’t Lie
Finally, there have been additional positive case developments, including most recently in a derivative action pending against Education Management Corp. ("EDMC") and its officers in the Pennsylvania state courts. Oklahoma Law Enforcement Retirement System v. Nelson et al. and Education Management Corp., No. GD-12-008785 (August 25, 2015 Memorandum and Order of Court). There, the court recently granted a motion to dismiss the complaint, in part, because of the proffer of statistical evidence by defendants showing that compensation decisions were not based "solely" upon the number of students enrolled. This rationale returns logic to a point that relators try to convince courts to ignore–under the old regulation, the numbers should tell the story. If compensation was adjusted based solely upon enrollments, the numbers will show that; if it was not, the numbers will show that other factors influenced the compensation adjustments.
B. Government Investigations Continue
The breadth and scope of government investigations continue without abatement. This past quarter we saw new investigations by the Federal Trade Commission, Consumer Financial Protection Bureau, the Department of Education, and the Department of Justice, among others. We summarize several such developments below.
First, both Apollo Education Group and Career Education Corporation announced this summer in filings with the Securities and Exchange Commission that they received civil investigative demands from the Federal Trade Commission ("FTC"). These come on the heels of the settlement between the FTC and Ashworth College this past May (where Ashworth agreed to a judgment of $11 million and to limit certain types of advertising), and appear to be part of the agency’s broader investigation of the sector that we first mentioned in January of 2014.
Second, Bridgepoint Education announced in August that the Consumer Financial Protection Bureau sent it a civil investigation demand related to the agency’s "investigation to determine whether for-profit post-secondary-education companies or other unnamed persons have engaged in or are engaging in unlawful acts or practices related to the advertising, marketing or origination of private student loans."
Third, the Department of Education sent a request in late August to DeVry University for documents and information regarding published employment outcomes and earnings of its graduates.
Finally, the United States Attorney for the Western District of North Carolina sent a subpoena to Universal Technical Institute Inc., seeking among other things, documents and information relating to the company’s compliance with the "90/10 rule." While the subject matter of the subpoena is not necessarily unusual, the authority for the subpoena is. According to the company, the subpoena was sent pursuant to the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA"), a statute that was enacted in the wake of the savings and loan crisis of the 1980s, but that the Department of Justice has recently been utilizing to combat alleged residential mortgage fraud. It will be interesting to see if other schools receive subpoenas pursuant to FIRREA and what precisely is the theory as to why schools would be subject to FIRREA.
C. Settlements with State Attorneys General Continue and the Colorado Attorney General’s Request for Preliminary Injunction Is Denied
This quarter we saw settlements with at least two states whose attorneys general have been very aggressive in investigating the sector: Massachusetts and Kentucky.
On July 30, 2015, Massachusetts Attorney General Maura Healey announced settlements with Kaplan Career Institute and Lincoln Technical Institute to resolve allegations that the schools inflated job placement numbers and utilized unfair recruiting tactics. Kaplan agreed to a $1.375 million settlement, which will be distributed to eligible graduates of Kaplan’s medical vocational programs. As part of the settlement, Kaplan also agreed to close the Kaplan Career Institute in Massachusetts and to notify the Attorney General’s Office before it attempts to open or re-open a school in Massachusetts. The settlement included no finding of wrongdoing, and Kaplan continues to deny any wrongdoing or liability. Lincoln Technical Institute agreed to settle for a little over $1 million, which will be used to pay down both private and federal student loans for eligible graduates of the school’s criminal justice program at its two Massachusetts campuses. The Lincoln Technical Institute settlement also requires the school to accurately calculate placement statistics moving forward and provide disclosures to potential students regarding job placements and transferability of credits. Similar to the Kaplan settlement, Lincoln Technical Institute also denied all allegations of wrongdoing.
On September 10, 2015, Kentucky Attorney General Jack Conway announced the end of a three-year investigation and consumer protection lawsuit against Daymar College with a $12.4 million settlement. The consent decree requires Daymar to pay $1.2 million to the Office of the Attorney General, which will then be distributed to former students who attended the college between July 27, 2006 and July 27, 2011. Daymar has also agreed to forgo collection of an additional $11 million in institutional debt owed to it by former students. In addition, the parties have agreed to have former Tennessee Attorney General Robert E. Cooper, Jr. serve as Compliance Monitor over Daymar for the next two years, and will pay him $250,000. The consent decree also included terms that require Daymar to provide a 21-day, risk-free refund period for most students and enhanced disclosures to students, as well as a free, bi-monthly career services workshop for current and former students for two years. Daymar continues to deny any wrongdoing or liability.
Finally, as reported in a previous update, the Colorado Attorney General brought suit against CollegeAmerica on March 30, 2015, accusing the school of using false and misleading advertisements allegedly promising students lucrative careers. On July 16, 2015, Colorado State Court Judge R. Michael Mullins denied the Colorado Attorney General’s motion for a preliminary injunction against CollegeAmerica, finding that the state failed to meet its burden of proof. Judge Mullins found that the preliminary injunction was unnecessary as to CollegeAmerica’s advertisements because the school had voluntarily removed all advertisements containing starting salary information derived from the National Association of Colleges and Employers. Judge Mullins further found the state had failed to carry its burden with claims relating to CollegeAmerica’s admissions process, as well as with regard to its EduPlan program, because there was no evidence of the school providing any false or misleading information in its disclosures provided during enrollment and for its EduPlan loans. And last, the court held that the Attorney General failed to produce sufficient evidence that CollegeAmerica had engaged in deceptive conduct by saying its loan program made the school affordable. As this demonstrates, it is relatively easy for an attorney general or other government official to claim wrongdoing by a school; it is much more difficult to prove those allegations with evidence of wrongdoing in court.
D. State Court Judge Strikes Down ITT Tech Suspension from California Veteran Program
In May, the California State Approving Agency for Veterans Education ("CSAAVE") suspended its approval of ITT Technical Institute’s enrolling veteran students and threatened to permanently withdraw its approval in 60 days. CSAAVE then claimed, without any evidence and without providing the company an opportunity to respond, that ITT Tech was not in compliance with the accreditation standards of the Accrediting Council for Independent Colleges and Schools, despite the fact that the accrediting council assured CSAAVE of ITT Tech’s compliance. ITT Tech challenged CSAAVE’s suspension in court, and in June, California State Court Judge William D. Claster stayed the suspension.
On August 21, 2015, Judge Claster issued a tentative final ruling in ITT Tech’s favor, finding that the suspension imposed by CSAAVE was unlawful, and noting that CSAAVE does not appear to have any statutory or regulatory authority to impose the suspension. A few hours later, CSAAVE abandoned its attempt to suspend ITT Tech and informed Judge Claster that there is no pending suspension of ITT Tech.
Conclusion
We will continue to keep you informed on these and other related issues as they develop.
[1] The asterisks indicate matters in which Gibson Dunn is involved.
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