Recent Developments Related to Litigation Involving the Educational Sector (July 17, 2012)

July 17, 2012

This is our most recent update of significant developments relating to the array of qui tam, securities, fraud, and other lawsuits and investigations involving schools, especially private sector schools.  This past quarter was quite eventful and included important rulings in two legal challenges to new Department of Education (“DOE”) regulations (both of which will likely impact the potential litigation risks faced by schools), a ruling on the motion to dismiss filed in the first compensation qui tam action in which the Department of Justice (“DOJ”) has intervened, and the issuance of Civil Investigative Demands (“CID”) to two schools by the recently created Consumer Financial Protection Bureau (“CFPB”).  These developments and others are discussed below.

A.   District Court Invalidates New Gainful Employment Regulations.*[1]

On June 30, 2012, the United States District Court for the District of Columbia invalidated the DOE’s new gainful employment regulations.  The Association of Private Sector Colleges and Universities (“APSCU”) challenged DOE’s regulations that sought to apply the gainful employment requirement contained in the Higher Education Act (“HEA”) by examining the debt, earnings, and debt repayment of a program’s former students.  The District Court held that “[b]ecause one of the debt measures lacks a reasoned basis, that regulation will be vacated as arbitrary and capricious.”  APSCU v. Duncan, Case No. 1:11-CV-01314-RC, Dkt. 25 at 1 (D.D.C. June 30, 2012).  Likewise, the court vacated related rules that “cannot stand without the debt measures,” including the reporting rule and the program approval rule, but upheld DOE’s disclosure regulations.  Id.

The near-term impact of this ruling on the sector is significant.  Had the gainful employment regulations been upheld, private sector schools would have been potentially subject to an increased risk of qui tam and securities lawsuits and regulatory sanctions by DOE.  Moreover, this decision illustrates that courts are willing to vacate agency regulations that are not properly justified and constructed.

B.   Court of Appeals Finds Legal Deficiencies with Several Aspects of New Compensation, Misrepresentation, and State Authorization Regulations.*

On June 5, 2012, the United States Court of Appeals for the District of Columbia Circuit issued a decision finding legal deficiencies with several elements of DOE’s new compensation, misrepresentation, and state authorization regulations.  APSCU v. Duncan, 2012 U.S. App. LEXIS 11269 (D.C. Cir. 2012).  Both APSCU and the United States had appealed the district court’s decision that struck down a key provision of the state authorization regulations and held that the compensation and misrepresentation regulations were lawful.

The Court of Appeals held that the misrepresentation regulations exceeded DOE’s regulatory authority in several important ways.  Specifically, under the proposed regulations, DOE had attempted to broaden the definition of misrepresentation to include truthful and nondeceitful statements, potentially exposing the sector to liability for truthful statements that arguably could have a tendency or likelihood to confuse.  The Court held that DOE may not sanction truthful, non-deceitful statements that are merely confusing, and the decision therefore eliminates the possibility of liability for schools on the basis of such statements.  The Court also held that the regulations deprived schools of certain procedural rights and governed misrepresentations with respect to subjects not covered by the HEA, and ordered DOE to address these deficiencies on remand.

Additionally, while the Court of Appeals generally affirmed that the compensation regulations did not exceed DOE’s authority, it remanded two aspects of these regulations for further consideration by the agency–the elimination of the safe harbor based on students completing their programs and the DOE’s lack of consideration on impacts to minority enrollment–that, in the Court’s opinion, were “lacking for want of adequate explanations.”  Id. at *43.  And despite upholding the state authorization regulations as applied to brick and mortar schools, the Court of Appeals affirmed the district court’s holding that a key element–the distance education regulation–exceeded DOE’s regulatory authority.  Moreover, the Court of Appeals specifically upheld the sector’s right “to bring as applied challenges against any alleged unlawful applications [of DOE’s regulations].” Id. at *26.

It is likely that this decision will have a significant impact on future litigation against the sector.  The narrowing of the misrepresentation rule will, we expect, help reduce the number and potential legal merit of certain student complaints filed against schools (whether on a class or individual basis).

On the other hand, the fact that the Court largely upheld the compensation rule will likely contribute to another round of qui tam lawsuits being filed against schools.  In fact, it is certainly possible, if not likely, that a number of new lawsuits have already been filed under seal since the new compensation rule went into effect in July 2011 and that DOJ has been waiting for the Court of Appeals’ decision regarding the validity of the regulation before making any intervention decisions.  (Indeed, there is an incentive for “whistleblowers” to file such lawsuits as early as possible due to the False Claims Act’s “first to file” provision, 31 U.S.C. § 3730(b)(5).)  Such lawsuits, once unsealed, will raise a variety of interesting issues under the False Claims Act including, for instance, whether and how prior lawsuits and administrative actions against schools may serve to bar these cases under the False Claims Act’s first-to-file and public disclosure bars.  31 U.S.C. § 3730(b)(5) (first-to file); id., § 3730(e)(4) (public disclosure).

C.   District Court Dismisses Claim That EDMC’s Compensation Plan Violated Applicable Regulations “As Designed,” but Permits an “As Implemented” Claim to Move Forward.*

On May 11, 2012, the United States District Court for the Western District of Pennsylvania dismissed claims brought by a qui tam relator and the Department of Justice that EDMC’s compensation plan, as written or “as designed,” violated the compensation provision.  United States ex rel. Washington v. Educational Mgmt. Corp., Case No. 2:07-cv-00461-TFM, Dkt. 183 (W.D. Pa. May 11, 2012).  The Court, however, did allow the litigation to continue on the issue of whether the compensation plan violated the incentive compensation provision “as implemented.”  Id. at 27.  In its decision, the court indicated that an “as implemented” claim is “inherently difficult to resolve at the motion to dismiss stage” and that “[i]t will be incumbent upon Plaintiffs to develop admissible evidence to support the theory.”  Id. at 38.

D.   CFPB Issues CIDs to Corinthian and ITT.*

During the last quarter, the CFPB sent CIDs to both Corinthian and ITT, the first known inquiries by the CFPB into the sector.  In March 2012, the CFPB also initiated a complaint system on private lending and has been actively studying student borrowing patterns.  These developments raise several concerns regarding the constitutionality and statutory authority of the CFPB, and one lawsuit has already been filed (by entities outside the sector) challenging the constitutionality of the CFPB.

E.   Apollo Settles Securities Litigation, Vacating Prior Judgment Against Apollo and Individual Defendants.*

On April 20, 2012, Apollo Group, the parent company of the University of Phoenix, entered into a settlement agreement to resolve a class action securities complaint that was originally filed in 2004.  The original complaint was based on allegations that Apollo made misleading statements about a DOE investigation into recruiting practices at the University of Phoenix.  Under the terms of the settlement, Apollo was required to pay $145 million to the class plaintiffs, over $48 million of which went to the plaintiffs’ attorneys.  As a result of the settlement, the court vacated a previous verdict against Apollo and individual defendants.

F.   Former Kaplan Employees Settle Discrimination Suit and Voluntarily Dismiss Qui Tam Claims.*

In April 2012, Kaplan Higher Education Corporation resolved a pending qui tam False Claims Act and retaliation lawsuit brought against it by two former employees of its ICM campus in Pittsburgh, Pennsylvania.  The former employees had brought claims premised on wrongful discharge and the False Claims Act based on allegations of falsified job-placement rates and violations of the incentive compensation provision.  The parties settled the wrongful discharge claim and the False Claims Act claims were voluntarily dismissed.  The United States Attorney for the Western District of Pennsylvania consented to the dismissal of the claims.

G.   CECO Settlement Approved by Court.

On April 19, 2012, the California Superior Court in San Francisco issued an order granting final approval of the settlement of a class action filed against Career Education Corporation (“CECO”).  The class action was premised on allegations that California Culinary Academy engaged in various misrepresentations during the admissions process.  Under the terms of the settlement, CECO was required to pay approximately $40.8 million to students who enrolled in or graduated from California Culinary Academy during a five year period.

H.   Virginia Settles Accreditation Lawsuit for $2.4 Million.

As lawsuits against the private sector have become more prevalent, private litigants have also begun to focus on public and non-profit institutions.  For instance, multiple lawsuits have been filed against law schools premised on alleged misrepresentations regarding employment placement rates coming out of school.[2]  Similarly, the State of Virginia recently settled a suit filed by 73 former nursing students at Virginia Western Community College for $2.4 million.  The suit was based on allegations that the state-run college engaged in fraud by failing to inform students that the nursing program had lost its national accreditation.  These developments demonstrate that all schools–for-profit, public, and private–are potentially subject to the increasing trend of litigation and regulatory activity.

I.   Another Securities Class Action Against a Private Sector School Is Dismissed.*

In the wake of the investigation by the Senate Committee on Health, Education, Labor & Pensions (“HELP”) into private sector schools and the increased regulatory scrutiny on the sector, opportunistic plaintiffs and their attorneys filed a series of securities lawsuits against individual companies within the sector.  To date, not a single one of these cases has survived a motion to dismiss.  Most recently, the United States District Court for the District of Minnesota, on June 1, 2012, dismissed a complaint filed against Capella Education Company with prejudice.  The dismissal of this lawsuit joins dismissals of similar lawsuits against DeVry, ITT, Corinthian, EDMC, and several other companies.

J.   Senator Harkin and the HELP Committee Seek to Release Documents to Law Enforcement.*

It is anticipated that a report will soon be released by the HELP Committee or its majority Staff that will be quite negative in tone and substance.  In addition, we understand that the Committee or Staff is interested in releasing documents provided by the thirty plus schools during the course of the investigation to the public and to “law enforcement.”  This is obviously troubling (and we believe inappropriate).


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

  [1]   The asterisks in the headings indicate matters in which Gibson Dunn is involved.

  [2]   To date, only one of these suits, against New York Law School, has been dismissed.

Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding the issues discussed above.  Please contact the Gibson Dunn lawyer with whom you work, or any of the following:

Los Angeles
Timothy Hatch (213-229-7368, [email protected])  
Marcellus McRae (213-229-7675, [email protected])
James Zelenay (213-229-7449, [email protected])

Orange County
Wayne Smith (949-451-4108, [email protected])
Nick Hanna (949-451-4270, [email protected])
Kristopher Diulio (949-451-3907, [email protected]

Washington, D.C.
Douglas Cox (202-887-3531, [email protected])
Michael Bopp (202-955-8256, [email protected])
Amir C. Tayrani (202-887-3692, [email protected])
Nikesh Jindal (202-887-3695, [email protected])

© 2012 Gibson, Dunn & Crutcher LLP

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