Recent Developments Related to Litigation Involving the Educational Sector (November 12, 2012)

November 12, 2012

This is the latest 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 included the release of the long-anticipated majority staff report from the Senate Committee on Health, Education, Labor & Pensions (“HELP”) and new rulings and government interventions in qui tam suits.  These developments and others are discussed below.

A.   Senate HELP Committee Majority Releases Report on For-Profit Education.

On July 30, 2012, the HELP Committee released its majority staff report summarizing the results of the investigation conducted by its chair Senator Tom Harkin (D-IA) into the for-profit education sector.  The report, which was the culmination of a series of hearings and reports initiated by Senator Harkin over the last two years, focused on criticizing the sector for its reliance on federal funds, drop-out rates, the level of expenditures for instruction, and student loan default rates.  Additionally, the report included profiles of 30 private sector institutions.  The profiles included a variety of allegations that plaintiffs’ lawyers may attempt to use as fodder for securities, qui tam, and student lawsuits.

Despite the overall negative tone about the sector, the report did contain some positive statements.  Most notably, the report recognized that “[f]or-profit colleges have an important role to play in higher education.”  Additionally, with regard to the so-called “incentive compensation” provision, the report reaffirmed that there is no law or regulation preventing a school from terminating recruiters who fail to meet minimum performance requirements.

It is important to note that this report is a staff report and was never voted on by the whole committee.  As such, the report does not carry the full weight of the HELP Committee behind it.  Additionally, because it was a staff report, an argument may exist that the report is inadmissible in federal court proceedings as unreliable hearsay.  This, of course, will not stop plaintiffs’ attorneys from attempting to rely upon this report–like they have relied upon the Nunn Report for the last 20 years–in current and future cases.

B.   NBER Report Serves As a Compelling Counterpoint to the Harkin Report.

In August 2012, the National Bureau of Economic Research released a working paper titled “The Labor Market Returns to a For-Profit College Education.”  This report serves as a compelling counterpoint to the negative perception of for-profit education set forth in the Harkin report. The report compared the earning gains of individuals who enroll in associate degree programs in for-profit schools with those who enrolled in public community colleges.  The analysis found that students enrolling in associate programs at for-profit schools experienced earnings gains of between 6 to 8 percent, consistent with students in public community colleges.  And those students who graduated experienced earnings gains of about 22 percent, or about 11 percent per year of education.  These gains can be shown to be higher than those for public sector graduates.  Moreover, graduates of for-profits work more hours and are more likely to work full-time as compared to community college alumni.  The results of this report are consistent with the recent Harvard and GAO reports regarding student outcomes and present a much more positive and accurate view of the sector.

C.   DOJ Intervenes in Qui Tam Lawsuit Against ATI on Every Issue, the First “Soup to Nuts” Intervention.

On August 23, 2012, DOJ filed a complaint intervening in a qui tam lawsuit filed against ATI Enterprises, Inc. in the United States District Court for the Northern District of Texas.  While an intervention by the DOJ in and of itself is notable, this case is particularly notable because the DOJ intervened on more than one issue.  In previous cases, the DOJ has intervened on particular claims (e.g., for alleged violations of the 90-10 rule or the incentive compensation provision).  But here, the DOJ’s complaint addresses all aspects of the litigation, including allegations that ATI misrepresented its placement rates to the Texas Workforce Commission, made a variety of misrepresentations to induce students to enroll, and caused DOE to award financial aid to ineligible students and fabricated documents to conceal their ineligibility.  Although it is too early to tell whether this case presents an aberration or a trend, it does serve as a reminder of DOJ’s willingness to intervene in cases brought against the sector.

D.   Recent Developments in False Claims Act Cases Show Mixed Results.

During the last quarter, there have been a number of notable developments related to qui tam suits, reflecting mixed results for the sector.

          1.   Fifth Circuit Rules That Federal Employees, Including Auditors and Investigators, Can File False Claims Act Suits.

On July 31, 2012, the United States Court of Appeals for the Fifth Circuit, which had previously closely scrutinized FCA complaints, greatly expanded the types of individuals who can file an FCA complaint.  In Little v. Shell Exploration & Production Co., 690 F.3d 282 (5th Cir. 2012), the court held that “even one whose job is to investigate fraud” has standing to bring an FCA case.  Under that standard, DOE auditors, program reviewers, and investigators, who are often privy to information that has not been publicly disclosed, arguably could bring FCA cases on that information. The court tempered its ruling somewhat by holding that if a relator was specifically employed to disclose fraud, any disclosures would be nonvoluntary–meaning that the federal employee could potentially lack standing under the original source rule.  However, with Congress’s recent changes to the public disclosure bar, which drastically limit what constitutes a public disclosure, this ruling substantially increases the number of individuals who could have standing to bring an FCA suit.

          2.   AIU and the University of Phoenix Receive Contradictory Decisions Based on the First-to-File Rule.

Two recent decisions involving motions to dismiss qui tam actions filed against for-profit schools resulted in seemingly inconsistent outcomes.  Both cases focused on the meaning of the term “pending” as it is used in the first-to-file rule in the FCA, which generally prohibits duplicative lawsuits against entities that contract with the government.  31 U.S.C. § 3730(b)(5).

In United States ex rel. Hoggett v. Univ. of Phoenix, Case No. 2:10-cv-02478, 2012 WL 2681817 (E.D. Cal. July 6, 2012), the University of Phoenix (“UOP”) filed a motion to dismiss a qui tam complaint filed against it on various grounds, including the FCA’s first-to-file and public disclosure rules.  UOP had argued that the case was barred by the first-to-file rule because it involved allegations of wrongdoing that were at issue in a previously dismissed action, meaning this action was duplicative and barred.  The relator in the case argued that his action was not barred because the prior case was no longer pending at the time he filed his case.  The United States District Court for the Eastern District of California agreed with the relator, holding that “[u]sing the first-to-file rule to bar whistleblower suits that allege new fraud perpetrated by a wrongdoer after completion of a previous suit would thwart the statute’s purpose to encourage whistleblowers to come forward.”  Id. at *4.  On that basis, the court found the first-to-file rule inapplicable.  UOP’s motion to dismiss was ultimately denied on all grounds.

In contrast, the United States District Court for the Northern District of Georgia reached the opposite conclusion in United States ex rel. Powell v. American Intercontinental University, Inc., Case No. 1:08-cv-02277, 2012 WL 2885356 (N.D. Ga. July 12, 2012).  American Intercontinental University (“AIU”), like UOP, argued that a case was barred by the first-to-file rule by previously-filed cases that had subsequently been dismissed.  The court in the AIU case found that although an earlier case must be “pending” at the time a later case is filed for the first-to-file bar to apply, the earlier case should be considered to be “pending” even after it was dismissed.  The court noted that the term “pending” as used in the FCA merely referred back to the first-filed action.  Id. at *4.  Moreover, the court stated that interpreting the term “pending” to mean only those cases that were active at the time of a later case’s filing “would create a bizarre result because if the second set of relators filed their complaint sooner–and while the first suit was still active–they would be barred . . . .  But if the second set waited the likely years it would take for a dismissal in the first . . . action[], they would be rewarded.”  Id. at *5.  Additionally, the court noted that defining “pending” as active “does not comport with who the actual plaintiff [is] in a qui tam suit–the government.”  Id.  Since the actual plaintiff would have already sued the defendant, the policies behind the FCA would not support successive suits based on the same subject matter.  Id.

It is likely that these courts will not be the last to address this issue.  However, the Powell court’s reasoned analysis could serve as a guidepost for defendants seeking to apply the first-to-file rule based on cases that had been dismissed.

3.   Qui Tam Suit Against EDMC Is Recommend to Be Dismissed in Part.*[1]

In United States ex rel. Sobek v. Education Management, LLC, Case No. 2:10-cv-00131 (W.D. Pa), EDMC is alleged to have violated the FCA under the false certification theory.  Specifically, the complaint alleges that EDMC violated the FCA by misrepresenting the accreditation of certain programs, job placement rates, cost of its programs, compliance with student progress tracking requirements, and compliance with the incentive compensation regulations, and by failing to return federal funding for students who were dropped from programs.  EDMC moved to dismiss on various grounds, including that the incentive compensation claims were barred by the FCA’s “first-to-file” rule. On October 22, 2012, the magistrate judge recommended dismissal of the incentive compensation claims based on the “first-to-file” rule, which relator conceded.  Additionally, the magistrate judge recommended dismissal of the claims based on purported misrepresentations of the cost of its programs and the purported failure to return federal funds for failure to plead facts sufficient to support the claims.  The magistrate judge, however, recommended that the remaining claims should be allowed to proceed on to discovery.  These recommendations can be appealed to the district court judge.

E.   DOJ Investigates Two Schools Regarding Compliance with Incentive Compensation Rules.*

On July 23, 2012, Universal Technical Institute, Inc. (“UTI”) announced that it was being investigated by DOJ.  The investigation was spurred by a qui tam complaint filed by a former employee who alleged that the company had violated the incentive compensation rules.  UTI is also being investigated by the Department of Labor based on allegations from the same employee that his employment was improperly terminated.  The qui tam complaint has not been unsealed, so it is unclear whether the allegations are based on the previous incentive compensation regulations, or those adopted by DOE last year.  Nor has DOJ made a determination regarding whether it will intervene.

Likewise, on October 15, 2012, Bridgepoint Education, Inc. (“Bridgepoint”) announced that it was being investigated by DOJ.  The DOJ’s letter indicated that it was investigating Bridgepoint’s compensation of its admission personnel.  DOJ indicated that it was considering implementing a formal process to obtain evidence and that it was open to a voluntary presentation from Bridgepoint, provided that any such presentation include specific admissions personnel whose compensation was reviewed in DOE’s most recent audit report.

F.   Bankruptcy Court in Decker College Proceeding Rules That Accreditor Made False Statements to DOE.

On July 10, 2012, the United States Bankruptcy Court for the Western District of Kentucky ruled that the Council on Occupational Education, Inc., the accreditor for Decker College, Inc., made factually erroneous statements to DOE.  In re Decker College, Inc., Case No. 05-61805 (W.D. Ky. July 10, 2012), Dkt. 198 at 18.  Specifically, the Court found that the accreditor had falsely informed DOE that Decker College had not been accredited to offer distance education programs.  Id.  As a result of these false statements, Decker College was determined to be ineligible to receive Title IV funding and was forced to repay $35 million to the DOE, ultimately leading to the school’s bankruptcy.  While this ruling cannot undo the unfair damage to Decker College, the ruling serves a reminder that in today’s environment, not only schools, but accreditors may be subject to scrutiny and claims for misrepresentations made to the government.

G.   Lawsuit Against Cooley Law School Is Dismissed, but Suit Against Thomas Jefferson Law School Proceeds.

As discussed in prior updates, multiple lawsuits have been filed against law schools premised on alleged misrepresentations regarding employment placement rates coming out of school.  One such suit was filed against Thomas M. Cooley Law School in the United States District Court for the Western District of Michigan, alleging that the school misrepresented information related to the employment prospects of its graduates.  On July 20, 2012, the court dismissed the suit, finding that certain statements were not objectively false and others, while false, could be easily verified, negating any argument of justifiable reliance.  MacDonald v. Thomas M. Cooley Law School, 1:11-cv-00831, 2012 WL 2994107, at *6, *9.  The court also dismissed claims premised on a theory of “silent” fraud because the school had no duty to disclose additional information related to its employment statistics.  Id. at *11.

To date, only one of these suits has survived motions to dismiss, a putative class action against Thomas Jefferson School of Law that was filed in California state court.  In that suit, the former associate director of the school’s career services office submitted a sworn statement indicating that she was repeatedly instructed to emphasize positive, but inaccurate, employment statistics and downplay negative employment statistics.  Additionally, she stated that she “routinely recorded currently unemployed students as ’employed’ if they had been employed at any time since graduation.”  Based on those statements, the plaintiffs filed a motion seeking sanctions against the school on October 18, 2012, asserting that the school altered and manipulated documents that relate to their allegations.

H.   Conclusion

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.


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