Recent Developments Related to Regulation and Litigation Involving the Education Sector (August 2017)

August 17, 2017

This is the latest update of significant developments relating to regulatory, administrative, or legal actions involving schools, especially private-sector schools.  This past quarter was eventful on the False Claims Act (FCA) front with a significant win for Kaplan, and a continued focus on the Ninth Circuit Court of Appeals.  There were also some favorable developments at the federal regulatory level that certain states appear determined to thwart, and much more to discuss.  Let’s get started.

A.     The False Claims Act

1.     Kaplan University Prevails on Summary Judgment in Incentive Compensation Case

On July 13, 2017, Kaplan won summary judgment in an FCA lawsuit in the Southern District of Florida based on allegations that Kaplan compensated admissions employees in violation of the incentive compensation rule.  U.S. ex rel. Diaz v. Kaplan Univ., et al., No. 09-20756, Dkt. No. 660 (S.D. Fla. July 13, 2017)*.  The court held that the relator’s claims were barred by the FCA’s public disclosure bar and that the relator could not establish that Kaplan’s management acted with the requisite degree of scienter.  The relator was not an original source of his allegations, the court reasoned, because there was no evidence that he was directly involved in the development of the compensation policies, and he testified in deposition that his knowledge of his allegations came secondhand.  Id. at *17–18.  Further, none of the evidence presented by the relator suggested that the Kaplan executives who signed program participation agreements knew or had any reason to believe that Kaplan’s policies were non-compliant; quite the contrary, they testified the policies were compliant and that they believed such to be the case.  Id. at *20–28.

This ruling continues the trend of positive decisions for schools at summary judgment.  Though FCA cases against schools often survive motions to dismiss and can often be lengthy and costly, courts—when able to examine the actual facts at summary judgment—continue to dismiss the cases on various grounds.       

2.     Eleventh Circuit Upholds Government’s Post-Appeal Settlement with Keiser University

In a case in which the United States initially declined to intervene, the Eleventh Circuit approved of the United States’ post-appeal $335,000 settlement with Keiser University in an FCA suit and a subsequent dismissal of the case.  In the underlying case, the relators—who alleged Keiser paid admissions employees in violation of the incentive compensation rule—prevailed at trial, but objected to and appealed the district court’s finding that the Government suffered no damages and awarded only $11,000, the minimum statutory penalty.  After the relators appealed, the Government sought to intervene and settle with Keiser, over the objection of the relators, and to dismiss the case.  In the words of the court, the Government did this because it "believed an appeal [by relators of the district court decision] was risky because there was a chance the Eleventh Circuit would affirm the district court’s narrow interpretation of FCA liability, thereby impairing FCA enforcement efforts throughout the circuit."  United States v. Everglades Coll., Inc., 855 F.3d 1279, 1284 (11th Cir. 2017).  The relators challenged the Government’s settlement and sought an evidentiary hearing and discovery that they hoped would uncover a "nefarious motive."  Id. at 1282.  The court rejected the relators’ arguments and found that the settlement was "fair, adequate, and reasonable" because the Government could consider fear of adverse precedent that would affect other cases in the circuit as part of its consideration.  Id. at 1288. 

It is certainly interesting that the Government was so concerned with the ruling (particularly on damages) in this case that it opted to settle the matter rather than have the Eleventh Circuit consider it. 

3.     Chamber of Commerce Explains Real-World Impact of Departing from Escobar

As we reported in November, Stephens Institute (a.k.a. Academy of Art University) has an interlocutory appeal pending before the Ninth Circuit Court of Appeals focused on two critical questions following the Supreme Court’s seminal FCA decision in Escobar: (1) whether the implied certification theory of liability is only viable when the Government contractor has made "specific representations about goods and services" and an omission from those representations constitutes a "misleading half-truth"; and (2) whether the Department of Education’s (ED) long history of not cutting off federal funds despite knowing about violations of the incentive compensation provision means that a violation of that provision cannot be considered material under the FCA.  See Rose v. Stephens Inst., No. 09-05966-PJH, Dkt. No. 219 at *7 (N.D. Cal. Oct. 28, 2016); Br. of Appellant at 2-3, U.S. ex rel. Rose v. Stephens Inst., No. 17-15111 (9th Cir. May 30, 2017).

Given the importance of these issues to government contractors in the education, health, and defense industries, the U.S. Chamber of Commerce submitted an amicus brief on May 30, 2017 that should carry significant weight in the Ninth Circuit.  Br. Amicus Curiae of Chamber of Commerce, U.S. ex rel. Rose v. Stephens Inst., No. 17-15111, Dkt. No. 19 (9th Cir. June 6, 2017).  The Chamber argues that both questions raised by the school must be answered yes:  strict compliance with the two conditions is necessary for an implied certification theory to be viable, and a history of contemporaneous payment decisions is the relevant inquiry for materiality.  Id. at *11–12.  As Stephens Institute did in its opening brief, the Chamber explains that Escobar directly supports both of these conclusions.  But the thrust of the Chamber’s brief, and what makes it particularly noteworthy, is that the Chamber explains that public policy also strongly supports these conclusions.

On the implied certification front, the Chamber explains that "[t]he requirement of a specific representation connected to the alleged violation ensures that companies have notice of which contractual and regulatory requirements—among countless requirements—they are representing to have fully satisfied."  Id. at *23.  While it is conceivable "businesses could try to identify and disclose with each invoice every colorable instance of non-compliance with FAR and other regulatory provisions, the United States Code, agency guidance letters, the contract, and its task orders[,]" the Chamber explains that such efforts "would prove enormously time-consuming and prohibitively expensive."  Id. at *24.  And the expense would fall directly on taxpayers who ultimately foot the bill.  Id.

As to the materiality standard, the Chamber argues that the Government’s real-time payment decisions is the central inquiry for materiality.  Contrary to the argument presented by the United States below and adopted by the district court in Stephens Institute, the fact the Government may continue to pay a school or business because of "difficulties of proof or resource constraints" does not mean the courts should ignore what the Government actually did.  Just the opposite.  "Every decision is a product of ‘resource constraints.’"  Id. at *34.  And how the Government allocates those resources (whether to investigate, cut off funding, or do neither) tells you what it considered important—i.e., what the Government considered material.  Id. Finally, the Chamber explains that a focus on the Government’s actual payment decisions "encourages companies to engage in self-disclosure."  Id. at *13.

The Department of Justice filed an amicus brief as well.  The DOJ takes a different view than the Chamber, and argues that the implied false certification theory does not require "specific representations" and that materiality should be assessed according to a "multi-factor, holistic analysis" rather than a narrow focus on the "government’s purported failure to take serious enforcement action or withhold payments upon learning of alleged violations."  U.S. ex rel. Rose v. Stephens Inst., No. 17-15111, Dkt. No. 31, at *33 (9th Cir. Aug. 7, 2017).  The DOJ reasoned that "as far as government claimants are concerned, every claim for payment constitutes an affirmative representation that the claimant is entitled . . . to be paid."  Id. at *22. 

We will of course keep an eye on this case.   

4.     A Reminder that All Schools Face the Threat of FCA Liability

In the midst of continued briefing in the Stephens Institute case, the Ninth Circuit issued a short decision in July in another education-related FCA case, U.S. ex rel. Cain v. Salish Kootenai College, Inc., No. 15-35001.  The issue before the panel in Cain was whether the college could be sued under the FCA, due to issues involving tribal sovereignty.  Writing for the panel, Judge Kozinski held that the Confederated Salish Kootenai Tribes, which is associated with the college bearing its name, could not be sued under the FCA because it did not qualify as a "person" who could be sued under the language of the FCA statute.  862 F.3d 939, 942 (9th Cir. 2017).  The panel, however, remanded to the district court to decide whether the "college functions as an arm of the Tribe and therefore shares the Tribe’s sovereign status."  Id.   

Although the statutory interpretation and sovereign immunity questions raised by Cain may have limited application to schools outside of the Native American context, Cain does serve as a continuing reminder that many postsecondary schools—not just for-profit ones—face the risk of lawsuits under the FCA.  Examples abound beyond Cain, including a Texas case brought under the FCA that has garnered a fair amount of attention because it involves a charter school associated with NFL Hall of Famer Deion Sanders.  Smith v. Sanders, 12-cv-04377 (N.D. Tex.). 

B.     In a Time of Regulatory Change, States and State Attorneys General Continue to Step Up Enforcement Efforts

In June, U.S. Secretary of Education Betsy DeVos stayed the roll-out of the gainful employment and the borrower defense to repayment regulations.  Secretary DeVos also announced ED’s plan to review and revise these two regulations through the negotiated rulemaking process under the Higher Education Act, which will further delay (if not overturn) the implementation of these regulations.

This decision came on the heels of two legal developments.  The borrower defense regulation was stayed under Section 705 of the Administrative Procedure Act, which allows federal agencies to halt the effective date of a rule pending judicial review.  On May 24, 2017, the California Association of Private Postsecondary Schools (CAPPS) filed suit in the United States District Court for the District of Columbia, seeking to block the implementation of the borrower-defense rules that were finalized last fall, by arguing in part that the regulations exceed the statutory authority conferred by the Higher Education Act.  Cal. Ass’n of Private Postsecondary Schs. v. DeVos, No. 1:17-cv-00999, Dkt. No. 1 (D.D.C. May 24, 2017).  And in announcing the decision to delay the enforcement of key provisions of the gainful employment regulation and allow schools more time to comply with certain disclosure requirements and file alternate earnings appeals, Secretary DeVos pointed to the recent decision by a federal district court judge that partially blocked the enforcement of the gainful employment rule against cosmetology schools.  Am. Ass’n of Cosmetology Schs. v. DeVos, No. 1:17-cv-00263, Dkt. No. 30 (D.D.C. June 28, 2017).

In response to the "regulatory reset" announced by the Trump administration, others continue to attempt to "pick up the slack" with regard to attacks against and enforcement actions involving the sector:   

• In an April letter to Secretary DeVos, 21 state attorneys general criticized ED’s decision to revoke certain Obama-era reforms purportedly aimed at improving borrowers’ access to loan repayment plans.  The reforms would have governed new contracts for student loan servicing companies that collect loan payments on behalf of ED and made servicers’ compensation based on performance metrics such as amount of time it takes to process applications for income-based repayment.  Borrowers have complained about response times from ED and its contractors.   
• In early July, Democratic attorneys general from 18 states and the District of Columbia sued Secretary DeVos and ED in district court in Washington state, challenging ED’s decision to suspend the borrower defense rules.  The rules would have taken effect July 1, but Secretary DeVos halted the roll-out, citing the CAPPS lawsuit described above.  The new federal suit in Washington state alleges that the CAPPS lawsuit was a "mere pretext" for repealing and replacing rules that had already been finalized. 
• Contrary to ED’s decision on borrower defense, the Consumer Financial Protection Bureau continues to strike out on its own and has issued rules banning companies from including consumer arbitration clauses that ban class actions.  The new rules are not a complete ban on arbitration clauses, which can still be enforced against individual plaintiffs, and the ban will not affect existing contracts.  It is not yet clear whether the rules will apply to for-profit schools, and the rule will certainly be subject to challenge (either in Congress or elsewhere).    
• California Assembly proposed eliminating Cal Grant funding for students attending for-profit colleges as part of its 2018 budget recommendation.  Although the proposal did not make it into the final budget signed by Governor Jerry Brown in June, the program’s budget was cut. 
• DeVry University agreed to a $455,000 settlement to end an investigation by Massachusetts Attorney General Maura Healey into whether the school misled prospective students about career outcomes.  DeVry is also beginning to pay out partial refunds to students under a settlement with the Federal Trade Commission.
• On August 15, Charlotte School of Law announced it will close.  The announcement came amidst Attorney General Josh Stein’s investigation into Charlotte Law under the state’s consumer protection laws, based on alleged concerns that the school may have misrepresented its compliance with accreditation standards to prospective students.  Although ED had announced in late July that it was prepared to reinstate Charlotte’s Title IV eligibility, the school then lost its license to operate in the state and the Attorney General threatened to take action to shut it down if it did not close voluntarily.
• West Virginia Business College has closed amid scrutiny from accreditors and the state Attorney General.  The school lost its accreditation when the federal government announced it would stop recognizing accreditation from the Accrediting Council for Independent Colleges and Schools (ACICS), the school’s former accreditor, and the Council for Community and Technical College Education voted to revoke the school’s permit to operate in the state.  The final straw was the state Attorney General’s announcement that he would take legal action if the school did not stop enrolling students.

C.     Other News

1.     Interagency Task Force Dissolved?

As reported in prior updates, an interagency task force was convened under the Obama Administration to oversee for-profit colleges and promote cooperation among federal agencies (e.g., ED, Veterans Affairs, the Treasury, and the Securities and Exchange Commission) and state attorneys general.  A few months into the Trump Administration, reports are that the task force has been dissolved or suspended by ED.   

Despite a shift in oversight by the federal government, state regulators remain active and may become even more assertive.  Indeed, state attorneys general show no sign of losing interest in prosecuting for-profits, as evidenced by the discussion above.  And when interviewed, Massachusetts Attorney General Maura Healey noted that her office has no intention of "go[ing] backwards" in its intense scrutiny of for-profit schools. 

2.     An Update on Regulatory Reform Task Force and Rumors of a White House Initiative on Higher Education

Back in February, President Trump signed an executive order creating a regulatory reform task force that would evaluate existing regulations and make recommendations about which regulations to repeal, replace, or modify.  On May 25, 2017, the regulatory reform task force published its first progress report, identifying the gainful employment and borrower defense to repayment regulations as requiring further scrutiny.  The report also called for a partial modification to the Family Educational Rights and Privacy Act, a federal law that seeks to protect students’ educational records, to reflect changes made by Congress in recent years and to "clarify provisions to reflect developments in the nature and use of education technology." 

In June, Liberty University President Jerry Falwell Jr. reported that the White House asked that he be a part of a group of 15 college presidents to address issues in higher education.  And contrary to prior reports, this group would not be an ED task force, but rather a White House advisory group.  We will keep you updated as details develop.    

3.     The Fourth Circuit Sides with Accreditor

In June, the Fourth Circuit unanimously overturned a district court’s decision to grant a preliminary injunction preventing Bristol University from losing its accreditation from ACICS.  Bristol Univ. v. ACICS, No. 16-1637, 2017 WL 2495201 (4th Cir. June 9, 2017).  The Fourth Circuit agreed with ACICS that Bristol failed to establish that the accreditor’s decisions were "arbitrary and capricious" and that ACICS need not "explain the decision to deny Bristol’s renewal application instead of providing Bristol more time to correct deficiencies."  Id. at *3–4.  Instead, the majority noted that Bristol had numerous opportunities to respond to deficiencies identified by ACICS.  According to the court, under the accreditation criteria, ACICS was then well within its rights "to deny Bristol’s renewal of accreditation application due to Bristol’s noncompliance with the accreditation standards" without further explanation as to why it did not provide Bristol with additional time to cure deficiencies.  Id. at *4. 

U.S. Circuit Judge Wynn wrote a concurring decision, agreeing with the majority that the preliminary injunction should be vacated, but disagreeing as to the proper grounds.  Id. at *6–9.  Judge Wynn based his decision on mootness given that ACICS had lost its status as a recognized accreditor from ED and therefore, Bristol’s accreditation could not be reinstated regardless of the outcome of the appeal.  Id. at *6.  

4.     Accreditor Rejects (for Now) Sale of Education Management Corporation Schools to Dream Center

The Middle States Council on Higher Education, the accreditor for the Art Institute of Pittsburgh and Art Institute of Philadelphia, rejected a proposed sale of both schools to the non-profit Dream Center Foundation.  The accreditor cited "insufficient information and evidence" and stressed that the decision was without prejudice and that Education Management Corporation, which owns both schools, could try again in the future.  This is one of a number of current, pending transactions, whereby for-profit educational institutions are potentially being acquired by a non-profit institution.   

5.     Most Remaining Vestiges of Corinthian and ITT Litigation Resolved

Two settlements bring ITT and Corinthian Colleges closer to resolving litigation from before their closures.  Shareholders suing Corinthian Colleges agreed to a $2.25 million settlement of their suit alleging that the college operator misled investors by covering up an allegedly fraudulent business model.  ITT similarly has settled a suit filed by the SEC, which alleged that ITT hid its student loan default rate to avoid having to pay back investors pursuant to a guarantee obligation if a certain number of students defaulted.  ITT will face no monetary damages and did not admit to any wrongdoing as part of the settlement. 

6.     Department of Education Budget and GI Bill Discussions Still Ongoing

Congress and President Trump continue to hash out the details of proposed cuts to ED’s budget, as well as changes to G.I. education benefits.  After President Trump initially proposed to cut $9.2 billion from education, House Republicans have proposed a more modest $2.4 billion cut.  The House also unanimously passed a bill that would expand G.I. education.  The bill includes provisions that would allow veterans to use the G.I. Bill for distance courses in technical and career education institutions, eliminate the 15-year deadline to use tuition assistance, and partially restore educational benefits used by veterans who attend institutions that close.

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As always, we will continue to monitor all of these developments, and you can look forward to updates in our next report.