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

February 7, 2017

This is the latest update of significant developments relating to regulatory, administrative, or legal actions involving schools, especially private-sector schools.  The last quarter has seen a number of significant developments, not the least of which is the ushering in of a new presidential administration, the last shots of the Obama administration against the sector, and further developments relating to the Supreme Court’s landmark False Claims Act decision in Universal Health Services v. U.S. ex rel. Escobar, 136 S. Ct. 1989 (2016).  These developments, and others, are discussed below. 

A.      The Trump Administration

Perhaps the most significant development of the last quarter affecting the sector is the election of Donald J. Trump as President of the United States.  Exactly how this election will affect for-profit institutions remains to be seen.  But while the Obama administration ushered in an era of hostility and increased regulation against the sector (including adopting the "gainful employment" regulation, working to impose the "defense to repayment" regulation, and removing the regulatory "safe harbors" that had provided educational institutions guidance as to compensation arrangements that would not violate the so-called incentive compensation rule), the Trump administration has stated it will be definitively anti-regulation and perhaps review agencies’ prior regulations to determine their necessity and impact on the economy.  We will keep an eye on how this affects the Obama-era regulations; but it is likely that it will affect them in some form or fashion. 

It also cannot be overstated that we are going from an administration that has exhibited downright hostility toward the sector, to an administration whose leader not only owned and operated a seminar program (Trump University) that came under attacks similar to those that have been made against for-profit educational institutions, but has stated that he will take the Executive Branch and agencies in a profoundly different direction than the prior administration in virtually all aspects.  In addition to potentially significant changes at the Department of Education, we note that there have been changes in leadership and are likely to be other potential changes at a number of the other federal agencies that have investigated and brought actions against schools, including the FTC, the SEC, and the CFPB.  It is hard to imagine that these changes will not improve and moderate the inappropriately aggressive approach taken by some of these agencies under the prior administration.     

Finally, we note while potentially significant and positive changes are expected from the new administration with regard to the sector, we also expect that certain Senate Democrats and state attorneys general will continue without any abatement and even attempt to "pick up any slack" with regard to attacks against and enforcement actions involving the sector.  For example, even if the "defense to repayment" regulation is withdrawn, existing authority arguably permits loan forgiveness in connection with state actions against schools.  Thus, we expect that certain state attorneys general will continue to target for-profit education, albeit perhaps now without the leadership (and arguably at times moderating influence) of the federal government.  We will keep an eye on these developments as well.        

B.      President-Elect Settles Lawsuits Related to Trump University

Showing just how much things have changed, in November 2016, it was announced that then President-Elect Trump had agreed to settle three lawsuits related to Trump University for $25 million.  The underlying lawsuits had alleged that Trump University, which is now defunct, had committed consumer fraud on those it enrolled by misrepresenting the qualifications of the instructors and other aspects of the program.  Although the allegations made against Trump University were similar to those asserted against for-profit educational institutions, Trump University was very different from most of those institutions, as Trump University was not accredited by an accrediting body recognized by the Department of Education and its students also did not receive any Title IV federal financial aid for attendance at the school.  Thus, Trump University was not required to pass the rigor involved with accreditation and Title IV eligibility and the settlement should not be all that relevant to the sector. 

C.      The Obama Administration Goes Out with a Bang

In 2008, when President Barack Obama assumed office, the for-profit education sector was growing and serving an increasingly important role in higher education.  Eight years later, after enduring intense federal and state attacks led by the Obama administration, the sector has been unfairly and seriously weakened, and two of the largest schools in the nation–Corinthian and ITT–were forced into bankruptcy.  Unfortunately, but not surprisingly, the Obama administration ended as it began, with attacks on the sector.  These last attacks are discussed below. 

1.      DeVry Settles with the FTC, Which Outlines Yet Another Way to Calculate Placement Rates 

On December 15, 2016, before the new administration was sworn in, the FTC announced it had reached a settlement with DeVry University and its parent company, with the school agreeing to pay $49.4 million to qualifying students and provide $50.6 million in debt relief.  Similar to other recent settlements with the Obama administration, the settlement includes a number of mandatory conduct terms.  For example, it requires DeVry to maintain specific substantiation to support any future advertising regarding graduate outcomes and educational benefits, and to implement training regarding what types of advertisements are prohibited by a stipulated court order.  The settlement also requires DeVry to exclude from its job placement statistics students who obtained the job more than six months before graduating. 

This last term is the latest example of a confusing mix of formulas that various entities and governmental bodies have attempted to impose as to how to calculate placement rates.  It seems each entity–each accrediting body, federal agency, state government, and even local government–has a different preferred (and sometimes required) methodology.  It certainly can be argued that this confusing mix, created by the regulators themselves, only serves to confuse students.  The goal should be a common standard across the board that students can understand and use for comparison purposes, not more formulas and methodologies.  And in pursuing the goal of uniformity, accreditors and others should take into account that "traditional" non-profit schools frequently are far more aggressive than their for-profit peers in advertising these issues.  Prominent public and private non-profit universities, for instance, routinely make statements like "90% placement rate for new graduates" or "86.6% of the Class of 2013 had confirmed achieving their post-graduation plans within six months of graduation," with little to no substantiation or any additional information or disclaimers.  All institutions should be held to the same standards.

2.      ED Affirms Decision to No Longer Recognize ACICS as an Accreditor

On December 12, 2016, in the waning days of the Obama administration, Education Secretary John B. King Jr. upheld the Department of Education’s decision to cease recognition of the Accrediting Council for Independent Colleges and Schools ("ACICS") as an agency that can accredit schools for eligibility for federal student aid.  The Secretary agreed with the Department’s earlier findings that the accrediting agency had failed to comply with federal recognition criteria and was not effective in applying those criteria.  This decision affects more than 250 colleges enrolling nearly 600,000 students, and it started an 18-month clock for institutions accredited by ACICS to find another accreditor to remain eligible for federal financial aid programs.  The Department also imposed additional operating conditions on institutions previously accredited by ACICS for continued participation in the federal student aid programs, requiring increased monitoring, transparency, oversight, and accountability measures. 

ACICS has now sued the Department over the decision.  In a recent development, a group of attorneys general from the states of Massachusetts, Maryland, Illinois, Maine, New York, and the District of Columbia has moved to intervene in defense of the Department’s decision, and a hearing is set on the motion for February 2017.  These same states, along with several others, had also tried to intervene, albeit unsuccessfully, in a case pending before the D.C. Circuit centered on whether the Consumer Financial Protection Bureau’s structure is unconstitutional.*  It remains to be seen whether the state attorneys general will be allowed to intervene here, and if so, how that will affect ACICS’s lawsuit.    

3.      The Department Issues Debt-To-Earning Rates Under Gainful Employment Rules

One of the hardest fought regulatory efforts of the Department of Education under the Obama administration was the adoption of the so-called "gainful employment" rules, tying schools’ eligibility to participate in Title IV programs to whether its graduates could meet certain metrics to repay average debt based upon average earnings over a certain period of time.  On January 9, 2017, the Department published the first debt-to-earnings rates for career training programs as required by the regulations.  In this review, the Department concluded that more than 800 programs failed to meet the standards set by the regulations.  Ninety-eight percent of the 800 programs the Department concluded were in violation of the gainful employment regulations were offered by for-profit schools.  These schools now face the possibility of losing access to federal student aid funding.

4.      Multiple Schools Close

This past quarter, several for-profit schools shuttered their doors under the increased hostility and regulatory attacks.  Globe University and the Minnesota School of Business announced on December 22, 2016 that they were closing their campus in Minnesota as they were denied access to federal student-aid funds by the Department.  Heritage College and Heritage Institute announced they were permanently closing all ten of their campuses on November 1, 2016 due to financial problems, declining enrollment, and a decrease in demand for the services of for-profit schools.  In addition, in December, the Department rescinded the Charlotte School of Law’s access to federal student aid, citing concerns raised by the American Bar Association that the for-profit law school had failed to prepare its students for participation in the legal profession. 

5.      The Department Conditions Approval of Sale of Apollo

On December 7, 2016, the Department announced that it was conditionally approving the proposed sale of Apollo Education Group, which owns the University of Phoenix among other schools, to three private equity firms for $1.14 billion.  This sale would turn the publicly traded company to one privately held, and would allow the Apollo Education Group to retain its eligibility for federal student grants and loans.  The Department’s stringent conditions include extensive disclosure requirements, a ban on adding new programs or increasing enrollment, a prohibition of mandatory arbitration clauses in enrollment contracts, and the posting of a letter of credit valued at 25 percent of its institutions’ federal funding allocation, or about $386 million.  The Department also required Apollo’s institutions to submit to monitoring of its financial stability, graduation, retention, recruitment and monthly enrollments.  Then, on December 20, the Department decided to lower the required amount Apollo Education would have to post from 25 percent to 10 percent, with the remaining 15 percent held in escrow accounts.  The buyers of Apollo Education Group accepted the terms on December 21, and the deal closed on February 1, after obtaining approval by the Higher Learning Commission, the accreditor of University of Phoenix and its other institutions. 

D.      Accreditor Found to Have Made Mistakes Resulting in School Collapse

While accreditors provide an important role in ensuring schools provide quality education to their students, like every entity, they can make mistakes and cannot be blindly trusted.  That is the takeaway of a recent decision by Secretary King, who affirmed an administrative judge’s ruling that the now-defunct Decker College need not make a $31.6 million repayment to the Department.  The administrative law judge had ruled in March that Decker’s accreditor, the Council on Occupational Education, had mistakenly informed the Department of Education that the school was not accredited to provide distance education (as it was doing), which in turn led the Department to rely on that "factually inaccurate" statement and terminate the school’s participation in the federal student aid program.  The Department appealed, but its own boss, Secretary King, rejected it, and sided with the administrative judge.

We can hope the Department has taken to heart the decision of its former leader, but there are signs that may just be hopeful thinking.  In a strikingly similar sequence of events, the Department cut off Charlotte School of Law’s participation in the federal student aid program in December, as mentioned above.  It did so relying on the decision of the American Bar Association ("ABA") to place the school on probation and an alleged lack of disclosures by the school about the ABA’s actions.  As in the Decker case, it is not clear, what, if any, efforts the Department made to ensure the ABA made "factually accurate" findings, or whether the Department considered the important differences between an ABA probation proceeding, and the much more serious and draconian consequences of a cutoff to federal funding. 

E.      The Seventh Circuit Denies Rehearing in Sanford-Brown Case

Finally, an update on the False Claims Act ("FCA") front.  As we reported in our last update, the Seventh Circuit issued an important decision in October interpreting the Supreme Court’s seminal decision in Universal Health Services v. U.S. ex rel. Escobar, 136 S. Ct. 1989 (2016).  The three-judge panel held that the relator had not shown that Sanford-Brown College made any statements that amount to "half-truths," and even if the plaintiff had, the statements would not meet the FCA’s demanding materiality standard.  United States v. Sanford-Brown, Ltd., 840 F.3d 445 (7th Cir. 2016).  Following that win for the school, the relator sought review by the full Seventh Circuit (a.k.a., "en banc review") or rehearing by the three-judge panel.  The Seventh Circuit rejected both requests on November 30, noting that "no judge in active service has requested a vote" on en banc review.

F.      A Look Forward

As we look towards 2017 and the incoming administration, it is important to reiterate and recall the well-established and well-accepted principle that informed the passing of the Higher Education Opportunity Act:  that students of all backgrounds–particularly those previously underserved by traditional postsecondary colleges and universities–be granted greater access to higher education.  For-profit schools provide an important alternative to traditional nonprofit colleges and universities by offering non-traditional students an opportunity to gain practical, skills-based training that better equips them to compete in the marketplace than the typical liberal arts degree.  With new leadership coming into the Department, we hope that regulators will continue to keep the goal of greater access to higher education in mind.

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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.

[*] The asterisks indicate matters in which Gibson Dunn is involved.


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