Recent Developments Related to Regulation and Litigation Involving the Education Sector (May 2016)

May 12, 2016

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 been an eventful one, with the Supreme Court hearing arguments in what could be the most important False Claims Act case in a century, the United States Court of Appeals issuing a ruling on the Gainful Employment rules, and the Federal Trade Commission taking action.  We discuss all of these topics, and many others from the last quarter, below.    

A.     The Courts Continue to Examine What Constitutes an FCA Claim in the Education Context and Beyond

            1.     The Supreme Court Hears Argument in the Escobar Case

Capturing the headlines this quarter, the Supreme Court heard oral argument in April in Universal Health Services v. U.S. ex rel. Escobar.  As we reported last quarter, this case has the potential to be the most important FCA decision in decades, including as applied to schools, because it squarely addresses what is front and center in many FCA cases:  is the so-called implied certification theory of liability (whereby a school or contractor is deemed to "impliedly certify" compliance with federal laws by accepting federal funds) viable, and if so, what is the scope of the doctrine?

Because of the importance of the issues to a number of industries, the case attracted a plethora of amicus briefs, including from the United States (which had not intervened), the Chamber of Commerce, and Association of Private Sector Colleges and Universities ("APSCU").*  APSCU took on the issue from the perspective of schools, and argued that the Supreme Court should reject the implied certification theory because it rests on an "untenable and unreasonable fiction" that a school’s facially true request for payment for financial aid is the equivalent of "certifying that the school is in perfect compliance with every law and regulation adopted pursuant to the Higher Education Act." 

Oral argument in the case occurred in early April, and took a tone that was far different than it would have been had Justice Scalia not passed.  The liberal bloc of the Court (Ginsburg, Breyer, Sotomayor, and Kagan) hammered defendant’s counsel with a string of aggressive questions as to what types of activity the FCA should cover.  Justice Kennedy asked a series of difficult questions of the defendant as well.  In contrast, only Chief Justice Roberts deeply probed the position of the relator, arguing for implied certification.  A decision is expected later this year, although it is also possible that the Court may divide 4-4, without a controlling opinion, as it has several times since Justice Scalia’s passing.  

            2.     District Court Rejects Implied Certification Theory

In U.S. ex rel. Brooks v. Stevens-Henager College, Inc., Civ. No. 2:15-cv-119-JNP-EJF (D. Utah Mar. 30, 2016), the United States District Court for the District of Utah addressed issues similar to Escobar in an FCA action filed against Stevens-Henager College.  In that case, two former admission consultants alleged, among other things, that the school had paid its recruiters bonuses in violation of the incentive compensation rule and violated the so-called 90-10 rule.  Id. at 4-5.  The relators (and later the United States in part) alleged this amounted to fraud because the school had explicitly certified compliance with these rules in its program participation agreement ("PPA") and implicitly certified compliance when it continued to receive government funds. 

In a thorough opinion, the Brooks court held that compliance with the incentive compensation provision, the 90-10 rule, and others included in the PPA can only support an FCA action if the "institution knowingly makes false promises of compliance in a PPA to gain entry into the program."  Id. at 18 (emphasis added).  "But once an institution becomes a Title IV participant, Title IV’s regulatory scheme, rather than the FCA, governs program compliance."  Id. at 19.  In other words, fraud at the initiation of the PPA process may provide a basis for an FCA claim, but alleged violations of the law while a PPA is in effect cannot.  The court explained that "[d]rawing the line at entering into a PPA makes sense" because the "administrative regime" is there to regulate "compliance issues" of schools once they have signed the PPA.  Id. at 18. 

This holding is supported by common sense, but also by the Seventh Circuit’s recent decision in U.S. ex rel. Nelson v. Sanford-Brown Ltd., 788 F.3d 696 (7th Cir. 2015), that we discussed last quarter.  The Seventh Circuit in that case held that it is "unreasonable" to "hold that an institution’s continued compliance with the thousands of pages of federal statutes and regulations incorporated by reference into the PPA" can support "liability under the FCA."  Id. at 711.  The relator in that case has since sought a writ of certiorari from the Supreme Court, which Sanford-Brown opposed in February.  The Supreme Court has not issued a decision yet, and may be holding the petition pending its decision in Escobar.

The Sixth Circuit addressed similar issues, albeit outside of the education context, in its February decision in U.S. ex rel. Wall v. Circle C Construction, LLC, — F.3d —-, 2016 WL 423750 (2016).  The government in that case, like many relators in cases against schools, argued that the "taint" of a regulatory violation meant that the government was entitled to recover the entire amount it paid to the contractor (in this case, for electrical work in government warehouses).  The court rejected that theory in fairly blunt terms, explaining that the theory could not stand when "the government turns on the lights every day"–i.e., when the government got what it paid for.    

            3.     DOJ Declines in FCA Lawsuit Brought Under New Compensation Regulation

The United States publicly announced on January 15, 2016 that it would not intervene in an FCA action filed against ITT Technical Institute.  U.S. ex rel. Lipscomb v. ITT Educ. Servs., Inc., No. 3:15-cv-00446-HES-JRK (M.D. Fla.).*  Lipscomb was somewhat unique as it is one of the first cases we are aware of alleging violations of the recruiter compensation rules under the new compensation regulation, in which the Department of Education ("ED") removed the safe harbors.

B.     Administrative Enforcement Actions

On the administrative enforcement side of the house, there were a variety of significant events in the last quarter.  These are discussed below. 

            1.     DeVry Faces Scrutiny from FTC and DOE

On January 27, 2016, the Federal Trade Commission ("FTC") filed suit against DeVry University and its parent company DeVry Education Group (together, "DeVry").  The FTC’s suit alleges that DeVry misled prospective students through its advertisements about the job prospects and income of DeVry graduates.  The FTC’s complaint alleges, among other things, that DeVry’s advertisements claiming that 90 percent of its graduates who were actively seeking employment obtained jobs in their field within 6 months of graduation were false and misleading.  The FTC also challenges DeVry’s statements that its graduates had 15 percent higher incomes one year after graduation on average than graduates of other universities or colleges.  To our knowledge, this is the first time the FTC has sued a major for-profit educational institution for its advertisements, and it is a case to watch.  

The same day the FTC filed its action, ED made an announcement of its own regarding DeVry–stating it had initiated a process requiring DeVry to cease making certain representations regarding its students’ post-graduation employment outcomes.  ED claimed it had initiated this process after concluding DeVry had failed to sufficiently substantiate the accuracy of its representations.  ED stated that DeVry will also be required to notify its currently enrolled students that certain representations were not substantiated to the extent required by law, and would be subject to a variety of other limitations as well.  According to ED, unless DeVry abides with ED’s demands, DeVry will lose access to federal financial aid programs.  This simultaneous action by the FTC and ED provides yet another example of the significantly enhanced inter-agency coordination.

As one would expect, following the FTC’s and ED’s actions, former students, represented by plaintiffs’ lawyers, filed two lawsuits against DeVry.  Both make claims similar to those made by FTC, with the first brought by two former students who seek to represent a nationwide class of former on-campus and online students and the second brought by another former student alleging that despite DeVry’s representations on post-graduation prospects, he has yet to obtain employment in his field of study since he graduated in 2014.   

DeVry plans to contest the complaint filed by the FTC as well as the consumer complaints, and will request a hearing on ED’s decision.  The school vigorously disputes the FTC’s allegations, noting that there is no national standard for calculating employment statistics among higher education institutions and the measures and standards DeVry used in support of its claims were appropriate.  DeVry further states that it believes it fully substantiated the representations ED challenged.

            2.     University of Phoenix Ordered to Produce Student Records in Response to FTC Demand

In an additional example of the FTC flexing its muscles, on January 14, 2016, a federal judge in the District of Arizona ordered the University of Phoenix and its parent company, Apollo Education Corp., (together, the "University of Phoenix") to comply with a civil investigative demand ("CID") issued by the FTC for education records.  FTC v. Apollo Educ. Grp, Inc., No. 2:16-mc-00002, Dkt. 4 (D. Ariz. Jan. 14, 2016).  This is part of an ongoing inquiry by the FTC into "possible violations of Section 5 in connection with [University of Phoenix’s] advertising, marketing, and sale of their educational products or services."  Dkt. 1 at 3 (D. Ariz. Jan. 12, 2016).

Notably, the University of Phoenix did not oppose this particular request from the FTC.  Rather, the parties proceeded to obtain a court order to ensure University of Phoenix was not violating the Family Educational Rights and Privacy Act ("FERPA") by producing student information to the FTC. 

The court granted the FTC’s petition, finding that "good cause warrants an order requiring [the University of Phoenix] to comply with the CIDs without providing [FERPA] notice" to students prior to production of student records.  Dkt. 4 at 2.  The University of Phoenix, the court further ordered, "shall comply with the Commission’s CIDs without disclosing to any person the contents of the civil investigative demands or any education records furnished in response to the civil investigative demands."  Id. 

This case is one of many scenarios where educational institutions are faced with the difficult situation of how to ensure compliance with FERPA while also producing student records to government agencies.  The approach taken by the FTC–obtaining a court order–is one option.          

            3.     ED Revokes Marinello Schools of Beauty’s Eligibility to Participate in Title IV Programs, Resulting in School Closure, and Takes Another Administrative Action

On February 1, 2016, ED announced that it had issued letters to five Marinello Schools of Beauty, comprising 23 locations, notifying them that ED had denied recertification of their eligibility to participate in the federal student aid programs.  ED claimed it had made this decision because of Marinello’s alleged fraudulent business practices, which ED claimed included requesting financial aid for students with invalid high school diplomas and withholding from students a portion of their federal aid. 

A few days later, Marinello announced that it was closing all 56 of its campuses as a result of ED’s decision to deny the schools access to financial aid.  The school stated it did "everything in [its] power to avoid this unfortunate conclusion and keep [the] school open," but "the Department of Education’s unprecedented and unfounded actions left [the school] with no other option except to close our schools." 

In a separate action, ED also denied Computer Systems Institute’s ("CSI") application for recertification of eligibility to participate in federal student aid programs.  ED claims it took this action because CSI allegedly had submitted false job placement rates to students, ED, and its national accreditor.  CSI announced on its website that it would contest ED’s findings and decision to withhold federal financial aid.

C.     Litigation Developments

There have also been a number of important litigation developments in both state and federal courts this last quarter as well.

            1.     Massachusetts AG Sues Two More For-Profit Schools

The Massachusetts Attorney General has been one of the most vocal and aggressive critics of the for-profit educational sector over the last several years.  This last quarter was no exception. 

First, on February 24, 2016, the Massachusetts Attorney General announced that it had filed a complaint in Suffolk Superior Court against Hosanna College of Health and its two founding executives, Jackson Augustin and Michelle Desarmes.  The complaint accuses Hosanna of operating without a license, misrepresenting its nursing programs, and actively recruiting students from the Boston area’s Haitian community to take nursing classes by falsely promising students that they would be well prepared to pass the mandatory national board exam in nursing and obtain well-paying nursing jobs as licensed nurses.  The complaint charges that less than 3 percent of Hosanna graduates passed the exam, and is requesting the court to order the school to refund tuition, fees, and other payments, impose civil penalties, and bar Hosanna from future unfair and deceptive conduct.  Hosanna contests these allegations.  Earlier in the month, the Massachusetts Department of Education demanded that Hosanna cease operations in the state.   

Second, on April 4, 2016, the Massachusetts Attorney General announced it had filed a complaint against ITT Educational Services.*  The complaint alleges that ITT engaged in aggressive sales tactics by using misleading information from 2010 through at least May 2013.  The complaint claims that ITT recruiters told prospective students that a high percentage of graduates found jobs in or related to their field of study when the actual job placement rates were 50 percent or less.  The complaint also alleges that ITT recruiters were expected to call up to 100 prospective students per day, faced employment consequences if they failed to meet quotas, and encouraged prospective students to visit an ITT campus as soon as possible where they were pressured to apply, take an admissions exam, and complete a financial aid appointment, all on the same day.  The complaint, filed in 2016, focuses on alleged events occurring years before and resulted from what ITT called a "wide-ranging fishing expedition" by the Massachusetts Attorney General that lasted for more than three years.  In a statement, ITT noted its disappointment with the Massachusetts Attorney General’s decision to file suit despite the company’s full cooperation in the lengthy investigation–in which ITT was provided with only the vaguest description of claims–and presentation of evidence that its conduct was lawful.    

            2.     Thomas Jefferson School of Law Obtains Jury Verdict on Student’s Misrepresentation Claims

On March 24, 2016, a jury in California state court in San Diego sided with Thomas Jefferson School of Law, and rejected claims by a former student that she had been misled by the school in connection with her decision to enroll.  Anna Alaburda sued the school in 2011, claiming she enrolled in the nonprofit law school after reading statistics that showed a high number of graduates had jobs nine months after earning their degrees.  Ms. Alaburda claimed that the employment statistics were inaccurate, and that she was unable to find a job working as an attorney, despite graduating near the top of her class in 2008 and passing the bar exam on the first try.  After less than a day of deliberations, the jury returned with a verdict 9-3 in favor of the school.

To our knowledge, this represents the first of the many lawsuits filed against law schools alleging misleading placement rates to reach trial (most of which were dismissed by the courts).  The result is consistent with the theme we have reiterated time and again in these alerts that when plaintiffs’ attorneys, the government, or anyone else is forced to actually try their allegations, their success rate is quite low. 

            3.     Three For-Profit Executives Sentenced on Financial Aid and Visa Fraud Charges

There are, of course, more cautionary tales as well.  On January 27, 2016, the U.S. Attorney General for the Southern District of New York announced that three senior executives from Micropower Career Institute ("MCI"), a closed for-profit medical professional school, were sentenced in federal court for their roles in allegedly defrauding ED of $1 million in financial aid funds and generating $7.4 million in illegal revenues from fraudulent student visas.  The three executives pled guilty last year.  United States District Judge Oetken sentenced MCI president Suresh Hiranandaney and his colleague, Lalit Chabria, to one year and one day in prison.  The third executive, Anita Chabria, was sentenced to six months of home confinement.  In addition, the three executives were ordered to forfeit $7,440,000 of the proceeds from the fraud to the federal government, and pay $1,000,000 in restitution to ED.

D.     D.C. Circuit Upholds Gainful Employment Rules

On March 8, 2016, the United States Court of Appeals for the District of Columbia issued its decision on the so-called "Gainful Employment" rules in the case of APSCU v. Duncan, Case No. 15-5190 (D.C. Cir. Mar. 8, 2016).*  The Court of Appeals, relying heavily on decisions that had been issued by other courts in other challenges to the rules, upheld the rules and affirmed the lower court decision doing the same. 

The Court of Appeals, agreeing with the District Court, found that the onerous new rules–tying schools’ programs’ eligibility to participate in federal financial aid to students’ abilities to pay off their debts–are "rooted in the text" of the statute from which ED claimed to derive authority.  That statute, as we have discussed, simply states that certain types of educational programs must provide a "program of training to prepare students for gainful employment in a recognized" occupation or profession.  20 USC §§ 1002(b)(1)(A)(i), 1002(c)(1)(A), 1088(b)(1)(A)(i).  It says nothing remotely approaching the detailed metrics ED’s new Gainful Employment rules impose. 

The Court of Appeals also agreed with the lower court that ED’s interpretation of the statute through the Gainful Employment rules is a "reasonable" one and that "neither the 2014 [version of the Gainful Employment] Rule nor the Department’s rulemaking process was arbitrary and capricious."  Previously, the Court rejected the challenge made by the APSCU to certain of the rules’ requirements relating to the data from which information to comply with the rules was to be sourced.           

An important note to the ruling, however:  it was based only on the plain language (or "the face") of the rules, not how they are applied in practice.  As a result, even with the D.C. Circuit’s ruling, schools should keep in mind–especially as they work to comply with the Gainful Employment rules–that the rules remain subject to "as applied" challenges, meaning a challenge that how they work in reality is illegal. 

APSCU has asked the full D.C. Circuit to rehear the appeal and the Court of Appeals has asked the Department of Justice to respond to the petition.  We will keep an eye on this request.  

E.     Federal Court Strikes Down Part of Massachusetts Regulations on For-Profit Schools

On January 25, 2016, the United State District Court for the District of Massachusetts issued an order striking down part of–but not all of–onerous regulations issued by the Massachusetts Attorney General against for-profit schools.  Massachusetts Ass’n of Private Career Schools v. Coakley, Case No.14-13706 (D. Mass. Jan. 25, 2016).  The court found that two of the nine challenged regulations were invalid under the First Amendment of the United States Constitution.  Specifically, the court struck down the so-called "Credit Transfer" regulation issued by the Attorney General, as it would have required schools to falsely inform students that they were unaware whether any other schools accepted their transfer credits.  And the court also struck down the "Time to Complete Program" regulation, as it would have prevented schools from honestly informing students that some students could finish the programs in less than the median time. 

The court upheld the remainder of the regulations.  But importantly–and echoing the comment above–the court also specifically noted that challenges to even the upheld regulations remain available to schools on an "as applied" basis, depending upon how the Attorney General attempts to enforce them.  There were seven regulations upheld by the court, including one preventing schools from contacting prospective students more than twice in any seven-day period, with or without consent, and a rule prohibiting schools from enrolling any "Unqualified Students." 

As of yet, neither party has appealed the District Court’s decision.

F.     ED Announces Another Enforcement Group Focused on For-Profit Education

On February 8, 2016, ED announced it had created a "Student Aid Enforcement Unit," combining:  (i) the team responsible for reviewing colleges’ compliance with campus safety rules, (ii) the team responsible for enforcing and hearing appeals of punishments on schools found in violation of ED rules, and (iii) the team of lawyers tasked with resolving debt relief claims resulting from the collapse of Corinthian Colleges.  ED stated that this new unit, armed with subpoena powers, will continue with these different functions, but also be tasked more broadly with investigating and punishing illegal activity at higher education institutions and providing debt relief to defrauded students.  The unit will focus on investigating, among other things, misrepresentations regarding post-graduation job prospects, the strength of schools’ educational programs, improper recruitment tactics, and fraudulent practices with regard to Title IV financial aid. 

Although ED stated this unit will not target only for-profit educational institutions, ED also stated that it was especially concerned about alleged problems afflicting career colleges, many of which are for-profit institutions.  And in the press release announcing this new unit, ED noted a series of recent enforcement actions it has taken against for-profit institutions. 

The new unit will have more than 50 ED employees, and the Obama Administration is requesting an additional $13.6 million from Congress to fund increased enforcement efforts.  Robert Kaye, who previously worked at the Federal Trade Commission, will be responsible for leading the unit.

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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