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

October 17, 2017

This is the latest update of significant developments relating to regulatory, administrative, or legal actions involving schools, especially private-sector schools.  This quarter saw further developments on several themes we’ve covered in previous updates, as courts continue to react to the Escobar decision and the Department of Education (ED) continues to distance itself from the policies and practices of the Obama era.  This quarter was also filled with developments for individual schools, some positive, some less so, including news of settlements, sales, funding and accreditation decisions, audits, and litigation.

A.     The False Claims Act

As our readers are well aware, the U.S. Supreme Court’s seminal decision last year in Universal Health Services, Inc. v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016) has already had a significant impact on False Claims Act (FCA) lawsuits brought against schools, particularly because Escobar makes clear that the materiality element under the FCA requires a showing that the alleged violation of the law was “material” to the government’s payment decision.  For example, Escobar‘s materiality standard helped propel Sanford-Brown to victory in the Seventh Circuit last year in United States ex rel. Nelson v. Sanford-Brown Ltd., 840 F.3d 445 (7th Cir. 2016), where the court held that ED’s decision to continue funding following its own review of the school’s actions indicated that any alleged violations were not “material.”

However, in August, in United States ex rel. LaPorte v. Premier Education Group, L.P., No. 11-cv-03523 (D.N.J., filed June 20, 2011), the United States District Court for the District of New Jersey rejected Premier Education Group’s arguments that Escobar required dismissal of the relators’ complaint there.  Premier had previously moved to dismiss the case unsuccessfully, but it argued that Escobar required reconsideration of the denial of that motion.  Judge Kugler disagreed, holding that the complaint was adequate even under Escobar.  Critically, in reaching that conclusion, the court did not address whether the relator had plausibly and specifically detailed that the alleged violations, including of the incentive compensation provision, were “material” to the government’s payment decision.  Id., Dkt. No. 167 at *4–7.

Something to watch is the Ninth Circuit’s impending decision in United States ex rel. Rose v. Stephens Institute, which will likely address Escobar‘s materiality standard in far greater depth.  In that highly anticipated case, the Ninth Circuit will tackle whether ED’s long history of not cutting off federal funds from a school despite knowing about the school’s violations of the incentive compensation provision means that a violation of that provision cannot be considered material under the FCA at the summary judgment stage.  See Rose v. Stephens Inst., No. 09-cv-05966-PJH, Dkt. No. 219 at *7 (N.D. Cal. Oct. 28, 2016); Br. of Appellant at 2-3, United States ex rel. Rose v. Stephens Inst., No. 17-15111 (9th Cir. May 30, 2017).  Oral argument is set for December 6, 2017.  In an interesting development, the United States has been granted permission to participate in oral argument even though it chose not to intervene and take over the case.  

Two important, recent decisions may feature prominently at oral argument in Rose.  First, in July, the Ninth Circuit recognized that a relator “face[s] an uphill battle in alleging materiality sufficient to maintain their claims” when the “government continues to make direct payments” despite knowledge of the alleged violation.  United States ex rel. Campie v. Gilead Sciences, Inc., 862 F.3d 890, 905 (9th Cir. 2017).  But the panel held that the relator had climbed over that hill, at least at the pleadings stage, because the “parties dispute exactly what the government knew and when.”  Id. at 906.  Second, in September, the Fifth Circuit in United States ex rel. Harman v. Trinity Industries, Inc. overturned the largest judgment in the history of the FCA in part because the government agency continued to pay “with full knowledge” of the alleged problems with the product at issue, highway guardrails.  — F.3d —- 2017 WL 4325279 (5th Cir. Sept. 29, 2017)*.

It will be interesting to see how these decisions impact Rose.  Although the Campie decision is from the Ninth Circuit, it was decided in a different procedural posture.  The appellant in Rose is seeking review of a summary judgment ruling and, unlike the defendant in Campie, who lost at the pleadings stage, has evidence of what the government knew and when.  In that way, Rose more closely resembles Harman.

B.     Regulatory Developments in Washington, D.C.

1.     The End of the Obama Era Coordination Between ED and CFPB

In late August, the Acting Assistant Secretary of the Department of Education, Kathleen Smith, announced that ED would no longer cooperate with the Consumer Financial Protection Bureau (CFPB) to share information on the oversight of federal student loans.  The announcement marks a sharp departure from ED’s policies under President Obama.  The two agencies had agreed in a series of Memoranda of Understanding “to collaborate to ensure coordination in providing assistance to and serving borrowers seeking to resolve complaints related to their private education or Federal student loans.”  As grounds for its termination of the Memoranda, ED cited the CFPB’s breach of their terms, specifically CFPB’s direct handling of borrower complaints without forwarding them to ED.  Moreover, Ms. Smith echoed what many critics had been saying for years:  “[T]he CFPB [wa]s using the department’s data to expand its jurisdiction into areas that Congress never envisioned.”

2.     The Formation of Two Negotiated Rulemaking Committees

On August 30, 2017, the Office of Postsecondary Education announced its intention to establish two negotiated rulemaking committees to revise two hallmark rulemakings by ED under President Obama:  (1) the gainful employment regulations and (2) the regulations on borrower defense to repayment of federal student loans.  Nominations to serve on these two committees closed on September 29, 2017, but the Office has not yet announced its selections.  We expect to know before our next update and will keep you posted.  In the meantime, as reported in our last quarterly update, ED has delayed the roll-out of both of these regulations and asked for public comments by November 13, 2017 on whether the regulations should be revised.  At least two lawsuits have been filed in United States District Court for the District of Columbia challenging the delay:  Massachusetts et al. v. United States Department of Education, No. 1:17-cv-01331 (D.D.C. filed July 6, 2017); and Bauer v. DeVos, No. 1:17-cv-01330 (D.D.C. filed July 6, 2017).

C.     Mixed News for Individual Schools

1.     More Settlements Related to the Closing of Corinthian

This past quarter, the wrap-up of the Corinthian closing took two steps forward.  First, on August 17, 2017, the CFPB simultaneously filed a complaint and a proposed settlement against Aequitas Capital Management, Inc. and related entities.  Cons. Fin. Protection Bureau v. Aequitas Capital Mgmt. Inc., No. 17-cv-01278-MO (D. Or. Aug. 17, 2017).  The complaint alleges that Aequitas funded high-cost private loans to former Corinthian College students to enable the school to qualify to receive federal student aid dollars.  If the U.S. District Court for the District of Oregon approves the settlement, about 41,000 former Corinthian students will be eligible to receive approximately $183.3 million in loan forgiveness and reduction.  In collaboration with the CFPB, the attorneys general of 13 states also reached proposed settlements with Aequitas.

Second, on September 5, 2017, the distribution trustee for Corinthian’s Chapter 11 case sought approval of a $12 million stipulated settlement with the former management of Corinthian.  In re Corinthian Colls., Inc., No. 15-10952-KJC, Dkt. No. 1535 (Bankr. D. Del. Sept. 5, 2017).  The settlement resolves claims the trustee planned to assert against several of Corinthian’s executives, including allegations that the executives breached their fiduciary duties of loyalty and care and committed corporate waste.  As part of the settlement, the executives did not admit to any wrongdoing.

2.     SEC Commissioners Reject Proposed Settlement with ITT’s Executives

In contrast to settlements related to Corinthian, on August 11, 2017, the U.S. Securities and Exchange Commission (SEC) announced that its Commissioners had rejected a proposed settlement with two former executives of ITT Educational Services, Inc.  SEC v. ITT Educ. Servs., Inc., No. 15-cv-00758-JMS-MJD, Dkt No. 181 (S.D. Ind. Aug. 11, 2017).  The SEC Commissioners rejected the settlement without any explanation.  That rejection was likely greeted with enthusiasm by two Democratic Senators, Richard Durban and Sherrod Brown, who had written to SEC Chairman Jay Clayton, urging the SEC to require the “highest applicable civil money penalties and disgorgement of [] ill-gotten gains” in any settlement with ITT’s executives.

3.     EDOIG Recommends That Western Governors University Return More Than $700 Million in Title IV Federal Student Aid

On September 22, 2017, the U.S. Department of Education’s Office of Inspector General (OIG) released the results of its audit of Western Governors University.  The audit report recommended not only that ED require the school to pay back at least $713 million in federal financial aid, but also that the school be determined to be ineligible to receive additional federal aid payments.  The audit’s findings centered around the difference between “distance” education courses, which must provide “regular and substantive interaction between students and their instructors,” and “correspondence” courses, which are not subject to that requirement.  If more than 50 percent of courses are correspondence courses or more than 50 percent of students are enrolled in correspondence courses, the school is ineligible to receive Title IV aid according to OIG.  The OIG concluded that Western Governors University failed to provide “regular and substantive interaction between students and their instructors” in a sufficient number of their courses, which rendered the school ineligible to participate in Title IV programs.  Western Governors University vehemently disputes the findings of the OIG’s audit report.

Notably, the OIG cannot revoke a school’s access to Title IV student-aid funding—only ED has that authority.  And although ED has yet to issue an official decision, a spokeswoman for Secretary Betsy DeVos stated that “[i]t is important to note that the innovative student-first model used by this school and others like it has garnered bipartisan support over the last decade.”

Western Governors University has 30 days to submit additional information about the audit report to ED.  We will keep you updated on new developments.

4.     The Department of Justice Declines to Intervene in FCA Case Against Charlotte Law School     

On August 15, 2017, an FCA lawsuit filed against the now-closed Charlotte Law School was unsealed after the Department of Justice decided not to intervene in the case.  A former professor, Barbara Bernier, filed the lawsuit, United States ex rel. Bernier v. Infilaw Corp., No. 16-cv-970-ORL-37DAB (M.D. Fla., filed June 6, 2016) in June 2016, alleging that Charlotte admitted unqualified students, misrepresented bar passage and employment rates, violated the 90-10 Rule, and paid low-performing students stipends to delay taking the bar examination.  After a lengthy investigation, with which Charlotte cooperated, DOJ declined to intervene in the suit, leaving the former professor to proceed on her own.  The materials unsealed in the matter also identified related cases and an investigation.  First, the Government filings stated that there were two other FCA lawsuits pending against Charlotte Law School that remain under seal.  Second, the Government stated that DOJ had earlier opened a criminal investigation.  It is not clear from the filings whether the investigation is still active or what conclusions, if any, it has reached.

5.     Positive Developments for Several Schools and an Accreditor Seeking ED Approval 

In our last update, we reported on the closure of several schools after losing Title IV eligibility.  We can now report that one school, Antonelli Medical & Professional Institute, has had its eligibility reinstated and is set to reopen.  ED originally denied the recertification application of the Pennsylvania school due to $5.6 million in outstanding liabilities assessed against American Beauty Academy, another school under common ownership with Antonelli, that American Beauty Academy had failed to timely pay.  But in late August, ED reversed its decision, explaining that it could not confirm that notification of the assessed liabilities was actually delivered to American Beauty Academy officials.

We also reported last quarter that the regional accreditor for the Art Institute of Pittsburgh and Art Institute of Philadelphia had rejected Education Management Corporation’s (EDMC) proposed sale of Art Institute schools to the nonprofit Dream Center Foundation.  In September, ED granted initial approval for the sale to proceed, but the deal is not yet final.  Each campus must meet conditions set by ED and provide additional documents and information for ED’s review.  And although EDMC has now submitted additional paperwork for reconsideration to the regional accreditor that originally rejected the deal, EDMC will have to wait for approval from that body as well.

ED has also approved the sale of Kaplan University to Purdue University but has conditioned its approval on Purdue assuming the debts and liabilities of Kaplan.  Purdue has previously stated that it would cover only liabilities tied to the new entity but not liabilities incurred by Kaplan prior to the closing of the deal.  The sale will also need approval from the Higher Learning Commission.

In addition, Arizona’s Ashford University has won back GI funding.  The Department of Veterans Affairs (VA) had previously expressed concern that Arizona lacked jurisdiction to approve Ashford’s GI benefits because the school might not have enough of a physical presence in Arizona.  The VA has now changed its position after Bridgepoint Education, which owns Ashford, dissolved an Iowa campus and moved Iowa operations to Arizona.

Finally, the Accrediting Council for Independent Colleges and Schools (ACICS) has reapplied for recognition from ED.  The accreditation body lost recognition in December 2016 when the Obama administration reacted to the closure of Corinthian and ITT Technical Institute, both ACICS-accredited schools.

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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.

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 usually work, or any of the following:

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Timothy Hatch (213-229-7368, [email protected])
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James Zelenay (213-229-7449, [email protected])
Jeremy S. Smith (213-229-7973, [email protected])

Jeremy S. Ochsenbein
(303-298-5773, [email protected])

Orange County
Nick Hanna (949-451-4270, [email protected])

San Francisco
Charles J. Stevens (415-393-8391, [email protected])

Washington, D.C.
Douglas Cox (202-887-3531, [email protected])
Michael Bopp (202-955-8256, [email protected])
Jason J. Mendro (202-887-3726, [email protected])
Amir C. Tayrani (202-887-3692, [email protected])
Lucas C. Townsend (202-887-3731, [email protected])

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