Presentation to the National Council of Higher Education Loan Programs:
Law Schools and Career Colleges:
In the Cross Hairs?
January 20, 2012
Tim Hatch
Gibson Dunn
Dennis Cariello
DLA Piper
Overview
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I. Qui Tam Cases Brought Against Schools
II. New Federal Education Regulations
III. Securities Class Action Lawsuits Brought Against Schools
IV. Consumer Fraud Action Brought By State Attorneys
General and Private Plaintiffs
V. Reactions from Regulators
VI. Criminal Investigations from DOJ
VII. Issues for Lenders
VIII. Mitigating or Avoiding Liability
Appendix (list of relevant cases)
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Qui Tam Cases Brought Against Schools
• False Claims Act, 31 U.S.C. §§ 3729-33
– One of the federal government's primary weapons to redress
fraud against government programs.
– Imposes liability upon anyone who (a) knowingly submits, or
causes another to submit, a false claim for payment to the
United States government, or (b) knowingly avoids or
decreases an obligation to pay the United States
government, which may include the knowing retention of an
overpayment.
– Potential damages: violator is subject to three times the
amount of actual damages plus civil penalties of up to
$11,000.00 per false claim.
• Large number of cases over past 10 years against
schools, most brought against private sector schools
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Qui Tam Cases Brought Against Schools
• Many Qui Tam cases based on so-called “incentive
compensation” provision of HEA but some based on
other alleged violations of HEA or ED regulations
• Some do not appear to be very closely related to the
flow of federal funds
– Alleged violations of state regulatory requirements
– Alleged violation of requirements imposed on schools by
private accreditors
– Alleged violation of Rehabilitation Act
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Qui Tam Cases Brought Against Schools
• All based on the false certification theory of FCA
liability – significant split among the circuits with
regard to the permissible scope of this theory
– Initially successful in convincing courts, including the 5th
Circuit, that claims based on incentive compensation
provision are not properly actionable – condition of
payment versus condition of participation
• That all changed with the Main decision by the 7th
Circuit and the Hendow decision by the 9th Circuit
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Qui Tam Cases Brought Against Schools
• With one or two possible exceptions, relators have not
been very successful in pursuing these lawsuits
– Most have been dismissed – no false certification, no
violation of the HEA provision (in light of the Safe Harbor
regulation), no jurisdiction
• To date, no finding of liability by any court in any case
– courts not influenced by assault on sector
• Schools have decided to settle several cases – generally
in those cases that were able to withstand a motion to
dismiss – settlements were for modest amounts and to
avoid the significant cost and disruption of discovery
– The University of Phoenix settlement
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Qui Tam Cases Brought Against Schools
• Up until the recent EDMC case, DOJ had declined to
intervene in every single incentive compensation case
as well as in almost all of the other cases – perhaps the
single most significant development in a qui tam case
– Number of reasons why DOJ has remained on the sidelines
– The EDMC case – aberration or a new approach?
• The involvement of the states
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Qui Tam Cases Brought Against Schools
• Where do we go from here?
• The new ED regulations (75 FR 66832) relating to
compensation and misrepresentations – a potential
game-changer (and not in a good way)
• Role of ED and DOJ
• Need for Supreme Court to address false certification
theory of liability
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New Federal Education Regulations
• Legal Challenges to New Regulations (75 FR 66832)
• Challenges new rules on:
– Incentive compensation (34 CFR 668.14(b)(22))
– Misrepresentation (34 CFR 668.71 et. seq.)
– State authorization of programs (34 CFR 600.9)
• Challenge to gainful employment regulation (34 CFR
668.7) (76 FR 34386)
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Securities Class Action Lawsuits Brought
Against Schools
• Lawsuits brought against most of the publicly-traded,
private sector schools
• Allegations mirror the allegations set forth in GAO
report and Harkin investigation
• To date, at least four complaints have been dismissed
– none have been permitted to go forward
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Consumer Fraud Action – Brought by
Attorneys General and Private Plaintiffs
• Increase in investigations, lawsuits, and regulatory
efforts by individual states
• Recent events in Kentucky, Florida, New York,
Massachusetts, Texas, others
• Other states take more pragmatic approach
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Consumer Fraud Action – Brought by
Attorneys General and Private Plaintiffs
• Actions brought by private plaintiffs continue but
schools given help in preventing these lawsuits from
going forward as class actions
• Favorable results in most “one off” cases
• Rumored settlement involving Career Education
• AT&T Mobility, LLC v. Concepcion, 131 S. Ct. 1740
(2011)
• Actions brought against lawyers representing plaintiffs
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Consumer Fraud Action – Brought by
Attorneys General and Private Plaintiffs
• Potential impact of new misrepresentation regulations
• Placement rates and reporting
• Although not limited to law schools,
misrepresentations of placement rates
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Reaction from Regulators
• Climate has increased scrutiny from regulators leading
to more program reviews, audits, visits and inquiries
– Job Placement and exam passage rates are hot topics and
advertising is being reviewed
• “The Pile on Effect” – no one wants to be the one who
dropped the ball or wasn’t involved
– Whether in coordination or done separately, the
Department of Education, state regulators and accreditors
have a propensity to focus on the same school
• Office of the Inspector General Has its own authority
and its own views
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Criminal Investigations by DOJ
• Rare but, unfortunately, not unprecedented
• ITT Educational Services – a case study
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Issues for Lenders
• FTC Holder Rule – allows student borrowers to assert
claims against a lender that he could assert against a
school
• Liability beyond the Holder Rule – may depend on
how close of a relationship between a lender and the
school
– RICO?
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Mitigating or Avoiding Liability
• A culture of compliance and an effective compliance
program
• Buy-in and participation of senior management
• Proper training of employees and students
• Clear and effective policies, procedures, and processes
• Proactive internal audit and compliance programs
• The importance of clear document retention policies
and procedures
• High quality programs and focus on the student
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Presentation to the National Council of Higher Education Loan Programs:
Law Schools and Career Colleges:
In the Cross Hairs?
January 20, 2012
Tim Hatch
Gibson Dunn
thatch@gibsondunn.com
213.229.7368
Dennis Cariello
DLA Piper
dennis.cariello@dlapiper.com
212.335.4816
Appendix – List of Qui Tam Cases Against
Schools
• U.S. ex rel. Bowman v. Computer Learning Center (S.D. Tex. 1999).
Allegations of improper incentive compensation. Company forced out of
business prior to resolution.
• U.S. ex rel. Graves v. ITT Educational Services, Inc. (S.D. Tex. 1999); 284
F. Supp. 2d 487 (S.D. Tex. 2003), aff’d, 2004 U.S. App. LEXIS 21799 (5th
Cir. 2004). Allegations of improper incentive compensation. DOJ declined,
dismissed by district court, dismissal affirmed by Fifth Circuit, cert denied by
Supreme Court.
• U.S. ex rel. Mahmoud v. ITT Educational Services, Inc. (C.D. Cal. 2002).
Allegations of grades being inflated for purposes of Cal Grant eligibility.
DOJ declined, case settled with California AG.
• U.S. ex rel. Olson v. ITT Educational Services, Inc. (S.D. Ind. 2004).
Allegations of poor quality education, awarding of grades that were not
deserved, shoddy facilities and equipment and poor placement
opportunities. DOJ declined, dismissed by district court, not appealed.
• U.S. ex rel. Bowman v. Education America (S.D. Tex. 2000); 2004 U.S.
App. LEXIS 24673 (5th Cir. 2004). Allegations of improper incentive
compensation. DOJ declined, dismissed by district court, dismissal affirmed
by Fifth Circuit, cert denied by Supreme Court.
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Appendix – List of Qui Tam Cases Against
Schools
• U.S. ex rel. Gay v. Lincoln Technical Institute (N.D. Tex. 2001); 2003 U.S.
Dist. LEXIS 25968 (N.D. Tex. Sept. 3, 2003), aff’d, 2004 U.S. App. LEXIS
21489 (5th Cir. 2004). Allegations of improper incentive compensation.
DOJ declined, dismissed by district court, dismissal affirmed by Fifth
Circuit, cert denied by Supreme Court.
• U.S. ex rel. Payne v. Whitman Education Group (S.D. Tex. 2002).
Allegations of improper incentive compensation. DOJ declined, dismissed
by district court.
• U.S. ex rel. Main v. Oakland City University (S.D. Ind. 2003); 426 F.3d 914
(7th Cir. 2005). Allegations of improper incentive compensation. DOJ
declined, dismissed by district court, reversed by Seventh Circuit, cert
denied by Supreme Court, case settled.
• U.S. ex rel. Hendow v. University of Phoenix (E.D. Cal. 2003); 461 F.3d
1166 (9th Cir. 2006). Allegations of improper incentive compensation.
DOJ declined, dismissed by district court, reversed by Ninth Circuit, cert
denied by Supreme Court, case settled.
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Appendix – List of Qui Tam Cases Against
Schools
• U.S. ex rel. Bott v. U.S. Education Corporation (N.D. Cal. 2004); 262 Fed.
Appx. 810, 2008 WL 59364 (9th Cir. 2008). Allegations of improper
incentive compensation. DOJ declined, dismissed by district court, affirmed
by Ninth Circuit, cert denied by Supreme Court.
• U.S. ex rel. Ortiz v. University of Phoenix (W.D. Tex. 2004). Allegation of
noncompliance with regulatory requirements, improper incentive
compensation and undue pressure to enroll and retain students. DOJ
declined, voluntarily dismissed by relator.
• U.S. ex rel. Ector v. Axia College (D.D.C. 2005). Allegations of improper
incentive compensation. DOJ declined, voluntarily dismissed by relator.
• U.S. ex rel. Brazell v. Alta Colleges (N.D. Tex. 2005). Allegations of
improper incentive compensation and violations of state regulatory
requirements. DOJ intervened on state regulatory claims, case settled.
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Appendix – List of Qui Tam Cases Against
Schools
• U.S. ex rel. Gatsiopoulos v. Kaplan Higher Education (W.D. Penn. 2006);
2011 WL 3489443 (S.D. Fla. 2011). Allegations of improper incentive
compensation and noncompliance with regulatory requirements. DOJ
declined, case transferred to Southern District of Florida. Motion to dismiss
denied in part and granted in part (denying motion to dismiss the claims
related to the incentive compensation ban). Case transferred back to
Western District of Pennsylvania; discovery proceeding on incentive
compensation allegations.
• U.S. ex rel. Pilecki-Simko v. Chubb Institute (D.N.J. 2006); 2010 WL
1076228 (D.N.J. Mar. 22, 2010). Allegations of improper incentive
compensation and noncompliance with regulatory requirements. DOJ
declined, motion to dismiss granted. Third Circuit affirmed.
• U.S. ex rel. Diaz v. Kaplan University (M.D. Fla. 2007). Allegations of
improper incentive compensation and noncompliance with regulatory
requirements, including the Rehabilitation Act. DOJ declined, case
transferred to Southern District of Florida, motion to dismiss granted in part,
denied in part. Motion to dismiss granted “as to all claims except for
Relators' False Claims Act counts based on violations of the Rehabilitation
Act and for Relator Diaz's retaliation claim.” Discovery proceeding.
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Appendix – List of Qui Tam Cases Against
Schools
• U.S. ex rel. Cruz v. Western Career College (E.D. Cal. 2007). Allegations of
improper incentive compensation. DOJ declined, voluntarily dismissed by
relator.
• U.S. ex rel. Torres v. Kaplan Higher Education (N.D. Ill. 2007). Allegations
of improper incentive compensation. DOJ declined, case transferred to
Southern District of Florida, motion to dismiss granted. Appeal dismissed.
• U.S. ex rel. Jajdelski v. Kaplan, Inc. (D. Nev. 2007). Allegations of financial
aid requests for students never enrolled. DOJ declined, motion to dismiss
granted. Appeal pending.
• U.S. ex rel. Shultz v. DeVry, Inc. (N.D. Ill. 2007). Allegations of improper
incentive compensation. DOJ declined, dismissed by district court, case
settled on appeal.
• U.S. ex rel. Leveski v. ITT Educational Services (S.D. Ind. 2007).
Allegations of improper incentive compensation. DOJ declined, first
motion to dismiss granted, second motion to dismiss granted in part and
denied in part. Subsequent motion to dismiss based on public
disclosure/original source bar granted.
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Appendix – List of Qui Tam Cases Against
Schools
• U.S. ex rel. Lee v. Corinthian Colleges (C.D. Cal. 2007);655 F.3d 984 (9th
Cir. 2011). Allegations of improper incentive compensation. DOJ declined,
dismissed by district court. Ninth Circuit, reversed and remanded the
dismissal of the claims. Amended complaint filed; anticipated motions to
dismiss to be filed shortly.
• U.S. ex rel. Fuhr v. Corinthian Colleges (C.D. Cal. 2007). Allegations of
improper incentive compensation. DOJ declined (2/25/09), dismissed by
district court. Appeal voluntarily dismissed.
• U.S. ex rel. Backhus v. Corinthian Colleges (M.D. Fla. 2007). Allegations of
improper incentive compensation. DOJ declined (Feb. or Mar. 2009),
voluntarily dismissed by relator.
• U.S. ex rel. Irwin v. Grand Canyon University (D. Ariz. 2007); 2009 U.S.
Dist. LEXIS 13832 (Feb. 10, D. Ariz. 2009). Allegations of improper
incentive compensation. DOJ declined, motion to dismiss denied, case
settled.
• U.S. ex rel. Buchanan v. South Univ. Online, No. 07-0971 (W.D. Pa. 2007).
Allegations of improper incentive compensation. DOJ declined (4/15/10),
voluntarily dismissed by relator.
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Appendix – List of Qui Tam Cases Against
Schools
• U.S. ex rel. Brodale v. Apollo Group (S.D. Cal. 2008). Allegations of
financial aid fraud and improper incentive compensation. DOJ declined
(order entered 5/13/09), dismissed by district court. Notice of Appeal filed
1/5/2010. Appeal voluntarily dismissed 2/11/2010.
• U.S. ex rel. Powell v. American Intercontinental University (N.D. Ga. 2008).
Allegations of improper incentive compensation. DOJ declined (7/22/09),
motion to dismiss denied, discovery proceeding; motion for partial summary
judgment and subsequent motion to dismiss pending.
• U.S. ex rel. Lopez v. Strayer Educ. Inc. (E.D. Va. 2008). Allegations of
improper incentive compensation. DOJ declined (7/13/09), motion to
dismiss on public disclosure grounds granted. Notice of appeal filed
4/16/2010. Appeal dismissed on 5/11/2010.
• U.S. ex rel. Walters v. EDMC, (E.D. Cal. 2010). Allegations of improper
incentive compensation. DOJ declined, voluntarily dismissed by relator.
• U.S. ex rel. Washington v. EDMC (W.D. Pa. 2007). Allegations of
improper incentive compensation. DOJ intervened, motion to dismiss filed.
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Appendix – List of Qui Tam Cases Against
Schools
• U.S. ex rel. Washington v. EDMC (W.D. Pa. 2007). Allegations of
improper incentive compensation. DOJ intervened, motion to dismiss filed.
• U.S. ex rel. Hoggett v. University of Phoenix (E.D. Cal. 2010). Allegations
of improper incentive compensation on behalf of the United States and the
state of California. State of California declined to intervene. Motion to
dismiss pending.
• Honrable Mention:
• U.S. ex rel. Vigil v. Nelnet, Inc., 639 F.3d 791 (8th Cir. 2011) (affirming
dismissal of claim alleging, in part, that the defendant violated FFELP
regulations by “offering Vigil and other loan advisors prohibited bonuses and
commissions based on the number of borrowers they persuaded to
complete consolidation-loan applications”)
• U.S. ex rel. Jones v. Collegiate Funding Services, Inc., 2011 WL 129842
(E.D. Va. 2011) (granting motion to dismiss complaint alleging, in part, that
the defendant “violated the HEA's anti-inducement provision by offering and
making illegal bonus payments to its employees based on the number of
FFELP student-loan applications initiated daily by the respective
employee”).
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Presentation to the National Council of Higher Education Loan Programs:
Law Schools and Career Colleges:
In the Cross Hairs?
January 20, 2012
Tim Hatch
Gibson Dunn
thatch@gibsondunn.com
213.229.7368
Dennis Cariello
DLA Piper
dennis.cariello@dlapiper.com
212.335.4816