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For-Profits and the False Claims Act

August 15, 2011

Days after the Obama administration and several state attorneys general joined a False Claims Act lawsuit accusing Education Management Corp. of violating federal law governing incentive compensation for recruiters, a federal appeals court on Friday reinstated a similar lawsuit against another major for-profit institution, Corinthian Colleges Inc.

While the administration passed up an opportunity to join the Corinthian lawsuit in 2009, the ruling by the U.S. Court of Appeals for the Ninth Circuit creates another chance for the government to do so, and creates at least the possibility that the Obama administration will make such interventions a trend, using litigation as an additional tool in its attempt to rein in abuses in the for-profit sector.

False Claims Act lawsuits against major higher education companies are not a new phenomenon; the Apollo Group, the parent company of the University of Phoenix, settled such a suit for $78.5 million in 2009, and dozens of other suits have been filed (with most of them being dismissed) in recent years. But it is uncommon for the federal government to join such lawsuits, as it did this summer in the Education Management case; the Obama administration has opted out of cases as recently as this summer.

Under the False Claims Act, parties (known as relators) sue on behalf of the federal government, claiming that the defendants have defrauded the treasury of funds and hoping to be joined by the U.S. Justice Department. Whether the government joins the cases or not, the plaintiff shares in any financial penalties, which can include trebled damages. Cases in which the federal government chooses to intervene have a higher likelihood of success than do those in which it does not.

Many of the cases brought against for-profit colleges under the False Claims Act involve alleged violations of the federal government’s ban on incentive compensation, which is among the federal rules that the Obama administration has just revised as part of its 18-month review of U.S. regulations designed to protect the integrity of federal student aid programs. Many of the provisions being challenged in the various False Claims Act lawsuits discussed in this article are no longer in place, although the underlying principle -- that recruiters should not be paid based solely on how many students they enroll -- remains in force.

The Justice Department's formal intervention in the Education Management case -- in which the attorneys general from numerous states also said they would join -- accuses the Pittsburgh-based EDMC (which owns the Art Institutes, Argosy University and Brown Mackie Colleges, among others) of violations of provisions of federal law that prohibit colleges from paying their recruiters based purely on enrollment numbers. The incentive compensation regulations were put in place more than two decades ago -- and were strengthened by the Education Department this year -- in response to concerns that colleges were giving their admissions officers financial incentives to enroll students who needed federal financial aid but did not have the academic capability to benefit from a higher education.

“Federal tax dollars must be protected from abuse,” said David J. Hickton, U.S. Attorney for the Western District of Pennsylvania. “This action against EDMC seeks to recover a portion of the $11 billion in federal student aid which EDMC allegedly obtained through false statements and which enriched the company, its shareholders and executives at the expense of innocent individuals seeking a quality education.”

The Justice Department’s decision to intervene in the EDMC case has critics of for-profit colleges believing (or at least hoping) that the Obama administration may now seek to join more consistently in such cases, with the goal of using the legal system to intensify the pressure that the U.S. Education Department has sought to put on commercial institutions through its aggressive regulatory approach.

If the administration is so inclined, it will have another opportunity in light of the Ninth Circuit’s decision Friday to resuscitate the qui tam case against Corinthian. A district court threw out the lawsuit in November 2009, concluding that the relators had failed to provide enough evidence that it would be able to prove that the California-based company (which owns Everest and Heald Colleges and WyoTech) had paid its recruiters based purely on enrollment or that Corinthian had “falsely certified” to the government that it had abided by the requirement.

The three-judge panel of the Ninth Circuit, however, largely overturned that lower court ruling on Friday. While it concurred with the district court judge that the relators had failed to make their case, the appeals panel said that the relators deserved a chance to amend their complaint to prove that the other criterion on which Corinthian based its pay to recruiters -- achieving an overall performance rating of “good” or “excellent” -- is so low a bar that it is meaningless.

“If the performance rating of at least “Good” requires an employee merely to fulfill basic performance requirements that are expected of any employee (such as showing up on time), then construing … that these ratings serve as an independent basis for compensation increases would lead to an ‘absurd result,’ “ the court said. “Under such a system, educational institutions could entirely circumvent the HEA incentive compensation ban by simply formalizing, through a performance rating system, the basic requirements expected of any employee, that is, the requirements of employment itself.”

The court also said that the lower court was wrong to deny plaintiffs another chance to show that Corinthian had misled the government.

Other aspects of the Corinthian case warrant mention. The appeals panel upheld the possibility that Corinthian’s auditor, Ernst & Young, violated the False Claims Act, too, by certifying that it had met the incentive compensation requirements, and said the plaintiffs should be given an additional chance to make that case, too. Such a finding, if ultimately upheld, could affect the army of law firms and auditors and consultants who help for-profit (and other) institutions comply with federal rules.

While the appeals panel’s decision in the Corinthian lawsuit is a triumph (albeit potentially a short-term one) for critics of for-profit colleges, the court’s ruling did hand one victory to the colleges themselves. The judges rejected the plaintiffs’ arguments that Corinthian had violated the Higher Education Act by firing or demoting recruiters based on the number of students they recruit. “Even as broadly construed, the HEA does not prohibit any and all employment-related decisions on the basis of recruitment numbers; it prohibits only a particular type of incentive compensation. Thus, adverse employment actions, including termination, on the basis of recruitment numbers remain permissible under the statute’s terms,” the Ninth Circuit panel said in its ruling.

 

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