U. of Phoenix Case Lurches Toward Trial

August 21, 2007

A federal judge has rejected the latest attempt by the University of Phoenix to shortcircuit a potentially massive lawsuit it faces, increasing the chances that the five-year-old case actually goes to trial.

The case, which has been rattling around the federal courts since 2002, hinges on the question of whether the enormous for-profit university violated federal law by paying its recruiters based on how many students they enrolled. A federal appeals court ruled last fall that Phoenix had to defend itself against the charges brought by two former instructors on behalf of the federal government under the False Claims Act, which allows individuals who believe they have identified fraud committed against the government to sue, hoping to be joined by the U.S. Justice Department. (The plaintiff then shares in any financial penalties, which can include trebled damages.)

Phoenix officials had their way in the early court battles, with a federal district court twice dismissing the lawsuit in 2004. But the university's fortunes began to ebb with the September 2006 ruling by the U.S. Court of Appeals for the Ninth Circuit that was seen by many college lawyers as one of several recent decisions expanding the applicability of the False Claims Act to higher education. Since then, the entire Ninth Circuit court denied a Phoenix petition asking it to rehear the case, and the U.S. Supreme Court refused to hear Phoenix's appeal.

On Friday, Judge Garland E. Burrell Jr., in the U.S. District Court for the Eastern District of California, rejected Phoenix's argument (made in this legal filing) that the university could no longer be a legitimate defendant in a False Claims Act lawsuit. The university argued that in agreeing to a 2004 settlement with the university, in which Phoenix agreed to pay $9.8 million to the U.S. treasury, the federal government (through the U.S. Education Department) had accepted an "alternate remedy" to the judgment sought by the plaintiffs, rendering the False Claims Act lawsuit moot.

But the plaintiffs -- and the U.S. Justice Department, which filed a brief on their behalf -- argued that the settlement could not be seen as an alternative to a ruling in the plaintiffs' lawsuit because the Justice Department must sign off on all False Claims Act resolutions, and the attorney general had played no role in the Education Department's settlement with Phoenix. Judge Burrell, in a terse ruling released Monday, sided with the plaintiffs and against Phoenix.

"While we are disappointed with the court's decision, we look forward to trying this case on its merits," said Timothy J. Hatch, a lawyer with Gibson Dunn & Crutcher, which is representing Phoenix. "We are confident the evidence will support the fact that University of Phoenix fully complied with the law. The plaintiffs are trying to twist a routine regulatory matter into a federal case of fraud and will not succeed." Hatch said in an interview Monday that the university was likely to ask higher courts to review Judge Burrell's ruling, but that it did not expect to prevail.

Nancy G. Krop, a lawyer representing the women who are suing Phoenix, said the decision meant that "we finally have a courtroom" in which to pursue the merits of their case. Krop said she expected to perform extensive discovery aimed at showing that the university paid its recruiters based on how many students they enrolled.

She said she expected the university to ask a judge to rule in its favor on summary judgment, but that she believed a trial will eventually be held on its current schedule -- in September 2009.

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