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Avalanche of Oversight: An Update Involving Litigation In The Educational Sector


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Title: Avalanche of Oversight: An Update Involving Litigation In The Educational Sector

Avalanche of Oversight An Update Involving
Litigation In The Educational Sector
  • Jim Zelenay
  • Of Counsel
  • Gibson, Dunn Crutcher LLP

  • Short history of litigation involving the sector
  • The Senate HELP Committee (i.e., Harkin
    Committee) Review and the Role It Plays
  • Where We Are Today
  • More investigations and litigation, from more
    sources, involving more laws and issues than ever
  • Common demands of resolutions
  • Risks posed by resolutions
  • Ways to avoid or minimize litigation and exposure

Short History Of Litigation Involving The Sector
  • Until the mid-2000s, the primary regulator was ED
  • Had extensive regulations
  • Authority increased with Congresss passage of
    the 1992 amendments to the Higher Education Act
  • Added incentive compensation provision
  • Added provisions about loan default rates
  • Tightened restrictions about ABT tests
  • More than 1100 schools closed in the ten years
    following 1992 amendments
  • Strong source of authority

Short History Of Litigation Involving The Sector
  • Relationship with ED was cooperative, but
    occasionally combative.
  • Dear Colleague letters
  • Informal guidance
  • Cooperative efforts to resolve issues
  • But see Computer Learning Centers (2000)
  • ED program review finding CLC violated the
    incentive comp provision based upon new
  • Required return of 180 million in Title IV funds
  • CLC declared bankruptcy
  • Thousands of students and employees left in the
  • Government left holding the bag for student debt
    (which was discharged)

Short History Of Litigation Involving The Sector
  • ED to its credit changed
  • Hansen Memorandum
  • Safe Harbor and other regulations (2002)
  • Other sources of federal and state oversight
    existed (DOJ, SEC, States Attorneys General,
    etc.), but ED remained the primary regulator and
    trust was placed with ED and accreditors
  • False Claims Act and other litigation had been
  • U.S. ex rel. Graves v. ITT DOJ declination,
    dismissed on the pleadings, affd by the Fifth

Short History Of Litigation Involving The Sector
  • 2005 The tide turns
  • U.S. ex rel. Main v. Oakland City University
    (2005) (Easterbrook, J.).
  • See also U.S. ex rel. Hendow v. University of
    Phoenix (2006)
  • False Claims Act is a dangerous weapon
  • Qui tam provisions
  • Treble damages
  • Per claim penalties
  • Untested theories of liability and damages
  • Oakland City University settled for 5.3 million
  • University of Phoenix settled for 67.5 million

Short History Of Litigation Involving The Sector
  • The water gets rocky . . .
  • 2008 -- Economy crashes
  • Student defaults increase significantly
  • Employee downsizing occurs
  • Floodgates open from plaintiffs attorneys
  • Scores of FCA, consumer, securities, and other
    lawsuits filed
  • New administration
  • Industry growth slows
  • Perfect storm for political opportunity (and
    short sellers)

Senate HELP Committee Review
  • Senator Harkin (D-IA) convenes a 2-year review by
    the Senate Committee on Health, Education, Labor
    and Pensions (HELP) of virtually every
    for-profit educational institution in the country
  • Highly political
  • Required production of massive amounts of
    material held multiple hearings
  • Issues lengthy report in 2012, attacking numerous
    institutions on a variety of fronts, including
    representations to students, marketing efforts,
    and student lending.
  • Harkin Report becomes Exhibit A and the
    playbook for what is to come and where we are

Where We Are Today
  • Intense slew of activity
  • Comes from more sources, covering more issues,
    than ever before.
  • Not just ED. Now, also
  • Other federal agencies
  • CFPB
  • FTC
  • SEC
  • DOJ
  • State Agencies and State Attorneys General
  • City and County Attorneys
  • Accreditors -- also subject to scrutiny of their
  • Plaintiffs Attorneys (FCA cases, consumer class
    actions, securities litigation, individual
    arbitrations / lawsuits, etc.)
  • Will discuss recent activity from these entities

  • The new kid on the block
  • Has flexed its muscles
  • Has seemingly tried to insert itself into many
    consumer interactions, whether or not they have
    to do with financing.
  • Has sued
  • For-profit education institutions (Corinthian,
  • Loan service providers (College Education
    Services LLC, Irvine WebWorks)
  • Even law firms engaging in debt collection
    lawsuits (Hanna Associates)
  • No target is too big or too small

  • Question of reach and authority is contested
  • Although sued Corinthian and ITT based upon
    alleged lending practices, complaints covered
    breadth of territory (e.g., representations to
    students regarding placement rates, recruitment,
    cost, etc.).
  • Sued ITT even though ITT did not own or service
    the loans
  • Remarkably used ITTs own mystery shop program
    against ITT
  • Constitutionality of CFPB also contested
  • Scope of settlement power
  • Settled with purchaser of Corinthian schools in
  • 480 million in loan forgiveness, plus other
    terms (a five-day cooling off period, required
  • Raises question What is this agencys role?
  • Settlements may set precedent in agencys view
    disclosures, industry code of conduct, etc.

  • Student loan issues on its radar
  • Sued College Education Services LLC alleging
    student debt relief service illegally charged
    advance fees, promised lower payments, etc.
  • Asked for consent order permanently banning CES
    from debt relief
  • Sued Student Loan Processing.US alleging false
    representation of affiliation with ED, illegal
    advance fees, deception of costs and terms
  • Issued October 2014 Report on Student Loan
  • Finding companies engaged in illegal practices
    (charging unfair late fees, harassing debt
    collection calls, etc.)
  • WSJ
  • Theres more tension between banks and those in
    the CFPBs student-lending division than in all
    other areas of the CFPB combined.
  • Student lending is the only consumer-lending
    sector that has its own ombudsman in the CFPB.
  • Will CFPB attempt to set industry standards /
    code of conduct?

  • Confirmed it has requested documents from one
    for-profit school
  • Per WSJ, conducting investigations . . .
    focusing on whether students are being deceived
    by for-profit colleges offering programs in
    career paths such as nursing, education,
    psychology and law enforcement. (WSJ, May 26,
  • Stated that it monitors student debt relief
    services for false claims
  • What is role of FTC in education?
  • FTCs traditional role related to advertising
  • ED has misrepresentation rules
  • Accreditors have misrepresentation rules
  • Educational information is nuanced, complicated,
    and highly regulated
  • More and more schools all schools advertising

  • Historically declined to intervene in FCA suits
    against the sector
  • That has changed
  • Has now intervened in a handful of cases
    generally, intervention plays an important role
  • Issued CIDs and grand jury subpoenas within the
  • Has made a commitment to begin reviewing FCA
    matters for potential criminal liability as well.

  • EDMC Intervened in case alleging incentive
    compensation violations. Case ongoing discovery
    going both ways statistical MSJ denied.
  • Stevens-Henager College Intervened in case
    alleging incentive comp. Case ongoing.
  • ATI Intervened in case alleging false
    statements about employment statistics,
    enrollment of ineligible students, etc. Case
    settled for 3.7 million
  • American Commercial Colleges Intervened in case
    alleging violations of 90/10 rule. Case settled
    for 2.5 million.
  • Maricopa County Community College Alleging
    improper certification students completed service
    hours. Settled for 4.08 million.
  • FastTrain College alleging misrepresentation of
    eligibility. Case ongoing.

  • Joint matter brought by DOJ and FDIC, with
    coordination of ED and CFPB
  • Investigation was the result of referral of
    service member complaints from CFPB
  • Alleged Sallie Mae denied members of the
    military six percent interest rate cap under The
    Service members Civil Relief Act.
  • Settled with Sallie Mae for 60 million (May

  • Remains the biggest player
  • Removed incentive compensation provision safe
    harbor regulations
  • Attempted to enact gainful employment
    regulations, tying eligibility to cost of program
    vs. students ability to repay debt
  • Challenged in court and set aside as arbitrary
    and capricious ruling affirmed on appeal
  • Has tried again being challenged again
  • Corinthian placed on heightened cash

States Attorneys General
  • Perhaps the most significant development
  • Onslaught of investigations and lawsuits by
    States Attorneys General
  • Working group of 15 different AGs investigating
    for-profit education
  • Employed the Harkin playbook
  • Numerous lawsuits
  • CA and Wisconsin AGs sued Corinthian for alleged
    deceptive practices ongoing
  • Ill AG sued Alta/Westwood Colleges, including for
    federal CFPA violations ongoing
  • NM AG sued ITT for alleged unfair loan practices
  • Iowa AG settled with Bridgepoint for 7.25
    million and a 3-year monitor
  • Yet again raises question of the role of state

States Attorneys General
  • MA AG
  • Sued Salter Schools for alleged misrepresentation
    settled for 3.75 million additional
  • Sued Corinthian for alleged misrepresentation
  • Investigating others in the industry
  • Issued its own regulations relating to for-profit
  • Massachusetts Association of Private Career
    Schools sued, claiming regulations are
    unconstitutional and in conflict with federal law
  • Case ongoing
  • Just one example of one of the many very
    aggressive states.
  • Others include Iowa, Kentucky, California.
  • Presents risks of fighting litigation in many,
    multiple jurisdictions at the same time.

  • Even cities in on the action
  • EDMC entered into a settlement with the City of
    San Francisco relating to alleged
    misrepresentation by the Art Institutes costs
    and placement statistics.
  • Case settled for 1.95 million a 1.6 million
    scholarship fund and 850,000 in scholarship
    funds to new students.
  • EDMC also agreed to calculate graduation and
    employment statistics in the manner specified by
    the settlement agreement.

Inter-Agency Coordination
  • October 2014 ED confirmed coordination long
  • Officially announced an interagency task force
    dedicated to oversight of for-profit education
  • ED, DOJ, Treasury, Veterans Affairs, CFPB, FTC,
    SEC, States
  • Meets at least once a quarter
  • Interagency investigations may be the new norm
  • Two schools of thought on development

Plaintiffs Attorneys
  • Have Not Stopped FCA cases, securities
    lawsuits, consumer class actions, etc.
  • Generally remain unsuccessful, but continue to
    cause defendants expense.
  • Harkin Report remains Exhibit A -- dispute
    regarding admissibility
  • A few rulings of note
  • Keiser University case First FCA education case
    to go to trial. Verdict for plaintiffs. No
    damages one penalty of 11,000.
  • Munoz v. CSI case Effectively any violation of
    the PPA can provide a basis for an FCA case that
    can survive pleadings.
  • U.S. ex rel. Hoggett v. Univ. of Phoenix
    Dismissed on public disclosure grounds.
  • Apollo, DeVry, and ITT Securities Lawsuits
    Apollo and DeVry dismissed on pleadings ITT
    dismissed on pleadings in part.
  • Sallie Mae class action case alleged to be
    true lenders of student loans, instead of
    banks, and used banks to avoid usury and consumer
    protection laws. Class certified.

How Investigations / Cases Are Being Resolved
  • For those that choose to cooperate expensive
    and distracting
  • For those that choose to litigate -- expensive
    and distracting
  • Potentially large collateral consequences
    (especially in FCA cases).
  • Rewarding if you win, not if you lose.
  • For those that choose to settle (particularly
    with government authorities)
  • Money / debt repayment
  • Monitors (more on that in a minute)
  • Amended or revised disclosures
  • Code of conduct
  • Different models

A Word on Monitors
  • Becoming more frequent in settlements
  • The importance of selecting the right person
  • Extremely important to have a clearly articulated
    agreement as to scope
  • Cost
  • Tenure
  • Areas subject to investigation
  • Approval required over items?
  • To whom monitor can provide information and what
  • How privileged information is handled
  • How concluded
  • What happens with work product? Does it stay
  • Coordinating only one monitor if facing multiple
    investigations / reviews

Some Risks Associated With Resolutions
  • Confusing and contradictory disclosures
  • Helps or hurts students?
  • Collateral consequences of settlements
  • Business consequences competitive disadvantages
  • Can spur other litigation FCA litigation,
    shareholder actions, consumer fraud actions,
    other government actions
  • Costs / Disruption
  • Monitors

Best Practices How to Avoid and Defend Against
  • Review and update formal business ethics
    awareness and compliance program and internal
    control system.
  • Tone at the top
  • Internal audits
  • External audits
  • Compliance hotline
  • Take complaints seriously / investigate. Most
    whistleblowers attempt to first resolve
    complaints internally.
  • But, be mindful of retaliation provisions in the

Best Practices How to Avoid and Defend Against
  • Inform and train employees, including on
    compliance and how to report purported
  • Consistently inform employees of outlets for
  • Have strong HR system in place
  • Most whistleblower are aggrieved / disgruntled
    former employees
  • Documentation and transparency with government
    are key.
  • Implement procedures to determine the credibility
    of evidence of alleged misconduct or violations
    to minimize exposure to liability.

Best Practices How to Avoid and Defend Against
  • Reasonable measures, not perfection A strong
    internal program may not prevent mistakes nor
    stop a rogue employee, but it may defeat
  • SAIC Collective knowledge doctrine.
  • Consider whether self-disclosure is required /
  • Consideration should be made in consultation
    with counsel
  • Evaluate business partners
  • Document the governments knowledge, awareness,
    and ratification of contractual or regulatory

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