Sep 14, 2011
Where there's money, there are trial lawyers, and their latest hope for a jackpot is a lawsuit against an industry in political disfavor with the Obama Administration: for-profit colleges.
Where there's money, there are trial lawyers, and their latest hope for a jackpot is a lawsuit against an industry in political disfavor with the Obama Administration: for-profit colleges.
Under a Civil War era law known as the False Claims Act, the federal government can sue contractors or other groups it thinks have defrauded it. Used properly, the law can serve a good purpose, protecting against waste and misuse of taxpayer dollars. Used improperly, it can become a flamethrower in the hands of plaintiffs lawyers filing frivolous suits in hopes of a big payday.
Under the False Claims Act the Justice Department may bring its own cases against suspected fraudsters or it can join cases brought by individuals in so-called "qui tam" actions. In a qui tam case, claims are filed by private citizens (enter, trial lawyers) and the Justice Department must review the claims and decide whether to get involved.
The facts of the case involve the Education Management Corporation, a Pittsburgh company that runs dozens of for-profit schools in the U.S. and Canada. According to the plaintiffs, the company broke federal law by paying its admissions recruiters on the basis of student enrollment. While the schools are allowed to take recruiters' success into account, they are not permitted to use it as the only factor determining compensation.
The company says its compensation plan, which included a legally vetted matrix of enrollment numbers combined with factors including good employee qualities like professionalism, customer service and initiative complied with the regulations issued by the Department of Education in 2002. In the preamble to the regulations, the Department acknowledged that "by the very job description, a recruiter's job is to recruit," and that Congress's new provision on employee compensation "did not imply that institutions could not base salaries or salary increases on merit."
By this year, Justice had apparently had a change of heart. In May, it announced it would intervene in the 2007 case, despite having passed up involvement in some 30 cases filed against for-profit and non-for-profit institutions since 2002. The new activism comes in the wake of other Administration broadsides against the for-profit industry. In June, the Department of Education issued new rules by which schools can qualify for federal financial aid, ostensibly to protect students from taking on too much debt. At the time, the White House economic aide Gene Sperling compared the boom in for-profit education to the debacle of subprime housing.
The original complaint against EDMC sets the magic number for liability at $11 billion, the amount the company took in as government student loans. The Justice Department has said it will seek a portion of that. California, Illinois, Indiana and Florida have also chosen to intervene in the case, filing under their own state false claims acts. Tennessee has also filed a motion to intervene.
In case any trial lawyers hadn't gotten the memo, David Hickton, the U.S. Attorney for the Western District of Pennsylvania, who is handling the suit, participated in a February 2011 event at the Allegheny County Bar Association that offered a tutorial on the basics of filing qui tam lawsuits. The event included helpful illustrations of chests full of gold. Under a section headlined "Victori Spolia," the materials informed lawyers that plaintiffs take 15% to 30% of any money recovered while the lawyers work on contingency fees. In 2010, those legal fees worked out to $385,167,574, up from $258,790,518 in 2009.
Yeehaw, boys. While the Administration has demeaned for-profit colleges, the programs often provide post-secondary studies for many students without the grades or means to attend traditional colleges. Drop-out rates are often worse than those at liberal arts college, but that comes with the territory of educating a more at-risk population.
If the government thinks such schools are unfairly benefitting from federal subsidies, then it should cut off grants to all college students. But it's an abuse of power to subsidize schools, complain about profits on those subsidies, and then unleash prosecutors and the trial bar to loot them.
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