United States of America ex rel. Hendow v. University of Phoenix
Summary
This False Claims Act ("FCA")* action against University of Phoenix ("UOP") was filed in 2003 in the federal District Court for the Eastern District of California by two former UOP enrollment counselors. The lawsuit alleges that UOP improperly obtained federal student financial aid funding from the U.S. Department of Education ("ED"), arguing it received this funding while in alleged violation of requirements set forth in Title IV of the Higher Education Act regarding the manner in which recruiters may be compensated. Importantly, the Department of Justice declined to intervene in, or take over, prosecution of the lawsuit. As described below, UOP strongly believes that the lawsuit is without merit.
Status
As a preliminary matter, the lawsuit was dismissed with prejudice by the district court. The plaintiffs appealed this decision to the Ninth Circuit Court of Appeals, which reversed the district court's decision to dismiss the lawsuit. The United States Supreme Court declined to reconsider the Ninth Circuit’s decision. UOP subsequently filed another motion to dismiss on additional grounds, which the district court denied. UOP has asked the district court for permission to seek an appeal of that decision. Nevertheless, should the case go forward, UOP is confident that the plaintiffs will not be able to meet their legal burden to prove that UOP's enrollment counselor compensation system was contrary to law.
Arguments
The reasons for UOP's confidence are many.
UOP's compensation system was and is fully compliant with all legal requirements -- Among other things, when viewed in light of the appropriate legal standard, it is clear, from both UOP's contemporaneous records and statistical analyses already performed by both UOP and its hostile adversaries, that UOP's compensation system was and is fully compliant with all legal requirements. Simply put, UOP did not violate the law, and the plaintiffs will not be able to prove otherwise.
The legal standard set by ED makes absolutely clear that Title IV does not prohibit the payment to recruiters of merit-based salaries as long as they are not based solely on the number of students enrolled -- Perhaps the single most significant challenge facing the plaintiffs is the legal standard set by ED with regard to the payment of merit-based salaries. In "Safe Harbor" regulations, published by ED in November 2002 to clarify the ways in which educational institutions can compensate recruiters without running afoul of the Title IV restrictions, ED made absolutely clear that Title IV does not prohibit the payment to recruiters of merit-based salaries and that such merit-based salaries are proper provided that the salaries are not based “solely on the number of students recruited, admitted, enrolled or awarded financial aid.” Through the regulatory notice and comment process, ED confirmed that its use of the word "solely" was intentional and intended to be interpreted consistent with "its dictionary definition;" that is, "singly," "alone," "exclusively" or "to the exclusion of other things." ED also recognized that "by the very job description, a recruiter's job is to recruit."
Thus, in order to prevail in their lawsuit, the plaintiffs will have to prove that UOP set and adjusted the salaries paid to its enrollment counselors based "solely" on the number of enrollments and that no other, non-enrollment factors were considered or used by UOP in setting and adjusting the salaries of its enrollment counselors. In other words, if UOP can show that any other non-enrollment factors were considered to any extent whatsoever (even a very small extent), the plaintiffs lose.
It will be very easy for UOP to demonstrate and establish that non-enrollment factors were considered as part of the evaluation and salary adjustment process for its enrollments counselors -- In evaluating the performance of its enrollment counselors and in setting and adjusting their salary levels, UOP considered, in addition to the number of enrollments achieved by the enrollment counselor, a whole host of quantitative and qualitative non-enrollment factors including tenure, judgment, communications, and working relationships.
In addition to the extensive contemporaneous documentation relating to the manner in which it evaluated and compensated its enrollment counselors, UOP will be able to put forward literally hundreds of current and former enrollment counselors who will testify that non-enrollment factors were considered in the evaluation process and did, in fact, impact the salary adjustment that they received. All of this testimony and documentation presented by UOP will be in stark and significant contrast to the handful of disgruntled and self-interested former enrollment counselors who will say that, notwithstanding all of the evidence to the contrary, they believed that enrollments were all that mattered in the evaluation and salary adjustment process.
Moreover, every statistical analysis that has been performed of UOP's compensation system, by both UOP and its adversaries , confirms that UOP’s compensation plan was and is compliant and clearly demonstrates that UOP's system was not based "solely" on the number of enrollments. Specifically, a prominent national accounting firm and a prominent national consulting firm have independently performed statistical analyses of UOP's compensation plan, which demonstrate that salary adjustments were not based solely on enrollments.
The plaintiffs' contention that these other non-enrollment factors were mere "smoke and mirrors" employed by UOP to mask its allegedly illegal compensation system is also unsupported by the record. In addition to being completely undermined by the manner in which compensation decisions actually took place, it is also inconsistent with the testimony that has been developed. The bottom line is that it will be very easy for UOP to demonstrate and establish that non-enrollment factors were considered as part of the evaluation and salary adjustment process. The plaintiffs' overheated rhetoric is legally irrelevant.
In order to establish FCA damages, the plaintiffs would have to demonstrate that UOP's system resulted in the enrollment of unqualified students and there is absolutely no evidence of this -- Even if the plaintiffs could somehow establish that UOP's compensation plan was not compliant – which for all the reasons set forth above they cannot – in order to establish FCA liability and obtain damages, we believe that the plaintiffs would also have to demonstrate that UOP's system resulted in the enrollment of unqualified students by UOP. The simple fact is that there is absolutely no evidence that UOP directed, encouraged, or permitted the recruitment of unqualified students. In fact, all of the available evidence is to the contrary.
First, we are not aware of a single enrollment counselor, including those hostile to UOP, who will testify that he or she enrolled unqualified students. Second, all of the statistical evidence suggests that UOP enrollment counselors enrolled students who could and did benefit from the education they obtained at UOP. For the time period relevant to the lawsuit, UOP's average cohort default rate on student loans was 5.8 percent, well below the national average of 7.4 percent for comparable for-profit schools and very close to the national average of 5.4 percent for traditional colleges. Moreover, UOP's graduation rate was between 50 to 60 percent – the same average rate found among traditional colleges. These default and graduation rates are widely-accepted measures of quality.
Because the plaintiffs will not be able to establish any wrongful conduct or liability on the part of UOP, there will be no damages -- Finally, the constant refrain from the plaintiffs' attorneys that damages in this case will be in the billions of dollars is just plain wrong. Obviously, because we believe, for all of the reasons set forth above, that plaintiffs will not be able to establish any wrongful conduct or liability on the part of UOP, there will be no damages.
Moreover, even if the plaintiffs were able to establish liability – which we are confident they cannot do – we still believe that there would be little or no damages as a result of the alleged conduct. There are at least three primary reasons for this belief.
- First, the proper measure of damages will not be the amount of Title IV funds received by UOP students. There is simply no legal, factual, or policy-based rationale for that theory. Rather, in order to establish damages, the plaintiffs will have to demonstrate that the government was actually damaged by UOP's alleged conduct – in other words, that there is a causal link between the alleged false statement by UOP and the harm the government has suffered. We believe that the court will require plaintiffs to establish, on a case-by-case basis, that UOP’s alleged violation resulted in the enrollment of poorly qualified students who were unlikely to benefit from further education or to pay back student loans. In light of the evidence discussed above, including the UOP low default and high graduation rates, the plaintiffs will have a very difficult time overcoming this burden and proving damages.
- Moreover, just like the "Safe Harbor" regulations, the plaintiffs simply ignore a critical and highly relevant October 2002 policy memorandum issued the Deputy Secretary of ED which sets forth ED policy with regard to incentive compensation compliance and enforcement. In this policy statement, ED makes quite clear that a violation of the incentive compensation rules does not cause damage to the government and that "[i]mproper recruiting does not render a recruited student ineligible to receive student aid funds for attendance at the institution on whose behalf the recruiting was conducted." Rather, the proper recourse for an alleged violation would be an administrative penalty of some sort. Thus, based on this policy alone, we believe that the plaintiffs will be hard pressed to prove that the government suffered any damage as a result of the alleged conduct.
- In addition, consistent with this policy, UOP and ED have already resolved virtually identical allegations relating to the manner in which UOP compensated its enrollment counselors and, in that settlement, ED affirmatively and expressly stated that it would not impose any further penalty or limitation on UOP. Indeed, we believe that the settlement agreement between ED and UOP raises a number of additional significant factual and legal challenges for the plaintiffs in this lawsuit.
For all of the reasons set forth above, we believe that the lawsuit is completely without merit and that UOP will prevail and the plaintiffs will recover nothing.
* The False Claims Act is a statute designed to remedy false or fraudulent claims for payment submitted to the federal government. The statute includes a legal device called a “qui tam” provision, which allows a private person to bring a lawsuit on behalf of the United States.
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