United States v. Educ. Mgmt. Corp.

• Decision Date: 11 May 2012
• Docket Number: Civil Action No. 07–CV–461.
• Citation: 871 F.Supp.2d 433
• Parties: UNITED STATES of America, and the States of California, Florida, Illinois, Indiana, Massachusetts, Minnesota, Montana, New Jersey, New Mexico, New York, and Tennessee, and the District of Columbia, each ex rel. Lynntoya Washington and Michael T. Mahoney, Plaintiffs, v. EDUCATION MANAGEMENT CORPORATION; Education Management Holdings LLC; Education Management LLC; the Art Institute of California—Hollywood; the Art Institute of California—Inland Empire; the Art Institute of California—Los Angeles; the Art Institute of California—Orange County; the Art Institute of California—Sacramento; the Art Institute of California—San Diego; the Art Institute of California—San Francisco; the Art Institute of California—Sunnyvale; Argosy University, Inland Empire; Argosy University, Orange County; Argosy University, San Diego; Argosy University, San Francisco; Argosy University, Santa Monica; Western State University College of Law; the Art Institute of Fort Lauderdale; the Art Institute of Jacksonville; the Art Institute of Tampa; Miami International University of Art & Design; Argosy University, Sarasota; Argosy University, Tampa; South University/West Palm Beach; South University/Tampa; Brown Mackie College—Miami; the Illinois Institute of Art—Chicago; the Illinois Institute of Art—Schaumberg; Argosy University, Chicago; Argosy University, Schaumburg; Brown Mackie College—Moline; the Art Institute of Indianapolis; Brown Mackie College—Merrillville; Brown Mackie College—Michigan City; Brown Mackie College—Fort Wayne; Brown Mackie College—South Bend; Brown Mackie College—Indianapolis; the Art Institutes International Minnesota; Argosy University, Twin Cities; Brown Mackie College—Albuquerque; the Art Institute of New York City; the Art Institute of Tennessee—Nashville; Argosy University, Nashville; the Art Institute of Atlanta; the Art Institute of Atlanta—Decatur; the Art Institute of Austin; the Art Institute of Charleston; the Art Institute of Charlotte; the Art Institute of Colorado; the Art Institute of Dallas; the Art Institute of Fort Worth; the Art Institute of Houston; the Art Institute of Houston—North; the Art Institute of Las Vegas; the Art Institute of Michigan; the Art Institute of Ohio—Cincinnati; the Art Institute of Philadelphia; the Art Institute of Phoenix; the Art Institute of Pittsburgh; the Art Institute of Portland; the Art Institute of Raleigh—Durham; the Art Institute of San Antonio; the Art Institute of Salt Lake City; the Art Institute of Seattle; the Art Institute of Tucson; the Art Institute of Vancouver; the Art Institute of Virginia Beach; the Art Institute of Washington; the Art Institute of Washington—Northern Virginia; the Art Institute of Wisconsin; the Art Institute of York—Pennsylvania; the Art Institutes International—Kansas City; the New England Institute of Art; Argosy University, Atlanta; Argosy University, Dallas; Argosy University, Denver; Argosy University, Honolulu; Argosy University, Phoenix; Argosy University, Salt Lake City; Argosy University, Washington D.C.; South University/Savannah; South University/Montgomery; South University/Columbia; South University/Richmond; South University/Novi; South University/Virginia Beach; Brown Mackie College—Akron; Brown Mackie College—Cincinnati; Brown Mackie College—Findlay; Brown Mackie College—Northern Kentucky; Brown Mackie College—North Canton; Brown Mackie College—Atlanta; Brown Mackie College—Kansas City; Brown Mackie College—Salina; Brown Mackie College—Louisville; Brown Mackie College—Hopkinsville; Brown Mackie College—Tucson; Brown Mackie College—Boise; Brown Mackie College—Tulsa; Brown Mackie College—Phoenix; Brown Mackie College—Greenville; Brown Mackie College—St. Louis; Brown Mackie College—San Antonio, Defendants.
• Court: U.S. District Court — Western District of Pennsylvania

871 F.Supp.2d 433

UNITED STATES of America, and the States of California, Florida, Illinois, Indiana, Massachusetts, Minnesota, Montana, New Jersey, New Mexico, New York, and Tennessee, and the District of Columbia, each ex rel. Lynntoya Washington and Michael T. Mahoney, Plaintiffs,

v.EDUCATION MANAGEMENT CORPORATION; Education Management Holdings LLC; Education Management LLC; the Art Institute of California—Hollywood; the Art Institute of California—Inland Empire; the Art Institute of California—Los Angeles; the Art Institute of California—Orange County; the Art Institute of California—Sacramento; the Art Institute of California—San Diego; the Art Institute of California—San Francisco; the Art Institute of California—Sunnyvale; Argosy University, Inland Empire; Argosy University, Orange County; Argosy University, San Diego; Argosy University, San Francisco; Argosy University, Santa Monica; Western State University College of Law; the Art Institute of Fort Lauderdale; the Art Institute of Jacksonville; the Art Institute of Tampa; Miami International University of Art & Design; Argosy University, Sarasota; Argosy University, Tampa; South University/West Palm Beach; South University/Tampa; Brown Mackie College—Miami; the Illinois Institute of Art—Chicago; the Illinois Institute of Art—Schaumberg; Argosy University, Chicago; Argosy University, Schaumburg; Brown Mackie College—Moline; the Art Institute of Indianapolis; Brown Mackie College—Merrillville; Brown Mackie College—Michigan City; Brown Mackie College—Fort Wayne; Brown Mackie College—South Bend; Brown Mackie College—Indianapolis; the Art Institutes International Minnesota; Argosy University, Twin Cities; Brown Mackie College—Albuquerque; the Art Institute of New York City; the Art Institute of Tennessee—Nashville; Argosy University, Nashville; the Art Institute of Atlanta; the Art Institute of Atlanta—Decatur; the Art Institute of Austin; the Art Institute of Charleston; the Art Institute of Charlotte; the Art Institute of Colorado; the Art Institute of Dallas; the Art Institute of Fort Worth; the Art Institute of Houston; the Art Institute of Houston—North; the Art Institute of Las Vegas; the Art Institute of Michigan; the Art Institute of Ohio—Cincinnati; the Art Institute of Philadelphia; the Art Institute of Phoenix; the Art Institute of Pittsburgh; the Art Institute of Portland; the Art Institute of Raleigh—Durham; the Art Institute of San Antonio; the Art Institute of Salt Lake City; the Art Institute of Seattle; the Art Institute of Tucson; the Art Institute of Vancouver; the Art Institute of Virginia Beach; the Art Institute of Washington; the Art Institute of Washington—Northern Virginia; the Art Institute of Wisconsin; the Art Institute of York—Pennsylvania; the Art Institutes International—Kansas City; the New England Institute of Art; Argosy University, Atlanta; Argosy University, Dallas; Argosy University, Denver; Argosy University, Honolulu; Argosy University, Phoenix; Argosy University, Salt Lake City; Argosy University, Washington D.C.; South University/Savannah; South University/Montgomery; South University/Columbia; South University/Richmond; South University/Novi; South University/Virginia Beach; Brown Mackie College—Akron; Brown Mackie College—Cincinnati; Brown Mackie College—Findlay; Brown Mackie College—Northern Kentucky; Brown Mackie College—North Canton; Brown Mackie College—Atlanta; Brown Mackie College—Kansas City; Brown Mackie College—Salina; Brown Mackie College—Louisville; Brown Mackie College—Hopkinsville; Brown Mackie College—Tucson; Brown Mackie College—Boise; Brown Mackie College—Tulsa; Brown Mackie College—Phoenix; Brown Mackie College—Greenville; Brown Mackie College—St. Louis; Brown Mackie College—San Antonio, Defendants.

Civil Action No. 07–CV–461.

United States District Court,

W.D. Pennsylvania.

May 11, 2012.

Christy C. Wiegand, Paul E. Skirtich, Michael A. Comber, United States Attorney's Office, Harry P. Litman, Litman Law Firm, Thomas J. Farrell, Valerie M. Antonette, Reich, Alexander, Reisinger & Farrell, LLC, Trent A. Echard, H. Yale Gutnick, Strassburger McKenna Gutnick & Gefsky, Pittsburgh, PA, Elizabeth C. Nelson, Kate E. Pomper, Jennifer M. Zlotow, Office of the Illinois Attorney General, Courtney R. Baron, David J. Chizewer, William C. Meyers, Goldberg Kohn Ltd., Chicago, IL, Rene D. Harrod, Office of the Attorney General, Ft. Lauderdale, FL, Stuart W. Cobb, Office of the Attorney General of Kentucky, Frankfort, KY, Kenny V. Nguyen, California Attorney General's Office, Sacramento, CA, Patricia O. Erdmann, Corinne W. Gilchrist, State of Indiana Office of the Attorney General, Indianapolis, IN, George S. Bell, Tennessee Attorney General's Office, Nashville, TN, Jane Drummey, Office of Attorney General of the District Of Columbia, Washington, DC, for Plaintiffs.

Charles H. Moellenberg, Jr., Laura E. Ellsworth, Scott W. Brady, Thomas S. Jones, Amy K. Pohl, Daniel E. Reidy, Jones Day, Pittsburgh, PA, Nikesh Jindal, Timothy J. Hatch, Gibson Dunn & Crutcher, Washington, DC, for Defendants.

MEMORANDUM OPINION AND ORDER OF COURT

TERRENCE F. McVERRY, District Judge.

Pending before the Court are DEFENDANTS' MOTION TO DISMISS PURSUANT TO FEDERAL RULES OF CIVIL PROCEDURE 12(b)(1) AND 12(b)(6), AND, IN THE ALTERNATIVE, MOTION TO STRIKE UNDER FEDERAL RULE OF CIVIL PROCEDURE 12(f) (Document No. 145) and DEFENDANTS' MOTION TO DISMISS COMPLAINT IN INTERVENTION BY THE DISTRICT OF COLUMBIA (Document No. 165). Defendants (collectively “EDMC”) filed briefs in support of each motion. The United States, Intervenor States and Relators, and the District of Columbia filed briefs in opposition; EDMC filed a consolidated reply brief; Plaintiffs filed a joint sur-reply brief; and EDMC filed a sur-sur-reply brief. Plaintiffs also filed a notice of supplemental authority, to which EDMC responded. Needless to say, the motions are now ripe for disposition. The Court commends counsel for the high quality of their written advocacy.

Factual Background

EDMC is one of the largest providers of post-high school education in America and operates over one hundred schools. Plaintiffs allege that EDMC paid incentive compensation to the employees who recruit new students to attend their numerous affiliated schools, referred to as Associate or Assistant Directors of Admissions (“ADAs”), in violation of Title IV of the Higher Education Act of 1965 (“HEA”), 20 U.S.C. § 1070 et seq., and EDMC's Program Participation Agreements (“PPA”). As a result of EDMC's alleged violation of the “Incentive Compensation Ban,” Plaintiffs contend that EDMC falsely represented its eligibility to receive federal student aid funds. Plaintiffs aver that since July 1, 2003, EDMC and/or students enrolled in EDMC schools have wrongfully obtained over eleven billion dollars ($11,000,000,000) in federal student aid funds and millions more in state funds. Plaintiffs seek treble damages under the federal and state False Claims Acts and have also asserted a number of common law claims.

Governmental financial support of students, beginning with the GI Bill, ¹ has been widely viewed as an enlightened social policy and investment in the nation's future. As explained in In re Brunner, 46 B.R. 752, 756 (S.D.N.Y.1985): “[T]hose whose past work or credit record might foreclose them from the commercial loan market are able to obtain credit at subsidized rates to advance their education. Those who might obtain loans only at exorbitantrates are similarly able to obtain low cost, deferred loans .... it is undeniable that guaranteed student loans have extended higher education to thousands who would otherwise have been forced to forego college or vocational training.” The government “offers loans at a fixed rate of interest, and it does so almost without regard for creditworthiness. Indeed, because it bases its loan decisions in part on student need, it arguably offers loans selectively to the worst credit risks.” Id. EDMC represents that its students come from traditionally underserved groups, and about half are minorities.

In Association of Accredited Cosmetology Schools v. Alexander, 979 F.2d 859 (D.C.Cir.1992), the Court provided a succinct summary of how the student loan program is structured:

Under Title IV of the Higher Education Act of 1965, students may obtain “Guaranteed Student Loans” (“GSLs”) to pay their post-secondary tuition and expenses. Schools wishing to participate in the GSL program must apply to the Department of Education (“Department”) for certification as “eligible institutions” under the HEA. As one might expect, such certification depends on the schools' satisfaction of several statutory and regulatory requirements. If a school's application is approved, the school must sign a contract with the Department called a “Program Participation Agreement.” In signing the Agreement, the school agrees, inter alia, “to comply with all the relevant program statutes and regulations governing the operation of each Title IV, HEA Program in which it participates.” Program Participation Agreement, at 2. The school also agrees that the Agreement “automatically terminates ... [o]n the date the institution no longer qualifies as an eligible institution.” Id. at 6. Once both parties have signed the Program Participation Agreement, participating lenders are authorized to make GSLs to the school's students. State or non-profit agencies guarantee the repayment of the GSLs. The Department, in turn, “reinsures” the guarantee agencies, meaning that it will pay off a defaulted loan with federal funds after specified collection efforts have proven futile.

Id. at 860 (citations omitted). The risk of defaults on student loans is borne not by the educational institution but by the students and taxpayers, who absorb the cost of any defaults. Id.

Because the schools receive payment in full, there is little economic incentive for them to limit student enrollments. This has led to...