In a ruling whose consequences could eventually strike a staggering financial blow to the University of Phoenix, the Ninth U.S. Circuit Court of Appeals has reinstated a lawsuit that alleges that the nation’s largest university obtained federal funds under false pretenses.
The complaint, filed in 2003 under the federal False Claims Act, alleges that the university wrongfully obtained a minimum of $3-billion in federal funds during the six years before the lawsuit was filed. Of that, perhaps $1.5-billion is recoverable, said Nancy G. Krop, a lawyer for two former recruiters for the university, who filed the suit. If the university is found liable under the law, it could be ordered to pay up to three times that amount.
“They lied to get the money. That’s the whole case in a nutshell,” Ms. Krop, of Redwood City, Calif., said last week. “A lot of schools were doing it right. The University of Phoenix thought the rules didn’t apply to them.”
The case contends that the university, which is part of the Apollo Group, a publicly traded corporation, paid recruiters on the basis of how many students they could get to enroll. The U.S. Department of Education prohibits institutions from giving “any commission, bonus, or other incentive payment based directly or indirectly on success in securing enrollments.” The university certified that it was in compliance with all federal regulations when it applied for eligibility for Pell Grant funds and other federal money under Title IV of the Higher Education Act.
Unanimous Opinion
Last week’s ruling, by a three-judge panel of the appellate court, reinstates the case after it had been dismissed in 2004 by a U.S. District Court in California on technical grounds. The panel’s unanimous opinion follows a similar ruling last October by the Seventh U.S. Circuit Court of Appeals, which reinstated a case against Oakland City University, a nonprofit Indiana institution, which was also allegedly paying recruiters on a per-capita basis (The Chronicle, October 21, 2005).
Higher-education lawyers said the latest ruling, coupled with the Oakland City decision, could leave many other colleges — whether corporately owned or nonprofit — vulnerable to similar kinds of lawsuits because the decisions expand the grounds under which such suits can be brought.
The Phoenix case will now go back to the lower court for trial. The university could appeal Tuesday’s ruling to the full Ninth Circuit Court or the U.S. Supreme Court. However, the Supreme Court declined to hear an appeal of the Oakland City case (The Chronicle, April 18).
“It’s definitely a defeat for Apollo,” said Jeffrey M. Silber, an analyst who covers education companies at BMO Capital Markets. But Mr. Silber said it was too soon to predict the impact of the ruling because the lawsuit itself could take years to be decided. Apollo has “lost a skirmish, but the war is far from over,” he said.
Terri Bishop, chief communications officer for the Apollo Group, said the decision was “not a finding of misconduct or liability by the company.” She said that on “initial review,” the company believes the opinion “greatly expands the scope of False Claims Act liability beyond what Congress had intended or even what other courts have recognized, and we disagree with it. We are therefore in the process of carefully reviewing the opinion in order to determine our next steps.”
‘Talismanic Significance’
The Ninth Circuit Court’s opinion was resounding in its language overturning the earlier dismissal. It said the lower court had improperly relied on the fact that the University of Phoenix had never given a “certification” of its eligibility for federal funds.
“The university and the district court below have taken our holdings to mean the word ‘certification’ has some paramount and talismanic significance, apparently believing that a palpably false statement does not bring with it False Claims liability, while a palpably false certification will,” Judge Cynthia Holcomb Hall wrote for the court. “This facile distinction would make it all too easy for claimants to evade the law.”
She added that “so long as the statement in question is knowingly false when made, it matters not whether it is a certification, assertion, statement, or secret handshake; False Claims liability can attach.”
The court found that the university could be found liable under two theories of the False Claims Act: false certification, either express or implied, and promissory fraud.
Under the False Claims Act, lawsuits can be brought by the government or by outside parties on behalf of the government. Any money recovered is shared by the government and the plaintiffs. In September 2004, Apollo paid the Department of Education $9.8-million to settle claims raised by a department review of its admissions practices. The company did not admit wrongdoing.
http://chronicle.com Section: Money & Management Volume 53, Issue 4, Page A33
