For-Profit College Chain Can’t Shake Lawsuit

(CN) - Education Management Corp., the nation's second largest operator of for-profit colleges, cannot dismiss claims it lied about its eligibility for federal student financial aid, a federal judge ruled.

Based in Pittsburgh, EDMC offers career programs at 110 campuses in North America; it had nearly 132,000 students as of October 2012, according to its website.

Jason Sobek, who was its associate director of admissions from June 2008 through November 2010, sued the company and its subsidiaries, Education Management LLC, South University LLC dba South University Online, Argosy Education Group dba Argosy University Online, and The Art Institutes International LLC dba The Art Institutes Online.

In the lawsuit, Sobek said the colleges made false claims about their eligibility to receive federal student loan funding, and about (I) accreditation of nursing programs; (II) job placement statistics; (III) tuition costs; (IV) satisfactory academic progress statistics; (V) incentive compensation ban; and (VI) reverse False Claims Act - failing to report students who should have been dropped from school rolls.

The case is related to United States ex rel Washington v. EDMC, but the government has decided to not intervene.

EDMC moved to dismiss, but U.S. Magistrate Judge Cynthia Eddy recommended in October 2012 that the motion be denied for counts I, II and IV but granted for counts III, V and VI.

The parties agreed that count V be dismissed under the "first-filed rule" due to the Washington case, and Sobek conceded that counts III, V and VI should be dismissed.

EDMC objected to Eddy's report, claiming that counts II and IV are analogous to the Medicare marketing regulations at issue in United States ex rel Wilkins v. United Health Group, which the 3rd Circuit held cannot support a claim under the False Claims Act.

U.S. District Judge Terrence McVerry overruled the objections on Friday.

"The court is unable to accept, at the pleading stage, EDMC's contention that the alleged accreditation, job placement and SAP [satisfactory academic progress] misrepresentations are somehow less 'core' or 'material' than the incentive compensation ban," McVerry wrote. "For example, it is certainly plausible that the government would refuse to provide funding for a student to attend a non-accredited nursing program. The court acknowledges EDMC's extensive efforts to draw parallels between the education regulations and the medical marketing regulations at issue in Wilkins. EDMC may be able to avoid liability by showing that the United States would not have refused payment even if it had known of EDMC's alleged violations of the regulations at issue. However, such a defense is fact-intensive and would not justify dismissal at the pleading stage."

McVerry tossed EDMC's claim that regulations governing job placement and satisfactory academic progress reporting contain vague and flexible standards.

"(T)he contention that EDMC complied with and/or did not knowingly violate the standard set forth in the regulations because it implemented 'reasonable' job placement and SAP policies is a fact-intensive defense," McVerry wrote. "Thus, EDMC's contention does not justify dismissal at the pleading stage."

EDMC is to respond by June 14.

Goldman Sachs and Providence Equity Partners acquired EDMC and its 70 schools for $3.4 billion in 2006.

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