The False Claims Act and For-Profit Colleges: Risks and Recent Cases

The False Claims Act (FCA) has become an important tool for regulating the for-profit college industry. This law allows private citizens to file lawsuits on behalf of the government against companies that commit fraud against the government. In recent years, FCA cases have been increasingly used to go after for-profit colleges that make false or misleading claims to receive federal student aid funds.

Background on the False Claims Act

The FCA, also known as the “Lincoln Law”, was originally passed in 1863 to combat fraud by suppliers of the Union Army during the Civil War. The law imposes liability on any person or company that knowingly submits false claims to the government in order to receive payments from government programs. There is a “qui tam” provision that allows private citizens, known as “relators”, to file suit on behalf of the government and receive a portion of any recovered damages.

Over the years, the FCA has become one of the government’s primary tools for combatting healthcare fraud. More recently, it has been applied with increasing frequency to for-profit higher education. The U.S. Department of Education disburses tens of billions of dollars in federal student aid annually, which requires colleges and universities to sign Program Participation Agreements certifying compliance with regulations. If schools are found to have made false certifications about their programs or recruitment tactics, they can face substantial FCA liability.

Multi-Million Dollar False Claims Act Settlements

One of the most high-profile FCA cases against a for-profit college came in 2015 when Education Management Corporation (EDMC) agreed to pay $95.5 million to resolve allegations it illegally paid recruiters based on the number of students enrolled. EDMC is among the country’s largest for-profit college chains, operating schools like Argosy University and The Art Institutes. The lawsuit was originally filed by a former EDMC employee under the FCA qui tam provisions.

The U.S. Department of Justice joined this whistleblower suit and accused EDMC of violating the ban on incentive compensation included in schools’ Program Participation Agreements. The company did not admit wrongdoing but agreed to reform its compensation practices. This remains the largest FCA settlement ever involving false claims made to the Department of Education.

In 2019, Career Education Corp. paid $493 million to settle FCA allegations of misleading prospective students about job placement rates and expected salaries after graduation. And in 2020, the University of Phoenix agreed to a $191 million settlement with the FTC over deceptive advertising targeted to military and veteran students.

Strategies for Mitigating Legal Risks

The best way for for-profit schools to avoid legal liability is simply to avoid making misrepresentations during student recruitment and enrollment. However, there are additional steps institutions can take to mitigate risks:

• Implement strong compliance programs to monitor marketing claims and recruiter statements
• Conduct regular audits of job placement rates and graduate salary reports
• Proactively address any problematic compensation incentives for admissions staff
• Provide thorough disclosures about program costs, graduation rates, accreditation status, credit transfer policies, etc.
• Maintain detailed recordkeeping to document compliance efforts
• Purchase insurance to help cover defense costs or settlements

Schools should also train admissions and financial aid personnel thoroughly on legal compliance issues. Establishing an ethical, student-focused institutional culture can go a long way in preventing the types of systemic abuses that lead to FCA lawsuits.

What This Means for Students

Prospective and current students should carefully research for-profit colleges before enrolling or taking out loans. Be skeptical of aggressive marketing claims about guaranteed jobs or salaries after graduation. Try to speak with independent graduates not hand-picked by the school to get candid perspectives on their career outcomes after finishing.

The FCA offers students another layer of protection against predatory recruiting tactics at for-profit institutions. If students have evidence their school made systematic misrepresentations to promote enrollment or maintain access to federal aid, they can file an FCA qui tam lawsuit or provide that information to regulators. Students can help prevent schools from taking advantage of other students down the road.

Students should also pay close attention to any disclosures or warning signs from oversight bodies. Pay attention if an accreditor has placed an institution on probation, or the Department of Education has required the posting of surety bonds. Though not definitive evidence of wrongdoing, these actions can indicate heightened risks for students.