Ninth Circuit reverses dismissal of suit against for-profit college

by Ben Vernia | August 29th, 2011

On August 12, the Ninth Circuit Court of Appeals, in U.S. ex rel. Lee v. Corinthian Colleges, Inc., reversed the district court’s dismissal of the suit, finding that although the relators’ complaint was deficient in some respects, amendment would not be futile.

The case was brought by two whistleblowers who were recruiters for the for-profit college, against the company, its board of directors, and outside accountant (Ernst & Young). They alleged that the company terminated recruiters and paid salary increases in violation of the Higher Education Act’s ban on incentive compensation. Ruling in the defendants’ motion to dismiss, the district court held that the compensation plan satisfied the Department of Education’s safe harbor, and denied leave to amend.

The Ninth Circuit reversed and remanded the case, ruling:

  • The relator’s allegation that they were “disciplined, demoted or terminated” because of low recruitment numbers did not violate the Act, which banned incentive compensation, not other employment actions relating to numbers;
  • There was inadequate evidence of the role of recruitment numbers in the college’s incentive compensation system, so that the complaint fell short of stating a plausible claim for relief;
  • Leave to amend should have been granted, because additional facts were conceivable to support the relators’ claim, including the allegation in their brief that meeting enrollment quotas was the basis on which salary increases were awarded;
  • The relators’ complaint failed to allege sufficient facts to support their allegation that the company acted with scienter, but this could be cured through an amended complaint:

    Relators repeatedly argue that Corinthian certified compliance with the HEA while knowing that it was in fact compensating recruiters based solely on their recruitment numbers. Relators further describe how the federal government dispenses HEA funds to educational institutions in accordance with the number of students they enroll and the degree to which Corinthian depends on such funding. These facts, if formally alleged, would certainly support an inference that Corinthian acted with fraudulent intent and did not, in good faith, rely upon the Safe Harbor provision.

  • The relators’ allegations against the board members were inadequate, but amendment was not futile and leave should have been granted;
  • Likewise, if the relators amended their complaint to adequately state a claim against the college, then their allegations against Ernst & Young would satisfy the pleading requirements.

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