School asks judge to dismiss fraud case

The nation’s largest vocational school chain asked a federal judge here on Monday to dismiss a massive fraud case against it, saying it already had paid the government to settle similar claims.

Two former University of Phoenix enrollment counselors, Mary Hendow and Julie Hendow, allege that the university, with 180 campuses and more than 310,000 students across the country, violated federal rules by offering incentives to employees, including higher salaries and more benefits, based on the number of students they enrolled.

The suit was filed in 2003 under the so-called qui tam False Claims Act, a statute that permits whistle-blowers to sue on behalf of the government and share in the recovery if the suit is successful.

The suit, if it goes forward, could cost the university many millions in damages. About 80% of Phoenix’s students are on federal financial aid, and the school collects about $2 billion a year from those taxpayer-subsidized students, according to government records.

A June 2005 study by the National Consumer Law Center found that Phoenix’s first-year completion rate for students enrolled in four-year programs was only 7%.

The university urges counselors “to enroll students without reviewing their transcripts to determine their academic qualifications to attend the university,” the suit asserts.

U.S. District Judge Garland E. Burrell has dismissed the suit once, holding that the plaintiffs’ allegations were beyond the scope of the False Claims Act. The U.S. 9th Circuit Court of Appeals reversed that decision, and the U.S. Supreme Court, in April, upheld the appeals court, setting the stage for a trial.

But a few months later, the university filed a motion seeking to have the case dismissed on new grounds: that it already had paid $9.8 million to the U.S. Department of Education to settle allegations similar to those made in the lawsuit -- numerous violations of the regulations prohibiting incentives based solely on enrollment numbers.

The settlement represents an “alternate remedy” for the government and consequently, there is no longer a basis for the suit, university attorney Timothy J. Hatch, of Gibson, Dunn & Crutcher, told Burrell. In support of this point, Hatch noted that Department of Education attorney Jennifer Woodward said the department’s review of Phoenix grew out of the fraud lawsuit.

Hatch said that if the lawsuit were permitted to go forward it would, in essence, give the government two bites at the apple and might lead to an impermissible “double recovery.” Two federal appeals court decisions on the False Claims Act contained language that supported his argument, he said.

But the lawyers for the whistle-blowers and the U.S. Justice Department countered that the settlement explicitly stated that the Department of Education did not have the authority to “waive, compromise, restrict or settle ... any past, present or future violations” by the university of either criminal laws or any action initiated against the school for fraud under the False Claims Act.

They also noted that the settlement made it clear that “sophisticated parties,” after negotiating, did not intend to include the fraud suit in the agreement, attorney Michael Rubin said.

If Phoenix’s position were upheld, Rubin said, it would enable a company to settle an administrative charge lodged by an agency, such as the Department of Education, and simultaneously wipe out a fraud suit against the company. “That cannot be true” because only the Justice Department can resolve a false-claims case, said Rubin, of San Francisco’s Altshuler Berzon.

“A deal is a deal,” Rubin said, adding that the university was acting in bad faith by trying to end the lawsuit.

Rubin also said no defendant in a qui tam suit had ever made the argument being advanced by Phoenix’s attorney, adding that there is no decision by any federal judge upholding the university’s position. “This is a case of first impression,” with significant ramifications that go well beyond this case, Rubin said.

Justice Department lawyer Jay D. Majors agreed. The university’s position “is a classic have-one’s-cake-and-eat-it-too behavior,” he said in a brief. If the judge agreed with that position, “it would permit any defendant to go around the attorney general and settle” a False Claims Act case by “trickery,” the brief states.

Moreover, in court Monday, Majors said that if Phoenix prevailed, it would mean that Justice Department attorneys would have to review every administrative settlement made by every government agency to ensure that it didn’t eviscerate any fraud charges.

“We are not here just for this case,” Majors said. “We are here because a ruling for the defendants would be wide-ranging and debilitating to the government.”

Judge Burrell asked both sides a number of questions but gave no indication of when or how he would rule. Lawyers involved in the case said they expected a swift ruling, based on how he has handled other matters in the case.

henry.weinstein@latimes.com