A government lawsuit against Downtown-based Education Management Corp., alleging that illegal compensation for recruiters helped the company attract $11 billion in federal student aid since 2003, will continue in a slimmed-down form, a judge decided Friday.
Calling the Department of Justice case against EDMC "massive and complex," U.S. District Judge Terrence F. McVerry said the government provided enough backup, at this stage, for its claim that the company paid recruiters based on the number of students enrolled. He denied EDMC's motion to dismiss the case.
"It is certainly possible that EDMC has properly compensated its [recruiters] in compliance with all government requirements," the judge wrote. He threw out accusations that the recruitment plan as written was illegal, but allowed the government to try to prove that it was implemented in a way that violated law.
"It's clearly a big win for the plaintiffs," said Harry Litman, who represents the two former EDMC employees who launched the case in 2007. "This was a very hard-fought motion to dismiss by EDMC where they staked a lot on saying the case should be thrown out, and the court has kept the case nearly completely intact."
An EDMC representative said in a statement that the firm was "very pleased," saying the judge's decision to allow much of the case to proceed "is not surprising given the lack of facts currently before the court" and the presumption at this stage of litigation that accusations are true. "We believe that the facts will demonstrate that the implementation of EDMC's compensation plan for admissions representatives complied with the law."
The case was started in 2007 by former EDMC employees who said the company paid recruiters solely based on enrollments, which is barred by federal law. The Department of Justice, five states and the District of Columbia joined last year, saying that various government agencies paid for EDMC students whose recruitments were spurred by the compensation plan.
EDMC, with some 150,000 students in 109 schools, countered that it considered enrollments, professionalism, customer service and business practices and ethics in setting compensation.
"Plaintiffs are attempting to 'prove a negative' -- i.e., that the quality factors were not used" in setting recruiter payment, the judge wrote. "It is difficult to plead such a theory with a great degree of particularity, but Plaintiffs have provided a sufficient level of detail."
He noted the government's argument that the compensation plan drove EDMC's explosive enrollment growth in past years, and related four-fold growth in federal student aid, to $2.6 billion in 2010-2011.
Judge McVerry dismissed the District of Columbia's counts. He ruled that EDMC must file a full answer to the accusations in the 5-year-old case by June 11.
"Now the litigation really begins in earnest," said Mr. Litman.
Rich Lord: email@example.com or 412-263-1542. First Published May 12, 2012 12:00 AM