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Lawsuit against Education Management Corp. Alleges Illegal Recruiter Compensation

Education Management Corporation ("EDMC") operates colleges for profit. More than 130,000 students attend its schools, either online or in office building‑style classrooms. Over the past 11 years, these students have paid EDMC more than $11 billion in tuition payments, funded almost exclusively from loans and grants from the United States government. Goldberg Kohn, along with several other law firms, represent two former employees of EDMC who have accused EDMC of obtaining that money by lying to the government. Goldberg Kohn and the whistleblowers are now assisting the United States Department of Justice, and the Attorney General Offices in five states, to recover the money fraudulently obtained.

The two former employees filed suit against EDMC under the False Claims Act, which allows private citizens who uncover fraud against the government to sue on the government's behalf. In exchange, the private citizens can earn a percentage of the money recovered for the government. The lawsuit against EDMC was filed in 2007.The United States Department of Justice investigated the claims and joined the EDMC lawsuit in April 2011, and subsequently five states joined the lawsuit. The governments and the former employees claim that EDMC knowingly violated legal restrictions on the way it paid the employees who were responsible for signing up students.

Colleges such as EDMC, whose tuition is paid with government funds, cannot legally compensate their employees based on the number of students they enroll. That restriction, known as the Incentive Compensation Ban, arose out of concern that such incentive payments will lead to overaggressive sales techniques, and ultimately to the enrollment of students who are not appropriate for the college and who may not be able to pay back the government loans.

On May 11, 2012, Judge McVerry, who presides over the EDMC lawsuit in the federal court in the Western District of Pennsylvania, found that the two former employees (the "Relators") and the governments had sufficiently alleged an $11 billion corporate‑wide fraud against EDMC based on the alleged violation of the Incentive Compensation Ban.

Under the False Claims Act, companies that knowingly submit false claims to the government, or fail to pay money owed to the government, are liable not only for the illegally obtained/retained funds, but also for treble damages and penalties of $6,000‑$11,000 per false claim.

In determining that the EDMC lawsuit should move forward into the discovery phase, the Court made a few important rulings:

  • A large corporation cannot escape liability for submitting false claims by insulating its highest-level officers from knowledge of the falsity of claims submitted by lower-level subordinates.
  • When a company knowingly violates a condition precedent for participation in a government program, such as the Incentive Compensation Ban, but affirms to the government that the company is in compliance with that condition, the company's subsequent requests for money under such programs are false claims.

The parties will now proceed to exchange documents and take the testimony of witnesses in the discovery phase of the litigation.

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