Many of the most dramatic legal stories ever told pit tenacious trial lawyers against the makers of some of the world's most notorious consumer goods - things like cigarettes and asbestos insulation and breast implants. Lately, though, plaintiffs lawyers are laying siege to an industry that doesn't manufacture much of anything at all - except perhaps for some fine French meals and a lot of underemployed graduates.
A class action suit filed four years ago underscores the potential for big payouts. In that case, the California Culinary Academy (CCA), a for-profit, educational institution based in San Francisco, agreed to a $40 million settlement last November after plaintiffs accused the school of misrepresenting its job placement rates, exaggerating its prestige, and falsely suggesting that it had a selective qualifying process when, in fact, it required of its entrants no more than a high school diploma or its equivalent, an interest in cooking, and the ability to pay $46,000 in tuition and fees for the twelve-month program (Amador v. Calif. Culinary Acad.
, San Francisco Super. Ct., No. CGC-07-467710; Adams v. Calif. Culinary Acad.
, San Francisco Super. Ct., No. CGC-08-473866).
"I feel this is analogous to where tobacco litigation was a few years ago," says Ray Gallo, lead counsel in the case. "Tobacco companies won for a long time until someone figured out that they knew things about their product that they weren't telling everybody. And I think that's what these cases may turn out to be."
To be sure, providing a subpar education isn't, by itself, grounds for a lawsuit. But when a school actually starts to lie about what it's offering - that, of course, could be viewed as fraud.
Gallo, of San Rafael, is pressing ahead with two other class actions - both against Le Cordon Bleu College of Culinary Arts in Pasadena, which is owned by the same company that owns CCA: Career Education Corp. (Vasquez v. Calif. School of Culinary Arts Inc.
, No. BC393129 Los Angeles Super. Ct. fourth amended complaint filed Apr. 12, 2011; Banks v. Calif. School of Culinary Arts Inc.
, No. BC459917 Los Angeles Super. Ct. complaint filed Apr. 19, 2011). "These are the kinds of cases that could result in a several hundred million dollar outcome," Gallo ventures.
However, even as Gallo remains focused on cooking schools, other kinds of for-profit schools are also feeling the heat. Consider:
- In August 2010, a class action cross-complaint was filed in San Bernardino County against Westwood Apex, a subsidiary of the for-profit Westwood College on behalf of a 2007 graduate of its Upland campus, who had agreed to pay more than $54,000 for a 34-month program in information technology. The cross-complaint, filed after the school attempted to collect on a student loan, alleges violations of California's consumer-protection laws, charging that Westwood admissions reps misrepresented facts about the total cost of attending the program, the school's accreditation, and its postgraduate job placement rate (Westwood Apex v. Contreras
, No. CIVDS 1007166 (San Bernardino Super. Ct. class action cross-complaint filed Aug. 11, 2010)).
- In August 2011, the California Attorney General joined an $11 billion lawsuit brought by the U.S. Justice Department against Education Management Corporation of Pittsburgh, Pennsylvania, a for-profit company that operates 13 campuses in California under the names Argosy University and the Art Institute of California. The suit accuses Education Management of violating the False Claims Act and illegally paying admissions recruiters based on the number of students they signed up (United States v. Educ. Mgmt. Corp.
, No. 07-CV-461 (W.D. Pa. joint complaint in intervention filed Aug. 8, 2011)).
- Two years ago a team of Bay Area lawyers, including Nancy Krop of Palo Alto and Robert J. Nelson of Lieff Cabraser Heimann & Bernstein, settled a whistleblower suit for $78.5 million. In that case the plaintiffs alleged that recruiters at the University of Phoenix received improper incentive pay and thus violated the federal law that requires separation between enrollment counselors and financial aid staff (United States ex rel. Hendow v. Univ. of Phoenix
, No. 03-CV-457 (E.D. Cal.); 20 USC § 1094 (2) (20); C.F.R. § 668.14(b)(22)(i).)
At the Washington, D.C.-based Association of Private Sector Colleges and Universities, Brian Moran serves as both general counsel and interim CEO and president. And the way he sees it, many of the lawyers attacking his industry are just being opportunistic. "Anytime you have an industry that's growing," he says, "you'll have those who look to benefit from its success. I think some of these lawsuits are an indication of our success. It kind of comes with the territory."
Indeed, many for-profit schools do have deep pockets - particularly those owned by large, publicly traded companies. The Apollo Group, for example, which owns the University of Phoenix and two other for-profit colleges, had net income of more than $521 million last year. And Career Education Corp., which owns the California Culinary Academy, had net income of $55 million.
But for all the talk about greedy lawyers, the industry still has some explaining to do. For one thing, compared to the graduates of other types of postsecondary schools, the students at for-profit colleges are nearly twice as likely to be unemployed after they finish. Moreover, at some of these for-profits the odds of even graduating aren't so good. At public colleges, about 55 percent of the students complete a degree within six years; at private nonprofit schools, the rate is 65 percent. By comparison, in 2008 DeVry University had a graduation rate of 31 percent, and the University of Phoenix, which is the country's largest for-profit college with nearly 400,000 students, saw a graduation rate of just 9 percent, according to a report put out last year by the Education Trust, a Washington, D.C.-based nonprofit advocacy group. (The University of Phoenix insists that the actual graduation rate was 36 percent when part-time and returning students are included.)
The report also noted that for-profit colleges provide "high-cost degree programs that have little chance of leading to high-paying careers, and saddle the most vulnerable students with more debt than they could reasonably pay off." It concluded: "Instead of providing a solid pathway to the middle class, [for-profit colleges] are paving a path into the subbasement of the American economy."
Throughout much of the 20th century,
America's patchwork of small, mostly local for-profit colleges and trade schools was higher education's sleepy backwater. In the 1990s, though, that began to change as big corporations bought more and more of these schools, then strung them together into national networks. By 2008 the sector as a whole enrolled the equivalent of three million full-time students - twice the enrollment in 2004.
One reason for this explosive growth was the economic downturn, which gave hundreds of thousands of suddenly unemployed workers a strong incentive to upgrade their skills. Still, even without the recession, for-profit colleges wouldn't have enjoyed so much growth without the billions of dollars that the federal government has provided in the form of student loans and grants. In fact, during the 2008-09 academic year students at for-profit colleges received $4.3 billion in Pell Grants - four times the total from a decade earlier - and about $20 billion in federally guaranteed student loans. All told, about a quarter of federal student aid now goes to these schools. And since so many of their alumni can't find work after graduation - if they graduate at all - they also account for nearly half of all student loan defaults. (Last year 15 percent of student borrowers who went to for-profit schools defaulted in the first two years of repayment, up from 11.6 percent the previous year.)
The combination of heavy debt burden and high default rates have some comparing the for-profit college boom to the subprime mortgage bubble of just a few years ago. Like subprime mortgage brokers, for-profit colleges rely on easy credit to keep the game going. And as long as government aid keeps pouring in, for-profit colleges have every incentive to attract as many new students as possible.
Just how far some schools will go came to light in an undercover investigation carried out last year by the Government Accountability Office. GAO investigators posed as prospective students applying for admission at 15 for-profit colleges. At several, would-be students were coached to falsify information on federal financial aid applications in order to receive the maximum award. In one recorded conversation, a representative of California-based Westech College - which has campuses in Victorville, Ontario, and Moreno Valley - advised a student to list nonexistent dependents on his federal aid application.
After the GAO's findings came out, the advocacy group Coalition for Educational Success sued the GAO for negligence and malpractice (Coalition for Educ. Success v. United States
, No. 11-CV-00287 (D.D.C. complaint filed Feb. 2, 2011)). The findings also drew the attention of a number of members of Congress - among them, Senator Tom Harkin of Iowa, who declared that the school's abuses went well beyond the misdeeds of "a few rogue recruiters."
A few months later, the U.S. Department of Education issued stricter eligibility rules for for-profit schools in its student loan programs. But, thanks to the efforts of industry lobbyists, those rules won't take effect until 2015. And even then, the DOE doesn't expect more than 5 percent of for-profit college programs to lose their federal aid eligibility. Still, judging from the latest enrollment statistics, it appears that both the bad press and the litigation is taking a toll: At DeVry University new student enrollment declined 25.6 percent for the quarter ended June 30, and it fell 47 percent at Kaplan colleges during the same period.
Stuart Talley, a partner at Kershaw, Cutter & Ratinoff in Sacramento, is handling two whistleblower cases on behalf of current and former employees of for-profit California trade schools. "The scam that goes on in these colleges is pretty much the same in every school," he says. "The counselors will say anything to the students to get them enrolled. One of the [recruiters] told me that their motto was 'Sell the dream, not the school.' So they sell the dream of a high-paying job with security."
Defenders of for-profit colleges acknowledge that some of these schools are less than selective in their admission policies. But they insist that the industry is being painted with overly broad strokes. And, they argue, because for-profit schools educate a disproportionate number of economically disadvantaged students, working adults, and single parents, the amount of debt incurred is bound to be a lot higher than at other institutions. Also, unlike community colleges, for-profit schools aren't publicly subsidized, which means students shoulder more of the cost.
"The for-profit sector serves an incredibly important role in educating a segment of our society that might not otherwise have access to education," says Bill Ojile, chief legal and compliance officer at Alta Colleges Inc. in Denver. "I think the situation we've seen in the last year or so where there's been a lot of negative attention, a lot of trial by anecdote, seems to have at its core a distrust of for-profit schools by policy makers primarily because of the for-profit element."
The stylish four-story building that houses
the California Culinary Academy is nestled in San Francisco's Potrero Hill district. Like so many schools, it's a place for dreaming as well as for learning.
Tacked on a bulletin board inside the academy are handwritten notes about the jobs students dream of landing after graduation. Among their aspirations: "Iron Chef." "Female Iron Chef." "Opening healthy and affordable restaurants around the world." "To be the best culinary chef in California."
What's even more noticeable, though, is the name "Le Cordon Bleu." It's plastered on the walls, and printed on catalogs and promotional materials. It's stenciled on the door of the restaurant that adjoins the academy. It's even emblazoned on the uniforms that students are required to wear.
A mark of distinction, the cachet behind Le Cordon Bleu dates all the way back to an elite 16th-century order of French knights who became known for the sumptuous banquets they gave. The first Cordon Bleu cooking school opened in Paris in 1895, and it soon became one of the finest culinary schools in the world.
CCA's connection to all this French lore, however, has more to do with marketing than with cooking. In fact, to promote its cooking schools throughout the United States and Canada, CCA's parent company, Career Education Corp., spent millions of dollars a year to license the name from the French company that owns it. Then in 2009 it paid $135 million to purchase the brand name outright for use in North America. A Career Education executive called the acquisition "a core asset essential to the future growth of our Culinary Arts segment."
But in the minds of many CCA students, the distinction between hype and reality is not always so clear. And in the proposed settlement that attorney Gallo negotiated with the school, 8,500 students who attended CCA between 2003 and 2008 are eligible for rebates of up to $20,000 each.
"[Academic officials] have no data whatsoever to suggest that any substantial portion of their graduates ever become chefs," says Gallo. "My personal investigation suggests it may be on the order of 5 percent. The only data the school has about what jobs people get after graduating indicates they get entry-level jobs at $11.50 an hour, which is not a living wage in San Francisco. And it's definitely not a living wage if you have $50,000 in vocational school debt, with an average interest rate of up to 15 percent."
Matt Foist, who attended CCA in 2005 and is part of the class action, says that he and other graduates he knows were unable to find work that paid more than $15 an hour. "If anyone would have told me that it's highly likely I would start in an entry-level position after graduating, I would have never ponied up $46,000," he says. "They hinted around that we'd be making 40 to 50K."
Career Education Corp. denies that it made misrepresentations and says it settled the lawsuit for business reasons. "We feel a lot of this is complaints by students who have struggled and who are laying blame at the foot of the school," says outside counsel Stuart Richter of Katten Muchin Rosenman. "We counsel our admission representatives not to make representations about what an individual student may achieve after graduation. It's a very personal outcome for each student. The fact is that the education afforded to our students puts them on a path to potentially becoming a chef. As with many professions, education affords opportunity but is no guarantee of success in the field."
Richter adds: "The newspapers are flooded with stories of schools in all sectors - including Ivy League and law schools - whose value proposition is being questioned in today's challenging economy. You may be the most brilliant student in the world coming out of Harvard, but if you don't interview well you may have a tough time getting a job."
Still, as part of the settlement, CCA did agree to make changes to its catalog and disclosure forms. One form will now state that the school's job placement rates "may include entry level jobs that pay entry level wages, including jobs that nonculinary-school graduates may be able to obtain," such as prep cook, line cook, and waiter. CCA also agreed to stop claiming that it has a "selective admissions" policy.
Alta College, which operates for-profit colleges
in six states, including California, currently faces four class action complaints. One of them is the San Bernardino County suit on behalf of Westwood College graduate Jesus Contreras, who defaulted on his loan. The lead plaintiffs attorneys in the case are Timothy Blood and Leslie Hurst from the San Diego firm of Blood Hurst & O'Reardon. The other suits include a nationwide federal class action against Alta filed in Denver (Bernal v. Burnett
, No. 10-1917 (D. Colo. complaint filed Aug. 11, 2010)), and state class actions in Texas (Walker v. Alta Colleges Inc.
, No. D-1-GN-09-003854 (Travis Cnty. Dist. Ct. complaint filed Nov. 9, 2009); Walker v. Alta Colleges Inc.
, No. A-09-CA-0894 (W.D. Tex.) (case removed to Fed'l Court - class certification denied Dec. 29, 2010)) and Wisconsin (Willes v. Alta Colleges Inc.
, No. 10-CV-1443 (Rock Cnty. Circuit Ct. complaint filed July 7, 2010; removed to Fed'l Court as No. 10-CV-00441 (W.D. Wis.))).
Attorneys for Alta are fighting back vigorously, buoyed by the U.S. Supreme Court's recent pro-arbitration, anti-class action ruling in AT&T Mobility LLC v. Concepcion
(131 S.Ct. 1740 (2011)). Less than two months after the high court's decision, the court in the Colorado litigation ordered individual arbitration. The Wisconsin case seems headed in the same direction: A motion to compel individual arbitration is pending. In Texas, the court denied class certification on the grounds that the named representative did not qualify under Rule 23 of the Federal Rules of Civil Procedure and then denied a motion to substitute a new representative; the plaintiffs have appealed to the Fifth Circuit.
cross-complaint against Alta alleges that Westwood and its top executives "engage in unlawful, unfair, and fraudulent practices at every step of the process from recruitment to postgraduate job placement." Admissions representatives, it continues, "are trained to provide uniform misrepresentations" about the cost of attending the college, school accreditation, and the transferability of credits. For signing up new students, admission staffers receive incentive bonuses such as trips to CancÃºn. One exhibit shows the company's training materials, which urge admissions staffers to make 500 calls per week to develop new leads. "Remember, the beginning process is ... a numbers game!" reads one company handout.
It doesn't hurt the plaintiffs' case, either, that Westwood College's campus in Dallas was one of the sites where GAO investigators uncovered shady recruitment practices. In one instance, when a GAO investigator posing as a student told a Westwood financial aid representative that he had $250,000 in savings, the school's representative reportedly stated that it was none of the government's business how much money the applicant had in the bank.
According to Alta officials, Westwood has implemented several reforms over the past year, including doing away with incentive-based pay for admissions counselors, and they intend to add a third-party verification program to ensure that students are being given correct information. But that hasn't stopped Alta from filing a defamation suit against one of the law firms representing plaintiffs in the case, Florida-based James, Hoyer, Newcomer & Smiljanich (Westwood College Inc. v. Estes
, No. 2010CV2196 (Colo. Dist. Ct., Cnty. of Denver filed Mar. 17, 2010), action stayed by Colorado Supreme Court pending review of First Amendment issues, Westwood College Inc. v. Estes
, No. 2011SA186 (Colo. Sup. Ct. order issued Jul. 19, 2011)).
On its website Westwood calls James Hoyer a "predatory law firm." And lawyers for the college are particularly steamed by how aggressively James Hoyer has used social media to publicize its lawsuits against the for-profit institution. They cite, for example, a Facebook group page that the firm created entitled "Warnings about Westwood College!" that has drawn nearly 400 members. The firm also maintains a website, http://westwoodscammed.me/, on which Westwood students and former employees can share their stories with the firm. Westwood officials even accuse the firm of having an attorney send out unsolicited tweets to damage the college's reputation and help pressure the school into a settlement.
"Lawyers have ethical prohibitions against making unsolicited contacts with individuals, and that should apply to Twitter as well," says Alta's Bill Ojile. "We just thought that was over-the-top offensive."
James Hoyer's lawyers deny that they did anything unethical. "We weren't soliciting clients," says senior partner Chris Hoyer. "We already had clients. We're looking for victims and witnesses and ex-employees. That's what lawyers are supposed to do. You're supposed to find as many people as you can with information. Courts go crazy if you bring fraud cases without particularity."
If ever there were any lingering doubts
about the allure of the for-profit college sector, they should have been eliminated six years ago when real estate mogul turned reality TV star Donald Trump created Trump University - an enterprise that promised to impart a lifetime of business savvy to any student willing to pay up to $35,000. With characteristic bravado, Trump assured prospective students that his handpicked team of instructors would "teach you better than the best business school."
The classes at Trump University aren't stuffy lectures led by pipe-smoking academics. Rather, they're freewheeling real estate seminars held in hotel meeting rooms that take on the flavor of a high school pep rally. The sessions feature Chairman Mao-size banners of The Donald prominently displayed at the front of the room, blaring motivational music like the O'Jays song "For the Love of Money," and chanted sales slogans.
But according to a class action filed in San Diego in April 2010, Trump University is a fraud, with promised one-year apprenticeships that are little more than three-day seminars, and mentorships that take students on field trips to places like Home Depot (Makaeff v. Trump University
, No. 10-CV0940 (S.D. Cal. complaint filed Apr. 30, 2010)).
"Trump University definitely preyed on people who are unemployed or who are gullible," says lead plaintiffs attorney Amber Eck of the San Diego law firm Zeldes & Haeggquist. "I've talked to clients in this case who have lost their house or their savings over paying for the courses. It's affected their health and emotional status. A lot of them tell me over and over again, 'I don't know how Donald Trump sleeps at night.' "
The court did not seem overly concerned about Mr. Trump's sleeping habits. His motion to be relieved from personally appearing at a court-ordered early neutral evaluation conference was denied. The magistrate judge overseeing the ADR process, hopeful that the case could be resolved at an early stage, ordered Trump to appear along with all four of the named plaintiffs.
The class action isn't the only serious problem Trump University has right now. In fact, the school faces a string of consumer complaints, reprimands from state regulators and the Better Business Bureau (which gave Trump University a D-minus rating), and an investigation launched by the New York attorney general's office into possible illegal business practices. The school, which is not accredited and offers no degrees or college credits, changed its name to the Trump Entrepreneur Initiative in May 2010 in response to complaints by New York education officials that it was misleading - if not illegal - for the institution to call itself a university.
Of course, the lawyers defending Trump are aggressively disputing these allegations. "As one lawyer who's working for us said to me, 'Anyone with $350 and a typewriter can file a complaint," says George Sorial, managing director and assistant general counsel for The Trump Organization. "The case has absolutely no merit. None of the allegations in the complaint are rooted in fact ... and, quite frankly, they're absolutely ridiculous. I'm absolutely confident that we will prevail in this matter."
Even so, at this writing the school has stopped accepting new students and suspended the seminars, although the online and one-to-one mentoring programs continue, according to Sorial.
When Trump University's traveling real estate seminars blew into a town they made plenty of noise. Newspaper and direct mail ads and email solicitations touted the seminars weeks in advance, with big headlines asking: "Are you interested in being mentored by Donald Trump?" One ad, written in Trump's voice, told prospective students that his school was home to "some of the finest instructors in the world, professors from great universities, the finest business schools and also friends of mine from the world of business."
But that was blatantly false, according to the class action complaint.
"He says these are his hand-picked experts, and we allege that they're not," says Eck. "In many cases, Donald Trump didn't even know who these people are, and he definitely did not pick them. And in a lot of cases, they were not even real estate experts, they were just commissioned salespeople who were hired for [their] ability to make sales.
"The three-day session really was a joke," she adds. "They drive around with students and look at properties, but it's nothing more than what a real estate agent would do with you for free. They'll say, 'Oh, here's a house, looks like you could fix it up, here's another house.' They do that for two days. And then on the third day they take you to a Home Depot and show you very general things like where the kitchen aisle is if you want to do a remodel. It's ludicrous."
Perhaps. But in Trump's defense Sorial points to student surveys that he says show extremely high approval ratings for the school. "We're talking about numbers in the 97 to 98 percent range of those that filled out our survey. You go to any school," he adds, "whether it's Harvard, Yale, MIT, or Stanford, and you interview 11,000 students, you're inevitably going to have a handful who were not happy with the quality of their education or can't get the job they want after graduation. I challenge any academic institution to beat a 97 or 98 percent customer satisfaction rate."
Indeed, even one of the students listed in Eck's class action - a woman named Tarla Makaeff who is now the target of a defamation countersuit by the school - described her experience with Trump U. as "amazing" and rated all ten facets of the program "excellent" on an evaluation form after her three-day mentorship. "Her own words speak for themselves," says Sorial.
Speaking for herself, Makaeff - who paid $34,995 for the six-month "Trump Gold Elite" program - doesn't deny that she gave the Trump seminars a favorable rating, but she says she felt pressured to do so. "They were standing there right over my nose as I filled [the evaluations] out. They put fear in you. You don't want to say anything bad about them after you've given them all this money."
As contentious as this litigation is, though, both sides can at least agree that the Trump name has everything to do with what's happened here. On the plaintiffs' side, Eck says her clients put aside misgivings about laying down so much money because they trusted what Trump stood for. And on Trump's side the lawyers say it's the name that's made the school such a juicy target.
"Let's be honest," says Sorial. "This is purely a shakedown."
For all the complaints about for-profit colleges
in recent years, they hardly come into court defenseless. And, even when trial lawyers win big, it's only after a long, hard slog.
The first students to lend their names to a class action against Trump University now understand this as well as anyone. Since they attended the seminars, Donald Trump has hosted seven seasons of The Apprentice
and The Celebrity Apprentice
, put his resort company into bankruptcy, acquired a star on the Hollywood Walk of Fame, hinted that he'd run for president, announced that he wouldn't run for president, and then declared he wouldn't rule out a presidential bid sometime in the future. And discovery in the case hasn't even begun.
"Smart class action attorneys have been turning down these kinds of cases for years," says Gallo, attorney for the culinary students in San Francisco. "When an experienced class action lawyer looks at these cases, he thinks, 'There are too many ways I can fail to get class certification. ... We did $5 million worth of work to get the settlement we got in the CCA case." And if it's approved, he adds, the plaintiffs will have waited eight years for a payout.
Gallo continues: "I've gotten calls from people saying, 'Is there going to be any money anytime soon? I'm about to be homeless.' You can't get an apartment if your credit's shot, unless you have cash. And they don't have credit because they can't service their loans."
Doubtless, rich educational experiences can be had at for-profit colleges - but not always in the way their students could have imagined.
Correction: In an earlier version of this article, Thomas Jefferson School of Law in San Diego was incorrectly listed among several for-profit institutions. TJSL is nonprofit and fully accredited by the ABA.
California Lawyer regrets the error.
Tom McNichol is a San Francisco-based writer.