| Contingencies | 11. CONTINGENCIES
An accrual for estimated legal fees and settlements of $1.9 million
and $2.3 million at June 30, 2015 and December 31, 2014,
respectively, is presented within other current liabilities on our
condensed consolidated balance sheets.
We record a liability when we believe that it is both probable that
a loss will be incurred and the amount of loss can be reasonably
estimated. We evaluate, at least quarterly, developments in our
legal matters that could affect the amount of liability that was
previously accrued, and make adjustments as appropriate.
Significant judgment is required to determine both probability and
the estimated amount. We may be unable to estimate a possible loss
or range of possible loss due to various reasons, including, among
others: (1) if the damages sought are indeterminate;
(2) if the proceedings are in early stages; (3) if there
is uncertainty as to the outcome of pending appeals, motions, or
settlements; (4) if there are significant factual issues to be
determined or resolved; and (5) if there are novel or
unsettled legal theories presented. In such instances, there is
considerable uncertainty regarding the ultimate resolution of such
matters, including a possible eventual loss, if any.
Litigation
We are, or were, a party to the following legal proceedings that we
consider to be outside the scope of ordinary routine litigation
incidental to our business. Due to the inherent uncertainties of
litigation, we cannot predict the ultimate outcome of these
matters. An unfavorable outcome of any one or more of these matters
could have a material adverse impact on our business, results of
operations, cash flows and financial position.
Student Litigation
Enea, et al. v. Career Education Corporation, California
Culinary Academy, Inc., SLM Corporation, and Sallie Mae,
Inc.
Defendants filed a motion to dismiss and to strike class action
allegations on October 31, 2013. A hearing on the motions was
conducted on March 14, 2014. Thereafter, the Court issued two
separate orders granting the motion to strike the class allegations
and the motion to dismiss without leave to amend. Plaintiffs filed
a motion seeking leave to file a third amended complaint and/or for
reconsideration of the Court’s orders. On May 9, 2014,
the Court denied plaintiffs’ motion to reconsider its order
striking the class allegations and granted plaintiffs leave to file
a third amended complaint as to some, but not all, of
plaintiffs’ claims. On May 15, 2014, plaintiffs appealed
the Court’s ruling with respect to the motion to strike the
class allegations. The Court has stayed the case pending a ruling
on the appeal.
Because of the many questions of fact and law that may arise in the
future, the outcome of this legal proceeding is uncertain at this
point. Based on information available to us at present, we cannot
reasonably estimate a range of potential loss, if any, for this
action because, among other things, our potential liability depends
on whether a class is certified and, if so, the composition and
size of any such class, as well as on an assessment of the
appropriate measure of damages if we were to be found liable.
Accordingly, we have not recognized any liability associated with
this action.
Surrett, et al. v. Western Culinary Institute, Ltd. and Career
Education Corporation.
Plaintiffs filed a fifth amended complaint on
December 7, 2010, which included individual and class
allegations by Nathan Surrett. Class notice was sent on
April 22, 2011, and the opt-out period expired on
June 20, 2011. The class consisted of approximately 2,600
members. They are seeking tuition refunds, interest and certain
fees paid in connection with their enrollment at WCI.
On May 23, 2012, WCI filed a motion to compel arbitration of
claims by 1,062 individual class members who signed enrollment
agreements containing express class action waivers. The Court
issued an Order denying the motion on July 27, 2012. On
August 6, 2012, WCI filed an appeal from the Court’s
Order and on August 30, 2012, the Court of Appeals issued an
Order granting WCI’s motion to compel the trial court to
cease exercising jurisdiction in the case. The oral argument on the
appeal was heard on May 9, 2014 and we are awaiting the
Court’s decision. All proceedings with the trial court have
been stayed pending the outcome of the appeal.
Because of the many questions of fact and law that have already
arisen and that may arise in the future, the outcome of this legal
proceeding is uncertain at this point. Based on information
available to us at present, we cannot reasonably estimate a range
of potential loss, if any, for this action because of the inherent
difficulty in assessing the appropriate measure of damages and the
number of class members who might be entitled to recover damages,
if we were to be found liable. Accordingly, we have not recognized
any liability associated with this action.
False Claims Act
United States of America, ex rel. Melissa Simms Powell, et al.
v. American InterContinental University, Inc., a Georgia
Corporation, Career Education Corp., a Delaware Corporation and
John Doe Nos. 1-100. Kellogg Brown &
Root Servs., Inc. v. U.S. ex rel. Carter
Because of the many questions of fact and law that may arise on
appeal, the outcome of this legal proceeding is uncertain at this
point. Based on information available to us at present, we cannot
reasonably estimate a range of potential loss, if any, for this
action because the complaint does not seek a specified amount of
damages and it is unclear how damages would be calculated, if we
were to be found liable. Moreover, the case presents novel legal
issues. Accordingly, we have not recognized any liability
associated with this action.
United States of America, ex rel. Brent M. Nelson v. Career
Education Corporation, Sanford-Brown, Ltd., and Ultrasound
Technical Services, Inc.
Because of the many questions of fact and law that may arise on
appeal, the outcome of this legal proceeding is uncertain at this
point. Based on information available to us at present, we cannot
reasonably estimate a range of potential loss, if any, for this
action because the complaint does not seek a specified amount of
damages and it is unclear how damages would be calculated, if we
were to be found liable. Accordingly, we have not recognized any
liability associated with this action.
United States of America, ex rel. Ann Marie Rega v. Career
Education Corporation, et al.
Because the matter is in its early stages and because of the many
questions of fact and law that may arise, the outcome of this legal
proceeding is uncertain at this point. Based on information
available to us at present, we cannot reasonably estimate a range
of potential loss, if any, for this action because the complaint
does not seek a specified amount of damages and it is unclear how
damages would be calculated, if we were to be found liable.
Moreover, the case presents novel legal issues. Accordingly, we
have not recognized any liability associated with this action.
Employment Litigation
Wilson, et al. v. Career Education Corporation
The case now is on remand to the district court for further
proceedings on the sole question of whether CEC’s termination
of the ARSC Plan violated the implied covenant of good faith and
fair dealing. The parties have completed fact discovery as to the
issue of liability. On March 24, 2015, we filed a motion for
summary judgment. The motion is fully briefed and the parties are
awaiting a ruling from the Court.
Because of the many questions of fact and law that may arise, the
outcome of this legal proceeding is uncertain at this point. Based
on information available to us at present, we cannot reasonably
estimate a range of potential loss, if any, for this action.
Accordingly, we have not recognized any liability associated with
this action.
Other Litigation
In addition to the legal proceedings and other matters described
above, we are also subject to a variety of other claims, lawsuits
and investigations that arise from time to time out of the conduct
of our business, including, but not limited to, claims involving
prospective students, students or graduates, alleged
violations of the Telephone Consumer Protection Act, both
individually and on behalf of a putative class, and routine
employment matters. While we currently believe that such claims,
individually or in aggregate, will not have a material adverse
impact on our financial position, cash flows or results of
operations, these other matters are subject to inherent
uncertainties, and management’s view of these matters may
change in the future. Were an unfavorable final outcome to occur in
any one or more of these matters, there exists the possibility of a
material adverse impact on our business, reputation, financial
position, cash flows, and the results of operations for the period
in which the effect becomes probable and reasonably estimable.
State Investigations
The Attorney General of Connecticut is serving as the point of
contact for inquiries received from the attorneys general of the
following: Arkansas, Arizona, Connecticut, Idaho, Iowa,
Kentucky, Missouri, Nebraska, North Carolina, Oregon, Pennsylvania,
Washington (January 24, 2014); Illinois (December 9, 2011);
Tennessee (February 7, 2014); Hawaii (May 28, 2014 ); New Mexico
(May 2014); Maryland (March 16, 2015); and the District of Columbia
(June 3, 2015) (these 18 attorneys general are collectively
referred to as the “Multi-State AGs”). In addition, the
Company has received inquiries from the attorneys general of
Florida (November 5, 2010), Massachusetts (September 27, 2012),
Colorado (August 27, 2013) and Minnesota (September 18, 2014). The
inquiries are civil investigative demands or subpoenas which relate
to the investigation by the attorneys general of whether the
Company and its schools have complied with certain state consumer
protection laws, and generally focus on the Company’s
practices relating to the recruitment of students, graduate
placement statistics, graduate certification and licensing results
and student lending activities, among other matters. Depending on
the state, the documents and information sought by the attorneys
general in connection with their investigations cover time periods
as early as 2006 to the present. The Company intends to cooperate
with the states involved with a view towards resolving these
inquiries as promptly as possible. In this regard, over the past
several months the Company has participated in several meetings
with representatives of the Multi-State AGs about the
Company’s business and to engage in a dialogue towards a
resolution of these inquiries.
We cannot predict the scope, duration or outcome of these attorney
general investigations. At the conclusion of any of these
matters, the Company or certain of its schools may be subject to
claims of failure to comply with state laws or regulations and may
be required to pay significant financial penalties and/or curtail
or modify their operations. Other state attorneys general may also
initiate inquiries into the Company or its schools. If any of the
foregoing occurs, our business, reputation, financial position,
cash flows and results of operations could be materially adversely
affected. Based on information available to us at present, we
cannot reasonably estimate a range of potential monetary or
non-monetary impact these investigations might have on the Company
because it is uncertain what remedies, if any, these regulators
might ultimately seek in connection with these investigations.
In addition to the aforementioned inquiries, from time to time, we
receive informal requests from state Attorneys General and other
government agencies relating to specific complaints they have
received from students or former students which seek information
about the student, our programs, and other matters relating to our
activities in the relevant state. These requests can be broad
and time consuming to respond to, and there is a risk that they
could expand and/or lead to a formal inquiry or investigation into
our practices in a particular state.
Regulatory Matters
ED Inquiry and HCM1 Status
In December 2011, the U.S. Department of Education
(“ED”) advised the Company that it is conducting an
inquiry concerning possible violations of ED misrepresentation
regulations related to placement rates reported by certain of the
Company’s institutions to accrediting bodies, students and
potential students. This inquiry stems from the Company’s
self-reporting to ED of its internal investigation into student
placement determination practices at the Company’s previous
Health Education segment campuses and review of placement
determination practices at all of the Company’s other
domestic campuses in 2011. The Company has been cooperating with ED
in connection with this inquiry. If ED determines that the Company
or any of its institutions violated ED misrepresentation
regulations with regard to the publication or reporting of
placement rates or other disclosures to students or prospective
students or finds any other basis in the materials we are
providing, ED may revoke, limit, suspend, delay or deny the
institution’s or all of the Company’s institutions
Title IV eligibility, or impose fines. In addition, a majority of
the Company’s institutions are currently in the process of
seeking recertification from ED to participate in Title IV
Programs. We cannot predict whether, or to what extent, ED’s
inquiry might impact this recertification process.
In December 2011, ED also moved all of the Company’s
institutions from the “advance” method of payment of
Title IV Program funds to cash monitoring status (referred to as
Heightened Cash Monitoring 1, or HCM1, status). Although the
Company’s prior practices substantially conformed to the
requirements of this more restrictive method of drawing down
students’ Title IV Program funds, if ED finds violations of
the HEA or related regulations, ED may impose monetary or program
level sanctions, impose some period of delay in the Company’s
receipt of Title IV funds or transfer the Company’s schools
to the “reimbursement” or Heightened Cash Monitoring 2
(“HCM2”) methods of payment of Title IV Program funds.
While on HCM2 status, an institution must disburse its own funds to
students, document the students’ eligibility for Title IV
Program funds and comply with certain waiting period requirements
before receiving such funds from ED, which results in a significant
delay in receiving those funds. The process of re-establishing a
regular schedule of cash receipts for the Title IV Program funds if
ED places our schools on “reimbursement” or HCM2
payment status could take several months, and would require us to
fund ongoing operations substantially out of existing cash
balances. If our existing cash balances are insufficient to sustain
us through this transition period, we would need to pursue other
sources of liquidity, which may not be available or may be
costly.
OIG Audit
Our schools and universities are also subject to periodic audits by
various regulatory bodies, including the U.S. Department of
Education’s Office of Inspector General
(“OIG”). The OIG audit services division commenced
a compliance audit of CTU in June 2010, covering the period
July 5, 2009 to May 16, 2010, to determine whether CTU
had policies and procedures to ensure that CTU administered Title
IV Program and other federal program funds in accordance with
applicable federal law and regulation. On January 13,
2012, the OIG issued a draft report identifying three findings,
including one regarding the documentation of attendance of students
enrolled in online programs and one regarding the calculation of
returns of Title IV Program funds arising from student withdrawals
without official notice to the institution. CTU submitted
a written response to the OIG, contesting these findings, on
March 2, 2012. CTU disagreed with the OIG’s proposed
determination of what constitutes appropriate documentation or
verification of online academic activity during the time period
covered by the audit. CTU’s response asserted that this
finding was based on the retroactive application of standards
adopted as part of the program integrity regulations that first
went into effect on July 1, 2011. The OIG final report, along
with CTU’s response to the draft report, was forwarded to
ED’s Office of Federal Student Aid on September 21,
2012. On October 24, 2012, CTU provided a further response
challenging the findings of the report directly to ED’s
Office of Federal Student Aid. As a result of ED’s review of
these materials, on January 31, 2013, CTU received a request
from ED that it perform two file reviews to determine potential
liability on two discrete issues associated with one of the above
findings. The first file review relates to any potential aid
awarded to students who engaged in virtual classroom attendance
activities prior to the official start date of a course and for
which no further attendance was registered during the official
class term. The second file review relates to students that were
awarded and paid Pell funds for enrollment in two concurrent
courses, while only registering attendance in one of the two
courses. The Company completed these file reviews and provided
supporting documentation to ED on April 10, 2013. As of
June 30, 2015, the Company has a $0.8 million reserve recorded
related to this matter. |
