The U.S. Court of Appeals for the Ninth Circuit revived a lawsuit on Friday against Corinthian Colleges Inc. that alleges that the for-profit institution received federal student aid while improperly paying its recruiters based on how many students they brought in.
A federal judge had dismissed the case in 2009, holding that Corinthian complied with a federal ban on certain forms of incentive compensation. In reversing that decision, the appeals court said the plaintiffs should be allowed to supply more detail about the workings of Corinthian's pay policies.
The ban, part of the federal Higher Education Act, is designed to prevent unscrupulous recruiters from signing up poorly qualified students.
Other for-profit colleges have fought similar lawsuits. The largest for-profit institution, the University of Phoenix, paid $78.5-million to settle an incentive-compensation lawsuit in 2009. The second largest, Education Management Corporation, is facing similar claims and was accused by the U.S. Justice Department on Monday of improperly securing more than $11-billion in federal student aid.
The federal government declined to join the case against Corinthian, which was brought by two private citizens. The suit alleges that the college and its auditor, Ernst & Young, had falsely certified that Corinthian complied with the Higher Education Act to receive federal student aid.
Corinthian acknowledged giving recruiters raises based partly on their enrollments, but it said another factor—an employee rating—was also considered. The two-part test for raises falls under a "safe harbor" provision in the law that allows colleges to give salary increases that do not rely "solely" on recruitment numbers, Corinthian's lawyers argue.
In Friday's ruling, however, the appeals court said Corinthian did not explain how the employee rating was calculated and could have ignored its influence in practice. Therefore, it said, the plaintiffs should be able to amend their complaint to make additional allegations.
