Litigation, Legal and Other Matters. The Company and its subsidiaries are involved in various legal, regulatory and other proceedings that arise in the ordinary course of its business. Although the outcomes of these proceedings against the Company cannot be predicted with certainty, based on currently available information, management believes that there are no existing claims or proceedings that are likely to have a material effect on the Company’s business, financial condition, results of operations or cash flows. However, based on currently available information, management believes it is reasonably possible that future losses from existing legal, regulatory and other proceedings in excess of the amounts accrued could reach approximately $20 million.
Kaplan subsidiaries were subject to two unsealed cases filed by former employees that include, among other allegations, claims under the False Claims Act relating to eligibility for Title IV funding. The U.S. Government declined to intervene in all cases, and, as previously reported, court decisions either dismissed the cases in their entirety or narrowed the scope of their allegations. The two cases are captioned: United States of America ex rel. Carlos Urquilla-Diaz et al. v. Kaplan University et al. (“Diaz”, unsealed March 25, 2008) and United States of America ex rel. Charles Jajdelski v. Kaplan Higher Education Corp. et al. (“Jajdelski”, unsealed January 6, 2009).
On August 17, 2011, the U.S. District Court for the Southern District of Florida issued a series of rulings in the Diaz case, which actually included three separate complainants: Diaz, Wilcox and Gillespie. The court dismissed the Wilcox complaint in its entirety; dismissed all False Claims Act allegations in the Diaz complaint, leaving only an individual employment claim; and dismissed in part the Gillespie complaint limiting the scope and time frame of its False Claims Act allegations regarding compliance with the U.S. Federal Rehabilitation Act. On July 16, 2013, the court entered summary judgment in favor of the Company on all remaining claims in the Gillespie complaint and on March 11, 2015, the U.S. Court of Appeals for the Eleventh Judicial Circuit affirmed that dismissal ending the Gillespie claims in Kaplan’s favor. On October 31, 2012, the court entered summary judgment in favor of the Company as to the sole remaining employment claim in the Diaz complaint. And, on March 11, 2015, the appellate court affirmed the summary judgment on all issues in the Diaz case except the court reversed and remanded Diaz’s claim that incentive compensation for admissions representatives was improperly based solely on enrollments in violation of the Title IV regulations. On July 13, 2017, the District Court again granted summary judgment on this final issue in the Diaz case in Kaplan’s favor, ending the case at the U.S. District Court level. The plaintiff has 60 days to appeal.
On July 7, 2011, the U.S. District Court for the District of Nevada dismissed the Jajdelski complaint in its entirety and entered a final judgment in favor of Kaplan. On February 13, 2013, the U.S. Circuit Court for the Ninth Judicial Circuit affirmed the dismissal in part and reversed the dismissal on one allegation under the False Claims Act relating to eligibility for Title IV funding based on claims of false attendance. The surviving claim was remanded to the District Court, where Kaplan was again granted summary judgment on March 9, 2015. Plaintiff has appealed this judgment and briefing is complete. In March 2017, the Appellate Court denied the appeal and ruled fully in Kaplan’s favor and Jajdelski filed a motion to re-hear the matter. On May 12, 2017, the Court of Appeals issued its Mandate ending the case and relinquishing jurisdiction.
Despite the sale of the nationally accredited Kaplan Higher Education Campuses business, Kaplan retains liability for these claims.
Department of Education (ED) Program Reviews. ED has undertaken program reviews at various KHE locations. Currently, there are five open program reviews, four of which are at campuses that were formerly a part of the KHE Campuses business, including the ED’s final reports on the program reviews at former KHE Hammond, IN, San Antonio, TX, Broomall, PA, and Pittsburgh, PA, locations. Kaplan retains responsibility for any financial obligation resulting from the ED program reviews at the KHE Campuses business that were open at the time of sale.
On February 23, 2015, the ED began a review of Kaplan University. The review will assess Kaplan’s administration of its Title IV, HEA programs and will initially focus on the 2013 to 2014 and 2014 to 2015 award years. On December 17, 2015, Kaplan University received a notice from the ED that it had been placed on provisional certification status until September 30, 2018, in connection with the open and ongoing ED program review. The ED has not notified Kaplan University of any negative findings. However, at this time, Kaplan cannot predict the outcome of this review, when it will be completed or any liability or other limitations that the ED may place on Kaplan University as a result of this review. During the period of provisional certification, Kaplan University must obtain prior ED approval to open a new location, add an educational program, acquire another school or make any other significant change.
The Company does not expect the open program reviews to have a material impact on KHE; however, the results of open program reviews and their impact on Kaplan’s operations are uncertain.