Insurance Coverage For False Advertising Claims

Monday, April 23, 2012 - 14:38

Law schools, graduate schools and trade schools are under fire for supposed false advertising in connection with their employment data. Unable to find work, recent graduates are filing (or preparing to file) suit, claiming that they were induced to enroll by intentional or negligent misrepresentations regarding the value of their degree and the career opportunities that awaited them - allegedly despite the economic downturn. 

The nation's universities are no strangers to litigation as they often find themselves defending against race and gender discrimination suits both in their student admissions processes and their hiring, promotion and dismissal of faculty and staffs. They are subject to routine contract disputes with vendors, and those involved in medical, biotechnology or computer research may find themselves the target of patent infringement claims. In every case, the prudent response is to examine the institution's insurance policies to determine whether there is insurance coverage available. The law school placement lawsuits are no different. Coverage may be available, but it likely will require a careful review of the claims made and the policies purchased.

The First Wave Of Suits

The recent downturn in the economy has had profound effects on academic institutions, from a lessening of federal aid as the government cut back research and other funding to a drop in applications as financial resources became scarce. The recession had an even more profound effect on students, many of whom racked up significant debt, finished their education and stepped out into the working world, only to find that they were not immune to the consequences of a poor economy. Law graduates were particularly hard hit. As reported by the National Association for Law Placement, for the Class of 2010 "the overall employment rate for new law school graduates is, at 87.6 percent, the lowest it has been since 1996." And that number does not tell the whole story. The NALP report goes on: “of those graduates for whom employment was known, only 68.4 percent obtained a job for which bar passage is required. This compares with 70.8 percent for the Class of 2009 and 74.7 percent for the Class of 2008 and is the lowest percentage NALP has ever measured.”

In suits against law schools, plaintiffs allege that applicants were offered skewed or false statistics showing that large numbers of recent law graduates were "employed." These reports supposedly failed to mention that the majority of those graduates could not find work in the legal market and were working in less-remunerative full- or part-time jobs in other areas. These pending lawsuits accuse more than a dozen of the nation's law schools of supposedly outright fraud, consumer fraud and negligent misrepresentation.

The suits are not small affairs. They are seeking class action status, meaning hundreds or possibly thousands of former students nationwide may be able to join and share in money damages asserted to be in the millions of dollars. Demanding a jury trial on behalf of a large class of victims, these lawsuits portray the law schools as "JD factories" seeking to increase their enrollment numbers and revenue by telling prospective law students - allegedly falsely - that abundant employment opportunities await them.

The case against Thomas M. Cooley Law School ("Thomas Cooley") in Michigan is typical. The plaintiffs graduated primarily during the recession (2008, 2009 and 2010) from Thomas Cooley, "by far the largest law school in the country" (according to the complaint). Following graduation, the graduates could not find full-time legal employment and essentially had to start their own firms or work in non-legal jobs earning much less than expected.

How were they allegedly defrauded? Plaintiffs assert that since 2005, the school reported with "'Madoff-like' consistency" that between 76 and 82 percent of graduates "secured employment within nine months of graduation." This was allegedly misleading because much of this employment was not in full-time jobs as lawyers. In fact, many were part-time and most were non-legal. Plaintiffs claim that if statistics had been more accurately reported, they would have more clearly shown that the number of graduates landing jobs as lawyers was less than 25 percent.

Plaintiffs also claim that the law school "grossly inflated" the graduates' reported mean salaries by failing to disclose that its numbers were based on a small subset of those graduates who actually responded (usually those with full-time jobs as lawyers). Plaintiffs claim that the reported mean salaries would have "decline[d] precipitously" if a broader and more statistically meaningful representation had been made. Plaintiffs seek $300 million, allegedly "the difference between the inflated tuition paid by Class members based on the material misrepresentations ... and the true value of a Thomas Cooley degree."

Lawsuits targeting law schools have met with mixed results. The case against New York Law School was dismissed by a New York state court judge who ruled that the numbers were not false or misleading and that law school applicants were sophisticated consumers, had other information available to them to verify the numbers, and were not injured (in that they received their law degree - post-graduation employment was not guaranteed by the school). Plaintiffs have appealed. In contrast, Thomas Jefferson School of Law in San Diego tried and failed to get the claims against it dismissed; thus, that case is proceeding. The claimed damages are in excess of $50 million, "which represents tuition and other fees that were paid in reliance on [Thomas Jefferson School of Law's] false and misleading statements."

The Second And Third Waves

Two of the lead attorneys bringing these lawsuits have laid out how they intend to proceed against other organizations. David Anziska and Jesse Strauss told Law360 that they intend to file twenty more lawsuits by Memorial Day and another twenty-five by Labor Day. That will make more than five dozen cases filed in California, Florida, Illinois, Massachusetts, Michigan, Missouri, New York, Pennsylvania, Rhode Island, and Washington, among others. The spring targets can simply visit Mr. Anziska's website to identify themselves. The fall targets will have to wait a little longer.

The Fourth Wave

Plaintiffs’ counsel does not view these suits as isolated litigation against a limited educational niche. Plaintiffs' attorney Anziska's website seeks potential plaintiffs from all types of schools. As Mr. Anziska explains, he "intends to expand his practice to holding other graduate and trade schools accountable for inflating their placement rates."

Why Insurance Matters

How are law schools and other educational organizations handling the risk associated with a potential or actual lawsuit by disgruntled graduates? By (correctly) considering the insurance policies that the law school or university has purchased over the years that may respond to such claims. These could be comprehensive general liability policies, directors and officers policies, or perhaps errors and omissions policies. Institutions facing suits seeking millions of dollars in liability in a putative class action lawsuit - and significant expenses for defending such claims - should review all available policies, with legal counsel, to determine whether coverage is available.

Coverage always depends on two things: the specific terms of the policy and the specific allegations pleaded. One complaint we have reviewed alleges solely intentional fraud. Such allegations may present a significant obstacle to some liability coverages, but even an institution facing only such allegations should examine its directors and officers policy to determine if "final adjudication" language preserves its coverage for defense costs. Other complaints assert species of consumer fraud and negligent misrepresentation. These broader pleadings likely expand the universe of coverage, particularly because some consumer fraud statutes allow for imposition of liability without regard to an actor's intentions. Directors and officers policies typically cover misstatements, misleading statements and breaches of duty. Under comprehensive general liability policies, "personal and advertising injury" coverage should be examined. While this enumerated coverage (it has been analogized to a "named peril" policy) is not a perfect fit, the doctrine of "implied disparagement" might carry the day. E.g., Knoll Pharm. Co. v. Auto. Ins. Co. of Hartford, 152 F. Supp. 2d 1026, 1037-38 (N.D. Ill. 2001). On the errors and omissions front, specific policies or coverage extensions should be examined to see whether the allegations about the activities of the school's placement office can establish coverage.

Conclusion

Those in charge of the risk management functions of any trade, professional or academic institution should always be assessing whether their insurance matches their risks given the current litigation and regulatory climate. A new risk has emerged: alleged placement data reporting misrepresentation. Prudence dictates that relevant policies be identified and applied. Questions about coverage should be resolved. At renewal, this risk needs to be explored further and addressed.

These cases are not just about money. They are also about something more. Protection of an institution's reputation is, rightfully, one of the highest priorities. It is fundamental to attracting students, faculty and philanthropic donations, whether from alumni or from others. A placement data lawsuit attacks that reputation. All resources, including insurance, should be marshaled in defense. The time to act is now by taking a fresh look at relevant insurance policies to see what it covers, and by asking the right questions of insurance brokers and advisers. It is good practice generally and, if your institution becomes a target, may allow you to get out in front of risk management issues before the board of trustees calls.

J. Wylie Donald, Partner, McCarter & English, LLP, counsels and litigates for clients on insurance coverage, environmental and products liability matters. Mr. Donald has successfully pursued claims under property, general liability, trucking, malpractice, E&O and D&O policies against primary, umbrella and excess carriers, captive insurers, state guarantee funds, insurers-in-rehabilitation and reinsurers. He has tried cases and argued appeals in the state courts in New Jersey and Maryland, conducted private arbitrations and mediations, and argued motions in federal courts across the nation.

His hard-fought, multi-year litigations have yielded numerous eight-figure settlements for his clients in products liability and property damage insurance coverage cases. In an environmental case in which the carriers asserted notice was over a dozen years late, he obtained a settlement of almost 90 cents on the dollar. In other cases, a laser-like focus has yielded outstanding results. In a case against a state guarantee fund, careful procedural planning resulted in a recovery of 95 percent three months after the complaint was filed. In another case, a motion for partial summary judgment  without taking any discovery – was sufficient to obtain 100 percent recovery.

Please email the author at jdonald@mccarter.com with questions about this article.