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Gibson, Dunn & Crutcher's Wayne Smith and Timothy Hatch have built an impressive record defending ITT Educational Services Inc. against long-running claims that it violated rules governing how for-profit education companies manage their businesses and compensate student recruiters. As we've reported, Hatch's work for ITT beginning more than a decade ago helped Gibson Dunn establish itself as a go-to defense firm for the for-profit education industry.

On Monday, however, Gibson Dunn hit a serious snag in its defense of ITT, which remains squarely in the sights of lawmakers and plaintiffs lawyers targeting for-profit education companies.

In a major reversal, the U.S. Court of Appeals for the Seventh Circuit resuscitated a whistleblower's False Claims Act lawsuit against ITT, throwing out an Indianapolis judge's August 2011 decision dismissing the case. Not only that, the appellate court vacated a scathing $400,000 sanctions order against the whistleblower's lawyers at Motley Rice and two other plaintiffs firms. And finally, in what could be interpreted as a rebuke to U.S. District Judge Tanya Walton Pratt, the Seventh Circuit ordered the case assigned to a new judge to oversee summary judgment briefing and a potential trial.

The Seventh Circuit panel rejected Pratt's finding that a Mississippi plaintiffs lawyer named Timothy Matusheski had recruited a "know-nothing" whistleblower to sue ITT for defrauding government aid programs based on public information about ITT's admissions and recruiter compensation practices. Pratt had ruled that "Matusheski plucked a prospective plaintiff out of thin air and tried to manufacture a lucrative case." But the appeals court concluded that whistleblower Debra Leveski presented substantial new allegations based on her decade-long employment with ITT, giving the federal courts jurisdiction to hear her case. Moreover, the panel ruled that Matusheski and his co-counsel at Motley Rice and Plews Shadley Racher & Braun did nothing wrong in approaching Leveski or helping her to press her case.

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