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SF Unified Settles $5.4 Million Legal Battle With School Bus Operator Over Pandemic Fees

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A small yellow school bus drives down a hilly street in San Francisco.
A First Student school bus picks up students in San Francisco on Sept. 13, 2018. (Robert Alexander/Getty Images)

Update, 1 p.m. Tuesday: The San Francisco Board of Education on Monday evening approved a settlement between the school district and its former school bus provider over unpaid invoices during the pandemic, when buses were not taking kids to school.

Under the agreement, the company, First Student, will pay San Francisco Unified $1 million, school board officials announced.

The bus company worked with the school district for about 40 years before San Francisco Unified switched bus providers in 2021. The company last year sued the district for refusing to pay $5.4 million in non-transportation services when in-person classes were canceled. The district, in turn, countersued the company for breach of contract, bad faith and violations of the California False Claims Act.

Last Thursday, a jury sided with the district, finding First Student guilty of violating the California False Claims Act, which bars the use of a false statement or document to obtain money from the state. But the jury also decided that the district did not incur any harm from receiving the company’s invoices, which it never paid.
That mixed decision resulted in what’s known as a “fatal inconsistency” in the verdict, prompting both parties to try to reach a settlement.

On Friday, the two parties announced they had reached a settlement agreement.

“We are glad the matter is resolved,” said Joe Arellano, spokesperson for First Student.

Original story, 5 p.m. Friday: The San Francisco Unified School District on Friday reached a settlement with its former school bus provider in a lawsuit over ongoing payments during the pandemic, when students were learning from home.

The terms of the deal with First Student, the bus operator, have not yet been released and the agreement must now be approved by the city's Board of Education.

“Today First Student and SFUSD reached a mutual settlement with no admission of liability on either side. We are glad the matter is resolved,” said Joe Arellano, spokesperson for First Student. “First Student took great pride in partnering with SFUSD for decades, transporting generations of families. We hope to return to the community in the future if the opportunity arises.”

On Thursday afternoon, a jury reached a verdict in the case in San Francisco Superior Court, records show. But a "fatal inconsistency" associated with the verdict caused the trial to continue into Friday, when the two parties ultimately settled.

“SFUSD and First Student reached a settlement agreement, which will go to the Board of Education for approval at an upcoming meeting,” said Laura Dudnick, spokesperson for SFUSD.

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The company, which had provided bus services to public school students in San Francisco for four decades, sued SFUSD last year for refusing to pay $5.4 million in non-transportation services — such as bus maintenance and insurance — billed for the 2020–'21 school year.

In disputing the payment, SFUSD argued it did not use any buses during that period, as classes were being held online, and was therefore not obligated to pay for those services. The district, in turn, countersued the company for breach of contract, bad faith and violations of the California False Claims Act.

The lawsuit comes at a turbulent time for SFUSD, which has had to navigate a months-long payroll fiasco, rapidly declining enrollment and other financial hardships coming out of the pandemic.

Ohio-based First Student, the largest school bus operator in the nation, contracts with roughly 1,000 districts across the United States and Canada.

SFUSD cut ties with the company early in the pandemic, when in-person instruction ground to a halt. In July 2021, just before the resumption of in-person instruction in schools, the district signed a $150 million, five-year contract with Zūm, a Redwood City-based start-up that allows parents and administrators to use an app to monitor pickups, bus locations and route changes.

The switch in providers was expected to save the district about $3 million annually, TechCrunch reported at the time of the deal.

Following the new contract agreement, First Student filed separate legal challenges against both SFUSD and Zūm, alleging the district's selection of its new bus provider was irresponsible and that the district failed to investigate First Student's allegations of misconduct in the bidding process. The court denied the motion against the district 2022.

That court case against Zūm is set to begin in August.

Correction (March 29): The previous version of this story inaccurately stated that the “fatal inconsistency” in the jury's verdict against First Student effectively overruled its decision.  That was not the case.

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