A representative for a graduate school in the UC system told me that
some students have negotiated with their employers to have them stay
on H1-B visa status while attending business school (in order to
qualify for in-state tuition).  Is this legal or is it bending the
rules?

I am a Canadian citizen who attended college in the US and have
lived/worked in San Francisco for 5 years; going to business school
this fall.  Any help you can provide would be great.