Recent Trends: Limiting Liability for Career Colleges Under the Federal False Claims Act
By Martin M. Loring, Partner, Husch Blackwell LLP
One signature. It is the final act taken by educational institutions to gain access to federal student loans and grants for thousands of students. That one signature, however, may simultaneously expose recipient institutions to allegations of hundreds of millions of dollars in liability.
Until recently, federal courts had provided only limited guidance on how to evaluate allegations against career colleges under the federal False Claims Act.
Two recent decisions, however, provide some clarity to this important question and now provide institutions with vital information for their regulatory-compliance practices.
Although compliance with all federal regulations remains critically important for career colleges, it appears that courts are limiting applications of the False Claims Act to instances of true fraud – where an institution makes a false promise that it intends to comply with federal regulations. These same courts are rejecting the argument that a failure to subsequently comply with a federal regulation can expose the institution to potentially massive civil judgments. Given the substantial damages claimed in many of these cases, this is a positive development for the sector.
The False Claims Act (FCA) is a federal statute under which the Federal Government can recoup losses it suffers as a result of fraud1. In addition to permitting the government to pursue alleged violations, the FCA allows private individuals to assert claims on the government’s behalf2.
In these cases, the private individual – referred to as a “relator” – files a lawsuit asserting that the government3 is the victim of fraud. That relator is then able to pursue monetary relief on behalf of the government. If successful, the relator retains up to 30 percent of the government’s overall recovery in the case4.
Thus, while the government is the primary beneficiary of any judgment, the FCA provides a lucrative financial incentive for relators (and their attorneys) to aggressively pursue large recoveries.
Damages sought in FCA cases can be, and frequently are, massive. The FCA requires treble damages for all proven violations5. Additionally, it imposes a statutory fine between $5,000 and $10,000 for each violation6. The treble damage provision alone provides enough leverage to result in potential damages that, if ultimately proven and awarded, would cripple many institutions.
And it is not only the threat of large judgments driving relators to pursue these cases. Along with large potential judgments comes the potential for large settlements. Earlier this year, Education Affiliates agreed to settle five outstanding FCA cases by paying $13 million7. “As part of this resolution, the five whistleblowers will receive payments totaling approximately $1.8 million8.” Thus, solely for their role in making the allegations, the three individual relators received a sizable award. This is just one example of the lucrative financial incentives the FCA provides to individual relators, and it demonstrates why these cases are becoming more common.
FCA allegations find their way to educational institutions through the institutions’ acceptance of federal funds. To receive funding from the federal government (such as federal loan and grant programs), each educational institution must sign a Program Participation Agreement (PPA)9. In that agreement, the institution agrees to abide by a laundry list of federal regulations, many of which are created by the Department of Education (ED)10. It is this contract between the institutions and the federal government that relators rely on to claim FCA liability11.
In the career college sector, FCA lawsuits largely came into vogue following a case known as United States ex rel. Hendow v. University of Phoenix12. In that case, the relators (who were former enrollment counselors) alleged that the University of Phoenix violated ED’s regulatory ban on paying recruiters compensation tied to the recruiters’ success in securing enrollments13. This regulatory ban on so-called “incentive compensation” is one of the regulations with which institutions promise to comply in their PPA14. In addition to the PPA, the Hendow relators alleged that the University of Phoenix also “certifie[d] each year that it is in compliance with the incentive compensation ban while intentionally and knowingly violating that requirement.”15 The court allowed the case to continue based on these allegations because, if those facts were ultimately proven true, it could demonstrate that the institution was making false promises to the government16.
Some relators (and potential relators), as well as their attorneys, thought that the Hendow case left open an important question: can FCA liability arise from any regulatory violation, simply because an institution previously signed a PPA promising to comply with those regulations? Many high-dollar lawsuits followed asserting precisely this theory, and the question remained largely unanswered for several years.
Recently, the courts began to answer this question in a case titled United States ex rel. Miller v. Weston Educational, Inc.17 There, the relators accused Heritage College of committing a number of regulatory violations after the college signed its PPA18. Specifically, the relators alleged that Heritage failed to keep accurate grade and attendance records, causing the government to pay Title IV funds it otherwise would have withheld19.
The court began its evaluation of this allegation by explaining the framework to use in FCA cases alleging fraud based on a PPA:
To demonstrate this promise was false, it is not enough to show that Heritage did not comply with the PPA; Relators must show that Heritage, when signing the PPA, knew accurate grade and attendance records were required, and that Heritage intended not to maintain those records20.
Thus, the court accurately described the FCA as a statute punishing fraud – not merely an isolated breach of a contract21.
For FCA liability to arise, therefore, a relator must be able to prove that the promises made in the PPA were false at the time they were made. 22
Turning to the specific facts of the Miller case, the court concluded that the relator presented sufficient evidence to allow the case to proceed to a trial. Namely, the relators presented evidence that: (1) Heritage’s own policies state that it must maintain accurate academic records; (2) Heritage engaged in a pattern of record-falsification both before and after signing the PPA; and (3) Heritage officials made statements encouraging staff to do whatever they could to maximize federal student aid received. The court held that this “evidence of Heritage’s pre-PPA knowledge and intent”23 was enough to survive summary judgment24.
The Miller case serves as an important guidepost for FCA cases in the education industry, because it defines the type of evidence needed to prove a claim. Although the court allowed the case to continue, the decision confirmed the appropriate legal paradigm for FCA cases at educational institutions: whether the relator is able to provide evidence that the promises in the PPA were false at the time they were made.
It did not take long for this legal principle to be applied against a relator, finding that he lacked sufficient evidence to proceed to trial. Less than six weeks after Miller, the United States Court of Appeals for the Seventh Circuit issued its decision in yet another FCA case alleging fraud committed by a career college, United States ex rel. Nelson v. Sanford-Brown, Ltd25.
The relator in Nelson was Brent Nelson, who had served as the Director of Education at Sanford-Brown’s Milwaukee campus for a six-month period in 2008-200926. Well after his tenure there, he filed his FCA lawsuit against Sanford-Brown in 201227. Nelson alleged that Sanford-Brown had committed – and was continuing to commit – a variety of regulatory violations, such as: paying prohibited incentive compensation, failing to maintain proper accreditation, and altering student attendance and grading records28. He alleged that these violations had occurred from 2006 through the present, and thus sought damages of all federal funding received by Sanford-Brown Milwaukee throughout that period29.
Nelson offered two theories under the FCA to try and establish his case, both of which proved unsuccessful.
Unlike the relator in Miller, Brent Nelson had no evidence whatsoever that the promise made in the PPA was false when made. That lack of evidence proved fatal to his case.
Nelson first argued that Sanford-Brown violated the FCA when it made or used a “false record or statement.”30 Essentially, he believed that because Sanford-Brown promised to comply with various regulations when it signed the PPA, it committed fraud whenever it “used” that PPA by receiving government funds when not in full compliance with all regulations covered by the PPA31.
The court disagreed, recognizing that this theory must be rejected because of its prior decision in a case known as United States ex rel. Main v. Oakland City University32. The court stated that “the outcome in Main was dependent on the defendants’ mindset when it entered into the PPA.”33 Because the relator in Main was able to sufficiently allege that the PPA was false when made, the relator was able to allege liability for subsequent claims (just like it could in Miller).
But Nelson lacked similar evidence34. As the court described:
He did not depose the individuals who signed the PPAs, nor did he present any documentary evidence concerning SBC’s execution of the PPAs. He elicited no evidence in discovery of defendants’ fraudulent mindset when SBC was added as an additional campus covered under the PPA, or at any other time throughout its operation35.
In fact, the only evidence presented about Sanford-Brown’s mindset when executing the PPAs was testimony from the individuals who signed them36. Far from establishing fraudulent intent, these individuals’ declarations confirmed that the PPAs were entered in good faith37. Without evidence that the PPAs were false when made, the court rejected Nelson’s first theory.
Nelson then moved to his second theory, where he argued that Sanford-Brown “presented” a fraudulent claim for payment38. In this argument, Nelson asserted that because Sanford-Brown promised to comply with several regulations, any claim submitted for payment when the institution is not in compliance with those regulations was fraudulent39.
The court similarly rejected this theory. Once again, because there was no evidence that the PPA was false when made, any subsequent regulatory violation could not constitute fraud40. “Absent evidence of fraud before entry, nonperformance after entry into an agreement for government subsidies does not impose liability under the FCA.”41
Nelson simply had no evidence of fraudulent entry into the program. As the court explained, that lack of evidence meant that Nelson could not succeed on his second theory, because “FCA liability is not triggered by an institution’s failure to comply with Title IV restrictions subsequent to its entry into a PPA, unless the relator proves that the institution’s application to establish initial Title IV eligibility was fraudulent.” 42
On both theories offered by Nelson, the court made clear that evidence of fraudulent entry into the government program was required to warrant FCA liability. Alleged regulatory noncompliance after a good-faith entry into the program simply will not suffice. Because Nelson lacked the necessary evidence, the court confirmed that his case was appropriately dismissed and could not proceed to trial.
Compliance with the regulations discussed in the PPA remains a vital component of a career college’s operations. As the court explained in the Nelson case: “Lest there be any doubt about the U.S. Department of Education’s ability to enforce the PPA through administrative mechanisms here, its regulations are clear that at all times it possessed the authority up to and including the power to terminate SBC from its subsidy program.”43 ED retains powerful and significant enforcement authority no matter what courts have to say about the FCA implications of regulatory violations.
Further, as the Miller decision illustrates, courts may consider a pattern of alleged regulatory violations – occurring simultaneous with the signing of the PPA – as evidence that a PPA was not signed in good faith44. Thus, consistent compliance with ED regulations remains critically important to avoiding FCA litigation.
Miller and Nelson do illustrate a recent trend, however, in limiting the degree to which relators and their attorneys will be able to stretch the FCA.
These courts required evidence that a PPA was fraudulent at the time it was made to warrant liability, and refused to rely solely on allegations of subsequent regulatory violations to take the place of sufficient proof.
Though further development of the law in this area will continue to define the scope of FCA liability for career colleges, the present trend appears to place regulatory enforcement in the hands of ED and take it out of the hands of relators and courts through sizable and potentially crippling FCA awards.
Marty is an experienced trial lawyer who has handled cases in state and federal courts and arbitrations across the country throughout his career. He focuses his practice on business and commercial litigation and frequently represents institutions of higher education. Marty specializes in complex litigation and has extensive experience defending consumer class action cases. For instance, he has defended for-profit colleges against hundreds of cases and claims filed in multiple jurisdictions by former students alleging consumer fraud and seeking class action status. Marty graduated cum laude in 1981 from the University of Missouri-Columbia Law School. He is a partner at the firm of Husch Blackwell, in its Kansas City office, where he has practiced continuously since 1981.
Contact Information:Martin M. Loring // Partner // Husch Blackwell LLP // 4801 Main Street, Suite 1000 Kansas City, MO 64112-2551 // 816-983-8142 // Martin.Loring@huschblackwell.com
1The full text of the FCA is available at 31 U.S.C. § 3729 et seq.
231 U.S.C. § 3730(b)(1). These cases are brought in a proceeding known as a “qui tam” lawsuit.
331 U.S.C. § 3730(b). If a private individual brings the suit, he must first serve the suit upon only the government, during which time the suit remains under seal. The government can elect to intervene and prosecute the suit itself, or decline intervention and permit the individual to continue the prosecution.
431 U.S.C. § 3730(d).
531 U.S.C. § 3729(1).
7See Press Release, U.S. Dep’t of Justice, For-Profit Education Company to Pay $13 Million to Resolve Several Cases Alleging Submission of False Claims for Federal Student Aid (June 24, 2015), available at http://www.justice.gov/opa/pr/profit-education-company-pay-13-million-resolve-several-cases-alleging-submission-false.
920 U.S.C. § 1094(a).
1020 U.S.C. § 1094(a)(1)-(29).
11Specifically, the FCA imposes liability if a person “knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval,” and also if a person “knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim.” 31 U.S.C. § 3729(a)(1)(A)-(B). Relators in cases against educational institutions frequently allege that the PPA creates liability under both of these provisions.
12461 F.3d 1166 (9th Cir. 2006).
13Id. at 1169.
14See 20 U.S.C. § 1094(a)(20).
15Hendow, 461 F.3d at 1169.
16Id. at 1177-78.
17784 F.3d 1198 (8th Cir. 2015).
18Id. at 1202.
20Id. at 1204 (emphasis added).
21Id. at 1209; see also United States ex rel. Main v. Oakland City Univ., 426 F.3d 914, 917 (7th Cir. 2005) (“A university that accepts federal funds that are contingent on following a regulation, which it then violates, has broken a contract. But fraud requires more than breach of promise: fraud entails making a false representation, such as a statement that the speaker will do something it plans not to do.” (internal citation omitted)).
22These types of cases (e.g., Miller, Hendow, Main) are known as “fraudulent-inducement cases,” where the relators allege—and provide evidence to prove—that the institution “submitted a fraudulent application to establish its initial eligibility.” United States ex rel. Vigil v. Nelnet, Inc., 639 F.3d 791, 797 (8th Cir. 2011) (emphasis added).
23Miller, 784 F.3d at 1204.
24Id. at 1206 (“Based on this evidence, a reasonable jury could find that Heritage knew it had to keep accurate grade and attendance records and intended not to do so.”).
25788 F.3d 696 (7th Cir. 2015). The author of this article, and his firm, Husch Blackwell LLP, represents Sanford-Brown, Ltd. in the Nelson matter.
26Id. at 701.
28Id. at 701-02.
29Id. When trebled according to the FCA statute, Nelson’s asserted damages would have exceeded $390 million. The district court eventually restricted Nelson’s claims to only the six-month period during which he worked at Sanford-Brown Milwaukee, and to only allegations concerning the Milwaukee campus (Nelson had previously asserted damages for three other campuses as well.) Id. at 703-04 (affirming the district court’s limiting of the claims due to a lack of subject-matter jurisdiction).
3031 U.S.C. § 3729(a)(1)(B).
31Nelson, 788 F.3d at 708.
32Id. at 708-09 (citing Main, 426 F.3d at 916).
33Id. at 708.
34Id. at 709 (“In this case, Nelson did not prove that SBC entered the PPA in bad faith.”).
37Id. (“Not only do these declarations fail to support Nelson’s contention that these individuals intended to defraud the Education Department out of subsidies—they explicitly assert the opposite.”).
3831 U.S.C. § 3729(a)(1)(A).
39Nelson, 788 F.3d at 709-10.
40As the court noted, a regulatory violation after a PPA is executed in good faith may constitute a breach of contract, but it is not fraud, which is required for FCA liability to attach. Id. at 710.
42Id. at 711. Attempting to avoid this result, Nelson asked the Seventh Circuit to adopt a theory of FCA liability known as “implied false certification.” Id. As Nelson articulated and offered this theory to the court, it posits that each time an institution requests payment from the government, it is “impliedly certifying” that it is in compliance with all regulations. Thus, (if the court were to adopt the theory) it would not matter that Nelson obtained no evidence of fraudulent entry into the PPA, because each submission would be a new implied certification of compliance.
The Seventh Circuit refused to adopt this theory. Id. at 711-12. Noting that it “lacks a discerning limiting principle,” the court explained that under the theory, even a single regulatory violation could serve as the basis for FCA liability for all subsequent government payments—a concept the Seventh Circuit had previously described as “absurd.” Id. at 711.
43Id. at 712.
44Miller, 784 F.3d at 1204.