August 3, 2010
As discussed in Gibson Dunn’s prior communications, there are two primary avenues to seek the early dismissal (i.e., before discovery) of a qui tam action brought against a school. First, you can argue that the Program Participation Agreement (“PPA”) does not constitute a certification upon which Government payment is conditioned and that, as a matter of law, the relator’s allegations are not actionable under the False Claims Act. It was on this theory that the Fifth Circuit affirmed the dismissal of several of the early incentive compensation qui tam cases. This theory, however, was subsequently rejected by the Seventh Circuit in the Main case and the Ninth Circuit in the Hendow case. In pending cases outside of the Seventh and Ninth Circuits, schools have been trying to convince district courts to follow the approach of the Fifth Circuit and to reject the approach taken by the Seventh and Ninth Circuits.
Second, you can argue that the conduct alleged by the relator (i.e., paying student recruiters based on the number of enrollments achieved, terminating student recruiters for not meeting enrollment goals, engaging in “grade inflation”) does not violate the Higher Education Act (“HEA”) or any other Department of Education regulation or requirement and, therefore, even if true, the conduct does not and cannot support a claim of fraud under the False Claims Act. This was the theory on which the Ninth Circuit affirmed the dismissal of the Bott case, finding that the HEA does not prohibit salary reviews generally, does not cover personnel actions such as terminating an under performing employee, and that a school’s good faith compliance with the “safe harbor” regulations negates scienter — an essential element in any False Claims Act case.
Over the past few months, at least four district courts have issued rulings on motions to dismiss qui tam actions brought against private sector schools. Three of the rulings have, unfortunately, accepted the false certification theory of False Claims Act liability, following the Main and Hendow cases. The news is somewhat better with regard to the other theory in that a court in New Jersey dismissed a qui tam action because it determined that none of the conduct alleged by the relator was prohibited by the HEA or Department of Education regulations. Another court, in Indiana, however, let a case go forward even though the relator affirmatively alleged in the complaint that student recruiters and financial aid administrators were reviewed and compensated based on a number of factors that did not relate to the number of students enrolled or receiving financial aid.
The False Certification Theory of Liability
Three district courts in the Third and Eleventh Circuits considered and rejected arguments to dismiss incentive compensation qui tam actions based on the false certification theory of liability. In all three cases, the courts decided to follow Main and Hendow and rejected the approach taken by the Fifth Circuit in Graves. The cases are United States ex rel. Pilecki-Simko v. The Chubb Institute, No. 06-3562, 2010 U.S. Dist. LEXIS 27187 (D.N.J. Mar. 22, 2010), 2010 U.S. Dist. LEXIS 48345 (May 17, 2010); U.S. ex rel. Powell v. American Intercontinental University, Inc., No. 1:08-CV-2277-RWS, 2010 U.S. Dist. LEXIS 53965 (N.D. Ga. June 2, 2010); and In re Kaplan Higher Education Corp., No. 09-MD-02057-CIV-Seitz/O’Sullivan (Order In Preparation of Hearing) (Docket No. 19, Apr. 28, 2010).
Notwithstanding these recent decisions, we believe that schools should continue to ask courts to find that the false certification theory is invalid as a matter of law when applied to the Title IV funding context and to try to create an even more pronounced split among the circuits so that the issue can ultimately be raised to and decided by the Supreme Court. We continue to believe that a compelling argument can be made that the Department of Education’s payment of Title IV funds is not conditioned on a school’s compliance with the incentive compensation provision and that courts should recognize the significant differences between conditions of participation or eligibility, which do not give rise to liability under the FCA, and conditions of payment, which may support a claim.
No Improper Conduct Alleged
In the Chubb Institute case, the school also argued that even if all of the allegations were true, the relators did not demonstrate that the school’s actions actually violated any statute or regulation relating to its participation in Title IV programs. Specifically, the relators alleged that the school violated the incentive compensation provision, pressured teachers to change grades and engage in “grade inflation” for purposes of meeting satisfactory academic progress standards, generated and submitted inflated and falsified placement rates, and improperly assisted applicants with the admissions exam. The court addressed and rejected each of the relators’ claims.
With regard to the incentive compensation allegation, the court, citing Bott, found that the conduct alleged by the relators was, as a matter of law, consistent with the Department of Education’s safe-harbor regulation:
Defendants argue that the compensation plans are protected by regulatory safeharbor because the compensation plan was not based solely on enrollment practices covered by the ban. As a matter of law, the Court agrees with Defendants. . . . [Defendants’ plan] bas[ed] performance evaluation not only on enrollment starts, but student retention, success at recruiting activities, and administrative tasks[.]
Pilecki-Simko, 2010 U.S. Dist. LEXIS 27187, at *33-34 (parenthesis omitted).
With regard to the allegation that the school engaged in grade inflation to meet “satisfactory academic progress” standards, the court found that the relators’ allegations were insufficient because “Relators provide no examples of this alleged misconduct (i.e., specific student grades changed, specific teacher pressured to change grading practices), and . . . they fail to aver circumstantial facts enabling the inference that [defendant] acted with scienter with regard to providing false progress reports” — i.e., that there was “grade inflation” with the specific intent of defrauding the government out of money. Id. at *31. The court also stated that it was “unclear . . . whether this alleged misconduct [even] violated Title IV requirements, accreditation requirements, or [defendant’s] own guidelines.” Id. at *31 n.14.
Similarly, with respect to placement rates, the court found that the relators’ claims failed because they did not:
identify which statements regarding the placement rates were false (or conversely what the actual placement rates were), to what degree they were inflated or diminished, and upon whose instructions they were falsified. In other words, Relators only provide the what, but omit the who, when, and how. Also missing . . . is the why; Relators do not allege circumstantial facts indicating [the school] knowingly committed acts in violation of § 3729.
Id. at *28-29 (emphasis and footnote omitted). Finally, the relators’ allegations regarding entrance tests failed because “Relators provide no examples of admissions counselors being instructed to apply ‘pixie dust’ to the admissions exams, nor do they provide examples of students benefiting from this practice.” Id. at *31-32.
The court’s analysis was not nearly as robust or satisfying in United States ex rel. Leveski v. ITT Educational Services, Inc., No. 1:07-cv-867-WTL-JMS, 2010 WL 1936118 (S.D. Ind. May 12, 2010). In that case, the court denied a motion to dismiss and permitted the case to go to discovery even though the relator alleged, in her complaint, that student recruiters and financial aid administrators were compensated based on a variety of factors, many of which did not relate to the number of students enrolled or receiving federal financial aid. The court stated that:
Although both the Second Amended Complaint and [the relator’s] affidavit state that ITT had a host of factors it considered when calculating bonuses for Student Recruiters and Financial Aid Administrators, Leveski’s contention is that the only factor that ITT actually considered was the number of students recruited or the number of students awarded financial aid. . . . As this is the Defendant’s motion to dismiss, the Court is obligated to take the facts alleged in the Second Amended Complaint as true and draw all reasonable inferences in favor of [the relator]. Therefore, under this plaintiff friendly standard, [the relator] has plead facts sufficient to survive the Defendant’s motion to dismiss.
Id. at *4.
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While these decision are not encouraging with regard to the false certification theory, they do not foreclose that theory, and they are, on balance, helpful with regard to an argument that none of the conduct alleged violates the HEA or any Department of Education regulation or requirement. Thus, we encourage schools to continue filing motions to dismiss and making these arguments, as appropriate. We will continue to monitor legal developments in this regard and keep you informed of any significant cases or developments.
 In the Kaplan cases, the court has not yet ruled on the other grounds raised in the motions to dismiss, including that the conduct alleged is permitted under the HEA and ED regulation, and that two of the actions should be barred under the first-to-file provision of the FCA.
 This analysis is similar to the analysis of the court in the Lee case in which another court dismissed an incentive compensation qui tam action. See United States ex rel. Lee v. Corinthian Colleges, CV 07-1984 PSG (MANx), 2009 U.S. Dist. LEXIS 120462 (C.D. Cal. Dec. 4, 2009). That dismissal is now on appeal before the Ninth Circuit. Obviously, this sort of argument goes away, or at least becomes much more difficult, if the Department goes forward with its proposed regulations eliminating the safe harbors.
Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding the issues discussed above. Please contact the Gibson Dunn attorney with whom you work, or any of the following:
Wayne Smith (949-451-4108, [email protected])
Joseph Busch (949-451-3898, [email protected])
Nick Hanna (949-451-4270, [email protected])
Kristopher Diulio (949-451-3907, [email protected])
Jessica Boschee (949-451-3857, [email protected])
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