False Claims Act Liability by way of False Statements in Program Participation Agreements
All institutions of higher education can be exposed to claims that they violated the United States False Claims Act ("FCA"), 31 U.S.C. § 3729, a law that is intended to reach any type of fraud that might result in financial loss to the federal government. FCA claims can arise in a variety of contexts for higher education institutions, including for example, through alleged violations of the 90/10 Rule for proprietary institutions, record keeping requirements, satisfactory academic progress statistics, job placement statistics, accreditation standards, and mismanagement of federal grant monies. This article will review the basics of the FCA, and then examine how FCA claims can arise from allegedly fraudulent statements in a Program Participation Agreement ("PPA"), specifically from an allegedly false certification of compliance with the Incentive Compensation Ban ("ICB"). This article concludes with some takeaways for institutions to consider when responding to whistleblower complaints related to Title IV financial aid compliance.
False Claims Act Basics
First signed into law by President Abraham Lincoln, the FCA is still today a powerful and favorite weapon in the government's arsenal for combating fraud, waste, and abuse. To that end, the FCA imposes liability on any person who: (a) knowingly presents, or causes to be presented to the federal government, a false or fraudulent claim for payment or approval; or (b) knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim. Id. at (a)(1)(A),(B). "Claim" means, among other things, "any request ... for money or property .... presented to ... the United States." Id. at (b)(2). The term "knowingly" does not require a specific intent to defraud, and may be satisfied if the person acted with reckless disregard for the truth or falsity of the information. Importantly, FCA lawsuits can be brought by the United States and also by private "qui tam" plaintiffs—typically individuals who work at an institution and are seeking to "blow the whistle" on what they think is fraudulent conduct. If current trends continue, and we see no reason why they would not, whistleblower FCA actions in the higher education space will continue to increase.
Regulatory noncompliance may give rise to FCA liability. So, while it is true that over the past decade the FCA has been used to predominately combat fraud in healthcare and government contracting, institutions of higher education should not consider themselves immune to the hefty penalties of the FCA. Cf United States ex rel. Sobek v. Educ. Mgmt., L.L.C., No. 10-131, 2013 WL 2404082, at *12–13 (W.D. Pa. May 31, 2013) ("The existence of an administrative enforcement mechanism does not preclude the possibility of an FCA claim [as] the government may select from a variety of remedies to combat fraud.") (internal citations omitted).
Program Participation Agreements and the Incentive Compensation Ban
A school's requests for Title IV funds can be "false or fraudulent" if the school made false statements in a PPA. A qui tam plaintiff can establish that claims for Title IV funds were "false or fraudulent" by showing: (1) that a school made false statements in its PPA; (2) that the school knew the statements were false; (3) that the statements were material to the Department of Education's ("DOE") decision to execute the PPA; and (4) that the school made claims for Title IV funds under the fraudulently induced PPA.
The federal government operates a number of programs to help students defray education costs, under Title IV of the Higher Education Act. These programs include the Federal Pell Grant, the Federal Family Educational Loan Program, the William D. Ford Federal Direct Loan Program, and the Federal Perkins Loan. 20 U.S.C. §§ 1070–1099d. Title IV funds are available only to those students who attend “eligible” institutions that fulfill certain requirements like entering into a PPA with the DOE. 20 U.S.C. § 1094(a); 34 C.F.R. § 668.14(a)(1). When entering into a PPA, a school promises to comply with all federal statutes and regulations applicable to Title IV. For-profit schools that have signed a PPA can receive up to 90 percent of revenue from federal sources per fiscal year. 34 C.F.R. § 668.14(b)(16) (“[T]he institution will derive at least 10 percent of its revenues for each fiscal year from sources other than Title IV, HEA program funds . . . or be subject to sanctions.”).
A common risk of FCA liability that crops up frequently in case law and settlements with the United States Department of Justice ("DOJ") are allegations by the government, or a qui tam plaintiff, that a school knowingly falsely represented compliance with the ICB in its PPA, and these false statements fraudulently induced the DOE to grant eligibility and/or disburse Title IV payments. While the ICB is intended to prevent abuse of Title IV program funds by largely for‐profit schools, the rules apply to any Title IV eligible institution. Two types of activities are subject to the ICB – securing: (1) enrollment; and (2) awards of financial aid. 34 C.F.R. § 668.14(b)(22)(i). A recruiter’s fixed salary or wages are not incentive compensation. Incentive compensation includes commissions, certain bonuses, merit salary increases and promotion decisions (tied to success in securing student enrollments or awarding financial aid), and payments made to recruiters based on student academic performance.
A Sizeable Settlement and Recent Case Law
The DOJ settlement with for-profit college company Education Management Corp. ("EDMC") involving the ICB is notable because of its size. The DOJ announced a "landmark" $95.5 million settlement with EDMC on November 16, 2015. The primary FCA allegation was that EDMC unlawfully recruited students in violation of the ICB, "by running a high pressure boiler room where admissions personnel were paid based purely on the number of students they enrolled." See https://www.justice.gov/opa/pr/profit-college-company-pay-955-million-se..., last visited June 3, 2018.
A 2018 opinion from the District of Utah is instructive because it demonstrates that ICB false certification FCA cases are not going away any time soon. In United States ex rel. Brooks v. Stevens-Henager College, No. 2:15–cv–119, 2018 WL 1614336 (D. Utah Mar. 30, 2018), the Court denied the college’s motion to dismiss the ICB claim, finding that the government had alleged sufficient facts to establish that the college had falsely certified that it would comply with the ICB; the college knew its promises to comply with the ICB were false; and the college’s promises to comply with the ICB were material to DOE’s decision to enter into PPAs. See also United States ex rel. v. Corinthian Colleges, 652 F. App’x 503 (9th Cir. 2016), cert denied, 137 S. Ct. 1080 (2017) (dismissing for lack of jurisdiction relators’ FCA claim that Corinthian falsely certified ICB compliance in order to receive federal education funds because relators were not an original source); United States ex rel. Laporte v. Premier Education Group, No. 11-3523, 2016 WL 2747195, at *14-15 (D.N.J. May 11, 2016) (recognizing but not reaching ICB safe harbor, and finding FCA claim not sufficiently pleaded because relators did not allege that the admissions representatives were incentivized by the provision of graduation bonuses to alter grades so that they could reenroll students and see them forward to graduation.); United States ex rel. Capriola v. Brightstar Education Group, Inc., 2013 WL 1499319, at * 7 (E.D. Cal. April 11, 2013) (denying motion to dismiss and finding that FCA allegations of false ICB certification were pleaded with specificity).
Most colleges and universities are participants in federal student aid programs administered under Title IV of the HEA – a critical fact when analyzing potential FCA exposure. Institutions should be aware that their own employees can act as whistleblowers and bring lawsuits under the FCA. To the extent that an institution’s personnel know that statements made in PPAs are false or fraudulent, the institution may be vulnerable to whistleblower claims based on false certifications of compliance with Title IV requirements. While few schools expect to become the subject of investigations and enforcement activity, all higher education institutions should consider the risks in advance, develop effective compliance programs, and encourage reporting of complaints.
If a whistleblower comes forward, you must properly investigate the complaint. During your internal investigation, keep three goals in mind: (1) identifying the "root-cause" of the alleged misconduct; (2) identifying any culpable individual(s); and (3) where applicable, holding the culpable individual(s) accountable. If you know the identity of the whistleblower, and he or she is willing to cooperate, start there. If the whistleblower complained anonymously, and you cannot reasonably identify him or her, do not initiate a witch-hunt. Going to great lengths to discover the whistleblower’s identity may backfire. Prudence and the law dictate that you not retailiate against the whistleblower. Follow your internal policies and apply them consistently throughout the investigation. Before interviewing the whistleblower or any other relevant individuals, decide who will conduct the interview. Using an attorney to conduct the interview will likely be the most prudent course.