Federal False Claims Act litigation has significant disruptive potential
While Latin has long since ceased to be the vernacular of higher education, you should be familiar with the "qui tam lawsuit." Qui tam ("in the name of the King") is quite special. It allows a citizen to bring suit on behalf of the United States government, accusing a person or organization of improperly securing or using federal funds.
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Michael B.
Goldstein
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The qui tam action seeks the recovery of those funds for the government. But the litigation is manifestly not an act of public charity. A successful relator (the plaintiff in this kind of case) stands to take home as much as 30 percent of the federal funds recovered, plus attorneys' fees. Last year the relators' share of the spoils in all qui tam cases was approximately $120 million.
There have now been more than a half dozen higher education cases. Each involved Title IV student financial aid programs, and notably the 'Program Participation Agreement' (PPA) that each institution's chief executive signs to initiate and maintain Title IV participation.
Unique characteristics
Another term for a qui tam action is "whistle blower suit." Qui tam cases are brought "under seal." That means the defendant generally does not know it is being sued - or why - until long after an investigation is initiated. Even when a defendant is first informed that an action has been filed, the full details of the complaint and the identity of the relators may be withheld. The secrecy is intended to protect the relators - who are often current or former employees - from retaliation.
Once the relator files the action, much of the heavy lifting is done at the government's expense. The government conducts the investigation, at the end of which the Justice Department must decide whether it will prosecute the case or turn it over to the relator. In all the known qui tam cases involving higher education to date, Justice has declined to take on the prosecution. But, as we will see, that does not mean they leave the field of combat.
Qui tam cases have been the bane of the health care industry for years, with most cases centering on abuses of the Medicare system. As an example, HealthSouth paid $325 million in 2004 to settle a false billing claim. Qui tam cases have long been commonplace against defense contractors ($800 toilet seats come to mind).
New and noteworthy are court decisions that have the potential to turn an educational institution's Title IV student financial aid participation into a ticking bomb. Recent cases have involved both for-profit and not-for-profit schools, and they may foreshadow a litigious and costly future.
False claims cases in student financial aid are so complex the appeals courts can't agree
Just two years ago it appeared that the federal courts drove a stake through the heart of very similar qui tam cases related to incentive compensation rules embedded in the Program Participation Agreement (PPA) for Title IV student financial aid.
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Michael B.
Goldstein
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In a series of federal cases initiated in Texas against several large for-profit school groups, the Fifth Circuit Court of Appeals held that violation of a term of the PPA does not itself create the basis for a false claim action.
Qui tam applies only when payment of a specific claim for federal funds is conditioned on certification of compliance. The appeals court effectively divided the process into phases. Phase One is the signing of the PPA. Phase Two is any request for funds under the various Title IV programs.
The court ruled that since the Phase Two request for funds did not repeat any assurance that the institution was abiding by the prohibition against incentive compensation, there was no false claim to be litigated.
The same court noted that the U.S. Department of Education could take action against an institution that violates the terms of the PPA, but such an administrative action would be a separate matter. This theme was echoed in later court decisions. A great sigh of relief arose - at least among those who were following the Texas cases, admittedly a rather small group.
Then came Oakland City University
Oakland City University is a small Baptist college in Indiana that was the target of aqui tam case. The allegations of the relator, Jeffrey Main, a former admissions recruiter, were quite similar to those made in the Texas cases. Main argued that the university signed its PPA knowing it was in violation of the prohibition against incentive compensation. When the school applied for the disbursement of Title IV funds (the "claim") it falsely certified compliance with the PPA. The Federal District Court, following the Fifth Circuit decision, dismissed the case on the same Phase One/Phase Two grounds.
Main appealed to the United States Court of Appeals for the Seventh Circuit in Cincinnati. The U.S. Department of Justice declined to take over prosecution of the case, but it submitted a lengthy amicus brief supporting the relator's position that the Fifth Circuit standard was incorrect.
The importance of the Oakland City University case was recognized on Dupont Circle. In an extraordinary demonstration of comity, the American Council on Education joined with the Career College Association to file an amicus brief supporting the District Court dismissal of the suit.
The Seventh Circuit appeals court brushed aside the Phase One/Phase Two analysis employed by the Fifth Circuit appeals court, holding instead that an initial certification in the PPA that is untruthfully made produces false claims downstream. In short, the Phase One certification is collapsed into the Phase Two request for funds.
Court vs. court
With the Fifth and Seventh Circuit Courts of Appeals taking opposite positions, the case was ripe for the U.S. Supreme Court, which is supposed to resolve such inter-circuit inconsistencies. Oakland City University duly appealed to the Supreme Court for review. Inexplicably - and without any comment or opinion - the Supreme Court declined to take up the case. Both decisions would stand, and the Oakland City University case could go forward.
Federal false claims cases spread and grow in size
Federal appeals courts in the fifth and seventh circuits are in disagreement as to what constitutes a federal false claim. In October 2005 the seventh circuit panel authorized a case to continue against Oakland City University that would have been dismissed in the fifth circuit. And the Supreme Court refused to become involved.
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Michael B.
Goldstein
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Meanwhile another - and even more troubling case was emerging. Chapman University found itself facing a qui tam action, also challenging its use of Federal Title IV student financial aid funds. But this time the claim was not that it had violated a provision of it's Program Participation Agreement (PPA).
Instead, the relators (plaintiffs suing on behalf of the federal government) claimed that university personnel had been untruthful in representing the nature of one of its academic programs during re-accreditation proceedings conducted by the Western Association of Colleges and Schools (WASC) and its Commission on Institutions of Higher Education.
They alleged that the untruthful statements resulted in re-accreditation. As a result of
re-accreditation, the university remained eligible to participate in the Title IV student financial aid programs. Based on such falsehood, all subsequent Title IV aid expenditures were false claims.
Phase zero complications involve accreditation
The Chapman University case went to a different federal appeals court - the Ninth Circuit. This time the Court not only sided with the Seventh Circuit but, with the active support of the Justice Department, expanded the zone of institutional vulnerability to include what one might term "Phase Zero." Phase Zero includes actions that precede the signing of the Title IV Program Participation Agreement (PPA).
The Ninth Circuit Court reasoned that a recovery of federal funds might be supported if the relator could prove that truthful representations to WASC would have resulted in a denial of re-accreditation.
As much as $1 billion at stake in Phoenix
In September 2006, the same Ninth Circuit appeals court published a long-awaited qui tam decision in a case involving the University of Phoenix, which was accused of improperly compensating enrollment counselors in violation of the laws governing the Title IV student aid programs.
In this decision, the Ninth Circuit appeals court in San Francisco reiterated its decision in the Chapman University case and went a few steps further. The Court rejected the argument that a PPA violation should trigger no more than an administrative action by the U.S. Department of Education, rather than a false claims liability for the entirety of the Title IV funds disbursed.
"These questions of enforcement powers are largely academic," the ruling states, "because the eligibility of the University under Title IV is explicitly conditioned, in three different ways, on compliance with the incentive compensation ban."
Note the emphasis on the word "explicitly." The court acknowledged that the U.S. Department of Education could choose restrictions and penalties far less onerous than repayment of all the 'false claims.' Nevertheless, whatever might be done by ED would not affect the qui tam proceeding.
The court also made short-shrift of the argument that the incentive compensation prohibition is a minor component of the rules governing Title IV participation and therefore should not provide a basis action so draconian as a False Claims Act proceeding. The court ruled that Every obligation is of equal stature, and a violation of any is sufficient basis for a false claim proceeding.
For now it's discovery, messy trials to come
Oakland City University. Chapman University. University of Phoenix. They're all defendants in qui tam actions alleging payment of incentive compensation to admissions personnel - and as a result misappropriation of federal student financial aid funds.
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Michael B.
Goldstein
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It is important to recognize that
none of these cases has actually proceeded to an actual trial. The court proceedings and appeals to date have been brought by the defendant institutions seeking dismissal.
The defendant institutions claimed that the relators (plaintiffs suing on behalf of the federal government) had failed to make a case, even assuming the absolute accuracy of their allegations. In each case the trial court agreed and dismissed the cases. Trial courts did likewise in earlier Texas cases against for-profit institutions. But unlike the Texas cases, in each of these three, an appeals court reversed the district court decision and ordered the litigation to proceed.
Each case is now in what is called the "discovery" phase, during which the parties, notably the relators, examine people and records to establish evidence. The distance between discovery and victory is considerable. A great many cases are resolved before trial because of what is - or is not - found during discovery.
However, discovery is an onerous and costly process. The relators literally have carte blanche to review any records and interview any persons about which they can make even a slim claim of relevance.
Cause and effect; substantial vs. absolute
This is serious business for each of the institutions. It is particularly significant in the Chapman University case. There, the relators must prove several things, the first two of which are most important to the higher education community.
First, the relators claim false statements were made to the university's WASC accreditors. Second, the relators claim truthful statements would have resulted in a decision not to reaffirm the university's accreditation. Evidence proving those two elements will make the rest of the False Claims Act case a relatively easy victory. Title IV student financial aid eligibility rests in part on accreditation. If an institution is not accredited, it is not eligible to dispense or receive Title IV funds.
Payroll and personnel records can show whether or not the incentive compensation rule was violated. Accreditation is a much more complex process. The outcome is the result of many interrelated factors coming together into a final subjective decision by the accrediting commission. Most accreditation standards (with very few exceptions such as state licensure) involve tests for compliance that are substantial, not absolute.
Substantiality is a judgment call. In the accreditation process it is made by several collectives, the visiting team, a possible intermediate review committee, and then the commission itself. The decision is often a consensus, and it may not be bi-polar.
An institution that is found to lack substantial compliance in an area is likely to be instructed to report on its progress toward compliance, either through monitoring or in serious cases probation. If a commission were to discover that part of an institution's submission - particularly if offered in conversation - proved inaccurate, the commission might or might not impose the ultimate sanction.
The relators must prove that the allegedly false statements would have resulted in a denial of re-accreditation. Every minute element of the re-accreditation process may come under their scrutiny. The members of the visiting teams and the commission may be interviewed under oath.
This is a potentially enormous intrusion into the accrediting process. The sine qua non of voluntary accreditation are confidentiality and collegiality. Contemplate how persons on a visiting team or commission might behave knowing that they might be asked under oath to discuss their thoughts, impressions and possible actions based on both what they observed and what they might have observed if a different story were told.
Not to mention the attorney's fees.
Michael Goldstein is a member of the Washington, DC law firm Dow Lohnes, PLLC and its higher education practice leader.