By Sean Beller
While the higher education space continues on an unpredictable path as administration turnover and court rulings have created an ever-changing landscape on key topics like gainful employment, borrower defense, and state authorization, False Claims Act (“FCA”) litigation has remained a consistent concern for institutions and the entities with whom they contract. Two federal courts recently granted motions to dismiss FCA claims related to Title IV-eligible institutions. These rulings are both an encouraging sign of the rigorous application of the heightened pleading standards of Federal Rule of Civil Procedure (“FRCP”) 9(b) to FCA claims, as well as a reminder of the importance of mounting an effective defense against an FCA claim as early as possible.
Background on FCA Litigation
As a primer for those who have not been involved in FCA litigation, the FCA is a federal fraud statute that imposes statutory fines and potentially treble damages (i.e. the amount of damage times three) on individuals or entities who knowingly submit false claims for payment to the Government (or knowingly avoid or decrease an obligation to pay the Government). The FCA includes a whistleblower provision that allows private individuals, styled as “relators,” to bring an FCA claim on behalf of the Government. In the higher education context, this means that students, employees, and other individuals can bring FCA claims against an institution. It is not uncommon for a relator to be a disgruntled ex-administrator, making allegations related to institutional Title IV-eligibility criteria (e.g. violations of the incentive compensation ban, manipulations of 90/10 calculations) or the Department’s misrepresentation regulations.
FCA claims brought against Title IV-eligible institutions can quickly become bet-the-company litigation because the Government and/or relators can pursue an implied certification theory of FCA liability, whereby an institution is deemed to have certified compliance with material Title IV requirements each time it submits a claim for payment. When FCA claims are premised on knowing non-compliance with Title-IV institutional eligibility criteria, the Government and/or relators can assert that all Title IV funds disbursed by an institution during the period of non-compliance, multiplied by three, should be included in the calculation of damages.
Given the potential exposure from treble damages, coupled with the fact that Department regulations provide that an institution is not Title IV-eligible if it has been judicially determined to have committed fraud involving the Title IV programs, it is imperative that FCA defendants mount an early and vigorous defense against meritless FCA claims. The primary means of doing so is by filing a motion to dismiss for failure to state a claim pursuant to FRCP 12(b)(6). While all civil plaintiffs must comply with the basic pleading requirements in FRCP 8(a), because the FCA is a fraud statute, FCA claimants must also comply with the heightened pleading requirements in FRCP 9(b) which mandate that the circumstances of fraud be pleaded with “particularity.”
Recent FCA Cases
In two recent instances in which Powers was involved, federal district courts have granted motions to dismiss brought by FCA defendants on the grounds that the relators failed to meet their burden under FRCP 9(b):
1. United States ex rel. Lorona v. Infilaw Corp., et al.: On August 12, 2019, the United States District Court for the Middle District of Florida dismissed FCA claims brought against law schools and other related defendants containing several allegations, including 90/10 manipulation. Judge Marcia Morales Howard’s detailed fifty-eight page ruling included the following excerpts critiquing the relators’ pleading of facts related to Program Participation Agreements and 90/10 allegations:
- “The Third Amended Complaint is devoid of any particularized allegations from which to plausibly infer that at the time the PPAs were signed, whenever that was, the persons who prepared and signed the PPAs, whoever they were, made certifications of compliance (or promises to comply) that were false at the time they were made.”
- “However, Relators’ general allegations as to the existence of this institutional loan scheme are unsupported by any particularized facts about the students with low-credit who received such loans and were not subject to collections, the dates such loans were issued, the amounts of any of these loans, or the number of such loans each Law School issued. Critically, Relators also fail to allege the total amount of allegedly improper non-Title IV revenue derived from these loans or the proportional relationship of this revenue to the total amount of the Law Schools’ revenues overall.”
- “Significantly, however, Relators do not allege ASLS’s total revenues in 2012, the specific data reported in the 2012 annual audit, or the proportion of ASLS’s overall revenues encompassed by the check exchange. Thus, while it is possible that ASLS would have been in violation of the 90/10 Rule absent the inclusion of funds from the check exchange and other programs, one cannot plausibly infer such a violation from the non-conclusory factual allegations contained in the Third Amended Complaint.”
2. United States ex rel. Kelly-Creekbaum v. L’Academie De Cuisine, Inc., et al.: On August 14, 2019, the United States District Court for the District of Maryland dismissed FCA claims brought against a third-party servicer co-defendant alleging loan processing and Title IV disbursement violations. Judge Deborah Chasanow summarized the application of FRCP 9(b) in the FCA context:
- “Several cases have clarified Rule 9(b)’s “who,” “what,” and “when” requirements in the context of the FCA. As to who, in FCA cases where the defendant is a corporate entity, Rule 9(b) requires the Plaintiff to name the individuals involved in the allegedly fraudulent conduct. As to what, a plaintiff must show a link between allegedly wrongful conduct and a claim for payment actually submitted to the government. Finally, as to when, Rule 9(b) requires a Plaintiff to allege with particularity the dates of the supposed fraudulent conduct.” (internal citations omitted).
- “The United States Court of Appeals for the Fourth Circuit has clarified how the heightened pleading standard under Rule 9(b) interacts with claims under the FCA: ‘[W]hen a defendant’s actions, as alleged and as reasonably inferred from the allegations, could have led, but need not necessarily have led, to the submission of false claims, a relator must allege with particularity that specific false claims actually were presented to the government for payment.’” (internal citations omitted).
These rulings are an encouraging sign that federal judges are willing to dig into FCA allegations when presented with a fulsome motion to dismiss, and will hold relators to the heightened pleading standards of FRCP 9(b). These rulings also contribute to a growing body of case law interpreting how FRCP 9(b) should be evaluated in the FCA and higher education contexts.
Finally, these rulings serve as a reminder of the crucial role that motions to dismiss play in the defense against FCA claims. Given the potential liability exposure, institutions and other defendants are often forced to settle FCA claims that survive the motion to dismiss stage, even if such settlements are disproportionate to the merits of the allegations.