Where’s the Beef?

As long as the courts put some sensible limits on the linkages (e.g., only allowing claims where the false statements would have materially affected the chances of accreditation, and therefore triggered loss of funding), then I see this as only a good thing for higher education.

We suffer from significant lack of public trust, in part due to a disparity between our rhetoric/promises and our deliverables. Holding colleges and universities accountable for falsehoods to accrediting bodies and federal agencies may worsen that situation in the short term, due to an opportunistic flurry of cases, but once the backlog clears, one can hope that the threat will oppress the bad actors and make it easier for honest institutions to distinguish themselves.

CJ, at 9:30 am EDT on May 26, 2006

The One-Two Punch

I am following the unfolding legal drama in the district and appellate courts regarding FCA liability in HE. While not particularly unique, the grant of qui tam standing to sue institutions receiving Title IV funds (amounting to more than $75 billion this year) under the FCA does conceivably give anyone aware of fraud a venue for the airing of dirty laundry and personal grievances. Winning the right to allege fraud under the FCA, of course, is much easier than convincing a jury of the fact.

U.S. ex rel. Jeffrey E. Main v. Oakland City University (CA 7th 05-2016)Especially influential in this regard is the October 20, 2005 Opinion of the Seventh Circuit Court of Appeals, written by Judge Easterbrook that establishes the PPA (Program Participation Agreement) as a legally binding contract between the institution and the federal government, from which flow enforceable duties and responsibilities. This new holding differs markedly from the much more casual interpretation of US DOE, as presented in the so-called ‘Hansen memo’. Judge Easterbrook scathingly characterized the memo, which was distributed to participating institutions as authoritative guidance, this way: “Such a memorandum has no legal effect; it was not published for notice and comment and does not authoritatively construe any regulation. ... [It is] a back-office memo...” (p. 4)

The other point worth noting about this is the visible shift in the stance of the Department of Justice on the applicability of the FCA to HE accreditation matters. As the DOJ brief states: “The FCA is ‘intended to reach all types of fraud, without qualification, that might result in financial loss to the Government.’ United States v. Neifert-White Co., 390 U.S. 228, 232 (1968). Numerous courts have held that where the United States makes compliance with certain requirements a condition of receiving a government benefit and a person submits a claim while not in compliance with such requirements, the claim violates the FCA. ... Nothing in this theory of liability requires that the substance of the federal requirement originate with the federal government, as long as the federal government has adopted the requirement as its own, by statute, regulation, rule or contract (p. 6, citations omitted).”

In their brief as amicus curiae, the DOJ also commented on the role of the PPA, which is a signed contract that lays out the conditions for the receipt of Title IV funds, which all institutions must have in order to be eligible for the receipt of federal funds. ” ...[A] false certification of compliance with agency requirements ‘creates liability when certification is a prerequisite to obtaining a government benefit.’ This theory of liability has been recognized by courts across the country (p. 7, citation omitted).”

Together, this pair of appellate opinions can only be characterized as a devastating one-two punch to the financial stability of all participating institutions. The first blow is the dismissal of US DOE guidance and internal policy as irrelevant to the enforcement of PPA terms. The second, and equally threatening, is the expansion of the scope of causality for alleging false claims on the basis of the FCA. As reported by Inside Higher Ed, Steinbach of the American Council on Education opined that, “This basically provides a private right of action to individuals who want to sue under the Higher Education Act, and it dismantles verbally the mechanism that the Department of Education uses to dispense advice, in a way that could be devastating. (October 24, 2005, http://insidehighered.com)

US DOE official, Ruth Tringo, privately acknowledged to me that most — if not all — of the hundreds of community colleges receiving Title IV funds do not have drug prevention programs, which is a central part of all PPAs issued by the department. [See General Terms and Conditions, Item 2. (a): “The Institution certifies that on the date it signs this Agreement, it has a drug abuse prevention program in operation that it has determined is accessible to any officer, employee, or student at the Institution.” See also PPA, Part 2 of “Certifications Required From Institutions,” the “U.S. Department of Education Drug Prevention Certification,” that details minimum program requirements.]

In addition, it should be noted that the PPA is also a fiduciary agreement governing the disbursement of funds by the federal government. But it is still very unclear at this early stage of the legal drama what the consequences will be for participating institutions that violate the different provisions of their PPA, and to what extent they can be held liable. In any case, these developments send a clear message that these violations are now actionable in federal court.

U.S. v. Chapman University (Cal. Cen. D. SACV 04-1256 JVS, May 23, 2006)Relying on implied certification theory of liability, the district court denied a motion to dismiss certain claims filed under the False Claims Act, relying in part on the Main decision (see above). Of course, even though the plaintiffs have survived a motion to dismiss for failure to state a claim, it will be much more difficult to prevail as the trial proceeds.

Whatever the outcome, the legal scaffolding is in place for waves of these kinds of suits against participating institutions — first, by authorizing private executioners and hangmen under the FCA, and second, by kicking out from underneath them the US DOE guidance they rely upon to interpret their fiduciary obligations — leaving institutions twisting in the wind.

Glen S. McGhee, Dir., FHEAP Florida Higher Education Accountability Project"Bridging the accountability gap in HE through accreditation reform.”

Glen S. McGhee, Dir., FHEAP at Florida Higher Education Accountability Project, at 9:20 pm EDT on May 27, 2006

The Fine Art of Slippery Sloping

Glen McGhee’s comments bear study, but they are best studied in the context of how education fraud suits work. But we should first evaluate Glen’s concerns about Judge Easterbrook’s disrespect for the “Hansen Memorandum". I will leave for another day the sordid political genesis of the Hansen Memorandum. The point is that there are administrative procedures required when an administrative agency proposes to undo legislation. At the very least, the dirty work must occur in the light of day. This means a Notice of Proposed Rule Making with an opportunity for the public to comment on a change in the agency’s regulations. Since none of this happened here, Judge Easterbrook’s characterization is entirely apt.

In evaluating Glen’s claim that these cases provide a platform for the “airing of dirty laundry and personal grievances", it would be helpful to understand what this law does NOT allow or encourage: First, state universities and state college systems are immune from these suits, as the U.S. Supreme Court has ruled that whistleblowers cannot bring cases against states or state-owned entities. Vermont Agency of Natural Resources v. United States ex rel. Stevens, 529 U.S. 765, 120 S.Ct. 1858, 146 L.Ed.2d 836 (2000). I’ll leave it to Glen to estimate how much this shrinks the “target” of $75 billion, but I’m willing to wager it’s a good chunk of the $75 bb Glen mentioned.

Second, before assuming that floodgates of litigation will be thrown open, it is helpful to contemplate the economics of False Claims cases. Unless the hypothetical airer of personal grievances has a lawyer in thrall, s/he will have to figure out how to pay for a lawyer. Lawyers come in a couple of flavors, those who charge hourly fees, and those taking cases on a contingent basis. Since putting a False Claims case together will cost upwards of $30,000, most academicians will be looking for contingent fee-flavored lawyers. In U.S. ex rel Hendow v. University of Phoenix, the DOJ has not been able to intervene in the case even though an OIG investigation essentially proved the whistleblowers’ case. This strongly suggests that in even the strongest cases, the lawyers will not be able to count on government intervention, and shall instead have to see the whole thing through themselves.

The interesting thing about contingent fee litigation is that it imposes market discipline on the plaintiff’s lawyers. An FCA lawyer taking a case on a contingent basis will see about 10 or 12 cents on the dollar. (The whistleblower will receive 25-30% of the recovery, and the lawyer will receive at most 40% of that). So even a case that involves a million dollars worth of fraud means a possibility of a $100,000 fee. Against this lofty sum must be weighed the 500-1,000 hours the case will take, the cost of experts, and, as Glen points out, the risk of losing.

From where I sit, the floodgates will yield only a trickle.

I cannot leave this subject without a comment on Glen’s disdain for the public airing of “dirty laundry". I’m sure that Cardinal Law thought the news about priests’ molestation of children was “dirty laundry", just as Nixon viewed Daniel Ellsberg’s release of the Pentagon Papers. My point is that from Abu Ghraib to Dan Rostenkowski, those in power wish their dirty secrets would be kept... and those without it hope the truth will set them free.

Mark, Lawyer at None, at 5:00 am EDT on May 30, 2006