Ever-Expanding False Claims Act

Federal court ruling further broadens scope of law that allows individuals to sue colleges they accuse of defrauding government.
May 26, 2006

When a ruling by the U.S. Court of Appeals for the Seventh Circuit last fall endorsed a legal theory that made it easier for individuals to sue colleges under the federal False Claims Act, higher education legal experts did what they often do: They predicted that the sky might fall, in the form of a flurry of lawsuits that might be more likely to succeed.

That sound you just heard might have been the first piece of the sky hitting the roof.

A federal judge in California on Tuesday cleared the way for three former adjunct professors at Chapman University to sue the institution under the False Claims Act, which permits lawsuits by an individual who believes he or she has identified fraud committed against the federal government, and who sues hoping to be joined by the U.S. Justice Department. (The plaintiff then shares in any financial penalties, which can include trebled damages.) In siding with those who sued Chapman, Judge James V. Selna not only cited the Seventh Circuit's decision in United States of America ex. rel. Jeffrey E. Main v. Oakland City University as a key precedent, but expanded on it in significant ways. Most notably, the judge concludes that a college can run afoul of the False Claims Act by violating a requirement imposed not directly by the federal government but by an accrediting group -- a position the Justice Department endorsed. 

"This is exactly what we were worried about with the Main case, and in fact it broadens it and takes it a step further," said Mark L. Pelesh, executive vice president at Corinthian Colleges and a longtime higher education lawyer. "Now making false claims to an accreditor somehow translates, through this conflationary approach, into making false claims for money to the federal government."

This is complicated legal terrain, so let's back up. First, last October's decision by the Seventh Circuit was perceived as breaking new ground because it concluded that a college or other recipient of federal funds could be held accountable under the False Claims Act for breaking a promise or commitment it makes to the government at one point in time or at one stage of a federal application process, even if it does not make a similar promise at the point at which it formally requests or receives the funds. Specifically, the court ruled that a former admissions director could sue Oakland City for allegedly paying recruiters based on enrollment because the initial, "phase one" application that it and other colleges make to the Education Department for certification to eventually award federal financial aid funds bars it from doing that, even though no money passes hands at that point.

“Lawyers who make a living out of suing universities can have a field day with this,” Sheldon E. Steinbach, vice president and general counsel of the American Council on Education, the chief umbrella group for higher education, said at the time of the ruling in the Main case.

The U.S. Supreme Court decided last month not to review the Oakland City v. Main decision, which leaves it intact in Illinois, Indiana and Wisconsin, the states that are part of the Seventh Circuit, and as legal precedent for other courts to cite.

And indeed, that's what happened this week, in a case known as United States of America v. Chapman University. In that case, three former instructors at the comprehensive institution in Orange, Calif., charged that Chapman had broken promises made to the federal and state governments about certain aspects of the quality of education offered at Chapman's University College branch campuses, which primarily serve adults.

They said, for example, that instructors at Chapman regularly shortchanged students by providing fewer in-class hours than are required by the Western Association of Schools and Colleges, the regional accrediting agency that oversees California, and that the university had purposely and fraudulently failed to give students in its marriage and family therapy program as many hours of clinical training as California's certification program for such therapists requires. (The university released a statement Wednesday that said: “We are very confident that this case has no merit; it lacks basis in law and in fact. We are certain that Chapman University will ultimately prevail.”)

The instructors, who say they resigned rather than participate in the fraud they allege occurred, sued under both the federal and California False Claims Acts. Chapman sought to have the case dismissed, and in his decision this week rejecting the university's request, Judge Selna said that the Seventh Circuit's decision in Main "provides a persuasive analytic framework" for the Chapman case.

Further, he accepted their unconventional argument that statements the university made during the course to the Western Association of Schools and Colleges in the course of the accreditation accrediting process were analogous to those Oakland City made to the U.S. Education Department that the Seventh Circuit concluded triggered the False Claims Act. The underlying theory: Chapman told the accreditor it would do certain things (like give students a certain amount of class time to make their degrees mean something). If it had not agreed to do those things, Chapman would not have received accreditation, and if it was not accredited by an agency recognized by the Education Department, the university would not have qualified for the federal grants and loans -- the receipt of which triggers the False Claims Act.

In siding with the plaintiffs and their novel theory, the federal court had the encouragement of another not insignificant party: the U.S. Justice Department. Although the government declined to take the instructors' side in their lawsuit against Chapman, Assistant Attorney General Peter D. Keisler filed a brief with the California court mostly backing their legal argument and opposing Chapman's request to dismiss the suit.

The university's argument "that 'no False Claims Act claim can be maintained based on the standards of [a] private accreditation authority' " sweeps "too broadly," the government brief notes. "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 [False Claims Act].... 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."

Michael B. Goldstein, a higher education lawyer at Dow Lohnes Albertson, said the Justice Department has seized on the Main case as a way of pushing for a broader interpretation of the False Claims Act, and has stepped into several pending cases -- including the anticipated blockbuster of higher education False Claims cases, one involving incentive compensation at the University of Phoenix that is now before the U.S. Court of Appeals for the Ninth Circuit -- to "make it clear that this is now the government's position."

Several lawyers who represent colleges bemoaned what they said was the expanding reach of the False Claims Act into higher education, although Goldstein and others were quick to note that all that the Main and Chapman cases have done so far is to allow those suing them to make the case that the institutions actually engaged in fraud, and to make it easier for others to persuade a court to give them such a chance.

But lawyers who tend to sue colleges in cases like this say that the lawyers' "sky is falling rhetoric" overstates the threat to the institutions. Daniel Bartley, who represents the three instructors in the Chapman case as well as those in the pending Phoenix case, says college lawyers are wrong to say that the new line of False Claims cases allow colleges to be sued if they have violated any of the hundreds of regulations that the government -- or, under the Chapman ruling, an accreditor -- imposes on them. "This applies only where there is a material breach of a condition of payment, and it's flagrant," Bartley said. "The only colleges that face trouble are those that are not obeying the law and the material accreditation standards that underlie their getting loans and grants."

Exactly what laws, regulations and standards are considered "material," of course, will be one of the many issues that could keep the courts (and colleges' lawyers) busy for months and years to come, if this line of False Claims Act cases continues to gather steam.


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