A federal appeals court’s recent decision demonstrates how even an eminent jurist can be confused by the complex regulatory system established by the Higher Education Act, with potentially significant negative consequences for colleges and universities.
In United States ex rel. Main v. Oakland City University,  Judge Frank Easterbrook of the U.S. Court of Appeals for the Seventh Circuit authored an opinion  for a three-judge panel that reversed a District Court decision and permitted a qui tam action to proceed under the False Claims Act. In that action, a former director of admissions for a university contended that the institution had violated the prohibition in the HEA and the U.S. Department of Education’s implementing regulations against paying incentives for enrolling students.
The False Claims Act is aimed at obtaining restitution to the government of money taken from it by fraud, and liability under that Act occurs when someone presents to the government a false or fraudulent claim for payment. In a qui tam action, a private individual -- the “relator” -- files a lawsuit seeking this restitution. The government may decide to take over the case, and the relator may obtain a financial reward if the action is successful.
Qui tam cases are a mixed bag. On the one hand, the government obtains the assistance of private individuals to extend its investigative and litigation resources to protect the integrity of government programs. On the other hand, given the vast array of federal programs and the volumes of requirements that result from them, qui tam actions offer fertile ground for trial lawyers seeking a supply of new business and a potent weapon to force settlements from organizations that participate in government programs. The key, of course, is for the courts to scrutinize these actions carefully and to circumscribe them to achieve the purposes of the False Claims Act.
This is what Judge Easterbrook’s opinion failed to do. His failure is all the more surprising in light of his reputation not only as a highly capable jurist, but as a conservative one presumably skeptical of broad constructions of federal law that fuel the litigiousness of the plaintiffs’ bar.
Fundamentally, Judge Easterbrook’s opinion simply got wrong crucial aspects of the regulatory structure established by the HEA. The opinion failed to understand the distinction between eligibility and participation in the student aid programs.
An institution establishes its eligibility under the HEA by filing an application with the Department of Education. However, an institution need not actually seek participation in the HEA student aid programs in this application. It may simply wish to be designated as eligible to participate because that status has significance apart from gaining access to the financial aid funding available to its students under Title IV of the HEA.
Furthermore, the application does not require the institution to certify its compliance with all HEA requirements. The eligibility requirements are more limited and, as pertinent to the Oakland City case, nowhere include any certification by a college that it complies with the incentive compensation prohibition.
Only when an institution seeks to be certified to participate in the student aid programs does it agree to comply with the many participation requirements applicable to those programs. It does so by signing the Program Participation Agreement (PPA), which does include a representation that it will not violate the incentive compensation prohibition. Even then, however, the institution has made no actual claim for federal funds. That may occur only when it helps students apply for Title IV loans and grants.
Judge Easterbrook dismissed this structure as “paperwork,” and this led him into error. Thus, early in the opinion, he stated that the university had assured the Department of Education in its eligibility application -- what he calls the “phase one application” -- that it would comply with the rule against incentive compensation. But, as noted above, that is simply wrong -- a college does not agree to comply with the incentive compensation rules until it formally seeks certification to participate in the program.
Easterbrook then went on more critically to state that the “phase two” application -- presumably the PPA and subsequent student applications for Title IV funds -- depended on the finding that the university was eligible and that the university could not be eligible if it knowingly violated the incentive compensation rule.
That too is wrong. The Department of Education has the discretion to use a variety of remedies in the event that it believes an institution violated a participation requirement like the incentive compensation rule. These include placing an institution on the reimbursement method of receiving Title IV funds, or requiring repayment of funds, fines, and provisional certification. To be sure, the department may also seek to revoke the institution’s eligibility, but it is not compelled to do so. In contrast, the department must revoke eligibility if a true statutory condition of eligibility is no longer met, such as accreditation by a recognized accrediting agency or state licensure.
Yet, Judge Easterbrook stated that “[i]f a false statement is integral to a causal chain leading to payment, it is irrelevant how the federal bureaucracy has apportioned the statements among the layers of paperwork.” This conflation of the requirements in a complex regulatory structure like the HEA can only fuel False Claims Act qui tam litigation, since now, based on Judge Easterbrook’s erroneous understanding of how the HEA works, any alleged violation can serve as the basis for relators and, more realistically, their enterprising counsel to sue.
By failing to grasp the distinction between eligibility and participation, his opinion, on behalf of one of the leading federal Courts of Appeals, may dramatically increase the vulnerability of institutions of higher education to a whole new species of lawsuits: False Claims Act qui tam actions alleging knowing violations of one of the myriad requirements in the HEA and implementing regulations. The danger of such litigation will be heightened by the threat of treble damages under the False Claims Act.
It was precisely this danger that another federal court recognized in a qui tam case involving the same incentive compensation requirement ( United States ex rel. Graves v. ITT Educational Services, Inc.). That court, following the teaching of the Supreme Court and five U.S. Courts of Appeals in an extensive and well-reasoned decision  that recognized the relevant distinctions in the HEA structure, understood that False Claims Act liability attaches not to the underlying allegedly fraudulent activity, but to the claim for payment. Judge Easterbrook’s opinion noted this case, which was squarely on point to the case before him, toward the end of his brief opinion. However, he gave it short shrift because it was decided by a district court judge (it was affirmed without opinion by the Fifth Circuit).
Judge Easterbrook seems to have had some inkling of the flood of litigation that his opinion may cause. In discussing the ITT case and Oakland City University’s protests that any purported regulatory violation in a funding program could require litigation in a False Claims Act suit, he took refuge in the requirement that the violation must be “knowing.”
As he stated, “[t]ripping up on a regulatory violation does not entail a knowingly false representation.” That is no bulwark against abusive plaintiffs’ attorneys. It will not be hard to plead a knowing violation, survive a motion to dismiss, and subject institutions to extensive discovery aimed at determining whether someone acting on their behalf “knew” that they planned to violate one of the many requirements of doubtful specificity in the HEA and the voluminous Department regulations.
Judge Easterbrook’s bland assurances that they will ultimately prevail will be cold comfort later after thousands of dollars of legal fees, extensive distractions from their missions of educating students, and smears against their reputations in the news media. Unless Oakland City is reversed, it is Judge Easterbrook and the Seventh Circuit who have unfortunately tripped up.
Mark L. Pelesh is executive vice president for legislative and regulatory affairs for Corinthian Colleges, Inc. He was formerly the head of the Education Law Group at Drinker Biddle & Reath in Washington, and specialized in the Higher Education Act and U.S. Department of Education regulations.