Oct. 24, 2005

Inviting a Flurry of False Claims Cases

A federal appeals court has cleared the way for a former admissions director and the federal government to sue Oakland City University for allegedly paying recruiters based on enrollment, despite having agreed not to do so under the Higher Education Act.

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But experts on higher education law said the ramifications of the court’s ruling could reverberate far beyond the case at hand, by radically altering the interpretation of the federal False Claims Act and undermining the legal validity of guidance from the Education Department and other federal agencies that colleges regularly follow.

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

Particularly disheartening to college lawyers like Steinbach is that the short but pointed decision was written by Judge Frank H. Easterbrook of the U.S. Court of Appeals of the Seventh Circuit, a highly respected legal thinker who is also a law professor of the University of Chicago, and therefore harder to dismiss in significance.

Easterbrook’s ruling came in what is known as a qui tam lawsuit, which is filed under the federal False Claims Act 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 this case, the lawsuit was brought by Jeffrey Main, who said that Oakland City, a private institution in Oakland City, Ind., that is affiliated with the General Baptist Ministries, had compensated him in part based on the number of students he enrolled, which is prohibited by the Higher Education Act, the law that governs federal student aid programs.

Main, joined by the federal government, charged that Oakland City violated the False Claims Act because, in initially applying for the right to distribute federal financial aid, its officials had signed a document (known as the Program Participation Agreement, or PPA) in which they made a wide range of commitments, including agreeing not to offer incentive compensation.

Oakland City argued — and a federal judge in the case first agreed — that assurances made in initial applications like the PPA could not be considered fraudulent statements under the False Claims Act, because no money passes hands based on that agreement. Colleges must apply a second time to formally seek money, and only fraudulent claims made in those applications can violate the False Claims Act, the district court judge ruled, citing a 2003 ruling by the U.S. Court of Appeals for the Fifth Circuit, in a case known as U.S. ex rel Graves v. ITT Educational Services.

But Easterbrook, writing for a three judge panel of the Seventh Circuit, which covers the states of Illinois, Indiana and Wisconsin, overruled the lower court’s decision. He ruled that the initial, “phase one” application that Oakland City and other colleges make to the Education Department for certification to eventually award Title IV funds is enough to set off a challenge under the False Claims Act, if a plaintiff can prove that an institution is shown at some later time to have fraudulently agreed in that initial application to do something (or to not do something).

While the appeals court’s decision opens the door for Main, Easterbrook notes that the former admissions director must still show “that the university not only knew, when it signed the [initial] application, that contingent fees to recruiters are forbidden, but also [that it] planned to continue paying those fees while keeping the Department of Education in the dark.”

Easterbrook also writes that Oakland City was wrong to have relied on a 2002 memorandum written by William Hansen, then under secretary of education, in which he played down the significance of violations of the rule against incentive compensation. Many colleges have cited the “Hansen memo,” as it has commonly come to be known, as prohibiting such payments but as acknowledging that colleges will face little in the way of penalties beyond repaying the government for any financial aid received improperly through the awarding of the incentives.

The Seventh Circuit opinion refers derisively to the Hansen guidance as a “back office memo” and says it has “no legal effect; it was not published for notice and comment and does not authoritatively construe any regulation.”

Jonathan Tarnow, a Washington lawyer with the firm of Drinker, Biddle & Reath, who is representing Oakland City, said the university was disappointed by the Seventh Circuit’s decision and was considering its options. He declined to comment further.

But other college lawyers who are not directly involved in the case said the decision could have a sweeping reach. Michael B. Goldstein, a lawyer in Dow Lohnes & Albertson’s higher education practice in Washington, said the Seventh Circuit’s decision could make colleges susceptible to a wide range of potential lawsuits under the False Claims Act. In the PPA that colleges sign to enter the Title IV programs, they commit to obeying scores if not hundreds of rules and regulations, and the court’s ruling now makes it possible for an individual to bring a lawsuit seeking triple damages for all financial aid deemed to have been received as a result of a breach of those rules.

The Fifth Circuit’s Graves decision (which the Supreme Court declined to hear) “was making Title IV false claims very, very difficult,” Goldstein said. “There’s a whole cottage industry surrounding these cases, and the Fifth Circuit had kicked the foundation out from under it. In this case, they’ve had a castle built for them.”

Steinbach of the American Council on Education said he was particularly troubled by the Seventh Circuit’s casual dismissal of the “Hansen memo” and other guidance that emanates regularly from federal agencies, in the form of “Dear Colleague” letters and other materials on which colleges often depend to gauge whether they are in compliance with federal laws and rules.

“As attorneys for institutions that rely on this kind of advice,” Steinbach said, a decision like this “undermines our degree of confidence and reliability in the guidance.” While Easterbrook did not specific how formal a document must be before it can be relied on, Steinbach said the message seemed to be “if it isn’t published in the Federal Register, it may not matter.”

Steinbach and Goldstein both said that college lawyers would have to examine this decision closely to decide just how broad the implications were for higher education and how aggressively college associations would mobilize to challenge it.

A lawyer for Main, meanwhile, said he was focused mostly on his client’s case and hadn’t thought much about the broader implications for colleges other than Oakland City. But Lane C. Siesky said he imagined that the court’s ruling would “make every institution want to go back and make sure they’re complying with everything they promised to comply with in the agreements they signed with the government.”

— Doug Lederman

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