Publications

25 Aug 2011

Ninth Circuit reinstates False Claims Act case against proprietary school

Education Services Alert

Dennis M. Cariello
Mark A. Nadeau
Allison L. Kierman

False Claims Act lawsuits are brought by individual plaintiffs on behalf of the government claiming that defendants have defrauded the US government of funds.  Numerous lawsuits have been filed against proprietary colleges in recent years based on alleged violations of the HEA’s ban on the payment of incentive compensation based on the number of students enrolled at an institution or the amount of federal student aid disbursed.  Generally, however, the courts have dismissed such lawsuits as insufficiently pled. 

Ban on recruiter-incentive compensation

The federal government distributes Title IV funds to assist with the cost of secondary education.  To receive such funds, colleges must abide by numerous requirements and certify their compliance with the requirements to the DOE.  Among the requirements, schools are prohibited from “provid[ing] any commission, bonus, or other incentive payment based directly or indirectly on success in securing enrollments or financial aid to any persons or entities engaged in any student recruiting or admission activities or in making decisions regarding the award of student financial assistance.”  20 U.S.C. § 1094(a)(20).  The ban is intended to ensure recruiters do not register “poorly qualified students who will derive little benefit from [federally guaranteed loans] and may be unable or unwilling to repay federally guaranteed loans.”  U.S. ex rel. Hendow v. University of Phoenix, 461 F.3d 1166, 1168-69 (9th Cir. 2006).

In 2002, the DOE created a safe harbor provision allowing colleges to provide “payment of fixed compensation, such as fixed annual salary or a fixed hourly wage, as long as that compensation is not adjusted up or down more than twice during any twelve month period, and any adjustment is not based solely on the number of students recruited, admitted, enrolled, or awarded financial aid.”  34 C.F.R. § 668.14(b)(22)(ii)(A) (2010) (italics added).

The Corinthian case revolves around Corinthian’s compliance with the incentive compensation limits of the HEA.

The Corinthian decision

In the Corinthian decision, the Ninth Circuit reversed a ruling by the United States District Court for the Central District of California dismissing a complaint brought against Corinthian.  The district court found that the plaintiffs, a former employee of and an independent contractor to Corinthian who were suing on behalf of the government, did not state sufficient facts in their complaint to prove Corinthian paid its recruiters based purely on enrollment numbers or that Corinthian “falsely certified” to the government that it had abided by the incentive compensation prohibition.  On February 25, 2009, the government gave notice it would not intervene in the action.

Plaintiffs pled in their complaint that Corinthian pays recruiters bonuses based on the number of students recruited.  Based on this fact, the plaintiffs alleged that Corinthian is liable for their “use of false statements to obtain HEA, Title IV loan funds,” terminating recruiters for failing to enroll a minimum number of students and falsely certifying their compliance with the HEA’s ban on the payment of incentive compensation.  The complaint also alleged that E&Y falsely certified that Corinthian complied with the incentive compensation ban and “rubber stamped the information provided to it by Corinthian.”  The district court dismissed the complaint, holding that it failed to allege that Corinthian made any false statement to the government in certifying their compliance with the HEA and that Corinthian’s compensation policy fell within the safe harbor provision because the recruiter’s salaries were not based “solely” on the number of enrolled students.

The Ninth Circuit agreed that the plaintiff failed to plead sufficient facts to state claims under the False Claims Act, but refused to throw the lawsuit out entirely.  Instead, the Ninth Circuit found that the plaintiff should be entitled to amend the complaint to show that Corinthian misled the government.  In overturning the lower court’s decision and allowing plaintiffs to amend the complaint, the Ninth Circuit found that the compensation plan could have been solely based on the number of students enrolled.  The two-tiered plan allowed any recruiter to obtain a bonus based on the number of students enrolled if that recruiter obtained a “good” or “excellent” performance review.  “Without an understanding what an employee must do to achieve a rating of ‘Good,’” the Ninth Circuit observed, “we cannot determine whether the rating is based upon substantive requirements that are separate and distinct from recruitment numbers.”

As part of its findings, the Ninth Circuit stated that the plaintiff should also be given another chance to plead E&Y’s liability for certifying that Corinthian had met the incentive compensation requirements and submitting false statements in financial statement audit reports.

The case is now back before the district court, giving the federal government another opportunity to intervene in the case.  Many await the government’s decision on whether to intervene.

Lessons from Corinthian 

• Corinthian’s right to fire recruiters for failing to meet enrollment numbers was upheld.  The court stated that “adverse employment actions, including termination, on the basis of recruitment numbers remain permissible under the [HEA].”
• The Ninth Circuit, in dicta, outlined some boundaries on what that court would consider permissible, non-enrollment based performance metrics sufficient to show that a bonus plan was not based solely on increases in enrollments.  For example, the court stated that requiring an employee “merely to fulfill basic performance requirements that are expected of any employee” and construing the safe harbor provision of allowing for such basic performance requirements to serve as an independent basis for compensation increases would lead to an “absurd result.”  Such policies, the court suggested, would allow colleges to circumvent the ban on incentive compensation by simply formalizing, through a performance rating system, the basic requirements of any employee.  The safe harbor provision cannot be interpreted in such a “meaningless” way, the court said.
• That the suit against E&Y was permitted to go forward may have a dramatic effect on the role auditors and consultants play in assisting proprietary colleges in complying with the HEA and certifying such compliance with the DOE and the costs for such services.

For more information about the Corinthian case and the issues it may raise for your business, please contact:

Dennis M. Cariello

Mark A. Nadeau

Allison L. Kierman