Higher Ed Law Prof Blog

Does Rockwell decision help U. of P?

On March 27th the Supreme Court ruled in Rockwell International v. US that any person bringing a private action aimed at recovering federal funds defrauded from Uncle Sam must have independent knowledge of he facts of the claim. While the decision tightens up the so called "qui tam" cause of acion, it seems unlikely that it will help the University of Phoenix.

In U.S. ex rel. Hendow v. University of Phoenix, 461 F.3d 1166 (9th Cir., September 5, 2006), reversed the trial judge, holding that a False Claims Act cause of action is available to the plaintiffs.

The facts of Hendow are these. When a college or university wants to receive federal subsidies under Title IV of the Higher Education Act, it must enter into a Program Participation Agreement with the Department of Education (DOE), in which it agrees to abide by a long list of statutory, regulatory, and contractual requirements. One of these requirements is a ban on incentive compensation, i.e., a ban on the institution paying recruiters on a per-student basis. The ban prohibits schools 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). This requirement is meant to discourage the possibility that recruiters will “sign up poorly qualified students who will derive little benefit from the subsidy and may be unable or unwilling to repay federally guaranteed loans.” United States ex rel. Main v. Oakland City Univ., 426 F.3d 914, 916 (7th Cir.2005), cert. denied, --- U.S. ----, 126 S.Ct. 1786, 164 L.Ed.2d 519 (2006). The ban was enacted based on evidence of serious program abuses that came to light some 15 years ago. See S.Rep. No. 102-58, at 8 (1991) (“Abuses in Federal Student Aid Programs”) (noting testimony “that contests were held whereby sales representatives earned incentive awards for enrolling the highest number of student[s] for a given period”); H.R.Rep. No. 102-447, at 10, reprinted in 1992 U.S.C.C.A.N. 334, 343 (noting that the “new provisions include prohibiting the use of commissioned sales persons and recruiters”).
In this case the plaintiffs allege under the False Claims Act that the University of Phoenix knowingly made false promises to comply with the incentive compensation ban in order to become eligible to receive Title IV funds. Mary Hendow and Julie Albertson (for purposes of this type of action, the relators) are two former enrollment counselors at the university. They claim that the University falsely certifies each year that it is in compliance with the incentive compensation ban while intentionally and knowingly violating that requirement. The relators also allege that these false representations, coupled with later claims for payment of Title IV funds, constitute false claims under 31 U.S.C. § 3729(a)(1) & (a)(2).
Hendow and Albertson contend that the University “compensates enrollment counselors… based directly upon enrollment activities,” ranking counselors according to their total enrollments and giving the highest-ranking counselors not only higher salaries but also benefits, incentives, and gifts. They claim that the University also “urges enrollment counselors to enroll students without reviewing their transcripts to determine their academic qualifications to attend the university,” thus encouraging counselors to enroll students based on sheer numbers alone. Albertson, in particular, alleges that she was given a specific target number of students to recruit, and that when she reached that benchmark her salary was increased by more than $50,000. Hendow specifically asserts that she won trips and home electronics equipment as a result of enrolling large numbers of students.
Second, Albertson and Hendow allege considerable fraud on the part of the university to mask its violation of the incentive compensation ban. They claim that the university's head of enrollment openly bragged that “[i]t's all about the numbers. It will always be about the numbers. But we need to show the Department of Education what they want to see.” To deceive the DOE, the relators allege, the Phoenix creates two separate employment files for its enrollment counselors, a “real” file containing performance reviews based on improper quantitative factors, and a “fake” file containing performance reviews based on legitimate qualitative factors. The fake file is what the DOE allegedly sees. They maintain that a series of Phoenix policy changes were deliberately designed to obscure the fact that enrollment counselors are compensated on a per-student basis; these, they say, include altering pay scales to obscure that they are adjusted based on the number of students enrolled.
Last, but not least, they allege that the university submits false claims to the government. Claims for payment of Title IV funds can be made in several different ways, once a school signs its Program Participation Agreement and thus becomes eligible. For instance, in the case of so-called Pell Grants, students submit funding requests directly (or with their schools’ assistance) to the DOE. But by contrast, under the Federal Family Education Loan Program, which includes so-called Stafford Loans, students and schools must submit joint applications to private lenders on behalf of the students, and in each instance a “guaranty agency” eventually make a claim for payment to the United States, and only in the event of default. The two relators allege that the university submits false claims along both of these paths. They claim that Phoenix, with full knowledge that it is ineligible for Pell Grant funds because of its violation of the incentive compensation ban, submits requests for those funds directly to the DOE, resulting in a direct transfer of the funds into university accounts. They add that the university, again with knowledge that it has intentionally violated the incentive compensation ban, submits requests to private lenders for government-insured loans.
On May 20, 2004, the district court dismissed the complaint with prejudice for failure to state a claim. The relators appealed on June 15, 2004. The United States Department of Justice submitted a brief as amicus curiae supporting the reversal of the district court’s decision.
Ninth Circuit’s reasoning. “In an archetypal qui tam False Claims action, such as where a private company overcharges under a government contract, the claim for payment is itself literally false or fraudulent. The False Claims Act, however, is not limited to such facially false or fraudulent claims for payment. Rather, the False Claims Act 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, 88 S.Ct. 959, 19 L.Ed.2d 1061 (1968). More specifically, in amending the False Claims Act in 1986, Congress emphasized that the scope of false or fraudulent claims should be broadly construed: ‘[E]ach and every claim submitted under a contract, loan guarantee, or other agreement which was originally obtained by means of false statements or other corrupt or fraudulent conduct, or in violation of any statute or applicable regulation, constitutes a false claim.’ S.Rep. No. 99-345, at 9 (1986), reprinted in 1986 U.S.C.C.A.N. 5266, 5274.
“The principles embodied in this broad construction of a ‘false or fraudulent claim’ have given rise to two doctrines that attach potential False Claims Act liability to claims for payment that are not explicitly and/or independently false: (1) false certification (either express or implied); and (2) promissory fraud.
“Many different courts have held that a claim under the False Claims Act can be false where a party merely falsely certifies compliance with a statute or regulation as a condition to government payment. The leading case on false certification in the Ninth Circuit is United States ex rel. Hopper v. Anton.
“In Anton, a relator-plaintiff brought a False Claims Act suit against the Los Angeles Unified School District (LAUSD) for allegedly submitting false claims for federal funds while in knowing violation of an underlying statute granting funds for special education programs (the Individuals with Disabilities Education Act, ‘IDEA’). 91 F.3d at 1263. In particular, the relator alleged that LAUSD's method of evaluating potential student eligibility for the program violated the IDEA. Id. LAUSD allegedly (1) submitted forms stating the number of eligible students in the district; (2) cashed checks that were partially comprised of federal funds; and (3) submitted triennial certifications averring that LAUSD “ ‘will meet all applicable requirements of state and federal law and regulations,’ including ‘general compliance’ with the IDEA.” Id. at 1265. We held that False Claims Act liability can attach under the theory of false certification, although the relators had not presented sufficient evidence of fraud. Id.
“In Anton, we explained the theory of false certification, identifying two major considerations: “ ‘(1) whether the false statement is the cause of the Government's providing the benefit; and (2) whether any relation exists between the subject matter of the false statement and the event triggering Government's [sic] loss.’ ” Id. at 1266 (quoting John T. Boese, Civil False Claims and Qui Tam Actions 1-29 to 1-30 (1995)). We also held that “[m]ere regulatory violations do not give rise to a viable FCA action,” but rather, “[i]t is the false certification of compliance which creates liability when certification is a prerequisite to obtaining a government benefit.” Id. at 1266-67 (emphasis in original). From the principles underlying these two statements, we created four conditions necessary to succeed on the false certification theory of False Claims Act liability.
“First, we emphasized the necessity of a false claim, rather than a mere unintentional violation. We did not hold in Anton that regulatory violations will go unchecked by the False Claims Act, but we did agree with the lower court's reasoning that for a “breach of contract, or violation of regulations or law, or receipt of money from the government” to give rise to an action under the False Claims Act, ‘[i]t requires a false claim.’ 91 F.3d at 1265. We went on to note that the ‘fatal defect’ in Anton was not that the claimed infraction was a regulatory violation, but that there was a ‘lack of a false claim.’ Id. at 1267. Thus, we established that to succeed on a false certification theory, some falsity must be alleged.
“Second, we emphasized the central importance of the scienter element to liability under the False Claims Act, holding that false claims must in fact be ‘false when made.’ Id. (citing United States v. Shah, 44 F.3d 285, 290 (5th Cir.1995)). In fact, we held, ‘[f]or a certified statement to be ‘false’ under the Act, it must be an intentional, palpable lie.’ Id. (citing Hagood v. Sonoma County Water Agency, 81 F.3d 1465, 1478 (9th Cir.1996)). We also noted that ‘some request for payment containing falsities made with scienter (i.e., with knowledge of the falsity and with intent to deceive) must exist.’ Id. at 1265. In short, we made clear that a palpably false statement, known to be a lie when it is made, is required for a party to be found liable under the False Claims Act.”

Federal Report Shows Increasing Use of Part-time Faculty

A report from the U.S. Department of Education's National Center for Education Statistics shows that colleges and universities are increasingly using part-time faculty members.  The report, "Employees in Postsecondary Institutions, Fall 2005, and Salaries of Full-Time Instructional Faculty, 2005-06,"  is a survey of universities and colleges that award federal financial aid;  it indicates that of the 1,314,506 faculty members, 624,753 (47.5%) were in part-time positions.  A previous survey done in 2003 found that 46.3% of faculty were part-time.  The new report also states that the proportion of full-time faculty who were either tenured or in a tenure-track position at degree-granting colleges and universities decreased from 65.2% (411,031 of 630,4190 in 2003 to 61.4% (414,574 of 675,624).  While the percentage of full-time faculty who are women increased to 40.6% in 2005 from 39.4% in 2003, men were more likely to be tenured on in tenure track positions:  47.5% of full-time male professors were teenured and 18.1% were in tenure track positions, but only 33.9% of full-time female professors were tenured and 21.3% were in tenure track positions.  With regard to racial and ethnic makeup of the full-time professoriate, 78.1% were white (down from 80.2% in 2003), 7.2% were Asian/Pacific Islanders (up from 6.5%), 5.2% were African-American (down from 5.2%), and 3.4% were Hispanic (up from 3.2%).

The full report is available at http://nces.ed.gov/pubs2007/2007150.pdf