Newspaper: Metropolitan News-Enterprise

Publication Date: Wednesday, September 6, 2006

Page No.: 1

Headline: Court: Lying to Obtain Eligibility for Federal Funding Triggers University’s False Claims Act Liability

Byline: By TINA BAY, Staff Writer

Body: A lawsuit alleging that the University of Phoenix lied to the federal government about its student recruiter compensation in order to obtain funding properly stated a cause of action under the False Claims Act, the Ninth U.S. Circuit Court of Appeals ruled yesterday.

Reversing a dismissal by U.S. District Judge Garland E. Burrell for failure to state a claim, a three-judge panel reinstated the qui tam action that former university employees Mary Hendow and Julie Albertson filed against the school in 2004.

The two former enrollment counselors, called “relators” under the act, came forward to the federal government in the spring of 2003, while still working for the university, with information that the institution was falsely claiming compliance with Title IV of the Higher Education Act in order to obtain Title IV funding.

To become eligible to apply for federal funds under Title IV, universities must enter into a “Program Participation Agreement” with the Dept. of Education in which they promise to comply with numerous federal requirements. Only upon signing this precursor contract may schools proceed to the step of actually applying for funds.

Hendow and Albertson alleged that the University of Phoenix falsely certified each year that it was in compliance with the participation agreement’s ban on incentive compensation to recruiters on a per-student basis, while intentionally and knowingly violating the requirement, in order to be eligible for funding.

The allegations included claims that the university gave Albertson a target number of students to recruit and increased her salary when she reaching that goal, and that Hendow won trips and home electronics for enrolling large numbers of students.

The relators’ also claimed that the university’s head of enrollment openly bragged, “[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.”

Although the alleged false representations occurred in the precursor certification request rather than the actual claims for payment of Title IV moneys, the relators claimed the university’s conduct as a whole made it liable under 31 U.S.C. Sec. 3729(a)(2) for knowingly making a false statement to get a fraudulent claim paid or approved by the government.

The False Claims Act provides for treble damages against those who make fraudulent claims for payment by the U.S. government. Under the act’s qui tam provision, a private citizen with personal knowledge of the fraud from non-public sources can sue on the government’s behalf and keep up to 25 percent of the settlement or award.

Burrell, sitting in the Eastern District of California, dismissed the qui tam complaint with prejudice in May 2004 on the ground that it failed to allege that the university’s claims for payment were explicitly or independently false, and alternatively did not satisfy the elements of False Claims Act liability based on the “false certification” or “promissory fraud” theories.

The broader theories, under which False Claims Act liability attaches to payment claims that are not explicitly false, did not apply because Title IV did not require any “certification” as a prerequisite for funding, Burrell reasoned.

Judge Cynthia Holcomb Hall, writing for the court, said Burrell mistakenly rested his analysis of the false certification theory on the word “certification” rather than the theory’s substantive focus on a party’s falsely certifying compliance with a statute or regulation as a condition to government payment.

“That the theory of liability is commonly called false certification is no indication that ‘certification’ is being used with technical precision, or as a term of art; the theory could just as easily be called the ‘false statement of compliance with a government regulation that is a precursor to government funding’ theory, but that is not succinct,” she wrote. “So long as the statement in question is knowingly false when made, it matters not whether it is a certification, assertion, statement, or secret handshake; False Claims liability can attach.”

Adopting the Seventh Circuit’s reasoning in a recent identical case involving Oakland City University, the court held that the university’s conduct also could also satisfy the elements of False Claims Act liability under the theory of promissory fraud, which is identical to the false certification theory but focuses on fraud in the inducement of the program participation agreement.

Under either of these theories, Holcomb wrote, Hendow and Albertson satisfied the elements of False Claims Act liability because they properly alleged that the university knowingly made false statements and engaged in fraudulent conduct, and that such actions were taken to satisfy a condition of government payment, namely the participation agreement

Holcomb noted:

“The University argues that the incentive compensation ban is nothing more than one of hundreds of boilerplate requirements with which it promises compliance. This may be true, but fraud is fraud, regardless of how ‘small.’”

Nancy G. Krop, the relators’ attorney, told the MetNews that the court’s decision to reinstate her clients’ suit brought much needed clarification to the false claims act.

“It’s a huge decision,” Krop said. “It has a huge impact beyond education. The government will be able to prosecute fraud in any field where there is a two-step process for obtaining funding, where step one is to comply with the requirements that are a precursor for eligibility, and step two is to ask for the funds.”

In an amicus brief filed in the relators’ behalf, the Dept. of Justice had expressed concern that the district court’s decision could impair enforcement of the False Claims Act in federal programs across the board that involve the two-step benefit process implemented by Title IV.

Krop added that all of the allegations in her clients’ complaint were verified by the Dept. of Education through an investigation it reported on in February 2004, and her clients—who have since moved on and are happily employed elsewhere—are focused on stopping the university’s illegal conduct.

The school’s counsel, Timothy J. Hatch, did not return calls seeking comment.

The University of Phoenix has online courses and campuses nationwide, including a Southern California campus comprised of 13 learning centers with numerous locations in Los Angeles county. It currently employs 17,000 faculty and staff and serves 200,000 students nationally.

The case is United States ex rel. Hendow v. University of Phoenix, 04-16247.