Where for-profit colleges are noncompliant, the DOJ has shown its willingness to enforce compliance through a robust tool—the False Claims Act
Administrators and employees of for-profit colleges need to be aware of a federal statute that may not immediately associate with these institutions: the False Claims Act (“FCA”).
Pressure has been building from the Department of Justice (“DOJ”) to prosecute civil FCA cases against for-profit colleges in a growing number of areas.
Four such example areas include the 90/10 Rule, job placement rates, incentive-based compensation to recruiters, and enrolling ineligible students. FCA actions in these areas have resulted in, and will likely result in additional, multi-million dollar settlements. These cases build on an enforcement trend that should be on the mind of every administrator and employee of a for-profit college. First, a primer on the FCA.
The False Claims Act
The FCA, 31 U.S.C. §§ 3729-3733, imposes civil liability on any person, including a corporation, who knowingly uses a “false record or statement to get a false or fraudulent claim paid or approved by the government,” and any person who “conspires to defraud the government by getting a false or fraudulent claim allowed or paid.” Allison Engine Co. v. United States ex rel. Sanders, 553 U.S. 662, 665 (2008). Violators of the FCA face treble damages and a civil penalty of $5,500 to $11,000 per occurrence.
The FCA’s qui tam provision, § 3730(b), allows a private person, known as a “relator” or “qui tam relator” to bring an action for a violation of § 3729 for herself and the United States government. A successful relator may receive a reward of up to 30 percent of the proceeds from a settlement or judgment against the alleged wrongdoer plus reimbursement for attorneys’ fees, costs, and expenses.
(Next page: Why federal intervention is crucial)
Qui tam actions are filed under seal and must remain so for at least sixty days. The action is not served immediately on a defendant. Instead, the complaint and a document known as a “relator’s statement” are served on the DOJ, which then uses the period under seal to investigate the relator’s claims.
Once the DOJ completes its investigation, the government can intervene as the plaintiff on one or more claims; decline to intervene; or move to dismiss the complaint. If the government intervenes, its attorneys act as lead counsel and the government will often prepare its own complaint.
Once the government makes its intervention decision, the matter is unsealed and proceeds much like any other lawsuit. If the government declines to intervene the relator may pursue the claims on its own. Conflicting sources place the rate of government intervention at between 22 percent and 27 percent. In recent years, over ninety percent of the cases in which the government intervened have resulted in a settlement or judgment against the defendant. Thus, relator’s counsel are generally receptive to the government’s requests in extending the period under seal.
The 90/10 Rule
Most for-profit colleges (also referred in statute as “proprietary institutions of higher education”) rely on at least some federal student aid under Title IV of the Higher Education Act of 1965 to operate. Federal funds are only available if the college obtains 10 percent or more of its annual revenues from other sources. That is, federal funding cannot exceed 90 percent of the college’s annual revenues. This is called the “90/10 Rule.” The formula for determining these percentages is found at 20 U.S.C. § 1094(d)(1).
Historically, this rule was not introduced until 1992. In its first iteration, it was the 85/15 Rule. The amendment to the Act to create the 90/10 Rule leaned toward allowing for-profit colleges more federal funding. Congress enacted the 85/15 Rule, and later, the 90/10 Rule, as a means of ensuring that for-profit colleges were not relying wholly on the government for funding. This rule requires colleges to seek out funding from private sources.
Two relators, filed a False Claims Act suit against American Commercial Colleges Inc. (ACC) based on the 90/10 Rule. They alleged, as former directors of ACC campuses, that ACC artificially inflated the amount of private funding it counted in calculating its compliance with the 90/10 Rule. Specifically, they alleged that ACC used short-term private student loans that it repaid with federal funds. They alleged that ACC manipulated its compliance to obtain a higher percentage of federal student aid.
The Department of Justice intervened in the case and extracted a settlement from ACC to resolve the allegations. In May 2013, the Department of Justice announced a settlement of approximately $2.5 million with ACC ($1 million fixed and $1.5 million contingent).
As the government is not obligated to intervene in any case, this action is an example of where the government is training its eye. Its intervention here is announcement to potential relators and potential defendants alike to be aware of compliance requirements under the 90/10 Rule.
(Next page: Job placement rates and incentives)
Job Placement Rates
Another requirement for participation in federal student aid programs includes entering into a Program Participation Agreement (PPA) with the Secretary of Education. Since 1992, executing a PPA has been mandatory. This agreement requires the college to abide certain statutory, regulatory, and contractual requirements. One of these requirements involves advertising job placement rates. If these are advertised to attract students, the college must also make available to prospective students its most recent and accurate employment statistics.
In a case against ATI Enterprises, the government alleged that the college misrepresented job placement statistics. It continued that doing so resulted in ATI’s fraudulently maintaining eligibility for federal financial aid.
The Department of Justice intervened in and settled two cases in August 2013 against ATI Enterprises for $3.7 million. Here, again, the government’s decision to intervene signals its interest in such cases and in viewing breached terms of PPAs as violations of the FCA.
Incentive-Based Compensation to Recruiters
Based on a theory similar to that for job placement statistics, for-profit colleges entering into a PPA must abide a ban on incentive compensation. Incentive compensation is 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).
In intervening in a case originally filed by a former Education Management Corp. (EDMC) admissions recruiter, the DOJ alleged in its complaint that EDMC violated the FCA when it falsely certified to the government that it was in compliance with the ban on paying incentive-based compensation to recruiters. It contended that Congress enacted this ban because paying bonuses and commissions to recruiters had resulted in at least three undesirable outcomes: enrollment of unqualified students, high student loan default rates, and wasted program funds. The states of California, Florida, Illinois, and Indiana intervened as plaintiffs as well.
While this case did not immediately result in a settlement, the government’s intervention shows that it is willing to litigate cases where for-profit colleges are not abiding the incentive-based compensation prohibition.
Enrolling Ineligible Students
A final area under governmental scrutiny is enrollment eligibility for students. It is perhaps axiomatic that for a college to receive Title IV funds, the student must be eligible for those funds. Institutions may employ a multitude of plans to bring on or retain ineligible students. In addition to retaining funding that institutions should not retain, it puts the students further into debt. The institutions use students’ master promissory notes and leads students to unknowingly default on loans. In short, when students come to the institution to enroll, it is incumbent on the institution to determine student eligibility. Retaining loan payments when students are ineligible is grounds for an FCA action. One case in particular shows how institutions carry out these plans.
In August 2012, the DOJ intervened and filed a complaint against ATI (the same defendant involved in job placement issues above). The complaint alleged that three campus had job placement issues, but also a number of student eligibility issues. For example, it alleged that ATI employees knowingly enrolled students who did not have high school diplomas; falsified high school diplomas; and kept students enrolled when they should have been dropped because they had poor grades or attendance.
The DOJ’s intervention evidences the importance of properly reviewing the eligibility of each student. Failure to do so may result in FCA liability through a relator or whistleblower action.
Compliance is key in Title IV funding. Where for-profit colleges are noncompliant, the DOJ has shown its willingness to enforce compliance through a robust tool—the False Claims Act. There are real stakes for students—their futures, for institutions—multi-million dollar liability, and for relators—reward of up to 30%. They should all keep these four areas in mind as their institutions receive Title IV funding.
David Scher is a principal of The Employment Law Group, P.C. A trial-tested attorney who specializes in qui tam and whistleblower retaliation actions, he is frequently quoted by the media. His legal analysis has been featured by outlets including ABC World News, Nightline, CBS, and the Washington Post.
R. Scott Oswald is managing principal of The Employment Law Group, P.C and past president of the Metropolitan Washington Employment Lawyers Association. He has been recognized as one of the Best Lawyers in America and is listed as a Top 100 Trial Lawyer by The National Trial Lawyers.