Where the False Claims Act meets for-profit colleges: 4 hot areas for compliance

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.

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