College’s Falsification of Grades and Attendance Records May Trigger FCA Liability
On Wednesday, April 29, the Eighth Circuit issued an opinion holding that evidence of a for-profit college’s falsification of grades and attendance records may support a claim that it “fraudulently induced the Department of Education [“DOE”] to provide [it] funds,” and was thus liable under the False Claims Act (“FCA”). Specifically, the claim alleged that, in an effort to obtain funds from DOE, the college agreed to accurately maintain certain records, but had no intention of actually doing so. Finding that the evidence was sufficient to be submitted to a jury on this issue, the court reversed in part the district court’s summary judgment ruling in favor of the defendant, and remanded the case.
In 2009, the college signed a Program Participation Agreement (“PPA”) with DOE under which it could receive funding in the form of federal grants, loans, or scholarships under Title IV of the Higher Education Act of 1965 (“Title IV funding”). To be eligible for funds, however, a student had to make “satisfactory progress” — a standard measured by cumulative grade point average. If a student withdrew, the college may have had to submit a refund to DOE “depending on how much of a program the student completed.” From 2009 to 2012, DOE disbursed over $32 million to the college.
Under the PPA, the college was required to “establish and maintain such administrative and fiscal procedures and records as may be necessary to ensure proper and efficient administration of funds.” These records include “documentation of each student’s eligibility and of any refunds due on behalf of the student.” (brackets and internal quotation marks omitted).
This action was initiated when two former employees of the college filed a qui tam suit against the College alleging, among other things, that the college falsified student grades and attendance records from 2006 to 2012, in order to remain eligible for Title IV funding. Under the FCA, anyone who “knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim” may be held liable. Furthermore, under a fraudulent inducement theory, FCA liability attaches to “each claim submitted to the government under a contract so long as the original contract was obtained through false statements or fraudulent conduct.” A successful fraudulent inducement claim must allege: “(1) the defendant made a ‘false record or statement’; (2) the defendant knew the statement was false; (3) the statement was material; and (4) the defendant made a ‘claim’ for the government to pay money or forfeit money due.” Here, the district court granted the college’s summary judgment motion, finding that the college “did not promise to keep perfect records and any promise was not material to the disbursement.”
On appeal, the Eighth Circuit disagreed, holding that “a reasonable jury could find that [the college] knew it had to keep accurate grade and attendance records and intended not to do so,” and that the promise to do so was material to the disbursement of funds. The court based its conclusion on evidence tending to show that (1) the college had “knowledge that accurate grade and attendance records were necessary to administer funds;” (2) it “had a pattern of altering records, both before and after signing the PPA;” and (3) “it aimed to maximize Title IV funds.”
Especially important for contractors are the implications of the court’s analysis with respect to materiality. The college argued that “a finding of materiality here makes any regulatory violation actionable under the FCA.” The court rejected that argument, citing a Ninth Circuit case where a university similarly argued that a certain obligation was “one of hundreds of boilerplate requirements with which it promises compliance,” and that attaching FCA liability to that requirement “opens [the university] up to greater liability.” The Ninth Circuit responded, “fraud is fraud, regardless of how ‘small,’” and sought to allay any concerns about the broad implications of the ruling by emphasizing that “innocent or unintentional violations do not lead to [FCA] liability.” Nevertheless, companies receiving federal funding should be aware that violations of even “boilerplate” requirements may implicate the FCA if there is evidence that the entity never intended to comply with the requirement despite its promise to do so.