Contingent-fee payments violate Higher Education Act

St. Louis Daily Record & St. Louis Countian, Nov 6, 2005 by Erin Suess

As stringent as the collegiate academic community is with students' work, so must they be in the way they recruit the next generation of pupils.

Oakland City University in Indiana learned that lesson the hard way after one of its recruiters sued the college for lying on its application for federal funding eligibility under the Higher Education Act. The 7th U.S. Circuit Court of Appeals found the university knowingly violated the HEA by paying its recruiters contingent fees for enrolling students, despite their qualifications, to garner more federal funding.

Oakland City University Director of Admissions Jeffrey Main brought his employer to court under the Fraudulent Claims Act after learning the contingency fees the college gave him violated both the statute 20 U.S.C. Section 1094 and the regulation 34 C.F.R. Section 668.14(b)(22)(i).

In addition to accusing Oakland City University of illegally paying fees to its recruiters, Main also alleged it lied to the government in phase one of the application process for HEA eligibility. Without fudging the applications to show the college was an eligible institution, phase two of the application process would have never passed the muster, Main hypothesized.

The U.S. District Court for the Southern District of Indiana dismissed Main's suit, positing that since the phase-one application requests a declaration of eligibility rather than an immediate payment from the U.S. Department of the Treasury, lying on that application does not violate FCA. Further, the judge ruled, because on the second phase of the application the college never reassured the government it was not paying its recruiters a contingency fee, Oakland City University never lied to the government.

In its review of the case, the 7th Circuit noted that no appellate court has published on this issue of fraudulent information in a multistage application process yet but added it found the case to be rather straightforward: The FCA applies to anyone who knowingly makes . . . a false record or statement to get a false or fraudulent claim paid or approved by the Government under 31 U.S.C. Section 3729(a)(2).

If a false statement is integral to a causal chain leading to payment, it is irrelevant how the federal bureaucracy has apportioned the statements among layers of paperwork, added Judge Frank H. Easterbrook.

Oakland City University protested this reading of the act, predicting such a stance would treat any violation of federal regulations in a funding program as actionable fraud, to which the Court of Appeal replied: but that's wrong.

In cases such as the one at hand, if a university accepts federal funds after failing to follow a federal regulation, it commits a breach of promise, explained the appeals court, but if a university makes a false representation, then the university commits fraud.

Tripping up on a regulatory complexity does not entail a knowingly false representation, added Easterbrook.

So to prove his case, continued the 7th Circuit, Main needed to prove that not only did Oakland City University know its contingency fees were illegal but also did so while keeping the Department of Education in the dark.

Oakland City University presented as evidence of its ignorance of the fraud a memorandum sent out by the deputy secretary of education in 2002 that said violations of the contingency-fee rule usually does not translate to a U.S. government financial loss. The appeals court tossed aside that shield, however, pointing out the memo has no legal effect, nor does it attempt to dissect any federal regulation.

More on point, held the Court of Appeals, was a brief filed as amicus curiae by the Department of Justice that stated if the allegations are true, it has a right to recover under the FCA.

That view, and not one implied by a back-office memo, represents the position of the United States, Easterbrook wrote. Not that the memo offers the University much assistance even on its own terms.

Again, the college protested the claim that there was any financial loss or harm done to the government, a claim the appeals court called a non-sequitur.

The statute provides for penalties even if (indeed, especially if) actual loss is hard to quantify, and at the margin contingent payments will lead to some unwarranted enrollments (and thus some unjustified federal disbursements), Easterbrook concluded.

That is, after all, why contingent payments are forbidden.

Judges John L. Coffey and Terence T. Evans joined Easterbrook in remanding the case back to the District Court.

United States of America ex rel. Jeffrey E. Main, plaintiff- appellant, vs. Oakland City University, defendant-appellee; No. 05- 2016; handed down Oct. 20.