November 18, 2016

Post-Escobar, Seventh Circuit Again Dismisses Suit Against For-Profit Educational Institution

By Hallie Noecker

Another federal circuit recently weighed in to apply the U.S. Supreme Court’s holding in Universal Health Services, Inc. v. United States ex rel. Escobar. Escobar was largely a victory for the United States and whistleblowers combatting fraud under the False Claims Act (FCA), resolving a split in the federal circuits by unanimously upholding implied false certification as a viable theory of FCA liability. Following the decision, however, at least two issues are left to percolate in the lower courts:

  1. Whether FCA liability may be premised on implied certification only where a defendant’s claim for payment included specific misrepresentations that were misleading in light of its noncompliance with the requirement at issue; and
  2. The standard for determining whether compliance with a particular requirement was material to the government’s decision to pay.

The Seventh Circuit directly addressed both issues in its recent opinion in United States ex rel. Nelson v. Sanford Brown, on remand to the court under a Supreme Court order to reconsider the case in light of Escobar. The Seventh Circuit’s pre-Escobar decision in Sanford-Brown categorically rejected implied certification as a theory of falsity. On remand, the Seventh Circuit reworked its opinion to reflect adherence to Escobar, but once again affirmed its summary judgment dismissal in Sanford-Brown’s favor.

The underlying suit alleged Sanford-Brown College, a for-profit education organization, violated its Program Participation Agreement (“PPA”) with the federal government, and in so doing overbilled the Department of Education for federal student aid subsidies by inappropriately incentivizing employees to recruit unqualified students and manipulate grades to maintain students’ aid eligibility.

On remand, the Seventh Circuit first read Escobar to require false or misleading representations in connection with the claim for payment, of which the court found no evidence. As an independent basis for summary judgment, the court found that plaintiffs had not satisfied Escobar’s materiality standard. The court also noted that the whistleblower provided no evidence to demonstrate the government actually would have chosen not to pay Sanford Brown had it known the university utilized incentive compensation programs in violation of its PPA.

Notably, the Eighth Circuit recently reached the opposite conclusion with respect to materiality in United States ex rel. Miller v. Weston Educational Inc., d/b/a Heritage College, a case similarly premised on manipulation of student data in the for-profit higher education context. Applying Escobar, the Eighth Circuit revived the whistleblower’s case, finding that defendant for-profit institution Heritage’s misrepresentations were material and could support liability under the FCA.

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