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Ninth Circuit Refuses to Kill Incentive Compensation Ban Whistleblower Suit

Posted  August 31, 2018
By Leah Judge

Last week, the Ninth Circuit refused to kill a False Claims Act lawsuit alleging that San Francisco’s Academy of Art University violated the federal incentive compensation ban. The ban, which falls under Title IV of the Higher Education Act, prohibits schools that receive federal funds from paying incentives to employees for securing enrollments. The ban operates to protect students from pushy recruiters looking to sell students on their school-regardless of whether the school meets the student’s needs-and to prevent them from taking out huge loans only to find themselves jobless after graduation.

The case, United States ex rel. Rose v. Stephens Institution, was brought by former Academy of Art admissions representatives who alleged that the school lavished employees with five-figure salary increases and trips to Hawaii for meeting enrollment targets. After losing a motion for summary judgment, the Academy urged the Ninth Circuit to hold that the Supreme Court’s 2016 decision in Universal Health Services, Inc. v. United States ex rel. Escobar barred the action.  Citing two Ninth Circuit decisions from last year – United States ex rel. Kelly v. Serco, Inc. and United States ex rel. Campie v Gilead Sciences – the court unenthusiastically agreed that, after Escobar, an implied false certification theory requires a whistleblower to show both that a claim makes specific representations about provided services, and that a defendant’s “noncompliance with material statutory, regulatory, or contractual requirements makes those representations misleading half-truths.” The court said that the admission representatives had made that showing, since the Academy represented that its students were “eligible borrowers” in an “eligible program” while hiding its noncompliance with the incentive compensation ban.

Over a dissent, the court also decided that the whistleblowers had offered sufficient evidence to take to a jury on whether those misrepresentations were material-i.e., whether knowing that the Academy violated the ban would have affected the government’s decision to keep funding it under Title IV.  Notably, the court didn’t require the whistleblowers to show that the government regularly cuts off funding in similar situations, a broader issue that the Supreme Court may address next term.

While the law might be evolving, incentive compensation ban cases aren’t new. In 2015, whistleblowers achieved a record $80 million settlement against Education Management Corporation, a Pittsburgh-based operator of a for-profit college chain that paid recruiters to enroll anyone with a “pulse and a Pell”-a federal student-aid Pell Grant. That case was jointly litigated with President Obama’s Department of Education, which aggressively pursued schools that defrauded students and taxpayers. In 2016 alone, the Obama DOE sued DeVry University for using unsubstantiated job placement claims to recruit students, pulled federal funding from the Marinello Schools of Beauty for enrolling students with invalid high school diplomas, and formed a Student Aid Enforcement Unit specifically to protect students from such practices.

But the Trump Administration’s interest in enforcing the incentive compensation ban is doubtful. This year, the Administration is supporting legislation that would eliminate key accountability provisions of the Higher Education Act-including the incentive compensation ban. The legislation-the Promoting Real Opportunity, Success, and Prosperity through Education Reform (PROSPER) Act-would also eliminate both the gainful-employment rule, which cuts federal funding from career programs that regularly leave graduates with debt they can’t repay, and the 90/10 revenue rule, which permits for-profit schools to generate at most 90 percent of their revenue from federal student aid.

If the PROSPER Act passes in its current form, whistleblower suits against unscrupulous schools may become an historical footnote. And, even absent the legislation, whistleblowers may be less likely to report abuse if they doubt they’ll have allies at the Department of Education.

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Tagged in: Court Decision, Education Fraud, FCA Federal, FCA Materiality,


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