United States District Court, D. Idaho
UNITED STATES OF AMERICA ex rel. KATIE BROOKS and NANNETTE WRIDE, Plaintiffs,
STEVENS-HENAGER COLLEGE, INC., a Utah corporation; CALIFORNIA COLLEGE SAN DIEGO, INC., a Utah corporation; COLLEGEAMERICA DENVER, INC., a Colorado corporation; COLLEGEAMERICA ARIZONA, INC., a Colorado corporation; CENTER FOR EXCELLENCE IN HIGHER EDUCATION, INC., an Indiana corporation; CARL BARNEY, an individual; SHAW, MUMFORD & CO., P.C., an expired Utah professional corporation; SHAW & CO., P.C., a Utah professional corporation; PRICEWATERHOUSECOOPERS LLP, a Delaware limited liability partnership; and DOES 1-500, inclusive, Defendants.
MEMORANDUM DECISION & ORDER
B. LYNN WINMILL, Chief District Judge.
Pending before the Court is Defendants Stevens-Henager College, Inc., California College San Diego, Inc., College America Denver, Inc., College America Arizona, Inc., Center for Excellence in Higher Education, Inc., and Carl Barney's motion to transfer venue to the District of Utah. (Dkt. 101). Alternatively, these defendants ask the Court to dismiss this case pursuant to Federal Rules of Civil Procedure 9(6) and 12(b)(6). Id. Defendants Shaw Mumford & Co., P.C. and Shaw & Co, P.C. join in the transfer motion. (Dkt. 107). For the reasons explained below, the Court will grant the motion to transfer.
In January 2013, relators Katie Brooks and Nannette Wride sued four colleges on behalf of the United States government: (1) Stevens-Henager College, Inc., (2) California College San Diego, Inc., (3) CollegeAmerica Denver, Inc., and (4) CollegeAmerica Arizona, Inc. Brooks and Wride allege that these colleges made false claims and statements in order to participate in federal financial aid programs, thus violating the federal False Claims Act (FCA), 31 U.S.C. §§ 3721-33. See Compl., Dkt. 1. Brooks and Wride later amended their complaint to name additional defendants, including individual defendant Carl Barney, corporate defendant Center for Excellence in Higher Education, Inc., and three auditing firms: Shaw Mumford & Co., P.C., Shaw & Co, P.C, and PricewaterhouseCoopers, LLP. The amended complaint also expanded the scope of their FCA claims against the schools. See Second Am. Compl. (SAC), Dkt. 86.
In April 2014, the United States intervened in a portion of the claims against two of the nine defendants: Stevens-Henager College, Inc. and Center for Excellence in Higher Education, Inc. See Intervention Compl., Dkt. 41. Before detailing the government's and relators' more specific allegations, the Court will provide some background information on the FCA and Title IV of the Higher Education Act, 20 U.S.C. §§ 1070-99.
1. False Claims Lawsuits Against For-Profit Colleges
The FCA imposes civil liability on a party who "knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval" or "knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim" paid by the government. See 31 U.S.C. § 3729(a)(1) (A) and (B). Realistically, the government cannot discover and prosecute all FCA violations, given that "[f]raud permeates generally all Government programs...." See S. Rep. No. 99-345, at 2 (1986), reprinted in 1986 U.S.C.C.A.N. at 5267. Accordingly, the FCA provides a qui tam enforcement mechanism, which allows private parties (relators) to sue on the government's behalf. See 31 U.S.C. § 3730(b).
The qui tam statute incentivizes whistleblowing by allowing relators to keep a share of the proceeds from judgment or settlement in their cases - as much as 30 percent of the total to which the United States is entitled. See 31 U.S.C. § 3730(d)(1) and (2). By offering "private relators bonanzas for valuable information, " United States ex rel. Chovanec v. Apria Healthcare Group, Inc., 606 F.3d 361, 364 (7th Cir. 2010), Congress ensured robust enforcement of the FCA's goal of rooting out fraud.
In recent years, numerous FCA lawsuits have been filed against for-profit colleges. In what is becoming a typical fact pattern, the relators are former employees who worked in the college's admissions office. These employees - called "admissions consultants" in this case - will typically say that the school paid them hefty bonuses simply for enrolling students. The problem with this practice is that schools receiving federal funding under Title IV of the Higher Education Act are banned from offering recruiters financial incentives for enrolling students. This ban, known as the "incentive-compensation ban, " is codified at 20 U.S.C. § 1094(a)(20). See also 34 C.F.R. § 688.14(b)(22). The incentive-compensation ban is meant "to curb the risk that recruiters will sign up poorly qualified students who will derive little benefit from the subsidy and may be unable or unwilling to repay federally guaranteed loans." United States ex rel. Hendow v. Univ. of Phoenix, 461 F.3d 1166, 1168-69 (9th Cir. 2006) (quoting United States ex rel. Main v. Oakland City Univ., 426 F.3d 914, 916 (7th Cir. 2005) (Easterbook, J.)). For-profit schools, in particular, are seen as being more likely to violate the ban; after all, a for-profit school is incentivized to make money, and one obvious way to make money is to enroll more students, without regard to whether the student will benefit from the educational services provided. See generally Gayland O. Hethcoat II, For-Profits Under Fire: The False Claims Act as a Regulatory Check on the For-Profit Education Sector, 24 Loy. Consumer L. Rev. 1, 18 (2011) (for-profit schools "cater to the very students that public and private nonprofit institutions often determine are unqualified to attend their institutions, and for-profits are also generally removed from pressures such as institutional rankings").
In many lawsuits against for-profit colleges, plaintiffs will proceed under a "false-certification" theory. See id. ( citing Hendow, 461 F.3d at 1171). As its name suggests, these plaintiffs will allege that the school falsely certified compliance with the incentive-compensation ban. These certifications are allegedly made in the schools' "Program Participation Agreements" (PPAs). Schools must enter into PPAs with the government if they wish to receive federal funds under Title IV of the Higher Education Act. And within these PPAs, the schools "must agree to abide by a panoply of statutory, regulatory, and contractual requirements" - including the incentive-compensation ban. Hendow, 461 F.3d at 1168. The courts that have adopted false-certification theories generally recognize that "[i]f 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." Main, 426 F.3d at 916.
In United States ex rel. Hendow v. University of Phoenix, 461 F.3d 1166, 1171 (9th Cir. 2006), the Ninth Circuit embraced the false-certification theory of liability in an educational setting, following the Seventh Circuit's lead in United States ex rel. Main v. Oakland City University, 426 F.3d 914, 916 (7th Cir. 2005). See also Ebeid ex rel. United States v. Lungwitz, 616 F.3d 993, 998-99 (9th Cir. 2010). The parties dispute whether the Tenth Circuit would apply a false-certification theory of liability in this case. See United States ex rel. Conner v. Salina Reg'l Health Ctr., Inc., 543 F.3d 1211, 1220 (10th Cir. 2008). Given its intended ruling on this motion - which is to transfer the case to a district court within the Tenth Circuit - the Court will not weigh in on this dispute.
2. The Factual Allegations in this Case
The factual allegations in this case generally follow the framework described above. Relators Katie Brooks and Nannette Wride worked as admissions consultants at defendant Stevens-Henager's Orem, Utah campus during 2009 to 2011. They say that the school paid them bonuses for enrolling students - in violation of the incentive-compensation ban. Relators further allege that this practice was implemented at all defendants' schools, not just at the Orem campus where they worked.
Relators also allege two other types of misconduct. First, they allege that the schools falsely certified compliance with the so-called "90-10 rule." This rule requires for-profit schools to obtain at least 10% of their revenue from non-government sources. See 20 U.S.C. § 1094(a)(24). Second, relators allege that the schools gave false information about faculty qualifications, attendance-taking practices, and student academic performance to an accrediting body. See SAC, Dkt. 86, ¶¶ 425, 430. According to relators, the Department of Education then relied on the schools' accreditation to determine that they were eligible to participate in Title IV programs. Id.
As described above, the relators' theory is that the schools knew they were violating the incentive-compensation ban and other applicable statutes and regulations, but nonetheless falsely certified to the government that they were in compliance with applicable statutes and regulations.
Finally, the relators implicate the schools' financial and compliance auditors in the alleged fraud. Relators accuse the auditors of falsely representing that they performed their audits within "applicable standards and guidelines, " thus inducing the Department of Education to make the schools eligible to participate in Title IV programs. Id. ¶ 412; see also id. ¶¶ 421, 438, 445.
As mentioned above, the government intervened in a relatively small portion of relators' claims. The government alleges claim against just two of the nine defendants (again, Stevens-Henager College, Inc. and Center for Excellence in Higher Education, Inc.). The government's allegations are limited to violations of the incentive-compensation ban; it did not intervene in claims related to the other allegedly improper practices, nor did it allege claims against the auditors. Finally, the government's claims are limited to a four-year period (July 2007 to July 2011) as opposed to the more than ten-year year period the relators allege.
Eight of the nine defendants ask the Court to transfer this case to the District of Utah pursuant to 28 U.S.C. § 1404. Section 1404(a) provides:
For the convenience of parties and witnesses, in the interest of justice, a district court may transfer any civil action to any other district or division where it might have been brought or to any district or division to which all parties have consented.
When considering a motion to transfer venue under this section, a court must weigh multiple factors, which could include, but are not limited to, the following:
(1) the location where the relevant agreements were negotiated and executed;
(2) the state that is most familiar with the governing law;
(3) the plaintiff's choice of forum;
(4) the respective parties' contacts with the forum;
(5) the contacts relating to the plaintiff's cause of action in ...