In order to participate in the Department of Education’s grant, loan, and work study programs under Title IV of the Higher Education Act (Title IV), colleges and universities must enter into Program Participation Agreements (PPAs) with the Department in which they promise to abide by a host of regulations, including regulations prohibiting the payment of incentive compensation (i.e., bonuses) to admissions and financial aid employees. With increasing regularity, whistleblowers have used the qui tam provisions of the federal False Claims Act (FCA) to bring suit on behalf of the United States against institutions that the whistleblowers contend are not in compliance with the regulations specified in the PPA. These whistleblowers claim that, by failing to comply with the regulations, institutions have disqualified themselves from Title IV, making every grant, loan, or work study payment the institution receives a “false claim” that the institution must pay back to the government, sometimes with treble damages, resulting in millions of dollars of potential liability. However, the recent case United States v. Sanford-Brown, Ltd., No. 14-2506 (7th Cir. June 8, 2015) clarifies that FCA liability is not as broad as these whistleblowers claim.

In Sanford-Brown, the plaintiff, a former employee, alleged that the college’s recruiting and student retention practices violated a number of Title IV regulations, including the prohibition on incentive compensation. The plaintiff argued that compliance with the Title IV regulations was a “condition of payment” such that, if the college knowingly violated the regulations after signing its PPA, the college effectively destroyed its eligibility to receive any Title IV payment, making every such payment a “false claim” under the False Claims Act, even though the plaintiff had no evidence the college affirmatively misrepresented its compliance with the regulations to the Department after it signed the PPA. The plaintiff also claimed the college’s alleged failure to comply with the terms of the PPA, after signing it, made the PPA a “false record” that the college used in the course of obtaining Title IV payments.

In affirming the trial court’s grant of summary judgment, the U.S. Court of Appeals for the 7th Circuit held that the plaintiff’s theories were too broad. According to the court, although a college must sign a PPA with the good faith intent to abide by it in order to gain entry into Title IV, subsequent compliance with each and every regulation specified in the PPA is not a prerequisite to receiving Title IV funds. Although an institution that violates regulations may be subject to regulatory penalties imposed by the Department, held the court, such an institution does not automatically lose its Title IV eligibility and, therefore, subsequent Title IV payments are not “false claims.”

The only exception the court noted was one where the plaintiff has evidence that the college never intended to abide by the PPA when it signed it. Such evidence could show that a college fraudulently induced its entry into the Title IV program itself, rendering the PPA a “false record.” However, because the plaintiff lacked any evidence that Sanford-Brown had any fraudulent intent at the time it signed the PPA, the court held that the plaintiff’s claims could not survive under this exception.

What this means to you

Sanford-Brown is an important case that establishes colleges and universities should not be subjected to draconian liability under the FCA due simply to their failure to comply with one or more of the hundreds of regulations incorporated by reference into PPAs. The case holds that the Department’s administrative enforcement mechanisms are the appropriate vehicle to remedy regulatory non-compliance.