Barrett et al v. Beauty Basics Inc

Filing 16

MEMORANDUM OPINION, as set out, re defendant's Motion to Dismiss 8 , An order in accordance will be entered contemporaneously with this Memorandum Opinion. Signed by Judge Sharon Lovelace Blackburn on 2/11/15. (CTS, )

FILED
2015 Feb-11 PM 02:40
U.S. DISTRICT COURT
N.D. OF ALABAMA

UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF ALABAMA
SOUTHERN DIVISION
UNITED STATES, ex rel.
JENNIFER BARRETT, QUANA
BURPO, VICKY CLEMMONS,
RANDI CREIGHTON, NADIA
IVORY, VICKIE McNEELY and
JOY URIBE, on behalf of THE
UNITED STATES OF AMERICA,
Plaintiffs,
vs.
BEAUTY BASICS, INC.,
Defendant.

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CASE NO. 2:13-CV-1989-SLB

MEMORANDUM OPINION
This case is before the court on defendant’s Motion to Dismiss. (Doc. 8.)1 Upon
consideration of the motion, the supporting and opposing memoranda, arguments of counsel
and the relevant law, the court finds, for the reasons stated below, that defendant’s Motion
is due to be granted, and the Complaint is due to be dismissed with leave for plaintiffs
(hereafter “plaintiffs” or “relators”) to file an Amended Complaint.2

1

Reference to a document number, (“Doc. ___”), references to the number assigned
each document as it is filed in the court’s record.
2

The Motion to Dismiss requests that the court dismiss the Complaint with prejudice,
but defendant has not shown why this case is the exceptional one in which relators should
not be allowed an opportunity to amend their complaint before dismissal. See Bryant v.
Dupree, 252 F.3d 1161, 1163 (11th Cir. 2001); FED. R. CIV. P. 15(a).

STANDARD OF REVIEW
A complaint is required to contain a “short and plain statement of the claim showing
that the pleader is entitled to relief.” FED. R. CIV. P. 8(a)(2). When a plaintiff alleges fraud
or mistake, the complaint must “state with particularity the circumstances constituting fraud
or mistake.” FED. R. CIV. P. 9(b). A defendant may move to dismiss a complaint pursuant to
Federal Rule of Civil Procedure 12(b)(6) if the plaintiff has failed to state a claim upon
which relief may be granted. To survive a 12(b)(6) motion, the complaint “does not need
detailed factual allegations”; however, the “plaintiff’s obligation to provide the grounds of
his entitlement to relief requires more than labels and conclusions, and a formulaic recitation
of the elements of a cause of action will not do.” Bell Atlantic Corp. v. Twombly, 550 U.S.
544, 555 (2007) (internal quotation marks and citations omitted). Accordingly, “[f]actual
allegations must be enough to raise a right to relief above the speculative level . . . on the
assumption that all the allegations in the complaint are true (even if doubtful in fact).” Id.
(citations and footnote omitted). The plaintiff need not prove his case, but must plead
“enough facts to state a claim to relief that is plausible on its face.” Id. at 570 (emphasis
added).
Additionally, “[w]hen considering a motion to dismiss, all facts set forth in the
plaintiff’s complaint ‘are to be accepted as true and the court limits its consideration to the
pleadings and exhibits attached thereto.’” Grossman v. Nationsbank, N.A., 225 F.3d 1228,
1231 (11th Cir. 2000) (quoting GSW, Inc. v. Long Cnty., 999 F.2d 1508, 1510 (11th Cir.

2

1993)). Further, all “reasonable inferences” are drawn in favor of the plaintiff. St. George v.
Pinellas Cnty., 285 F.3d 1334, 1337 (11th Cir. 2002). However, “‘[u]nsupported conclusions
of law or of mixed fact and law have long been recognized not to prevent a Rule 12(b)(6)
dismissal.’” Dalrymple v. Reno, 334 F.3d 991, 996 (11th Cir. 2003) (quoting Marsh v. Butler
Cnty., 268 F.3d 1014, 1036 n.16 (11th Cir. 2001)). Therefore, though the court must accept
all factual allegations as true, it is “not bound to accept as true a legal conclusion couched
as a factual allegation.” Iqbal, 556 U.S. at 678 (citation omitted).
FACTUAL BACKGROUND3
To pursue a career in esthiology, relators obtained federal financial aid and enrolled
in the Aveda Institute at Birmingham (hereinafter “Aveda”), owned and operated by
defendant. (Doc. 1 ¶ 10-11; doc. 9 at 5 n.1.) Although esthiology is left undefined by relators’
Complaint, its study apparently involves “skin care training with an emphasis on using pure
flower

and

plant

essences

in

treatments.”

AVEDA

INSTITUTE,

http://aveda.edu/institute/aveda-institute-birmingham (last visited February 10, 2015).4
Between late 2012 and summer of 2013, relators were not provided grades or “properly
licensed instructors,” both of which, relators allege, are required by Aveda’s accrediting
institution, the National Accrediting Commission of Career Arts and Sciences (“NACCAS”).

3

As noted above, for purposes of deciding the Motion to Dismiss, the court accepts
as true all facts alleged in the Complaint.
4

The court’s research did not reveal significant use of the term outside of Avedasponsored websites. The term is most likely a trade name.
3

(Doc. 1 at ¶¶ 12-15.) “During this time period, [d]efendant falsely certified in written reports
to NACCAS that it was in [c]ompliance with NACCAS’s standard,” and “with full
knowledge that [defendant] did not meet the requirements for accreditation under NACCAS
standards, [defendant] then represented to the United States Department of Education that
it met the NACCAS standards” by certifying that it met those standards in “Program
Participation Agreements” (“PPAs”). (Id. at ¶¶ 16,17.) Had defendant not engaged in this
“two[-]part fraud,” relators allege, defendant would not have received funds from the Title
IV, Higher Education Act program. (Id. at ¶¶ 17, 19.) Relators allege that these facts amount
to “a false and fraudulent claim against the United States.” (Id. at ¶ 21.) Although they fail
to actually invoke the False Claims Act (“FCA”), 31 U.S.C. § 3729 et seq., in Count I,5 that
is the Act that they assert gives this court jurisdiction to hear their claim. (See id. at ¶¶ 9, 21.)
ANALYSIS
Defendant attacks relators’ two-step theory of liability and the sparse factual
allegations with which they present it. It argues that falling behind on accreditation
requirements in 2013 and failing to notify the accrediting agency does not make its 2009 PPA
fraudulent, nor does it make any certification to the United States that it was in fact
accredited—which nobody disputes, (doc. 1 ¶ 12)—fraudulent. (Doc. 9 at 13-14.) The theory,

5

Relators concede that Count II, titled “Reimbursement,” does not state a cause of
action and that it should be dismissed.
4

defendant argues, depends upon the incorrect assumption that “accreditation is immediately
revoked upon” defendant’s alleged infractions. (Doc. 9 at 15.)
The Complaint does not mention a 2009 PPA, but merely references “the PPAs” that
defendant made “periodically.” (Doc. 1 ¶ 17.) The Complaint alleges that “during this time
period”—that is, “beginning in approximately December of 2012 through July
2013”—“defendant falsely certified in written reports to NACCAS that it was in
[c]ompliance with NACCAS’s standard.” (Doc. 1 ¶ 15-16.) The Complaint alleges in the
next paragraph that defendant, “with full knowledge that it did not meet the requirements for
accreditation under NACCAS standards, then represented to the United States Department
of Education that it met the NACCAS standards.” (Id. ¶ 17) (emphasis added). It did this, the
Complaint alleges, through PPAs “made periodically” with the United States in which
defendant would certify “that it meets the NACCAS standards.” (Id.) Defendant’s assertion
that “[i]n fact, NACCAS accreditation is the only certification in the PPA regarding
NACCAS,” and that the “PPA does not mention or certify meeting NACCAS standards,”
(doc. 9 at 17 n.23), does not help it on a motion to dismiss. Defendant must attack the
Complaint as-is, and contrary to defendant’s argument, the Complaint plainly alleges a false
certification.6 (See doc. 9 at 16.)

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This understanding of the certifications at issue comes from a close but natural
reading of the Complaint. Clearly, representing that one is accredited is different than
representing that one is meeting accreditation standards. Given that particularity is required
in this pleading, that difference is significant to whether or not the “factual contentions [in
the pleading] have evidentiary support.” Fed R. Civ. P. 11(b)(3). Any amended complaint
5

Defendant next argues that the Complaint fails Rule 9(b)’s requirement that “[i]n
alleging fraud . . . a party must state with particularity the circumstances constituting fraud.”
To comply with Rule 9(b), a complaint must allege:
(1) precisely what statements were made in what documents or oral
representations or what omissions were made, and (2) the time and place of
each such statement and the person responsible for making (or, in the case of
omissions, not making) same, and (3) the content of such statements and the
manner in which they misled the plaintiff, and (4) what the defendants
obtained as a consequence of the fraud.
U.S. ex rel. Clausen v. Lab. Corp. of Am., Inc., 290 F.3d 1301, 1310 (11th Cir. 2002)
(citation omitted).
The second requirement is the problem for relators. The Complaint does not allege a
specific date on which any one certification was made, nor any “person responsible for
making” any certification, see Clausen, 290 F.3d at 1310, but rather makes the blanket
declaration that “every certification submitted by [d]efendant to the United States
Department of Education” between December 20127 and October 2013 “was false and
fraudulent.” This statement does not provide two types of information that the Eleventh
Circuit has recognized as important: “actual dates” and “amounts of charges.” U.S. ex rel.
Clausen v. Lab. Corp. of Am., Inc., 290 F.3d 1301, 1312 & n.21 (11th Cir. 2002). Timing is
especially important here because it may change the question of FCA liability from whether
should not say one and mean the other.
7

Given the significance of December 2012 in the Complaint, the reference to
December 2011 in paragraph twenty-two is presumably a typographical error. (See doc. 1
¶¶ 15, 22; doc. 1-1 at 1.)
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defendant falsely certified to the United States that it was in compliance with NACCAS
standards in order to receive federal funds, which seems to be a plain instance of an FCA
violation, to whether receiving federal funds during a lapse of perfect compliance with
NACCAS standards constitutes an FCA violation, which is not so straightforward, see
McNutt ex rel. United States v. Haleyville Medical Supplies, 423 F.3d 1256 (11th Cir. 2005)
(“When a violator of government regulations is ineligible to participate in a government
program and that violator persists in presenting claims for payment that the violator knows
the government does not owe, that violator is liable, under the [FCA], for its submission of
those false claims[.]”) (emphasis added); United States ex rel. Hendow v. University of
Phoenix, 461 F.3d 1166, 1176 (9th Cir. 2006) (“The statute, regulation, and agreement here
all explicitly condition participation and payment on compliance with, among other things,
the precise requirement that relators allege that the University knowingly disregarded.”)
(emphasis added); id. at 1177 (“The fact that defendants [in Mikes v. Straus, 274 F.3d 687,
696 (2d Cir. 2001),] did not meet the appropriate standard of care does not necessarily mean

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that they were ignoring their duty to try their best to comply . . . .”).8 Timing will also affect
the argument on whether scienter can be inferred. (See doc. 9 at 19-20.)
The more difficult problem, however, comes out in relators’ Opposition to Defendant
Beauty Basics, Inc.’s Motion to Dismiss. (Doc. 13.) Latching onto defendant’s admission
“that it did file a PPA on March 5, 2009,” relators craft an entirely different presentation of
how the defendant violated the FCA: by “not notify[ing] the government of its violations of
the accreditation standards after the filing of said PPA” all the while “receiv[ing] federal
loans made under Title IV.” (Doc. 13 at 8.) It would be one thing if this were merely an
additional allegation (which could only be included by amending the complaint), but
apparently, this has been the true meaning of the words in the Complaint all along. (See doc.
13 at 13 (“The Complaint states that [d]efendant received funds from the government while
it knew that it was not in compliance [with NACCAS accreditation standards].”).) If relators
had any confidence in their original allegations, the court expects they would have simply

8

Relators may think that asking for details as specific as “actual dates” and “amounts
of claims” is too demanding. After all, how are students supposed to know the inner
workings of their school’s billing transactions? Well, that may be why
[m]ost relators in qui tam actions are insiders. As a corporate outsider,
[relators] may have . . . to work hard to learn the details . . . while not being
privy to [the defendant’s] . . . files and computer systems. But, while an insider
might have an easier time obtaining information about billing practices and
meeting the pleading requirements under the False Claims Act, neither the
Federal Rules nor the Act offer any special leniency under these particular
circumstances to justify [relators] failing to allege with the required specificity
the circumstances of the fraudulent conduct [they] assert[] in [this] action.
Clausen, 290 F.3d at 1314.
8

repeated them: that “[d]efendant, despite being in clear violation of the standards and policies
of NACCAS, certified to the United States government that it met the standards and policies
set by NACCAS and did so with the intent of receiving federal funds.” (Doc. 1 ¶ 18.) But
relators must know that such clarity is unsustainably misleading because they abandon that
language in favor of this: “Defendant received federal aid and payments from the government
during the time period that it knew it was not in compliance with NACCAS standards. These
submissions were implicit reaffirmations of compliance despite being non-compliant.” (Doc.
13 at 8.)
Explaining Rule 9(b)’s purpose, the Eleventh Circuit noted:
When a plaintiff does not specifically plead the minimum elements of their
allegation, it enables them [sic] to learn the complaint’s bare essentials through
discovery and may needlessly harm a defendants’ [sic] goodwill and reputation
by bringing a suit that is, at best, missing some of its core underpinnings, and,
at worst, are baseless allegations used to extract settlements.
Clausen, 290 F.3d at 1313 n.24. Here, relators got one “bare essential[],” a date of a PPA,
in a motion to dismiss, one step earlier than discovery. (See doc. 13 at 8.) However, relators
cannot proceed to discovery without first preparing the sort of detail-rich complaint required
by Rule 9(b) as interpreted by the Eleventh Circuit in Clausen.
CONCLUSION
Because the Complaint does not comply with Rule 9(b)’s particularity requirement,
defendant’s Motion to Dismiss, (doc. 8), is due to be granted and the Complaint is due to be
dismissed with leave for plaintiffs to file an Amended Complaint. An order in accordance

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will be entered contemporaneously with this Memorandum Opinion. If an Amended
Complaint is not filed within the time specified in the accompanying order, this case will be
dismissed without prejudice.
DONE this 11th day of February, 2015.

SHARON LOVELACE BLACKBURN
UNITED STATES DISTRICT JUDGE

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