Rose et al v. Stephens Institute

Filing 208

Order by Hon. Phyllis J. Hamilton denying 192 Motion for Reconsideration.(pjhlc2S, COURT STAFF) (Filed on 9/20/2016)

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1 2 3 4 UNITED STATES DISTRICT COURT 5 NORTHERN DISTRICT OF CALIFORNIA 6 7 SCOTT ROSE, et al., v. 9 ORDER DENYING MOTION FOR RECONSIDERATION 10 STEPHENS INSTITUTE, 11 United States District Court Northern District of California Case No. 09-cv-05966-PJH Plaintiffs, 8 Defendant. Re: Dkt. No. 192 12 13 14 Defendant’s motion for reconsideration came on for hearing before this court on 15 August 31, 2016. Plaintiff-relators Scott Rose, Mary Aquino, Mitchell Nelson, and Lucy 16 Stearns (“relators”) appeared through their counsel, James Wagstaffe, Stephen Jaffe, 17 Kenneth Nabity, and Brady Dewar. Defendant Stephens Institute, doing business as 18 Academy of Art University (“AAU”), appeared through its counsel, Steven Gombos, 19 Gerald Ritzert, and Jacob Shorter. The United States appeared through its counsel, 20 Jonathan H. Gold. Having read the papers filed by the parties and carefully considered 21 their arguments and the relevant legal authority, and good cause appearing, the court 22 hereby DENIES the motion, for the following reasons. 23 BACKGROUND 24 25 A. The Relators’ Claims This is a qui tam action brought by relators against AAU for violations of the False 26 Claims Act (“FCA”). Relators allege that AAU fraudulently obtained funds from the U.S. 27 Department of Education (the “DOE”) by falsely alleging compliance with Title IV of the 28 Higher Education Act. Specifically, relators allege that defendant ran afoul of Title IV’s prohibition on 1 2 providing “any commission, bonus, or other incentive payment based directly or indirectly 3 on success in securing enrollments or financial aid to any persons or entities engaged in 4 any student recruiting or admissions activities.” 20 U.S.C. § 1094(a)(20); 34 C.F.R. 5 § 668.14(b)(22). This requirement, which applies to colleges and universities that receive 6 federal funding, is referred to as the incentive compensation ban (“ICB”). The ICB is 7 designed to prevent schools from incentivizing recruiters to enroll poorly-qualified 8 students who will not benefit from federal subsidies, and may be unable or unwilling to 9 repay federal student loans. United States ex rel. Main v. Oakland City Univ., 426 F.3d 10 914, 916 (7th Cir. 2005). United States District Court Northern District of California 11 Relators acknowledge the existence of a “safe harbor,” which allowed colleges to 12 provide “payment of fixed compensation, such as a fixed annual salary or a fixed hourly 13 wage, as long as that compensation is not adjusted up or down more than twice during 14 any twelve month period and any adjustment is not based solely on the number of 15 students recruited, admitted, enrolled, or awarded financial aid.” 34 C.F.R. 16 § 668.14(b)(22)(ii)(A) (emphasis added) (2010). However, relators allege that AAU’s 17 actions fall outside of the safe harbor, because it awarded compensation based only 18 upon enrollment success. (Although it applied at the time of the events of this suit, this 19 safe harbor was subsequently repealed in 2011.) On December 21, 2009, relators brought two causes of action, both under the 20 21 False Claims Act: (1) knowingly presenting, or causing to be presented, a false or 22 fraudulent claim for payment or approval under 31 U.S.C. § 3729(a)(1)(A); and (2) 23 knowingly making, using, or causing to be made or used, a false record or statement 24 material to a false or fraudulent claim under 31 U.S.C. § 3729(a)(1)(B). On November 8, 25 2011, after the government declined to intervene, relators filed the operative second 26 amended complaint (“SAC”), asserting the same two causes of action. Dkt. 18. 27 /// 28 /// 2 1 2 B. Procedural History AAU’s motion for summary judgment came on for hearing on March 9, 2016. Dkt. 150, 169. In a May 4, 2016 order, the court denied the motion, but limited the relators’ 4 claims to a single “implied false certification theory” under § 3729(a)(1)(A). Dkt. 179 at 5 12–13 (the “May 4 Order”). The court found that an express certification theory was “not 6 viable” because relators conceded that AAU’s individual requests for Title IV loans did not 7 contain any explicit certification of compliance with the ICB. Id. at 11. Rather, AAU 8 expressly certified compliance only in its 2006 and 2012 program participation 9 agreements (“PPAs”). Id. As the allegations of ICB violations were limited to the fall of 10 2006 through the fall of 2010, relators had no evidence that either promise in the PPAs 11 United States District Court Northern District of California 3 was “false when made.” Id. at 11–12. As a result, a promissory fraud theory was also 12 not viable. 13 The remaining claim is based on implied false certification, which “occurs when an 14 entity has previously undertaken to expressly comply with a law, rule, or regulation, and 15 that obligation is implicated by submitting a claim for payment even though a certification 16 of compliance is not required in the process of submitting the claim.” Ebeid ex rel. U.S. v. 17 Lungwitz, 616 F.3d 993, 998 (9th Cir. 2010). The court found triable issues of fact as to 18 whether, from late 2006 through 2010, AAU submitted claims that were impliedly false in 19 light of its 2006 promise to comply with the ICB. In particular, relators submitted 20 evidence tending to show that AAU applied for Title IV student loans even though its 21 recruiters were being paid bonuses based on enrollment success. 22 An FCA claim has four elements: “(1) a false statement or fraudulent course of 23 conduct, (2) made with scienter, (3) that was material, causing (4) the government to pay 24 out money or forfeit moneys due.” U.S. ex rel. Hendow v. Univ. of Phoenix, 461 F.3d 25 1166, 1174 (9th Cir. 2006). As to falsity, the court found that there was a material dispute 26 of fact over whether AAU paid out compensation solely based on enrollment, and thus fell 27 outside the scope of the safe harbor. Dkt. 179 at 16. Similarly, there was evidence 28 tending to show AAU acted with knowledge of falsity—or at least a reckless disregard for 3 1 the truth—with respect to its alleged noncompliance with the ICB. In particular, the court 2 noted evidence suggesting that AAU attempted to hide its compensation practices. Id. at 3 17–18. AAU did not “meaningfully challenge” materiality or causation, the two remaining 4 elements. Id. at 18. 5 C. The Escobar Decision 6 On June 1, 2016, the court granted a stay of proceedings until the Supreme Court 7 issued its ruling in Universal Health Services, Inc. v. U.S. ex rel. Escobar. Dkt. 183. The 8 Supreme Court had granted certiorari in Escobar to decide whether the implied 9 certification theory of legal falsity under the FCA was viable. On June 16, the Supreme Court issued its opinion in Escobar. In pertinent part, the Court held that “the implied 11 United States District Court Northern District of California 10 false certification theory can, at least in some circumstances, provide a basis for liability.” 12 Escobar, 136 S. Ct. 1989, 1995 (2016). Noting that “[w]e need not resolve whether all 13 claims for payment implicitly represent that the billing party is legally entitled to payment,” 14 id. at 2000, the Court found that liability attaches: at least where two conditions are satisfied: first, the claim does not merely request payment, but also makes specific representations about the goods or services provided; and second, the defendant’s failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes those representations misleading half-truths. 15 16 17 18 19 20 Id. at 2001. However, the Supreme Court required a “rigorous” showing that the defendant’s 21 failure to disclose noncompliance was material to the government’s payment decision, 22 noting that “statutory, regulatory, and contractual requirements are not automatically 23 material.” Id. at 2001–02. Instead, materiality “look[s] to the effect on the likely or actual 24 behavior of the recipient of the alleged misrepresentation.” Id. at 2002 (citing 26 Williston 25 on Contracts § 69:12, p. 549 (4th ed. 2003)). The Court noted some factors that may be 26 considered: 27 28 In sum, when evaluating materiality under the False Claims Act, the Government’s decision to expressly identify a provision as a condition of payment is relevant, but not 4 automatically dispositive. Likewise, proof of materiality can include, but is not necessarily limited to, evidence that the defendant knows that the Government consistently refuses to pay claims in the mine run of cases based on noncompliance with the particular statutory, regulatory, or contractual requirement. Conversely, if the Government pays a particular claim in full despite its actual knowledge that certain requirements were violated, that is very strong evidence that those requirements are not material. Or, if the Government regularly pays a particular type of claim in full despite actual knowledge that certain requirements were violated, and has signaled no change in position, that is strong evidence that the requirements are not material. 1 2 3 4 5 6 7 8 9 Id. at 2003–04. On June 23, pursuant to Local Rule 7-9(b)(2), this court granted AAU leave to file 10 United States District Court Northern District of California 11 12 13 14 15 16 17 18 a motion for reconsideration regarding the impact of Escobar on the May 4 Order. Dkt. 191. The basis for leave was a potential “change in law occurring after the time” of the summary judgment order. L.R. 7-9(b)(2). Materiality was not “meaningfully challenged” in defendant’s motion for summary judgment, and therefore not addressed in the May 4 Order, because this issue was settled by Ninth Circuit law. See Hendow, 461 F.3d at 1175–76. The court noted that “Escobar articulated a materiality standard under the [FCA] that, at least potentially, undermines the existing Ninth Circuit law on the issue.” Dkt. 191 at 1–2. AAU followed with the instant motion, which argues that the court should 19 20 21 22 23 reconsider its denial of summary judgment because there is no material dispute of fact that: (1) the allegations in this case fail the “two-part test” for falsity established by Escobar; and (2) materiality is not satisfied under the Escobar’s “demanding” standard. See Dkt. 192 (“Mot.”). DISCUSSION 24 25 26 27 28 A. Legal Standard A party may move for summary judgment on a “claim or defense” or “part of . . . a claim or defense.” Fed. R. Civ. P. 56(a). Summary judgment is appropriate when there is no genuine dispute as to any material fact and the moving party is entitled to judgment 5 1 as a matter of law. Id. When deciding a summary judgment motion, a court must view 2 the evidence in the light most favorable to the nonmoving party and draw all justifiable 3 inferences in its favor. Id. at 255; Hunt v. City of Los Angeles, 638 F.3d 703, 709 (9th Cir. 4 2011). A party seeking summary judgment bears the initial burden of informing the court 5 6 of the basis for its motion, and of identifying those portions of the pleadings and discovery 7 responses that demonstrate the absence of a genuine issue of material fact. Celotex 8 Corp. v. Catrett, 477 U.S. 317, 323 (1986). Material facts are those that might affect the 9 outcome of the case. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). A dispute as to a material fact is “genuine” if there is sufficient evidence for a reasonable 11 United States District Court Northern District of California 10 jury to return a verdict for the nonmoving party. Id. Where the moving party will have the burden of proof at trial, it must affirmatively 12 13 demonstrate that no reasonable trier of fact could find other than for the moving party. 14 Soremekun v. Thrifty Payless, Inc., 509 F.3d 978, 984 (9th Cir. 2007). On an issue 15 where the nonmoving party will bear the burden of proof at trial, the moving party may 16 carry its initial burden of production by submitting admissible “evidence negating an 17 essential element of the nonmoving party’s case,” or by showing, “after suitable 18 discovery,” that the “nonmoving party does not have enough evidence of an essential 19 element of its claim or defense to carry its ultimate burden of persuasion at trial.” Nissan 20 Fire & Marine Ins. Co. v. Fritz Cos., Inc., 210 F.3d 1099, 1105–06 (9th Cir. 2000); see 21 also Celotex, 477 U.S. at 324–25 (moving party can prevail merely by pointing to an 22 absence of evidence to support the nonmoving party’s case). When the moving party has carried its burden, the nonmoving party must respond 23 24 with specific facts, supported by admissible evidence, showing a genuine issue for trial. 25 Fed. R. Civ. P. 56(c), (e). But allegedly disputed facts must be material – existence of 26 “some alleged factual dispute between the parties will not defeat an otherwise properly 27 supported motion for summary judgment.” Anderson, 477 U.S. at 247–48. 28 /// 6 1 B. AAU’s Motion for Leave to Take Judicial Notice 2 In conjunction with its motion, AAU asks the court to take judicial notice of seven 3 documents based upon their status as official government reports and agency records. 4 Dkt. 194. AAU submits these documents as evidence regarding the DOE’s past 5 enforcement of the ICB. The court GRANTS the request for judicial notice. The motion is unopposed, and 6 7 judicial notice is appropriate because AAU has established that the documents are official 8 government reports available on official websites. See, e.g., Jarvis v. JP Morgan Chase 9 Bank, N.A., No. CV 10–4184–GHK, 2010 WL 2927276 (C.D. Cal. July 23, 2010) 10 (“Judicial notice may be taken of documents available on government websites.”). However, the court will consider the evidence only as they relate to the DOE’s United States District Court Northern District of California 11 12 historical practice in enforcing the ICB—which is relevant to the materiality issues—and 13 not for the truth of any legal conclusions asserted therein. In particular, the court will 14 consider the so-called “Hansen Memo” only as evidence regarding the DOE’s past 15 enforcement of the ICB, and ignore its legal assertion that ICB noncompliance “does not 16 render a recruited student ineligible.” See Dkt. 194-1 Ex. B, Memorandum from William 17 D. Hansen, Deputy Secretary of the Department of Education to Terri Shaw, Chief 18 Operating Officer of Federal Student Aid (October 30, 2002). The Hansen Memo lacks 19 binding legal force; it is an informal internal memo, not an authoritative agency regulation. 20 See Main, 426 F.3d at 917 (Hansen Memo has “no legal effect”). 21 C. Analysis Turning to the merits, in order for the court to reconsider its May 4 denial of 22 23 summary judgment, ASU must show that, in light of Escobar, there is no longer any 24 material dispute of fact as to liability under the FCA. The required elements for FCA 25 liability are: (1) a false statement; (2) made with scienter; (3) materiality; and (4) 26 causation. Hendow, 461 F.3d at 1174. AAU’s motion for reconsideration only challenges 27 the falsity and materiality elements. 28 /// 7 In particular, AAU alleges two bases for reconsideration under Escobar. First, it 1 2 argues that the claims here fail Escobar’s new “two-part test” for falsity in implied 3 certification claims. Second, AAU argues that non-compliance with the ICB was not 4 material to the payment decision under Escobar based on (i) the DOE’s history of rarely 5 revoking Title IV funds for ICB violations; and (ii) because the DOE has continued to pay 6 AAU despite having knowledge of the allegations in this case. Mot. at 2–3.1 Escobar’s Alleged “Two-Part Test” for Implied False Certification 7 1. 8 AAU is incorrect as a matter of law that Escobar establishes a rigid “two-part test” 9 for falsity that applies to every single implied false certification claim. The Supreme Court’s statement that FCA liability attached “at least where two conditions are satisfied,” 11 United States District Court Northern District of California 10 Escobar,136 S. Ct. at 2001, must be read in context. The Court explicitly prefaced its 12 holding by making clear that “[w]e need not resolve whether all claims for payment 13 implicitly represent that the billing party is legally entitled to payment.” Id. at 2000. The 14 Supreme Court’s use of “at least” indicated that it need not decide whether the implied 15 false certification theory was viable in all cases, because the particular claim before it 16 contained “specific representations” that were “misleading half-truths.” Id. at 2001. The 17 language in Escobar that AAU relies upon does not purport to set out, as an absolute 18 requirement, that implied false certification liability can attach only when these two 19 conditions are met. Even assuming that this “two-part test” applied, relators have raised a triable issue 20 21 that the claims here were impliedly false per the two conditions of Escobar. As the loan 22 23 24 25 26 27 28 1 AAU also asserts, in a conclusory fashion, that there is no evidence that anyone at AAU knew that the ICB was material. Mot. at 20. This argument is a non-starter, because this court has already held that the relators’ evidence established a triable issue on whether AAU acted with scienter under the FCA. May 4 Order at 16–18. In particular, relators presented evidence suggesting that AAU was keenly aware of the significance of ICB and the safe harbor, such that AAU employees took active steps “to hide their compensation practices.” Id. at 17. This evidence suffices to create a genuine dispute of fact that “AAU knew that it was actively circumventing the law,” and that AAU knew the ICB was material to the government. Id. at 18. Nothing in Escobar alters this prior finding. 8 1 form submitted by AAU shows, see Dkt. 194-1 Ex. E, AAU’s request for payment 2 represents that the student-borrower is “eligible” and is enrolled “in an eligible program.” 3 If AAU was not in compliance with the ICB, failure to disclosure this fact would render the 4 loan forms misleading because AAU would not have been an “eligible” institution. While 5 AAU attempts to distinguish between an “eligible program” and an “eligible institution,” an 6 eligible program can only exist if the institution is eligible, and a student can only be 7 eligible if she is enrolled an eligible institution. See 34 C.F.R. § 668.32(a)—(a)(1)(i) (“A 8 student is eligible [for Title IV funds] if the student . . . [is] enrolled . . . at an eligible 9 institution.”). AAU’s distinction between student eligibility and institutional eligibility has been implicitly rejected by the Ninth Circuit. See Hendow, 461 F.3d at 1176 11 United States District Court Northern District of California 10 (“[C]ompliance with the incentive compensation ban is a necessary condition of continued 12 eligibility and participation: compliance is a ‘prerequisite’ to funding; funding shall occur 13 ‘only if’ the University complies . . . .”). 14 In sum, Escobar did not establish a rigid two-part test for falsity that must be met in 15 in every single implied certification case. In any event, AAU did make “specific 16 representations” in the submitted student loan forms that would be “misleading half- 17 truths” should the relators prove at trial that AAU was not in compliance with the ICB. As 18 the court has already found, the relators have presented evidence creating a triable issue 19 as to whether the AAU’s implied certifications of compliance with the ICB were, in fact, 20 false. May 4 Order at 13–16. 21 2. Whether the Alleged ICB Violations Were Material 22 AAU’s primary argument is that any noncompliance with the ICB was not material 23 under the “rigorous” standard set forth in Escobar. As preliminary matter, the Ninth 24 Circuit has previously held that the ICB is material under the FCA. See Hendow, 461 25 F.3d at 1176–77 (9th Cir. 2006). As a result, to even assert its materiality argument, AAU 26 must show that Escobar “undercut the theory or reasoning underlying the prior circuit 27 precedent in such a way that the cases are clearly irreconcilable.” Miller v. Gammie, 335 28 F.3d 889, 900 (9th Cir. 2003). 9 1 Hendow’s materiality holding does rely heavily on the fact that Title IV funds are 2 “explicitly conditioned, in three different ways, on compliance with the incentive 3 compensation ban.” 461 F.3d at 1175. This is only one non-dispositive factor after 4 Escobar, which held that “statutory, regulatory, and contractual requirements are not 5 automatically material.” 136 S. Ct. at 2001–02. The focus under Escobar is not how the 6 condition is designated but instead “the effect on the likely or actual behavior of the 7 recipient of the alleged misrepresentation.” Id. at 2002. However, Hendow further found 8 that “if the University had not agreed to comply with [the ICB], it would not have gotten 9 paid.” 461 F.3d at 1176. As a result, this court finds that Hendow and Escobar are not 10 United States District Court Northern District of California 11 “clearly irreconcilable,” and thus Hendow remains binding precedent. Nonetheless, the court has evaluated the ICB and concludes that it is a material 12 condition under the standard articulated in Escobar. The FCA defines “material” to mean 13 “having a natural tendency to influence, or be capable of influencing, the payment or 14 receipt of money or property.” 31 U.S.C. § 3729(b)(4). Under Escobar, the court is to 15 examine the ICB’s tendency to influence the behavior of the government, looking to such 16 factors as whether the provision was a condition of payment, whether the government 17 consistently refuses to pay claims in the mine run of cases based on noncompliance, or 18 whether, instead, the government routinely pays a particular claim in full despite its actual 19 knowledge of noncompliance. 136 S. Ct. at 2003–04. 20 In support of its materiality argument, AAU relies on (i) the DOE’s decision not 21 take action against AAU despite its awareness of the allegations in this case; and (ii) the 22 fact that, historically, the DOE has only rarely revoked a school’s Title IV funds based on 23 an ICB violation. Mot. at 14–20. 24 The court finds that the DOE’s decision to not take action against AAU despite its 25 awareness of the allegations in this case is not terribly relevant to materiality. The DOE 26 did not cite any reason for this decision, which could well have been based on difficulties 27 of proof or resource constraints, or the fact that the truth of the allegations has yet to be 28 proven. In such circumstances, the DOE’s inaction does not provide any basis for the 10 1 court to infer that the DOE had “actual knowledge” of AAU’s violations or chose not to act 2 because it considered the ICB unimportant. 3 AAU also relies on the DOE’s history of uneven enforcement of the ICB. The 4 record shows that, between 1998 and 2009, the DOE handled 54 incentive compensation 5 ban cases. See Dkt. 194-1, Ex. C at 30. Of these, 22 ended in settlement agreements 6 yielding over $59 million for the DOE. Id. at 32. Of the 32 substantiated violations, the 7 DOE required corrective action (i.e., forward-looking reforms) in 25 cases, imposed fines 8 in two cases, and imposed liability (i.e., revoking Title IV funds) in one case. Id. at 31. 9 AAU is thus correct that, with one exception, the DOE “has not limited, suspended or terminated any schools’ participation in Title IV” based on ICB violations. Dkt. 194-1 11 United States District Court Northern District of California 10 Ex. A at 9. However, this fact does not prove that the DOE considered ICB violations 12 immaterial or unimportant to the Title IV bargain. To the contrary, the DOE took 13 corrective actions against schools, issued fines, and entered into settlement agreements 14 (which function like a fine or partial revocation of funds) totaling tens of millions of dollars. 15 The government’s actions show that the DOE cared about the ICB, and that it did not 16 always pay the claims “in full” despite knowledge of the ICB violations. Escobar, 136 S. 17 Ct. at 2003; cf. Hendow, 461 F.3d at 1176 (“[T]he DOE . . . quite plainly care about an 18 institution’s ongoing conduct, not only its past compliance [with the ICB.]”). 19 Finally, the court notes that the DOE’s enforcement of the ICB has changed over 20 time, signaling a “change in position” that is relevant under Escobar. 136 S. Ct. at 2004. 21 In 2002, in informal guidance, the DOE took the position that fines, and not suspension of 22 participation in Title IV, were the most appropriate penalty for ICB violations. See 23 Hansen Memo, Dkt. 194-1 Ex. B at 1. It also created the safe harbors in that year. Dkt. 24 194-1 Ex. D at 2. However, by 2008 this position had attracted criticism and Congress 25 commissioned a study of DOE’s ICB enforcement. See Dkt. 194-1 Ex. C at 2. The DOE 26 subsequently took steps to eliminate the safe harbors. Dkt. 194-1 Ex. A at 1. In 2015, 27 after the Office of the Inspector General released a critical report, see id., the DOE 28 officially rescinded the Hansen Memo. Considering these recent changes, it would be a 11 1 2 mistake to give too much weight to the DOE’s record of past enforcement. In sum, ICB compliance is a matter “to which a reasonable person would attach 3 importance in determining his or her choice of action with respect to the transaction 4 involved.” Escobar, 136 S. Ct. at 2003 n.5 (citing Williston on Contracts § 69:12, pp. 5 549–50). Nothing in Escobar suggests that actions short of a complete revocation of 6 funds are irrelevant to the court’s materiality analysis. Here, the government’s corrective 7 reforms, fines, and settlement agreements show that it considered the ICB to be an 8 important part of the Title IV bargain, and that it took action against schools based on ICB 9 noncompliance. These actions show that ICB noncompliance was “capable of influencing” the government’s payment decisions. 31 U.S.C. § 3729(b)(4). At the least, 11 United States District Court Northern District of California 10 relators have shown that there is a triable issue as to whether the ICB is material under 12 the Escobar standard. Summary judgment in favor of AAU would therefore be 13 inappropriate. CONCLUSION 14 15 For the foregoing reasons, the motion for reconsideration is DENIED. The court 16 shall hold a joint case management conference on October 6 at 2:00 p.m. to set a 17 pretrial schedule. 18 IT IS SO ORDERED. 19 Dated: September 20, 2016 20 21 22 __________________________________ PHYLLIS J. HAMILTON United States District Judge 23 24 25 26 27 28 12

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