Jude Gillespie et al v. Kaplan University et al
ORDER Granting in Part and Denying in Part 171 MOTION to Dismiss for Lack of Jurisdiction 170 Amended Complaint filed by Kaplan Higher Education Corporation, Kaplan, Inc., Kaplan University. Relators' claims under the False Claims Act are d ismissed with prejudice except for Relators' claims based on Defendants' violations of the Rehabilitation Act. Defendants' Motion is Denied as to Diaz's retaliation claim. Defendants shall file theri answer to the viable portions of the Second Amended Complaint no later than 8/31/11. Signed by Judge Patricia A. Seitz on 8/17/11. (mg) Modified on 8/17/2011 (mg).
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF FLORIDA
CASE NO. 09-20756-CIV -SEITZ/SIMONTON
UNITED STATES OF AMERICA,
ex reI. CARLOS URQUILLA DIAZ, et al.,
KAPLAN UNIVERSITY, et al.,
ORDER GRANTING IN PART AND DENYING IN PART MOTION TO DISMISS
THIS MATTER is before the Court on Defendants' Motion to Dismiss Relators' Second
Amended Complaint [DE-I7I]. Relators Gillespie, Diaz, and Wilcox filed this qui tam action
pursuant to the False Claims Act. l Relators' Second Amended Complaint alleges that
Defendants filed false claims for payment under Title IV of the Higher Education Act (HEA)
because they were not eligible to file the claims based on their failure to comply with
requirements of eligibility. Pursuant to Federal Rules of Civil Procedure 9(b), 12(b)( 1), and
I2(b)( 6), Defendants move to dismiss the claims for lack of subject matter jurisdiction and for
failure to state a cause of action. For the reasons set forth below, Defendants' Motion is granted
as to all claims except for Relators' False Claims Act counts based on violations of the
Rehabilitation Act and for Relator Diaz's retaliation claim.
IThis is one of three qui tam actions against Kaplan Higher Education Corp. that are
before this Court pursuant to an order of the Judicial Panel on Multidistrict Litigation.
Defendants have filed motions to dismiss in all three. Chronologically, this is the second filed of
the three actions. The first filed action, Gatsiopouios, alleges violations ofthe False Claims Act
based on alleged violations of the HEA's incentive compensation ban and the HEA's 70 Percent
Rules. The third filed action, Torres, also alleges violations of the False Claims Act based on
alleged violations of the incentive compensation ban.
I. Facts and Procedural History
Plaintiffs, three former employees of Defendants, filed their first complaint under seal on
March 7, 2008. Subsequently, two amended complaints were filed. The operative complaint, the
Second Amended Complaint [DE-170], was filed under seal on June 24, 2009 and unsealed, by
Court order, on July 15,2009.
Defendants Kaplan University (KU) and Kaplan Higher Education Corp. (KHEC) are
accredited by the Higher Learning Commission and are recipients of federal student financial aid
funds from the U.S. Department of Education, pursuant to the HEA. KU operates numerous
online educational enterprises throughout the United States. KU is a wholly owned subsidiary of
KHEC. 2 KHEC is a division of Defendant Kaplan, Inc. (Kaplan).3
Relator Jude Gillespie worked for Defendants4 from April 2004 through April 2005 as a
Course Developer, Department Chairman, and Associate Professor of Paralegal Studies. Relator
Carlos Urquilla-Diaz worked for Defendants 5 from August 2004 through April 2005 as a
Professor of Paralegal Studies. Relator Ben Wilcox was also an employee of Defendants.
Wilcox was a Dean at KU and apparently worked out of Fort Lauderdale and Chicago. Relators
initially were represented by the same counsel. However, prior to the filing of the Second
2The Second Amended Complaint, in the same paragraph, alleges that KU is a wholly
owned subsidiary of The Washington Post Company and that KU is a wholly owned subsidiary
3The Second Amended Complaint does not explain what Defendant Kaplan does.
4The Second Amended Complaint does not specify for which of the Defendants Gillespie
According to the Second Amended Complaint Diaz worked for Kaplan Online, which is
not a Defendant, and KHEC.
Amended Complaint, Gillespie obtained new counsel. The Plaintiffs were ordered to file a single
Second Amended Complaint. While the Second Amended Complaint is a single complaint, it is
essentially two separate complaints pasted together, with Gillespie pleading two causes of action
under the False Claims Act and Wilcox and Diaz pleading two causes of action based on the
False Claims Act and a retaliation claim by Diaz.
Gillespie's claims and Wilcox and Diaz's claims both allege violations of the Program
Participation Agreement (PPA). In order to obtain federal student financial aid through Title IV
of the HEA, an educational institution must certify to the United States government
(Government) that it will comply with statutory and regulatory prerequisites established by the
HEA and the Department of Education (DOE). Certification is done through the execution of a
PP A. All the Relators allege that Defendants have failed to comply with certain of these
statutory and regulatory prerequisites.
A. Gillespie's Claims
Gillespie's claims are based on two different violations of the PP A: (1) failure to comply
with section 504 of the Rehabilitation Act6 and (2) inflating student grades to falsely certify that
6Section 504 of the Rehabilitation Act, 29 U.S.C. § 794, reads in pertinent part:
(a) Promulgation of rules and regulations
No otherwise qualified individual with a disability in the United States, as defined in
section 705(20) of this title, shall, solely by reason of her or his disability, be excluded
from the participation in, be denied the benefits of, or be subjected to discrimination
under any program or activity receiving Federal financial assistance or under any program
or activity conducted by any Executive agency or by the United States Postal Service. The
head of each such agency shall promulgate such regulations as may be necessary to carry
out the amendments to this section made by the Rehabilitation, Comprehensive Services,
and Developmental Disabilities Act of 1978.
(b) "Program or activity" defined
students are maintaining satisfactory academic progress. As to the first alleged violation, the
PP A references that the educational institution will comply with section 504 of the Rehabilitation
Act. On April 14,2005, Gillespie filed a complaint with the DOE's Office of Civil Rights
(OCR) because Defendants failed to accommodate Gillespie's bipolar disorder. The OCR
investigated the claim, which it denied, but in October 2007, the OCR found that Defendants
were in violation of section 504 of the Rehabilitation Act and its implementing regulations. 7 As
a result of the findings OCR and Defendants entered into a Resolution Agreement. Based on the
OCR's findings, Gillespie alleges that Defendants falsely certified to the Government that they
were in compliance with the necessary prerequisites to obtaining federal funding. Gillespie also
alleges that, even after entering into the Resolution Agreement, Defendants continued to be in
For the purposes of this section, the term "program or activity" means all of the
(3)(A) an entire corporation, partnership, or other private organization, or an entire sole
proprietorshi p-(i) if assistance is extended to such corporation, partnership, private organization, or sole
proprietorship as a whole; or
(ii) which is principally engaged in the business of providing education, health care,
housing, social services, or parks and recreation;
7The OCR set out its findings in an October 27,2005 document which stated that
Defendants were in violation of section 504 for the following reasons: (1) the university does not
have published procedures detailing how a disabled employee can request accommodations; (2)
the university needed to provide policies and procedures that address discrimination separately
from harassment; (3) the complaint procedure should be amended to provide the detailed process
by which employees could seek informal and formal resolution of their concerns; (4) the
university should designate consistently to whom informal and formal complaints may be
addressed; (5) the policies and procedures should be amended to provide a definitive manner and
time in which investigations are to be completed; (6) the complaint procedures should be
amended to require the university to notify complainants in writing of the results of
investigations; and (6) the policies should set out to where one could appeal an investigation's
non-compliance with the Rehabilitation Act and with the Resolution Agreement.
As to the second alleged violation of the PP A, in order to receive Government funding
Defendants were required to certify that each student applying for Government financial aid was
maintaining satisfactory academic progress toward their degree or certificate. The Second
Amended Complaint alleges that Defendants maintained a policy of manipulating student
academic progress in order to show that students were maintaining satisfactory academic
progress. Defendants did this by making professors' jobs dependent on their student evaluations,
which gave professors strong incentives to give good grades in order to receive strong student
evaluations, and by having grade distributions that resulted in 50% of a class receiving "A"s and
"B"s. Defendants also falsely certified that students met a minimum grade point average. As a
result of Defendants' failure to comply with the Rehabilitation Act and the scheme to manipulate
grades to satisfy the satisfactory academic progress requirements, Gillespie alleges two counts
against Defendants for violation of the False Claims Act, one under 31 U.S.C. § 3729(a)(1)(A)8
and one under 31 U.S.C. § 3729(a)(1)(B).9
B. Diaz and Wilcox's Claims
Diaz and Wilcox allege multiple violations of the PP A based on: (1) a violation of the
HEA's incentive compensation ban; (2) a violation of the 9011 0 Rule; (3) falsifying documents in
order to receive program accreditation; and (4) several other actions which allegedly violated the
PP A. First, Diaz and Wilcox maintain that Defendants violated the PP A by paying student
8S ection 3729(a)(l)(A) prohibits the knowing presentment ofa false or fraudulent claim
for payment to the United States.
9S ection 3729(a)(1)(B) prohibits the knowing use of a false record or statement material
to a false or fraudulent claim.
recruiters with incentive compensation, that included retention bonuses, cash bonuses, trips, and
other incentive compensation, based on the number of students the recruiter enrolled. The PP A
certifies that Defendants will not provide any commission, bonus or other incentive payment
based directly or indirectly on success in securing enrollments. This is also a violation of the
HEA and DOE regulations. Defendants further violate the HEA and DOE requirements by
asserting in a yearly letter that they are in compliance with these requirements and have not paid
any incentive compensation for securing enrollments.
Second, Diaz and Wilcox allege that Defendants violated the 90/10 Rule of the higher
education laws, which requires that at least 10% of student tuition must come from cash, rather
than student loans. Defendants violated the 90/10 Rule by enrolling its employees in courses
which were paid for out of the Gift of Knowledge Fund, which awarded money to employees to
pay for tuition. Third, Diaz and Wilcox allege that Defendants falsified documents in order to
receive program accreditation from the Higher Learning Commission, which Defendants needed
in order to be eligible to receive federal student loan funds. In addition, Relators Diaz and
Wilcox assert several other bases for their action: Defendants pressured professors to inflate
grades in order to certify that the students were obtaining satisfactory academic achievement as
required by 34 C.F.R. § 668.24(b) and Defendants encouraged students to use some of their
student loan funds to buy non-educational items, such as cars. Based on these actions, Diaz and
Wilcox allege violations of31 U.S.c. § 3729(a)(1) and § 3729(a)(2).
Diaz also alleges a claim for retaliation. Diaz asserts that he was fired in April 2005 after
indicating to Defendants that he was notifying federal and state authorities of Defendants' lack of
honesty with the Higher Learning Commission, of Defendants' method of recruiting students,
and of "other potential violations."
C. The Pennsylvania Action
Approximately five months prior to the filing of Relators' Complaint, another qui tam
complaint was filed against Defendant KHEC, United States ex rei. Gatsiopoulos v. Kaplan
Career Institute & Kaplan Higher Education Corp. Two former employees of a KHEC
subsidiary in the Western District of Pennsylvania filed this earlier action on November 2,2006.
This case is before this Court pursuant to an order of the Panel on Multidistrict Litigation. The
Gatsiopoulos complaint alleges, among other things, that KHEC submitted false claims to the
Government because KHEC was not in compliance with the HEA's ban on incentive payments
to admission and financial aid personnel. By prior orders, the Court has held that the
Gatsiopoulos action will continue on three claims: (1) violations of the False Claims Act, 31
U.S.C. §§ 3729(a)(1)(A) and 3729(a)(1)(B), based on Defendants' alleged incentive
compensation program; (2) violations of the False Claims Act, 31 U.S.C. §§ 3729(a)(1)(A) and
3729(a)(1)(B), based on the 70 Percent Rules; and (3) Gatsiopoulos' retaliation claim.
II. Motion to Dismiss
Defendants move to dismiss the Second Amended Complaint on multiple grounds. First,
Defendants argue that Relators' Second Amended Complaint is barred by the first-to-file rule.
Second, Defendants assert that Relators' Second Amended Complaint does not, and cannot state
a cause of action under the False Claims Act because the Second Amended Complaint does not
allege any violation of the HEA or its rules and regulations. Third, Defendants argue that
Relators' theory of liability under the False Claims Act fails as a matter oflaw. The Court has
previously held that Relators' theory of recovery, the False Certification theory, is a valid theory
of recovery and, thus, this Order will not address that argument. 10 Furthermore, because the
Court cannot determine whether Relators' claims are barred by the first-to-file rule until after it
has determined which of Relators' claims are viable, the Court will address the first-to-file issue
A. Failure to Adequately Plead a Violation of the HEA
Defendants move to dismiss the Second Amended Complaint because Relators have
failed to adequately plead the alleged violations underlying their False Claims Act counts.
Claims made pursuant to the False Claims Act must meet the pleading requirements of Federal
Rule of Civil Procedure 9(b).11 Rule 9(b) requires that claims of fraud be pled with particularity.
10See DE-19 in Case No. 09-md-02057. In that Order, the Court held that the False
Certification theory was a valid theory of recovery under the False Claims Act. The Court stated
that there is a cause of action under the False Claims Act when an institution executes a PP A,
whereby, in order to be eligible for Title IV funds, it agrees to comply with certain statutory and
regulatory requirements and submits or causes to be submitted requests for funds when the
institution knows it is not in compliance with the statutory and regulatory requirements. See
United States ex rei. McNutt v. Haleyville Medical Supplies, 423 F.3d 1256, 1259 (11th Cir.
2005) (stating that "[w]hen 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 [because compliance with the regulation is required for
payment], that violator is liable, under the Act, for its submission of those false claims"); United
States ex reI. Hendow v. University of Phoenix, 461 F.3d 1166, 1176 (9th Cir. 2006) (finding a
cause of action under the False Claims Act based on the promises and representations made in
the PP A and holding that executing the PP A and agreeing to comply with the statutes and
regulations were "'prerequisites,' and 'the sine qua non' offederal funding, for one basic reason:
if the University had not agreed to comply with them, it would not have gotten paid."); United
States ex rei. Main v. Oakland City University, 426 F.3d 914, 917 (7th Cir. 2005) (finding a
cause of action under the False Claims Act if the institution knew of the incentive pay ban, told
the Department of Education it would comply with the ban, but planned to do otherwise).
lIThe Eleventh Circuit has recognized the importance of compliance with Rule 9(b) in
actions under the False Claims Act (FCA):
Requiring relators to plead FCA claims with particularity is especially important in light
of the quasi-criminal nature ofFCA violations (i.e., a violator is liable for treble
The Eleventh Circuit has stated:
Rule 9(b) is satisfied if the complaint sets forth (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
Mizzaro v. Home Depot, Inc., 544 F.3d 1230, 1237 (lith Cir. 2008) (internal quotations and
citations omitted). Thus, under Rule 9(b) a plaintiff must plead "the who, what, when, where,
and how of the allegedly false statements and then allege generally that those statements were
made with the requisite intent." Id. Defendants move to dismiss portions of Relators' claims
because they have not met this standard.
i. Claims of Grade Inflation and False Certification of Satisfactory Academic
First, Defendants argue that Relators have not established that the alleged grade inflation
and accompanying pressure on professors to inflate grades violates any law or regulation and,
thus, such claims cannot be the basis of an action under the False Claims Act. Relators have not
directly responded to this argument. While the Second Amended Complaint alleges that grades
were inflated in order to maintain eligibility to receive Title IV funding, which requires
satisfactory academic progress, Relators have not set out how the alleged grade inflation violates
damages). Rule 9(b) ensures that the relator's strong financial incentive to bring an FCA
claim-the possibility of recovering between fifteen and thirty percent of a treble damages
award-does not precipitate the filing of frivolous suits.
us. ex reI. Atkins v. McInteer, 470 F.3d 1350, 1360 (lith Cir. 2006).
any rules or regulations. While Relators have cited to 34 C.F.R. § 668.34(b),12 they have not pled
how grade inflation violates this regulation. Furthermore, the regulation applies to a student's
eligibility to receive HEA funds, not an institution's eligibility. See 34 C.F.R. § 668.34(a). \3
Because Relators have not alleged any violation of a statute or regulation, they have not alleged
Relator Gillespie also alleges that Defendants falsely certified that students were
maintaining satisfactory academic progress. However, the Second Amended Complaint does not
allege the who, what, when, where, and how of this false certification, other than to explain the
alleged grade inflation scheme. There are no facts alleged as to any specific student or students
who were not attending class, not doing their work, or otherwise not adequately performing but
whom Defendants certified were performing in order to receive student loans. Without more
factual details about the actual alleged false certification, this claim does not meet the pleading
requirements of Rule 9(b). Thus, the claims based on grade inflation and false certification of
satisfactory student academic progress must be dismissed.
12This regulation was significantly amended effective July 1,2011. The regulation in
effect at the time of the actions alleged in the Second Amended Complaint reads: "A student is
making satisfactory progress if, at the end of the second year, the student has a grade point
average of at least a 'C' or its equivalent, or has academic standing consistent with the
institution's requirements for graduation."
13This section of the regulation was also amended effective July 1,2011. The regulation
in effect at the relevant time states: "If a student is enrolled in an program of study of more than
two academic years, to be eligible to receive title IV, HEA program assistance after the second
year, in addition to satisfying the requirements contained in § 668.32(f), the student must be
making satisfactory progress under the provisions of paragraphs (b), (c) and (d) of this section."
ii. Claims of Incentive Compensation
Second, Defendants argue that Relators have not adequately pled a violation of the
incentive compensation ban in the HEA. In their response to the Motion to Dismiss, Relators
also do not respond directly to this argument. The incentive compensation ban prohibits any
institution from providing "any commission, bonus, or other incentive payment based directly or
indirectly on success in securing enrollments or financial aid to any persons or entities engaged in
any student recruiting or admission activities or in making decisions regarding the award of
student financial assistance." 20 U.S.C. § 1094(a)(20). The Second Amended Complaint alleges
that Defendants paid their recruiters "based primarily on the number of students recruited" and
that the recruiters were paid retention bonuses, cash bonuses, trips and other incentive
compensation. See DE-170, ~84. The Second Amended Complaint further alleges that, while
other factors were formally involved in compensation, they were not actually included and thus
there was a "disguised plan." See id.,
Relators' allegations are not sufficient to state a violation of the incentive compensation
ban. The Second Amended Complaint states that other factors were part of the plan (but does not
identify the other factors) and Relators have not pled any allegations, other than bare conclusions,
to show that the other factors that were part of the compensation plan were not actually
considered in practice. See id. The Second Amended Complaint does not plead with the
particularity required by Rule 9(b) how Defendants did or did not consider the other factors set
out in their compensation plan. Thus, as set out in the Second Amended Complaint, Defendants'
compensation plan does not violate the incentive compensation ban set out in the HEA.
Consequently, these claims are dismissed.
iii. Claims Involving the 90110 Rule
Third, Defendants argue that Relators misconstrue the 90/10 Rule and thus do not
actually plead a violation of the rule. The 90/10 Rule prohibits an eligible institution from
deriving more than 90% of its revenue from HEA funds used to satisfy student tuition, fees, and
other institutional charges. 34 C.F.R. § 600.5(a)(8), (d)(1) (2010).14 The Second Amended
Complaint alleges that nearly 100% of Defendants' revenues come from Title IV funds, which is
a violation of the regulation. According to the Second Amended Complaint, Defendants
established the Gift of Knowledge Scholarship in order to have 10% of their student body paying
their tuition in cash and, thus, Defendants would appear to be in compliance with the 9011 0 Rule.
The Gift of Knowledge Scholarship was awarded to Defendants' employees. Relators assert that
Defendants simply diverted student loan monies into the Gift of Knowledge account and would
then give the money to employees who would then pay it to Defendants as tuition. In turn, the
employees would receive a tuition tax credit form from the IRS.
Defendants maintain that even if these allegations are true, Relators have not pled that
counting the revenue from the Gift of Knowledge Scholarship would create a violation of the
9011 0 Rule. Defendants are correct that the Second Amended Complaint does not allege how
Defendants' accounting practices regarding the revenue from the Gift of Knowledge Scholarship
violate the 9011 0 Rule. Consequently, Relators have not adequately pled a violation of the 9011 0
Rule and, thus, these allegations cannot be the basis of a claim under the False Claims Act.
Accordingly, the claims based on a violation of the 90110 Rule are dismissed.
14The current version of this regulation omits the 90/10 Rule.
iv. Claims Involving the Rehabilitation Act
Fourth, Defendants argue that they have not violated the Rehabilitation Act and, thus,
such non-existent violations cannot be the basis for a fraud claim. Defendants also assert that the
Second Amended Complaint makes the unsupported conclusory allegation that Defendants are
not yet compliant with the Rehabilitation Act. IS The Second Amended Complaint alleges that
the DOE's Office of Civil Rights (OCR) concluded that Defendants were in violation of the
Rehabilitation Act and lists seven specific violations found by the OCR. 16 All of the violations
listed by OCR were system-wide violations, not violations arising from the treatment of a
specific individual. Thus, based on these allegations, which the Court must take as true, Relators
have adequately pled that Defendants were not in compliance with section 504 of the
Defendants also argue that Relators have not alleged with any specificity how Defendants
continue to be non-compliant with the Rehabilitation Act. Relators have not responded to this
specific argument. Nothing in the Second Amended Complaint sets out with particularity how
in their Response to the Supplemental Submission of Relators in
Opposition to Defendants' Motions to Dismiss [DE-37 in Case No. 09-md-02057], Defendants
argue that a violation of the Rehabilitation Act should not be the basis of a fraud claim under the
False Claims Act and that Relators have failed to allege with particularity that Defendants'
violations of the Rehabilitation Act were done in order to defraud the Government. First, the
Court notes that the violations at issue were system-wide violations regarding a failure to
implement required procedures. Such violations are an appropriate basis for a False Claims
action. More importantly, these arguments could have been, but were not, raised in Defendants'
Motion to Dismiss. Furthermore, the purpose of the Response was to respond to Relators'
supplemental briefing in which Relator Gillespie raised the issue of scienter, but only in relation
to violation of the Rehabilitation Act. Additionally, Relators have not had an opportunity to
respond to these newly raised arguments. Thus, the Court will not consider them here.
16The specific violations are set out in footnote 7, supra.
Defendants continue to be non-complaint with section 504. Furthermore, the very same
documentation submitted by Gillespie to substantiate Defendants' non-compliance indicates that,
after Defendants and OCR entered into a Resolution Agreement, OCR found that Defendants had
complied with the terms of the Resolution Agreement. Thus, Relators have failed to adequately
plead that Defendants continue to be non-compliant with the Rehabilitation Act. Therefore, any
claims based on continued non-compliance with the Rehabilitation Act are dismissed.
Accordingly, Relators' claims based on non-compliance with the Rehabilitation Act may proceed
but are limited in their time frame to cover only up until the OCR found Defendants in
compliance with the Rehabilitation Act. 17
v. Claims Involving False Accreditation Documents
Fifth, Defendants argue that Relators' claims based on alleged false accreditation
documents fail because Relators do not allege a false claim made to the Government, which is a
requirement of the False Claims Act, 31 U.S.C. § 3729. In response, Relators adopt the
arguments set out in a brief filed by the United States in an unrelated case and attached to the
response to the motion as Exhibit 12 [DE-181-10]. In the brief, the United States argues that a
claim under the False Claims Act exists if a party makes false statements to an accrediting
agency in order to obtain accreditation necessary to receive federal funds. This is exactly what
the Second Amended Complaint alleges - that the false documents given to the accrediting
agency led to accreditation that was necessary for Defendants to receive federal funds.
17It is not clear from the Second Amended Complaint or any of the numerous
supplemental filings when the OCR found Defendants in compliance. However, whenever OCR
determined that Defendants were in compliance with the Rehabilitation Act and the Resolution
Agreement would be the end of the time period on which Relators can base their claim.
In Allison Engine Co. v. United States ex rei. Sanders, 553 U.S. 662, 671 (2008), the
Supreme Court stated that a violation of 31 U.S.C. § 3729(a)(2) occurs when the "defendant
made a false record or statement for the purpose of getting 'a false or fraudulent claim paid or
approved by the Government.'" Section 3729(a)(2) does not requires "proof that the defendant
caused a false record or statement to be presented or submitted to the Government." Id. Thus,
under Allison Engine, if Defendants made false statements to the accreditation body in order to
be able to obtain Government funds, Defendants have violated the False Claims Act. This is
what the Second Amended Complaint alleges. Consequently, such false statements can be the
basis of a False Claims action. However, the allegations that form the basis of this claim do not
meet the pleading requirements of Rule 9(b) because nothing in the Second Amended Complaint
sets out what false statements were made to the accrediting bodies, when they were made, or who
made them. See DE-170, ~~183-192. Therefore, Defendants' Motion is granted to the extent
Relators' claims are based on the unspecified allegedly false statements made to accrediting
vi. Other Allegations of False Claims
Sixth, Defendants argue that Relators' Second Amended Complaint alleges a host of
other activities which led to Defendants' violation of the False Claims Act, including allegations
of enrolling unqualified students, the extreme pressure of admissions representatives to perform,
the misuse of accreditation claims, and misadvising students. Specifically, Defendants argue that
the allegations in paragraphs 87-91, 96-101,103-105, 120, 124-125, 144-149, 150-153, 159-162,
188,237-238,240, and 242 of the Second Amended Complaint should dismissed for failure state
an actual violation of any statute or regulation and because they do not meet the pleading
requirements of Rule 9(b). Again, Relators do not address this argument in their response.
While many of these allegations are quite detailed, there are no allegations in the Second
Amended Complaint that demonstrate that these allegations, if true, would constitute a violation
of any statute or regulation. Therefore, Defendants have not pled a cause of action based on the
allegations in paragraphs 87-91, 96-101,103-105, 120, 124-125, 144-149, 150-153, 159-162,
188, 237-238, 240, and 242. Accordingly, any cause of action based solely on these allegations
vii. Diaz's Retaliation Claim
Finally, Defendants maintain that Diaz's retaliation claim must be dismissed based on res
judicata and because Diaz has not adequately pled that he engaged in protected conduct under §
3730(h). Diaz has not responded to the res judicata argument. In an earlier filed action,18 based
primarily on claims of job discrimination, Diaz, in his amended complaint, alleged retaliation
claims based on Florida's Whistleblower Act, retaliation based on Florida Statute § 760, and
retaliation for complaints about pressure to inflate student grades. None of these retaliation
claims are based on conduct protected under 31 U.S.C. § 3730(h). Thus, the issues in the two
different suits are not the same and res judicata does not apply. Furthermore, in his second
amended complaint in that action, Diaz dropped these retaliation claims in favor of a retaliation
claim under 42 U.S.C. § 1981 and Title VII. Therefore, no final judgment was entered on Diaz's
retaliation claims under Florida's Whistleblower Statute and Florida Statute § 760, or on Diaz's
retaliation claim based on his complaints about grade inflation. Entry of a final judgment on the
18The earlier filed action is Case No. 08-cv-60368, which was filed in this district. In
Case No. 08-cv-60368, summary judgment was entered in favor of Defendants KU, KHEC and
merits is a necessary element of res judicata. 19 Consequently, Diaz's retaliation claim is not
barred by res judicata.
Diaz does respond that he has adequately pled a retaliation claim under Rule 8. This
Court has previously stated:
[A]n employee has a retaliation claim against her employer if she suffers adverse job
consequences as a result of her "efforts to stop 1 or more violations" of the False Claims
Act. 31 U.S.C. § 3730(h). Protected conduct is conduct that "furthered an action filed or
to be filed" under the False Claims Act. Hutchins v. Wilentz, Goldman & Spitzer, 253
F .3d 176, 187 (3d Cir. 2001) (internal quotations omitted). Thus, "[i]f an employee's
actions, as alleged in the complaint, are sufficient to support a reasonable conclusion that
the employer could have feared being reported to the government for fraud or sued in a
qui tam action by the employee, then the complaint states a claim for retaliatory discharge
under § 3730(h)." United States ex rei. Sanchez v. Lymphatx, Inc., 596 F.3d 1300, 1304
(11th Cir. 2010).
us. ex reI. Gatsiopoulos v. Kaplan Career Institute, 2010 WL 5392668, *6 (S.D. Fla. Dec. 22,
2010). The Second Amended Complaint alleges that Diaz notified Defendants that they were not
being truthful with the Higher Learning Commission, notified Defendants of his concerns
regarding the way Defendants recruited students, and notified Defendants of other potential
violations. The Second Amended Complaint further alleges that Diaz indicated to Defendants
that he was notifying the proper Federal and State authorities of Defendants' wrongful activities.
As a result, Diaz was fired. Defendants argue that these allegations do not state a cause of action
for retaliation because they do not plead any protected activity under § 3730(h). While the
allegations in the Second Amended Complaint lack factual details, the Second Amended
19In the Eleventh Circuit, a claim is barred under the doctrine of res judicata if: (I) there is
a final judgment on the merits; (2) the decision was rendered by a court of competent
jurisdiction; (3) the parties, or those in privity with them, are identical in both suits; and (4) the
same cause of action is involved in both cases. Ragsdale v. Rubbermaid, Inc., 193 F.3d 1235,
1238 (11th Cir. 1999).
Complaint does plead that Diaz told Defendants that he was notifying the proper Federal and
State authorities of their wrongful deeds. Based on this, Defendants reasonably could have
feared being reported for fraud or being sued in a qui tam action. See Us. ex rei. Sanchez v.
Lymphatx, 596 F3d 1300, 1304 (lIth Cir. 2010) (holding that plaintiff had pled a valid retaliation
claim where she alleged that she had complained about the defendant's unlawful actions and
warned them that they were incurring significant criminal and civil liability).
Defendants also maintain that Diaz' s retaliation claim should be dismissed because there
was no possibility that Diaz could have filed a viable False Claims action based on the
information he reported. In order to be protected under § 3730(h), an employee need not have a
winning False Claims Act claim; he need only have a "distinct possibility that a viable [False
Claims] action could be filed." Dookeran v. Mercy Hospital o/Pittsburgh, 281 F.3d 105, 108
(3d Cir. 2001). As set out above, because Relators have set out some viable False Claims Act
claims and because there was a distinct possibility that Diaz could have filed other viable False
Claims actions, Diaz has sufficiently set out a retaliation claim for purposes of a motion to
dismiss. Consequently, as set out above, the Relators' only remaining claims are Gillespie's
False Claims action based on Defendants' failure to comply with section 504 of the
Rehabilitation Act and Diaz's retaliation claim.
B. First-To-File Rule
Finally, because this is the second of three qui tam actions filed against Defendants and
pending before this Court, the Court must determine whether it is barred by the first-to-file rule.
The first-to-file rule is the name often given to 31 U.S.C. § 3730(b)(5) which states: "When a
person brings [a qui tam action], no person other than the Government may intervene or bring a
related action based on the facts underlying the pending action." This provision creates a
jurisdictional limit on a court's authority to hear duplicative qui tam suits. United States ex reI.
Grynberg v. Koch Gateway Pipeline Co., 390 F.3d 1276, 1278 (10th Cir. 2004). A later filed
case need not be based on the exact same facts as the earlier one in order to be barred by the firstto-file rule. Id. at 1279. The question is whether the actions are "related."
[S]o long as a subsequent complaint raises the same or a related claim based in significant
measure on the core fact or general conduct relied upon in the first qui tam action, the §
3730(b)(5)'s first-to-file bar applies. Once an initial qui tam complaint puts the
government and the defendants on notice of its essential claim, all interested parties can
expect to resolve that claim in a single lawsuit. The pendency of the initial qui tam action
consequently blocks other private relators from filing copycat suits that do no more than
assert the same material elements of fraud, regardless of whether those later complaints
are able to marshal additional factual support for the claim.
Id. Accord United States ex reI. LaCorte v. SmithKline Beecham Clinical Laboratories, Inc., 149
F.3d 227, 232-33 (3d Cir. 1998).
Defendants assert that Relators' Second Amended Complaint is barred by the first-to-file
rule by the complaint in Gatsiopoulos. However, the False Claims Act counts in that case are
based on Defendants' alleged incentive compensation program and alleged violations of the
HEA's 70 Percent Rules. In the instant action, the only remaining basis for Relators' False
Claims Act counts are the alleged violations of the Rehabilitation Act. While these two cases
have the same theory ofliability, the False Certification theory, their claims under the False
Claims Act do not rely on the same core facts or general conduct. The claims in Gatsiopoulos
would not put the Government on notice of violations based on non-compliance with the
Rehabilitation Act. Thus, to bar Relators' remaining claim under the False Claims Act would not
serve the purpose of the first-to-file rule, which is to prevent duplicative suits based on the same
core facts. Consequently, Relators' remaining claims under the False Claims Act are not barred
by the first-to-file rule.
Having had three opportunities to plead their claims, it is apparent that Relators have no
facts that will cure the specific defects in the Second Amended Complaint, which are outlined
above. Thus, any further leave to replead would be futile. 20 Therefore, based on this Order,
Relator's Second Amended Complaint shall proceed on the following three claims: (1) violation
of the False Claims Act, 31 U.S.C. § 3729(a)(I)(A) based on non-compliance with the
Rehabilitation Act, until the point in time when the OCR determined that Defendants were in
complaince; (2) violation of the False Claims Act, 31 U.S.C. § 3729(a)(1)(B) based on noncompliance with the Rehabilitation Act, until the point in time when the OCR determined that
Defendants were in compliance; and (3) Diaz's retaliation claim.
Accordingly, it is
ORDERED that Defendants' Motion to Dismiss Relators' Second Amended Complaint
[DE-171] is GRANTED in part and DENIED in part:
a) Relators' claims under the False Claims Act are dismissed with prejudice except for
Relators' claims based on Defendants' violations of the Rehabilitation Act.
b) Defendants' Motion is DENIED as to Diaz's retaliation claim.
2°Relators request leave to amend if their allegations do not meet the pleading
requirements of Rule 9(b). However, they have not provided any information that would indicate
that they can rectify the pleading shortfalls in their claims. Thus, without more, amendment
would be futile.
c) Defendants shall file their answer to the viable portions of the Second Amended
Complaint no later than August 31,2011.
DONE and ORDERED in Miami, Florida, this ~ day of August, 2011.
PATRICIA A. SEITZ
UNITED STATES DISTRICT JUDGE
All counsel of record
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