Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-casd-3_08-cv-01399/USCOURTS-casd-3_08-cv-01399-3/pdf.json

Nature of Suit Code: 890
Nature of Suit: Other Statutory Actions
Cause of Action: 31:3729 False Claims Act

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UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF CALIFORNIA

UNITED STATES OF AMERICA, the

STATE OF CALIFORNIA, and

STEPHEN LEE BRODALE, an

individual,

Plaintiff,

CASE NO. 08 CV 1399 JM

(WMC)

ORDER GRANTING

DEFENDANT’S MOTION TO

DISMISS THE FOURTH AND

FIFTH CAUSES OF ACTION

OF COMPLAINT

Doc. No. 18

vs.

APOLLO GROUP, INC., a California

Corporation, d/b/a/ UNIVERSITY OF

PHOENIX; and KIM SAVICH,

KYAN FLYNN, JENNIFER BRODIE,

and MATT JOHNSTON, as

individuals and agents of APOLLO

GROUP, INC., and DOES 1-50,

inclusive, 

Defendants.

On August 1, 2008, qui tam relator, Plaintiff Stephen Brodale, filed this

complaint on behalf of the United States and the State of California against Defendant

Apollo Group, Inc, its subsidiary University of Phoenix, and individual employees, Kim

Savich, Kyan Flynn, Jennifer Brodie, and Matt Johnston. Brodale alleges six causes of

action, four of which have been submitted to arbitration. The remaining two counts,

counts four and five, are qui tam whistleblower claims. Count four was brought as a

qui tam action claiming violations of the Federal False Claims Act (“FCA”), 31 U.S.C.

§ 3729. Count five was brought as a state qui tam action claiming violations of

Case 3:08-cv-01399-JM-WMC Document 31 Filed 11/06/09 Page 1 of 8
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California Government Code § 12650. 

On September 14, 2009, Defendant moved to dismiss counts four and five based

on the following three reasons: (1) counts four and five are jurisdictionally barred by

the FCA’s first-to-file rule, (2) Plaintiff failed to comply with particularity requirements

of Federal Rules of Civil Procedure (“FRCP”) 12(b)(6) and 9(b), and (3) Plaintiff failed

to satisfy the procedural filing requirements associated with FCA claims. 

On October 8, 2009, Plaintiff responded to Defendant’s motion to dismiss

asserting that (1) counts four and five are not sufficiently related to a pending qui tam

action as to be jurisdictionally barred by the first-to-file rule, (2) the complaint does

allege facts sufficient to satisfy the particularity requirements of Rule 12(b)(6) and Rule

9(b), and in the alternative he should be given the opportunity to amend, and (3) he

complied with FCA’s procedural requirements.

The court finds this matter appropriate for decision without oral argument. See

CivLR 7(d)(1). For the reasons set forth below, the court GRANTS Defendant’s

motion to dismiss counts four and five. 

I. BACKGROUND

On September 1, 2004, Stephen Brodale was hired as Director of Financial

Services by Apollo Group, Inc. to oversee the financial aid department of the University

of Phoenix’s (“University”) San Diego campus. (Compl. ¶ 14). Brodale alleges that

the University’s Director of Enrollment, Kyan Flynn and the Senior Director of

Finance, Jennifer Brodie, acted illegally and fraudulently, at the direction of Campus

Directors, Kim Savich and Matt Johnston, as well as the University itself, to encourage

and facilitate the falsification of federal financial aid documents for prospective and

current students. (Compl. ¶ 17). Brodale alleges that the actions of the University’s

employees were authorized and ratified by the Apollo Group, Inc. (“Apollo”) as owner

and operator of the University. Id. Brodale claims that Apollo paid enrollment

counselors based on their enrollment activities regardless of the financial qualifications

of applicants or the ability of applicants to complete their education. Id. This incentive

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or commissioned based pay system encouraged employees to engage in illegal

fraudulent activities in order to gain increased pay and to maintain their jobs. 

In or about August or September 2006, Brodale began complaining to the

University about the fraudulent and illegal actions of the enrollment staff. (Compl.

¶ 18). Brodale’s complaints included evidence of staff coaching prospective and active

students to lie about their income and number of dependants on their financial aid

applications, to change their income, and in some cases fraudulently completing the

forms themselves and forging student signatures. Id. 

Brodale further alleges that the University responded to his allegations by writing

him up, giving him poor performance reviews, orchestrating fraudulent evaluations,

demanding unrealistic performance expectations, and generally conspiring to terminate

him. (Compl. ¶ 19). Brodale claims that the conspiracy on the part of the University

and Apollo to terminate him was retaliation for his blowing the whistle on the

improprieties of the enrollment department. (Compl. ¶ 20).

On January 14, 2008, Brodale was terminated by the University. Id. Thereafter,

on August 1, 2008, Brodale filed this complaint against Apollo Group, Inc., University

of Phoenix, and the individually named defendants. 

II. DISCUSSION

The False Claims Act imposes liability upon those who submit a false or

fraudulent claim for payment to the United States Government. 31 U.S.C. § 3729(a);

Campbell v. Redding Medical Center, 421 F.3d 817, 820 (9th Cir. 2005). The qui tam

provisions of the False Claims Act encourage private parties, referred to as “relators,”

who are aware of fraud being perpetuated against the government to sue for a civil

penalty on behalf of the government. 31 U.S.C. § 3730(b)(1). Once the complaint is

served on the government, within 60 days, the government must elect to either proceed

with the action itself, or notify the court that it declines to take over the action, in which

case the relator has the right to pursue the action. 31 U.S.C. § 3730(b)(4). 

A. Count Four Should be Dismissed Pursuant to the First-to-File Rule

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Plaintiff’s FCA claim is dismissed under FRCP Rule 12(b)(1) as jurisdictionally

barred by the FCA’s “first-to-file” rule. Brodale asserts allegations already the subject

of the pending qui tam action United States ex rel. Hendow v. University of Phoenix,

Case No. 03-0457-GEB-DAD (E.D. Cal., filed Mar. 7, 2003) (“Hendow”). See Def.

RJN Exhs. A-C . 

1. Legal Standard

Qui tam actions are limited by what is referred to as the “first-to-file” bar. 31

U.S.C. § 3730(b)(5). According to Section 3730(b)(5), “when a person brings a [qui

tam] action, no person other than the Government may intervene or bring a related

action based on facts underlying the pending action.” See also Redding Medical

Center, 421 F.3d at 821. Section 3730(b)(5)’s plain language unambiguously

establishes an “exception-free” first-to-file bar, preventing successive plaintiffs from

bringing related actions based on the same underlying facts. U.S. ex rel. Lujan v.

Hughes Aircraft Co. 243 F.3d 1181, 1187 (9th Cir. 2001). The first-to file provision

is jurisdictional, requiring dismissal under Rule 12(b)(1) or 12(b)(6) of any claims it

precludes. Id. at 1189-90.

To fall within this rule, an action need not assert facts identical to those in the

prior complaint. Id. at 1188-1189 (establishing the material facts, not identical facts,

test should be used to determine if a related action was based on facts underlying

pending action for purposes of FCA). Rather, the current action need only “allege the

same material elements of fraud described in an earlier suit.” Id. at 1189 (holding that

facts which were similar, but not identical, to facts alleged in prior qui tam action

against same defense contractor by a different former employee were sufficient to form

the basis of dismissal of another employee’s qui tam as a “related action” under first-tofile provision). 

 In rejecting an identical facts test, the court in Lujan based its finding on similar

conclusions reached by most of the few federal courts that have addressed section

3750(b)(5). The court noted that the cases’ common principal is that “section

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3750(b)(5) precludes a subsequent relator’s claim that alleges the defendant engaged

in the same type of wrongdoing as that claimed in a prior action even if the allegations

cover a different time period or location within the company.” Id. (quoting United

States ex rel. Capella v. United Technologies Corp., 1999 WL 464536, at 9 (D. Conn.

June 3, 1999)). In Lujan the court further explained that the application of a narrow

identical facts test would be contrary to the statute’s plain language and legislative

intent. Such a test would encourage piggyback claims that would provide no additional

benefit to the government, “since once the government knows the essential facts of a

fraudulent scheme, it has enough information to discover related frauds.” Id. (quoting

U.S. ex rel. La Corte v. SmithKline Beecham Clin. Laboratories, Inc., 149 F.3d 227, 234

(3d Cir. 1998)).

2. Analysis

Brodale’s FCA action asserts the same material elements of fraud as the pending

Hendow action. The gravamen of both Brodale’s complaint and the Hendow action is

financial aid fraud. Both actions focus on Defendants’ alleged use of employee

compensation incentives (bonuses, increased salary, promotions) to encourage its

employees to enroll as many students as possible for the purpose of defrauding the

federal financial aid system. 

First, Brodale’s action is based on the same type of wrongdoing (fraud against

the government) as alleged in the Hendow action. In other words, the Hendow action

and the Brodale action do not allege two different fraudulent schemes that would give

rise to separate and distinct recovery. The measure of damages in both actions would

be the same: the dollar amount of federal financial aid funds obtained fraudulently.

Second, both actions claim fraud related to student financial aid requests. Both Hendow

and Brodale must show the same material facts to establish the “falsity” element of

FCA violations alleged in their respective complaints. That is, both must show that the

University provided false or fabricated information on federal financial aid forms.

Third, both actions allege that the purported fraud stems from University’s management

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encouraging employees to ignore and/or falsify student applicant’s qualifications for

financial aid.

 While the Hendow action claims violations of Title IV of the Higher Education

Act’s (“HEA”) incentive compensation ban and the Brodale action does not specifically

invoke the HEA and alleges somewhat different conduct, this distinction is of no

consequence. Both actions allege that the University encouraged fraud against the

government in the form of false financial aid requests, through incentive compensation.

Indeed, Brodale’s complaint alleges Plaintiffs “encourag[ed] and facilitat[ed] the

falsification of federal financial aid documents for the prospective students” and “paid

enrollment counselors based on their enrollment activities, regardless of the

qualifications of applicants or abilities of applicants to complete their education.”

(Compl. ¶ 17). This is the exact conduct alleged in the Hendow complaint which states,

“Corporate Enrollment directed enrollment counselors to increase their enrollment

numbers by disregarding potential students’ qualifications” in order to obtain federal

funds. (Doc. No. 18, Def. Motion Exh. 5, ¶ 17, 53). Finally, Brodale’s claim does not

add anything new or useful to the Hendow claim such that it should not be considered

parasitic to the previously filed action. See Capella, at 11. 

The material elements of the alleged fraud in both actions are not only related but

are nearly identical. Thus, the government was placed on sufficient notice of the

allegations against it with the filing of the Hendow action meaning Brodale’s FCA

claim is repetitive and barred by the first-to file rule. Accordingly, count four is

dismissed for lack of subject matter jurisdiction pursuant to FRCP Rule 12(b)(1). 

B. Count Five Barred for Lack of Jurisdiction 

1. Legal Standard

California’s FCA is patterned after the similar federal statute. See Cal. Gov.

Code § 12650. Like the federal FCA, California’s statute also contains a first-to-file bar

on successive qui tam actions. According to California’s first-to-file provision, “no

other person may bring a related action based on the facts underlying the pending

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action.” Cal. Gov. Code § 12653(c)(10). 

2. Analysis

In count five, Brodale alleges Defendants defrauded the State of California by

falsifying state financial aid requests for state funded student loans and grant programs.

The pending Hendow qui tam action, however, does not include claims of fraud against

the State of California. Therefore, the state qui tam claims alleged in Brodale’s action

do not relate to the FCA claims asserted in Hendow. Likewise, the State of California

would not have been alerted to Defendant’s fraudulent activity through the Hendow

action. Thus, count five is not barred by the California’s first-to-file rule. 

Plaintiff’s state claim is, however, barred for lack of jurisdiction. Although

Plaintiff asserts that this court has jurisdiction based on federal diversity jurisdiction,

his contention is incorrect. The first requirement for diversity jurisdiction is that the

parties to the controversy be completely diverse. See 28 § U.S.C. 1332(a)(1). Here,

both Brodale and Apollo are residents of the State of California. For purposes of

diversity jurisdiction, a corporation is deemed a citizen of any state where it has been

incorporated. 28 U.S.C. § 1332(c)(1). Apollo is a California corporation registered as

such with the California Secretary of State, number C1690019. (Compl. ¶ 4). There

is no dispute that Brodale is a citizen of the State of California. (Compl. ¶ 3).

Accordingly, the parties are not entirely diverse for purposes of maintaining an action

in federal court based on diversity jurisdiction. Likewise, because the state action is

based on violations of California law (Ca. Ed. Code § 69431) there is no basis for

federal question jurisdiction. See 28 U.S.C. § 1331. Therefore, count five must be

dismissed for lack of jurisdiction. 

///

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///

///

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III. CONCLUSION

Based on the foregoing reasons, the court hereby GRANTS Defendants’ motion

to dismiss counts four and five. The Clerk of the Court is directed to close the file. 

IT IS SO ORDERED.

DATED: November 6, 2009

 Hon. Jeffrey T. Miller

 United States District Judge

cc: All parties

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