In the

United States Court of Appeals

For the Seventh Circuit ____________

No. 05-2016

UNITED STATES OF AMERICA ex rel. Jeffrey E. Main,

Plaintiff-Appellant,

v.

OAKLAND CITY UNIVERSITY,

Defendant-Appellee.

____________

Appeal from the United States District Court for the

Southern District of Indiana, Evansville Division.

No. 3:03-cv-71 RLY-WGH—Richard L. Young, Judge.

____________

ARGUED SEPTEMBER 12, 2005—DECIDED OCTOBER 20, 2005

____________

Before COFFEY,EASTERBROOK, and EVANS, Circuit Judges.

EASTERBROOK, Circuit Judge. Many federal subsidies

under the Higher Education Act require multiple layers

of paperwork. First the college or university submits an

application to establish the institution’s eligibility. If this

application, which we call phase one, is granted, the

institution and its students submit additional (“phase two”)

applications for specific grants, loans, or scholarships. Both

a statute, 20 U.S.C. §1094, and a regulation, 34 C.F.R.

§668.14(b)(22)(i), condition institutional eligibility on a

commitment to refrain from paying recruiters contingent

fees for enrolling students. The concern is that recruiters
2 No. 05-2016

paid by the head are tempted to sign up poorly qualified

students who will derive little benefit from the subsidy and

may be unable or unwilling to repay federally guaranteed

loans. Oakland City University assured the Department of

Education on its phase-one application that it complies with

the rule against contingent fees.

Jeffrey Main, the relator in this qui tam action under the

False Claims Act, 31 U.S.C. §§ 3729-33, contends that the

University’s representation was fraudulent. According to

the complaint, Main himself received contingent fees as a

recruiter and later as the University’s Director of Admissions. Initially Main thought the compensation system

proper, but when he learned of the federal statute and rule

he filed this suit. The district court dismissed it on the

pleadings, see Fed. R. Civ. P. 12(b)(6), ruling that even

wilful falsehoods in phase-one applications do not violate

the Act, because the phase-one application requests a

declaration of eligibility rather than an immediate payment

from the Treasury. The phase-two applications for grants,

loans, and scholarships are covered by the Act, the judge

ruled, but are not false, because they do not repeat the

assurance that the University abides by the rule against

paying contingent fees to recruiters.

Given the posture of the litigation, we must assume

(as the complaint alleges) that the University (a) knew of

the prohibition against paying contingent fees to recruiters,

and (b) lied to the Department of Education in order to

obtain a certification of eligibility that it could not have

obtained had it revealed the truth. These facts imply that

the phase-two applications would not have been granted

had the truth been told earlier, for all disbursements

depended on the phase-one finding that the University

was an eligible institution.

Although no published appellate decision to date has

addressed the question whether a multi-stage process

forecloses liability for fraud in the first stage, the answer is
No. 05-2016 3

straightforward. The False Claims Act covers anyone who

“knowingly makes, uses, or causes to be made or used, a

false record or statement to get a false or fraudulent claim

paid or approved by the Government”. 31 U.S.C.

§3729(a)(2). The University “uses” its phase-one application

(and the resulting certification of eligibility) when it makes

(or “causes” a student to make or use) a phase-two application for payment. No more is required under the statute.

The phase-two application is itself false because it represents that the student is enrolled in an eligible institution,

which isn’t true. (Likely the student does not know this,

however, so the phase-two application is not fraudulent.)

The statute requires a causal rather than a temporal

connection between fraud and payment. See generally

United States ex rel. Lamers v. Green Bay, 168 F.3d 1013,

1018 (7th Cir. 1999). If a false statement is integral to a

causal chain leading to payment, it is irrelevant how the

federal bureaucracy has apportioned the statements among

layers of paperwork.

The University protests that this approach would treat

any violation of federal regulations in a funding program as

actionable fraud, but that’s wrong. A university that accepts

federal funds that are contingent on following a regulation,

which it then violates, has broken a contract. See Gonzaga

University v. Doe, 536 U.S. 273 (2002). But fraud requires

more than breach of promise: fraud entails making a false

representation, such as a statement that the speaker will do

something it plans not to do. Tripping up on a regulatory

complexity does not entail a knowingly false representation.

To prevail in this suit Main must establish that the

University not only knew, when it signed the phase-one

application, that contingent fees to recruiters are forbidden,

but also planned to continue paying those fees while

keeping the Department of Education in the dark. This

distinction is commonplace in private law: failure to

honor one’s promise is (just) breach of contract, but making
4 No. 05-2016

a promise that one intends not to keep is fraud. See, e.g.,

Perlman v. Zell, 185 F.3d 850 (7th Cir. 1999); Bower v.

Jones, 978 F.2d 1004, 1012 (7th Cir. 1992). So if, as a

district judge supposed in United States ex rel. Graves v.

ITT Educational Services, 284 F. Supp. 2d 487 (S.D. Tex.

2003), educational institutions do not certify to the Department of Education at the phase-one stage that they know

about and comply with the rule against paying capitation

fees for recruiting students, then the University will win

this suit whether or not it has violated that rule. But if the

University knew about the rule and told the Department

that it would comply, while planning to do otherwise, it is

exposed to penalties under the False Claims Act.

Oakland City University relies heavily on a memorandum

that the Deputy Secretary of Education circulated

to subordinates in 2002. Such a memorandum has no legal

effect; it was not published for notice and comment and does

not authoritatively construe any regulation. The Department of Justice, though it elected not to take over the

litigation, see 31 U.S.C. §3730(b)(2), has filed a brief

as amicus curiae in this court contending that the allegations of the complaint, if true, demonstrate a right to

recover under the False Claims Act. That view, and not one

implied by a back-office memo, represents the position of

the United States. Not that the memo offers the University

much assistance even on its own terms. It states that a

violation of the rule against incentive compensation usually

does not lead to financial loss to the United States—for any

given student may well have enrolled, and been eligible,

anyway. The University argues from this that a fraudulent

certification does not violate the False Claims Act. That’s a

non-sequitur. The statute provides for penalties even if

(indeed, especially if) actual loss is hard to quantify, and at

the margin contingent payments will lead to some unwarranted enrollments (and thus some unjustified federal

disbursements). That is, after all, why contingent payments
No. 05-2016 5

are forbidden.

The judgment of the district court is reversed, and the

case is remanded for further proceedings consistent with

this opinion.

A true Copy:

Teste: 

 ________________________________

Clerk of the United States Court of

Appeals for the Seventh Circuit 

USCA-02-C-0072—10-20-05