Opinion ID: 2806273
Heading Depth: 2
Heading Rank: 2

Heading: Theories of Qui Tam liability

Text: Regarding Nelson’s claims from the period of his employ‐ ment at SBC (June 2008–January 2009), the district court granted summary judgment in favor of the defendants principally because it found “no clear manifestation of congres‐ sional or regulatory intent to condition payment of Title IV federal subsidies on compliance with the disputed Title IV Restrictions.” Sanford‐Brown, Ltd., 30 F.Supp.3d at 814. In FCA cases, we review a district court’s grant of summary judgment in favor of the defendant de novo, construing all facts in favor of the nonmoving party. U.S. ex rel. Feingold v. AdminaStar Federal, Inc., 324 F.3d 492, 494 (7th Cir. 2003).
The FCA imposes liability where any party “knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim.” 31 U.S.C. § 3729(a)(1)(B). To establish liability under this provision, a relator must prove that: (1) the defendant made a statement or record in order to receive money from the government; (2) the statement or record was false; and (3) the defendant knew it was false. U.S. ex rel. Yannacopoulos v. General Dynamics, 652 F.3d 818, 822 (7th Cir. 2011). Nelson and the government, as amicus curiae, argue that because the defendants agreed to comply with all Title IV regulations by entering into the PPA, they fraudulently used it when they made—or caused students to make or 20 No. 14‐2506 use—applications for federal subsidies with knowledge that they were not in compliance with the Title IV Restrictions. See Appellant Br. 18 (“By and through the PPAs and Title IV Services Agreement, CEC and Sanford Brown agreed and promised to comply with all Title IV regulations.”). SBC counters that to satisfy the “knowingly” component of the statute, Nelson must offer proof that the institution entered into the PPA with the intent to defraud the government out of subsidies. These dueling views stem from the parties’ differing interpretations of our decision in United States ex rel. Main v. Oakland City Univ., 426 F.3d 914 (7th Cir. 2005). In Main, we considered whether a PPA entered into by an institution qualified as a false record under the FCA where the promises of future compliance it contained were false when the parties entered into the agreement. 426 F.3d at 916. We concluded that it was and reversed the district court’s order dismissing the case, concluding that “[i]f a false statement is integral to a causal chain leading to payment, it is irrelevant how the federal bureaucracy has apportioned the paperwork.” Id. The outcome in Main was dependent on the defendants’ mindset when it entered into the PPA. The relator’s complaint alleged that university ownership intended to defraud the government out of subsidies from the outset; consequently, we held that the institution’s PPA with the Secretary and all subsequent claims for payment submitted incident to it were poisoned by the institution’s underlying bad faith. 426 F.3d at 917 (“To prevail in this suit Main must establish that the University not only knew, when it signed the [PPA], that contingent fees to recruiters are forbidden, but also planned to No. 14‐2506 21 continue paying those fees while keeping the Department of Education in the dark.”); accord, U.S. ex rel. Miller v. Weston Educ., Inc., 784 F.3d 1198, 1204 (8th Cir. 2015) (“To demonstrate this promise was false, it is not enough to show that [the institution] did not comply with the PPA; relators must show that [the institution], when signing the PPA, knew accurate grade and attendance records were required, and that [the institution] intended not to maintain those records.”). To establish that the defendants knowingly used a false record under Main, the relator must establish the defendants’ mindset at the time of entry into the PPA. The third prong of Yannacopoulos reaffirms this mens rea requirement. In other words, Nelson needed to prove that SBC knowingly entered into the PPA to defraud the government (thereby creating a “false record”) and then planned to “use” the PPA thereafter to submit poisoned (and therefore, false) claims for payment. U.S.C § 3729(a)(1)(B) (“knowingly ... uses”). Main underscores this conclusion through its elaboration on the definition of fraud that promises of future performance do not become false due to subsequent non‐compliance. 426 F.3d at 916. Proof of “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.” Id. at 917 (empha‐ sis added). In this case, Nelson did not prove that SBC entered the PPA in bad faith. He did not depose the individuals who signed the PPAs, nor did he present any documentary evidence concern‐ ing SBC’s execution of the PPAs. He elicited no evidence in discovery of defendants’ fraudulent mindset when SBC was added as an additional campus covered under the PPA, or at 22 No. 14‐2506 any other time throughout its operation. The only record evidence of the defendants’ mindsets are the declarations filed by Larson and McCullough. Not only do these declarations fail to support Nelson’s contention that these individuals intended to defraud the Education Department out of subsidies—they explicitly assert the opposite. See Larson Decl. at ¶¶ 5, 6; McCullough Decl. at ¶¶ 7, 8. Under these facts, SBC is not liable under Nelson’s False Record theory. 2. Nelson’s 31 U.S.C § 3729(a)(1)(A) False Presentment Theory The FCA also imposes liability where any party “know‐ ingly presents, or causes to be presented, a false or fraudulent claim for payment or approval.” 31 U.S.C § 3729(a)(1)(A). To establish liability under this theory, a relator must prove the existence of: (1) a false or fraudulent claim; (2) which was presented for payment, or caused to be presented for payment, by the defendant; (3) with knowledge the claim was false. U.S. ex rel. Fowler v. Caremark RX, L.L.C., 496 F.3d 730, 741 (7th Cir. 2007), overruled in part on other grounds by Glaser, 570 F.3d at 920. Nelson and the government argue that SBC’s certification upon entry into the PPA that it would abide by the Title IV Restrictions causes SBC to present false or fraudulent claims for payment or approval to the government if it violates any of the PPA’s conditions because adherence to those IV Restric‐ tions are “conditions of payment.” Based on this theory, an institution must remain in compliance with all of the PPA’s conditions in order to remain lawfully eligible to continue receiving federal subsidies. Thus, Nelson and the government No. 14‐2506 23 argue that compliance with the PPA is not merely a condition of participation, but a condition of payment. See Appellant Br. 29 (“[U]nder the FCA, payment and participation are one and the same, as a claimant is not entitled to payment unless eligible to participate.”). According to this theory, the PPA serves as a trigger poised to impose FCA liability at some indefinite point in the future, because continued lawful receipt of the federal subsidies depends on continued compliance with the PPA. In support of their argument that continuing ongoing eligibility is a statutory requirement of participation in receipt of Title IV funding, Nelson and the government rely on United States ex rel. Hendow v. Univ. of Phx., 461 F.3d 1166 (9th Cir. 2006), Main, and the PPA’s implementing regulation, which states that “[a] participation agreement conditions the initial and continued participation of an eligible institution ... upon compliance with ... [the Title IV Restrictions.]” 34 C.F.R. § 668.14(a)(1) (emphasis added). See Appellant Br. 27. Under the logic of Main, 426 F.3d at 917, and Yannacopoulos, 652 F.3d at 824, SBC argues that so long as the institution enters into the PPA in good faith, the Title IV Restrictions it promises to adhere to are not a trigger set to impose liability if violated in the future, because those restrictions are merely conditions of initial participation that must be true at the time the PPA was entered into, not conditions that are prerequisites to payment for the purpose of liability under the FCA. Main recognizes that promises of future performance do not become “false” due to subsequent non‐compliance. 426 F.3d at 917. And Main goes on to suggest that a violation of Title IV Restrictions after signing a PPA in good faith is not an action‐ able false claim: “[a] university that accepts federal funds that 24 No. 14‐2506 are contingent on following a regulation, which it then violates, has broken a contract.” Id. This distinction between fraud at the outset and breach of contract after entry into a PPA is signifi‐ cant “because a mere breach of contract does not give rise to liability under the False Claims Act.” Yannacopoulos, 652 F.3d at 824. Despite Main’s signals, only one circuit decision has squarely addressed whether violations of Title IV Restrictions after good‐faith entry into Title IV trigger FCA liability. See U.S. ex rel. Vigil v. Nelnet, Inc., 639 F.3d 791, 797 (8th Cir. 2011). In concluding that they do not, Vigil drew its reasoning from Main and Hendow, where the complaints that had been dis‐ missed were reinstated because the relator alleged that each institution submitted fraudulent applications to establish their initial Title IV eligibility. See Main, 426 F.3d at 916 (assuming that the institution “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”); Hendow, 461 F.3d at 1169 (relator alleges fraud occurred “in order to become eligible to receive Title IV funds”). We agree with Vigil’s conclusion because it is the logical extension of Main and our other FCA authorities. Good‐faith entry into the PPA is the condition of payment necessary to be eligible for subsidies under the U.S. Department of Education’s subsidies program. Absent evidence of fraud before entry, non‐ performance after entry into an agreement for government subsidies does not impose liability under the FCA. Our earlier decisions in Yannacopoulos, Main, and U.S. ex rel. Gross v. AIDS Research Alliance‐Chi., 415 F.3d 601, 604 (7th Cir. 2005) (pre‐ dating Main and holding that FCA liability requires an initial No. 14‐2506 25 fraudulent certification of compliance with applicable authori‐ ties to be a condition of or prerequisite to government pay‐ ment), compel this result because here, as in Vigil, the relator has not alleged—nor has he proven—that SBC fraudulently secured its initial Title IV eligibility, so no false certification of compliance is attributable to SBC. Accordingly, we join the Eighth Circuit and hold that FCA liability is not triggered by an institution’s failure to comply with Title IV Restrictions subsequent to its entry into a PPA, unless the relator proves that the institution’s application to establish initial Title IV eligibility was fraudulent.5 Distilled to its core, Nelson and the government’s theory of liability lacks a discerning limiting principle. They argue that compliance with all the contents of the PPA are conditions of payment, while candidly acknowledging that certain violations of the PPA do not impose FCA liability. These positions are at odds with each other. If we adopt Nelson and the govern‐ ment’s argument and ignore the significant differences in effect that good‐faith entrance and fraudulent inducement into a PPA have on subsequent violations, then any of the conditions in the PPA that are not met by the institution would have the potential to impose strict liability on it under the FCA. That proposition is untenable. See Momence, 764 F.3d at 712. 5 Our decisions in Yannacopoulos, Main, and Gross, as well as the Eighth Circuit’s decision in Vigil, part ways with the Ninth Circuit’s decision in Hendow on the FCA consequences of a violation of Title IV Restrictions that occurs after good‐faith entry into a PPA. To the extent that is the case, we respectfully disagree with the Ninth Circuit. 26 No. 14‐2506 Just last term, in Momence, we cautioned against the adoption of a similarly groundbreaking and blanket theory of FCA liability when we acknowledged that under the relators’ theory, even a single regulatory violation would be a condition of any and all pay‐ ments subsequently received by the facility inas‐ much as the regulators could terminate the facility for practically any deficiency. Id. (emphasis in original). There we rejected as “absurd” the relators’ argument that compliance with regulations were conditions of payment in the Medicare and Medicaid context. Id. Consistent with Momence’s foreshadowing, we conclude that it would be equally unreasonable for us to hold that an institution’s continued compliance with the thousands of pages of federal statutes and regulations incorporated by reference into the PPA are conditions of payment for purposes of liability under the FCA.6 Although a number of other circuits have 6 Although Nelson asserts that these concerns are hyberbole because “minor technical violations ... do not give rise to an FCA claim,” see U.S. ex rel. Lamers v. City of Green Bay, 168 F.3d 1013, 1019 (7th Cir. 1999), “material[ity]” speaks only to the nature of the violation. § 3729(a)(1)(B) (“material to a false or fraudulent claim”). Whether a violation is material or not has no impact on whether we characterize compliance or noncompli‐ ance with the Title IV Restrictions incident to the PPA as a condition of participation or as a condition of payment. If compliance with the PPA is a condition of payment, the consequence of that determination would (in addition to importing boundless FCA jurisdiction on any recipient of government subsidies) simultaneously undermine its existing administra‐ (continued...) No. 14‐2506 27 adopted this so‐called doctrine of implied false certification, id. at 711 n.13 (citing cases),7 we decline to join them and instead join the Fifth Circuit. See U.S. ex rel. Steury v. Cardinal Health, Inc., 625 F.3d 262, 270 (5th Cir. 2010). The FCA is simply not the proper mechanism for govern‐ ment to enforce violations of conditions of participation contained in—or incorporated by reference into—a PPA. Mikes v. Straus, 274 F.3d 687, 699 (2d Cir. 2001) (“The False Claims Act was not designed for use as a blunt instrument to enforce compliance with all [] regulations.”). Rather, under the FCA, evidence that an entity has violated conditions of participation after good‐faith entry into its agreement with the agency is for the agency—not a court—to evaluate and adjudicate. See, e.g., id. at 700, 702; U.S. ex rel. Conner v. Salina Reg’l Health Ctr., Inc., 543 F.3d 1211, 1220 (10th Cir. 2008) (conditions of participation “are enforced through administrative mechanisms”). 6 (...continued) tive enforcement powers in exchange for this newfound and robust theory of FCA liability. The Eighth Circuit has observed that, under these circumstances, “[i]t would be curious to read the FCA, a statute intended to protect the government’s fiscal interests, to undermine the government’s own regulatory procedures.” Vigil, 639 F.3d at 799. We agree. 7 The FCA doctrine of implied false certification “treats a bill submitted to the government as an implicit assurance that the bill is a lawful claim for payment, an assurance that’s false if the firm submitting the bill knows that it’s not entitled to payment.” U.S. ex. rel. Grenadyor v. Ukrainian Village Pharmacy, Inc., 772 F.3d 1102, 1106 (7th Cir. 2014). As Grenadyor notes, before today this doctrine was “unsettled” in this circuit. Id. (citing Momence, 764 F.3d at 711 and n.13). 28 No. 14‐2506 Lest there be any doubt about the U.S. Department of Education’s ability to enforce the PPA through administrative mechanisms here, its regulations are clear that at all times it possessed the authority up to and including the power to terminate SBC from its subsidy program. See 34 C.F.R. §§ 600.41(a)(1); 668.86; Conner, 543 F.3d at 1220 (observing that “the ultimate sanction for violation of such conditions is removal from the government program”). However, in this case, the subsidizing agency—as well as other federal agencies—have already examined SBC multiple times over and concluded that neither administrative penalties nor termina‐ tion was warranted. See Appellees’ Br. 9. In sum, “PPA” is an abbreviation for Program Participation Agreement—not Program Payment Agreement. When entered in good faith, a PPA memorializes conditions of participation (not conditions of payment) in connection with the U.S. Department of Education’s subsidies program. In this case, the agency’s regulations have at all times provided—and continue to provide—a governmental enforcement mechanism in the form of an administrative proceeding before the subsidizing agency, whereby any evidence of violations of conditions of participation may be considered and adjudicated. Accordingly, we reject Nelson’s False Presentment theory.