By The Book - August 2013: False Claims Act and Education Funds Lost to Fraud

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While enforcement of the False Claims Act has traditionally been focused on the health care industry, universities and for-profit educational institutions have been increasingly targeted, typically based on representations and certifications made in connection with participation in federal student loan programs. On the other side of the coin, New York State’s analogue to the False Claims Act, strengthened by amendments that took effect in 2010, provides New York State universities and school districts with an effective, and so far underutilized, means to proactively seek recovery of funds lost due to fraud brought upon them by others. In any event, the educational community is certain to become more aware of the federal and state false claims acts in the years ahead.

FEDERAL FALSE CLAIMS ACT

The federal False Claims Act (FCA) was originally passed in 1863 as a means for the federal government to recover financial losses incurred when useless goods were sold to the Union Army during the Civil War. The current version of the FCA, as amended in 1986 and further strengthened in 2009, far exceeds the scope originally contemplated by Congress when it enacted the statute known as “Lincoln’s Law.”

In its current form, the FCA is a powerful, wide-ranging tool in the hands of the government and “whistleblower” plaintiffs (a/k/a, qui tam relators). Importantly, civil liability under the FCA is not limited to “direct,” false, or fraudulent claims such as where payment is made by the federal government for goods or services that are not delivered, or where the government is billed for a higher-priced good or service than was actually provided. Rather, civil liability under the FCA may also be based, among other grounds, on a false certification theory – i.e., where a defendant “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) (2012).

Importantly, the FCA provides a statutory penalty of “not less than $5,000 and not more than $10,000” for each violation plus “3 times the amount of damages which the Government sustains because of the act of that person,” plus costs and attorneys’ fees. 31 U.S.C. § 3729(a)(1) (2012); 31 U.S.C. § 3730(d) (2012). The damages may be reduced to “2 times the amount of damages which the Government sustains because of the act of that person” if the defendant complies with the FCA’s self-reporting provision. 31 U.S.C. § 3729(a)(2) (2012).

Recent reported False Claims Act cases against educational institutions have been predicated on violations of statutory, regulatory, and/or contractual requirements that educational institutions agree to abide by in order to receive federal subsidies under Title IV and the Higher Education Act. For instance, in United States ex rel. Hendow v. University of Phoenix, 461 F.3d 1166 (9th Cir. 2006), the Ninth Circuit Court of Appeals held that FCA liability under a false certification theory may be based on a false statement that violates a statutory or regulatory requirement, such as certifying compliance with federal restrictions on payments to recruiters.

The case law interpreting the False Claims Act continues to evolve. How aggressively the government and qui tam plaintiffs will seek to apply the FCA against universities and other educational institutions is uncertain. What is certain is that universities and other educational institutions cannot afford to ignore the encouragement provided by the FCA to be scrupulously compliant with all applicable federal regulations and requirements, and to immediately seek the assistance of outside counsel upon learning about any potential FCA violation or investigation.

NEW YORK FALSE CLAIMS ACT

Conversely, the New York False Claims Act (NY-FCA), enacted in 2007 and substantially amended in 2010, provides the state and local governments, including school districts, with a relatively new, and largely untested, mechanism to recover funds lost through fraud. In language similar, but not identical to the federal FCA, the NY-FCA, State Finance Law §§ 187-194, empowers the New York State Attorney General, local governments, and private persons (i.e., whistleblowers) with the authority to bring a civil action against any person, including any corporation, that “knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval;” “knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim;” or conspires, obtains, or withholds money or property from the state or local government through false or fraudulent conduct. N.Y. State Fin. Law § 189(1) (McKinney 2002 & Supp. 2013).

The statute defines “knowing and knowingly” to be satisfied when the person “(i) has actual knowledge of the information; (ii) acts in deliberate ignorance of the truth or falsity of the information; or (iii) acts in reckless disregard of the truth or falsity of the information.” N.Y. State Fin. Law § 188(3)(a) (McKinney 2002 & Supp. 2013). In other words, a cause of action under the FCA “require[s] no proof of specific intent to defraud, provided, however that acts occurring by mistake or as a result of mere negligence are not covered by this article.” N.Y. State Fin. Law § 188(3)(b) (McKinney 2002 & Supp. 2013).

A person found to violate the NY-FCA may be subject to a civil penalty between $6,000 and $12,000, plus “three times the amount of all damages” sustained by the government, plus costs and attorneys’ fees. N.Y. State Fin. Law § 189(1)(g), (3) (McKinney 2002 & Supp. 2013). Actions commenced by a whistleblower (known as a “qui tam civil action”) are subject to a specific procedure delineated in the statute and provide the whistleblower with the possibility of being awarded 15-25% of the total recovery just for commencing the case, and 25-30% if the government does not intervene, plus expenses, costs, and attorneys’ fees. N.Y. State Fin. Law § 190 (McKinney 2002 & Supp. 2013).

Importantly, the 2010 Amendments to the NY-FCA included, among other things, a provision adding liability for consequential damages. N.Y. State Fin. Law § 189(1) (g) (McKinney 2002 & Supp. 2013). This new provision supplies a significant inducement for whistleblowers and local municipalities such as school districts to use the NY-FCA to try to recover the costs of repair or replacement arising from a contractor’s false or fraudulent claims. For example, in September 2012, the New York Attorney General’s Office announced an $18 million settlement with a food management services provider for improperly overcharging more than 39 New York schools and school districts statewide, by receiving discounts from food vendors it worked with, but not passing on those savings to New York’s schools, as required by law.

Because local governments themselves, and “any person” can bring civil actions for violations of the NY-FCA on behalf of the state or local governments, the NY-FCA supplies New York schools and school districts with an effective means, in a climate of tight budget restraints, to recover scarce and necessary funds lost through fraud.

Topics:  Education Budget, Enforcement, False Claims Act, Fraud, Misrepresentation, Student Loans

Published In: Education Updates, Government Contracting Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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