United States ex rel. Klein v. Empire Education Corp.
959 F. Supp. 2d 248
N.D.N.Y.2013Background
- Relator Lawrence Klein, former Director of Career Services at Empire Education (Mar 2008–Dec 2009), filed a qui tam complaint under the federal False Claims Act (FCA) and Massachusetts and New York false claims statutes alleging schemes to procure Title IV and state education funds through false statements and practices. The federal and state governments declined to intervene.
- Allegations included false statements about credit-transferability, program quality and employment/graduation statistics, inflated GPAs to retain Title IV eligibility, unlawful tying of recruitment to employment actions, and retaliatory discharge after Klein complained.
- Empire moved to dismiss under Fed. R. Civ. P. 12(b)(6) and Rule 9(b), arguing Klein failed to plead fraud with the particularity required and that an implied false certification theory cannot be used where statutes create conditions of participation rather than conditions of payment.
- The complaint did not identify any specific submitted claims for payment, individual Doe defendants by conduct, or particular students/courses/times tied to alleged grade inflation or misrepresentations.
- The court held the FCA retaliation claim (retaliatory discharge) survived Rule 12(b)(6); all other claims (First, Second, Third, Fourth, Sixth, Seventh) were dismissed for failure to plead fraud with particularity under Rule 9(b), with leave to amend. Does 1–50 were dismissed for lack of particularized allegations.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether implied false certification (conditions of participation) can sustain FCA claims | Klein: implied-certification viable in higher-education context; Mikes limited to Medicare | Empire: Mikes bars FCA liability when statute/regulation creates only conditions of participation, not payment | Not reached on merits — dismissal for failure to plead particularity made deciding Mikes unnecessary |
| Whether FCA anti-retaliation claim was adequately pleaded | Klein: he engaged in protected activity (reported grade falsification) and was terminated in retaliation | Empire: argued dismissal under Rule 12(b)(6) in part via HEA safe-harbor / challenged merits | Court: retaliation claim (Fifth) survives; Rule 9(b) inapplicable to retaliation claim |
| Whether fraud-based FCA and state claims plead particularity under Rule 9(b) (claims for payment, times, actors, specifics) | Klein: alleged complex, long-running scheme and requested relaxed 9(b) given limited access to billing; can amend to add detail | Empire: complaint lacks specific false claims, dates, amounts, speakers, students, and Doe conduct; 9(b) not satisfied | Court: First, Second, Third, Fourth, Sixth, Seventh dismissed for failure to satisfy Rule 9(b); leave to amend granted |
| Whether Doe defendants were sufficiently identified under Rule 9(b) | Klein: sued Does 1–50 as managerial employees involved in scheme | Empire: generalized Doe allegations fail to link specific individuals to fraudulent claims | Held: Does 1–50 dismissed for lack of particularized allegations |
Key Cases Cited
- United States ex rel. Mikes v. Straus, 274 F.3d 687 (2d Cir. 2001) (distinguishes conditions of participation from conditions of payment in FCA implied-certification analysis)
- United States ex rel. Hendow v. Univ. of Phoenix, 461 F.3d 1166 (9th Cir. 2006) (rejects Mikes distinction in higher-education context)
- Kirk v. Schindler Elevator Corp., 601 F.3d 94 (2d Cir. 2010) (applied Mikes analysis outside Medicare to distinguish conditions of payment/participation)
- Ashcroft v. Iqbal, 556 U.S. 662 (2009) (pleading standard: factual allegations must plausibly suggest liability)
- Bell Atlantic v. Twombly, 550 U.S. 544 (2007) (plausibility pleading standard for Rule 12(b)(6))
- Luce v. Edelstein, 802 F.2d 49 (2d Cir. 1986) (dismissals under Rule 9(b) ordinarily with leave to amend)
- Gold v. Morrison-Knudsen Co., 68 F.3d 1475 (9th Cir. 1995) (FCA claims subject to Rule 9(b) particularity)
- Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124 (2d Cir. 1994) (scienter may be pleaded generally but strong inference required)