I. INTRODUCTION
Plaintiff-relator Lawrence Klein (“Klein”) filed this qui tam action against Empire Education Corporation (“Empire” or “defendant”) and Does 1-50 pursuant to the federal False Claims Act (“FCA”), 31 U.S.C. §§ 3729-33; the Massachusetts False Claims Act, Massachusetts General Laws, Chapter 12, Section 5A et seq.; and the New York False Claims Act, New York State Finance Law, Section 187 et seq. The United States, Massachusetts, and New York have elected not to intervene.
Defendant filed a motion to dismiss pursuant to Federal Rules of Civil Procedure (“Rule-”) 12(b)(6) and 9(b). Plaintiff opposed, and defendant replied. The United States submitted a Statement of Interest pursuant to 28 U.S.C. § 517. The motion was taken on its submissions without оral argument.
II. FACTUAL BACKGROUND
Klein worked for Empire from March 11, 2008 until his discharge on December 8, 2009, in the position of Director of Career Services at defendant’s Pittsfield, Massachusetts campus. Klein purports to recover damages and civil penalties on behalf of the United States, Massachusetts, and New York, arising out of false claims approved and presented by Empire to obtain amounts from the United States Department of Education (“DOE”) pursuant to Title IV of the Higher Education Act (“HEA”).
When individuals apply for student loans from the government, educational institutions such as Empire are eligible for Title IV funds on behalf of their students through a variety of government programs, such as the Federal Pell Grant Program, the Federal Supplemental Educational Opportunity Grant Program, the Federal Perkins Loan Program, and the Federal Family Education Loan Program (collectively, “Title IV Programs”). These institutions also request funds for eligible students through DOE programs provided by Massachusetts and New York.
The federal government, Massachusetts, and New York do not pay these funds directly to the student applicants, but rather to the educational institution or a third party intermediary lender. The government or intermediary lender wires these funds directly into the institution’s account, and the institution credits the funds against the student’s tuition and other fees the student owes the institution. The federal government, state agencies, and nonprofit organizations (“Guaranty Agents”) guarantee the federal and state funds that the student is borrowing and the educational institution receives. The Guaranty Agents are accordingly subsidized and re-insured by the DOE.
When students graduate or withdraw from an educational institution, they are responsible for paying back the federal government, Massachusetts, and/or New York, whether they complete their schooling or drop out. If a student defaults on the payment of these funds, a Guaranty Agent reimburses the applicable federal or state government lender. If the Guaranty Agent cannot collect from the student, then the DOE reimburses the Guaranty Agent.
As a condition of participation in Title IV programs, an educational institution is required to enter into a written Program Participation Agreement (“PPA”) with the United States Secretary of Education. In signing the PPA, the institution agrees that it will comply with the various federal statutes and regulations that serve as conditions of participation for the Title IV programs. Klein alleges that Empire en
Klein alleges: Empire made misrepresentations regarding the transfer of credit policies (First Cause of Action); Empire made misrepresentations regarding the nature of its educational programs, employment and graduation statistics, and other information (Second Cause of Action); Empire fraudulently certified grade point averages to procure federal and state funding to pay the tuition of students who would otherwise be ineligible to receive funding (Third Cause of Action); Empire unlawfully tied student recruitment to adverse employment actions (Fourth Cause of Action); Empire unlawfully discharged Klein in retaliation for engaging in protected activities (Fifth Cause of Action); Empire violated the Massachusetts False Claims Act (Sixth Cause of Action); and Empire violated the New York False Claims Act (Seventh Cause of Action).
III. LEGAL STANDARDS
A. Federal and State False Claims Acts
The FCA is intended to recover damages from those who defraud the federal government. It imposes liability on those who knowingly present, or cause to be presented, false or fraudulent claims for payment, or knowingly make, use, or causе to be used, false records or statements to get false claims paid or approved. 31 U.S.C. § 3729(a)(1)(A) & (B). Private persons, known as relators, may file qui tarn actions — actions on behalf of the government — for violations of § 3729. Id. § 3730(c)(3); see also United States ex rel. Dick v. Long Island Lighting Co.,
The Massachusetts False Claims Act “is modeled on the federal FCA” and “courts use the federal FCA for guidance in interpreting the Massachusetts] FCA.” United States ex rel. Ciaschini v. Ahold USA Inc.,
B. Rule 12(b)(6)
In order to survive a motion to dismiss under Rule 12(b)(6), “a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’ ” Ashcroft v. Iqbal,
C. Rule 9(b)
It is well-settled law that “claims brought under the FCA fall within thе
In the context of the FCA, the plaintiff-relator must allege “facts as to time, place, and substance of the defendant’s alleged fraud, specifically the details of the defendant’s] allegedly fraudulent acts, when they occurred, and who engaged in them.” United States ex rel. Chapman v. Office of Children & Family Servs. of the State of N.Y., No. 1:04-CV-1505,
Although Rule 9(b) provides that “[m]alice, intent, knowledge, and other condition of mind of a person may be averred generally ... the relaxation of Rule 9(b)’s specificity requirement for scienter must not be mistaken for license to base claims of fraud on speculation and conclusory allegations.” Shields v. Citytrust Bancorp, Inc.,
IV. DISCUSSION
Empire moves to dismiss the complaint for failure to state a claim pursuant to Rule 12(b)(6) and for failure to allege fraud with particularity pursuant to Rule 9(b). It argues that: (1) plaintiff cannot state a claim pursuant to Rule 12(b)(6) under the FCA nor state law by relying on an implied false certification theory with a statute that is a condition to participation in a federal funding program, and not a condition for payment of federal funds; (2) the fourth cause of action alleging adverse employment actions fails to state a claim under Rule 12(b)(6); and (3) the complaint fails to plead fraud with particularity as required by Rule 9(b) because it fails to identify any claims for payments of funds, fails to allege sufficient facts as to the underlying fraudulent scheme, and fails to allege facts as to Does 1-50. Klein responds that: (1) he has stated a valid claim under an implied false certification theory; (2) his complaint pleads factual details sufficient to satisfy Rule 9(b); and (3) he should be granted leave to amend the complaint should Empire’s motion to dismiss any causes of action be granted.
A. Rule 12(b)(6) Motion
1. Implied False Certification Theory — All Causes of Action
Empire contends that Klein has failed to state a claim pursuant to Rule 12(b)(6) because he cannоt rely on an implied false certification theory of liability.
Empire relies on Mikes, which drew a distinction between conditions of participation in a federal program and conditions of payment of federal funds in the Medicare context. Id. at 699-700. The plaintiff in Mikes, a discharged employee physician, alleged that her former employer, a partnership of physicians, failed to conform to the guidelines of 42 U.S.C. § 1320c-5(a), which establishes conditions of participation in the Medicare program. Mikes,
Empire argues the instant matter involves a straightforward application of Mikes: although the PPA it executed serves as a prerequisite for participation in HEA programs, none of the statutes or regulations upon which Klein relies expressly require that Empire make any certification to the federal government as a condition for payment of federal funds. It contends that Mikes is not limited to the Medicare and medical provider context, but that it instead sets forth the broader rule that conditions of participation in federal programs cannot serve as the basis for liability under the FCA.
Both Klein and the United States contend that Mikes is limited to the Medicare context, which contains a plethora of administrative health regulations. Plaintiff relies on authority from the Ninth Circuit, which expressly rejected the distinction between conditions of participation and conditions of payment in the higher education context. United States ex rel. Hendow v. Univ. of Phoenix,
The application of Mikes to the facts at hand and Klein’s rеsulting ability to bring suit under the FCA and its state analogues present a close question. Because the complaint fails to state a claim, as explained below, the application of Mikes need not be decided at this time.
The FCA incorporates broad anti-retaliation protection for whistleblowers. To state a claim for retaliatory discharge under the FCA, Klein must prove that he was “discharged, demoted, suspended, threatened, harassed, or in any other manner discriminated against in the terms and conditions of employment because of lawful acts done by [him] ... in furtherance of an action under this section or other efforts to stop 1 or more violations” of thе FCA. 31 U.S.C. § 3730(h)(1). In other words, he must show: “(1) that he engaged in conduct protected under the statute, (2) that defendants were aware of his conduct, and (3) that he was terminated in retaliation for his conduct.” United States ex rel. Sarafoglou v. Weill Med. Coll. of Cornell Univ.,
Klein alleges that he was placed on “probation” and ultimately terminated from Empire because he notified Empire “that it wаs not being truthful about its falsification and manipulation of student’s grades, in violation of the HEA.” Compl. ¶ 122. Plaintiff further alleges that he received these adverse employment actions “[a]s a consequence of his expression of concerns of ... Empire’s acts and conduct which were in violation of the HEA and PPG.” Id. ¶¶ 124-25. He concludes that “Empire retaliated against [him] for his engaging in protected activities under the FCA.” Compl. ¶ 127.
Accepting plaintiffs allegations as true and drawing all reasonable inferences in his favor, a reasonable jury could conclude that plaintiff was investigating matters that were calculated or reasonably could lеad to an FCA action. Thus, Klein has stated a claim for retaliatory discharge and his fifth cause of action will remain.
B. Rule 9(b) Motion
Empire argues that plaintiff has not set forth facts sufficient to satisfy the heightened pleading standard under Rule 9(b).
At the outset, Does 1-50 must be addressed. Empire argues that Klein has failed to allege the “specific conduct of each individual defendant” under Rule 9(b). Def.’s Mem. Supp. Mot. to Dismiss 24 (“Def.’s Mem.”). It contends that, although plaintiff names “Does 1-50” as defendants, he has not identified “even a single managerial employee purportedly involved in the fraudulent conduct.” Id. 25. Indeed, plaintiff has simply identified Does 1-50 as a group of “managerial employees” without alleging any particular conduct of an individual John Doe or managerial employee. See, e.g., Compl. ¶¶ 34, 36-37, 39. The complaint “provides no means of linking any of the defendants] ... to the [false claims].” United States ex rel. Branigan v. Bassett Healthcare Network,
Next, Empire contends that Klein fails to “allege any particulars regarding claims for payment to the government,” including
Klein argues that Rule 9(b)’s requirements should be relaxed because of the “unique circumstances of the case.” Pl.’s Opp’n Mot. to Dismiss 12 (“Pl.’s Mem.”). He contends that the alleged fraud here is “particularly complex, involves a large number of ocсurrences, or took place over an extended period of time,” which provides an appropriate context for a relaxed pleading standard. Johnson v. Univ. of Rochester Med. Ctr.,
Courts have occasionally relaxed the pleading standards of Rule 9(b) in limited circumstances “when facts are peculiarly within the opposing party’s knowledge.” Boykin v. KeyCorp,
Klein served as Empire’s Director of Career Services, a relatively high-ranking position where he was likely privy to many “of the ways in which the corporation’s internal affairs [were] ... conducted.” DiVittorio v. Equidyne Extractive Indus., Inc.,
1. Empire’s Misrepresentations Regarding the Transfer of Credit Policies — First Cause of Action
Klein alleges that Empire, through its managerial employees, made representations to prospective students that they could transfer “course credits earned at thе institution to other institutions, including community colleges.” Compl. ¶ 34. Despite this representation, students who enrolled at Empire’s Pitts-field, Massachusetts campus “later determine[d] that course credits earned [at the Pittsfield campus] are only transferable to Empire’s Latham, New York campus” and must accordingly “re-take the courses at another institution.” Id. ¶¶ 37-38.
Klein has failed to state with the required particularity that Empire misrepresented its credit transfer policies. Accordingly, his first cause of action will be dismissed.
2. Empire’s Misrepresentations Regarding the Nature of its Educational Programs, Emplogment and Graduation Statistics, and Other Information — Second Cause of Action
Klein alleges that Empire and its managerial employees, Does 1-50, “have made misrepresentations as to the availability, frequency, and appropriateness of its courses and programs to satisfy the employment objectives that it states its programs are designed to meet,” Compl. ¶ 47; the “number, availability, and qualifications, including the training and experience, of its faculty and other personnel,” id. ¶ 49; Empire’s “plans for improvements in its academic programs,” id. ¶ 52; the availability and quality of its equipment, id. ¶ 55; the percentage of students employed in their “chosen fields” after they graduate, id. ¶¶ 69-70; and the “advantage” that their students receive in the marketplace, id. ¶¶ 78-79.
For all of Klein’s numerous allegations, he fails to identify: (1) which Empire employee made representations regarding the nature of its educational programs; (2) when and where such representations were made; (3) how they were fraudulent; and (4) any resulting submission of a false claim for payment. For example, he alleges that Empire falsely certified that “four out of five Mildred Elley graduates find rewarding positions in their chosen field after graduation,” id. ¶ 69, but does not explain what merits a “rewarding position” or a “chosen field” for the purposes of Empire’s survey. Although plaintiff does allege that such a statement was made “as of February 19, 2010,” id., he does not allege which Empire employee made this statement, at what campus it was made, how Empire “manipulated numbers” to disseminate “fraudulent reports knowingly and willfully,” or what resulting claims for payment were falsely submitted to the government, id. ¶ 71.
Klein further provides conclusory allegations regarding Empire’s representations of its curriculum. He asserts that “Empire represents that the education students will receive at its institution will provide them with ‘an invaluable advantage as [they] enter the 21st century marketplace.’ ” Id. ¶ 78. In addition to omitting the speaker, time, and location of this representation, plaintiff also fails to identify which “skills” or purported “advantage” in the workplace Empire’s curriculum targets. Instead, he only alleges that Empire “has provided [its students] with little to no ‘advantage’ in said marketplace.” Id. ¶ 79. These vague assertions fall short of the Rule 9(b) standard.
Thus, Klein has failed to state with particularity that Empire misrepresented the
3. Empire’s Fraudulent Certification of Grade Point Averages — Third Cause of Action
Klein alleges that, in order to “increase its number оf students, Empire engages in a scheme to fraudulently procure funding for these students from the United States ... representing tens of thousands of dollars in government benefits to which the students would otherwise be unentitled/ineligible to receive.” Compl. ¶ 89. Although many students fail to obtain an adequate grade point average in order to remain eligible for federal and state funding, Empire’s instructors inflate their students’ grades, upon pressure from Empire’s managerial employees. Id. ¶¶ 90-92. Plaintiff concludes that “[t]his scheme to manipulate student grades constitutes a fraud, affecting a significant amount of federal and state funding recipients at Empire.” Id. ¶ 93.
Nowhere in the complaint does Klein identify any students whose grades were inflated, any managerial employees who pressured instructors to inflate grades, or any instructors who actually did inflate their students’ grades. Nor does he plead basic factual details surrounding the grade inflation, such as the time, course, campus location, or amount of grade inflation. Moreover, plaintiff-relator does not proffer any factual connection between Empire’s misrepresentations regarding grade point averages and false claims it submitted to the government for payment. Even though plaintiff can allege scienter generally, he cannot “base сlaims of fraud on speculation and conclusory allegations.” Wood ex rel. United States v. Applied Research Assocs., Inc.,
Thus, Klein’s allegations regarding Empire’s fraudulent certification of grade point averages fail under Rule 9(b), and his third cause of action will be dismissed.
4. Empire’s Student Recruitment Tied to Adverse Employment Action — Fourth Cause of Action
Klein alleges that Empire “compensated or otherwise provided incentives based directly or indirectly on the faculty member’s success in securing enrollments through student recruiting.” Compl. ¶ 106. According to plaintiff, defendant required faculty members to contact and recruit students who had previously dropped out and tо “make representations as to improvements in the institution and as to the student’s particular aptitude and ability to complete the course of instruction.” Id. ¶¶ 107-09. Moreover, Empire placed on probation and terminated faculty members who failed to meet their student enrollment quotas, “without consideration of any other meaningful performance factor not related to recruiting, enrolling, or awarding Title IV aide.” Id. ¶¶ 112-14.
As the complaint now stands, Klein has only provided generalized allegations as to Empire’s student recruitment policies and the resulting employment actions. Thus, he has failed to state with the particularity required under Rule 9(b) that defendant tied student recruitment to adverse employment actions. Accordingly, the fourth cause of action will be dismissed.
5. Empire’s Violations of Massachusetts and New York Law — Sixth and Seventh Causes of Action
Empire argues that Klein has failed to state a cause of action under either the Massachusetts False Claims Act or the New York False Claims Act. It contends that Klein’s state law claims “are subject to dismissal for the same reasons as [his] federal FCA claims,” primarily because he “does not identify even a single claim for payment made to either Massachusetts or New York.” Def.’s Mem. 12-13. Plaintiff responds that paragraphs 6 and 7 of the complaint, which are both incorporated into the Sixth and Seventh Causes of Action, state with particularity that both Massachusetts and New York “have awarded funds or aid to Defendant as a result of the false claims detailed throughout the complaint.” Pl.’s Mem. 18.
Paragraphs 6 and 7 of the complaint, however, do no more than allege that Massachusetts and New York are named as plaintiffs because their respective funds “were and are awarded to the Defendant as a result of the false claims alleged in this Complaint.” Compl. ¶¶ 6-7. Instead of pointing to any specific funding that Massachusetts or New York provided to Empire, Klein tracks the statutory language of the HEA and Code of Federal Regulations. Compl. ¶¶ 130-33, 136-39.
Accordingly, Klein’s sixth and seventh causes of action will be dismissed.
C. Leave to Amend the Complaint
In opposition to Empire’s motion to dismiss, Klein requests leave to amend the complaint pursuant to Rule 15(a), should the motion be granted in whole or in part. Plaintiff asserts that he “can adduce and plead additional facts showing [Empire]’s misrepresentations and fraudulent scheme, if necessary.” Pl.’s Mem. 19.
The liberal amendment policy of Rule 15(a) provides that a district court may give a party leave to amend its pleading “when justice so requires.” When a motion to dismiss is granted pursuant to Rule 9(b), the usual practice is to grant leave to amend the complaint. Luce v. Edelstein,
In opposition to defendant’s motion, Klein “specifically requested leave to amend should dismissal be granted.” Luce,
Therefore, all claims except the fifth cause of action alleging retaliatory discharge will be dismissed without prejudice and with leave to file an amended complaint that cures the pleading deficiencies described above. Plaintiff is advised that his failure to timеly file an amended complaint will result in the dismissal of the first, second, third, fourth, six, and seventh causes of action.
V. CONCLUSION
Klein has pleaded seven causes of action, six of which lack the particularity required of fraud claims pursuant to Rule 9(b). Although he has failed to state the circumstances surrounding Empire’s alleged fraud and the actions' of Does 1-50 with particularity, his allegations indicate serious misconduct which may be actionable under the FCA, the Massachusetts False Claims Act, and the New York False Claims Act. Plaintiff contends that he is in a position to proffer additional facts and has requested leave to amend. The liberal amendment policy of Rule 15 favors granting leave to amend here. If plaintiff fails to file an amended complaint, the first, second, third, fourth, six,- and seventh causes of action will be dismissed.
The fifth cause of action alleging retaliatory discharge in violation of the FCA will remain regardless of plaintiffs decision to file an amended complaint or not. He is reminded however that his amended complaint must be a complete pleading that will replace and supersede the original complaint in its entirety.
The application of United States ex rel. Mikes v. Straus to the higher education context is left for another day.
Therefore, it is
ORDERED that
1. Defendants Empire Education Corporation and Does 1-50’s motion to dismiss the complaint pursuant to Federal Rule of Civil Procedure 12(b)(6) is DENIED;
3. Defendants Empire Education Corporation and Does 1-50’s motion to dismiss the Fifth Cause of Action pursuant to Federal Rule of Civil Procedure 9(b) is DENIED;
4. The First, Second, Third, Fourth, Sixth, and Seventh Causes of Action are DISMISSED without prejudice; and
Plaintiff may file an amended complaint on or before September 12, 2013.
IT IS SO ORDERED.
In the event plaintiff fails to file an amended complaint on or before September 12, 2013, an immediate order will be entered dismissing the First, Second, Third, Fourth, Sixth, and Seventh Causes of Action. Defendants will have until October 2, 2013, to file an answer to the Fifth Cause of Action.
In the event plaintiff files an amended complaint on or before September 12, 2013, defendants will have twenty (20) days frоm the date the amended complaint is filed to file an answer or a motion to dismiss.
Notes
. For this proposition, Empire relies on United States ex rel. Kirk v. Schindler Elevator Corp., where the Second Circuit applied the Mikes analysis to a claim brought for violations of conditions of payment under the Vietnam Era . Veterans Readjustment Assistance Act.
. "Rule 9(b)'s heightened pleading standard does not apply to plaintiff's FCA retaliation claim since no showing of fraud is required.” Mooney,
. Empire first contends that Klein fails to state a claim under Rule 12(b)(6) because the HEA contains a safe harbor provision which allows institutions to make salaty adjustments as long as they are "not based solely on the number of students recruited, admitted, enrolled, or awarded financial aid.” United States ex rel. Lee v. Corinthian Colls.,