FCA Claim of “Phantom Students” Won’t Continue to Haunt College, Says Ninth Circuit
The for-profit education company Kaplan, Inc. recently scored a win when the Court of Appeals for the Ninth Circuit affirmed Kaplan’s summary judgment victory in a decade-long False Claims Act suit. This case shows that while in certain jurisdictions FCA cases may be surviving motions to dismiss with more frequency, they continue to be ripe for dismissal at summary judgment. Specific, direct evidence of a false claim is required to survive summary judgment.
In 2003, Kaplan purchased Heritage College, a post-secondary school in Las Vegas. In 2005, Charles Jajdelski, a former Kaplan employee, filed a lawsuit that alleged that Kaplan knowingly received federal financial aid on behalf of “phantom students” who either never attended Heritage or who had previously withdrawn. The alleged scheme involved the artificial boosting of enrollment and job placement scores by various fraudulent tactics, including maintenance of missing students on class attendance rosters and false enrollment and job placement records. Jajdelski claimed that the false claims consisted of requests for “Title IV money based on accreditations obtained by fraud and by fraudulent non-compliance with the schools’ Placement Agreement.”
Kaplan’s Motion to Dismiss and Ninth Circuit Remand
In 2011, the district court dismissed Jajdelski’s Fourth Amended Complaint, finding that he had failed to plead his FCA claim with sufficient particularity. Jajdelski did not identify any particular false statements submitted to the government, when or where these false claims were submitted, or even who submitted the claims. The district court also noted that all of Jajdelski’s fraud allegations happened before Kaplan bought Heritage in 2003.
In 2013, the Ninth Circuit reversed, finding the district court had improperly “faulted” Jajdelski for not having identified in his complaint which false claims were submitted and when. The Court of Appeals noted that it has “rejected that a qui tam relator [like Jajdelski] must ‘identify representative examples of false claims’ for his allegations.” The Ninth Circuit, rather, expressly aligned with the Fifth Circuit’s approach for pleading purposes: it is sufficient for a plaintiff-relator “to allege particular details of a scheme to submit false claims paired with reliable indicia that lead to a strong inference that claims were actually submitted.” The Court reasoned that “it would stretch the imagination to believe that Kaplan employees fastidiously (and secretively) documented fake student enrollment statistics and met about them once the threshold for financial aid eligibility was crossed, only for the scheme to deviate . . . at the last moment such that they did not submit those claims to the Department of Education.” For the time being, Jajdelski’s FCA claim had survived.
Kaplan’s Summary Judgment Victory
After the case returned to the district court, Jajdelski submitted a “mountain of exhibits and declarations” in opposition to a motion for summary judgment filed by Kaplan. The district court found that Jajdelski failed to present any admissible evidence which pinpointed any actionable false claim submitted to the Department of Education. Accordingly, the court ruled that because evidence of an actual false statement is the sine qua non of an FCA claim, Jajdelski’s theory that false statements “must have been submitted” could not suffice to avoid summary judgment.
Jajdelski appealed once again. This time, the Ninth Circuit concurred with the district court’s reasoning that Jajdelski had not made a sufficient evidentiary showing to keep his case alive. The Court of Appeals noted that “[t]he sole direct evidence of a false claim Jajdelski offers is the case of R.R., the student who attempted to re-enroll in a Heritage College program only to discover that she was listed as ‘graduated’ even though she had dropped out. But Robles’s listing on the attendance roster and as falsely ‘graduated’ does not necessarily mean that Heritage continued to receive student aid funds for Robles after she left the school.” Finally, the Court noted that, to the extent that Jajdelski’s evidence showed that Heritage falsified graduation and placement rates, the evidence went toward a previously dismissed accreditation claim – not to Jajdelski’s “phantom student” claim.
All institutions of higher education can be exposed to FCA claims, as we’ve previously reported (here and here). When analyzing potential exposure, institutions of higher education should look to the Ninth Circuit’s ruling as a clear demonstration of the gulf between evidence that may support an actionable claim under 9(b) versus one which may survive summary judgment. The Ninth and Fifth circuits require only “reliable indicia that lead to a strong inference” of false claims at the pleading stage, in contrast to the First Circuit and others which require a relator to identify at least one false claim with particularity. But a plaintiff-relator’s FCA claim should not survive summary judgment solely upon an assertion that false claims “must have” been made without proof to back up the assertion. And as we have reported recently, other Courts of Appeal are rejecting other types of circumstantial evidence to demonstrate the existence of a false claim. The lack of actionable proof of plaintiff-relator’s claims may deter future litigation in this arena. And at the least, this lack of proof should impact the settlement calculus when these suits do arise.