Financial Aid Fraud and FCA Litigation: Court Addresses Notice Requirement for “Fraud Alert” Employees and Relevance of College President’s Knowledge of Whistleblowing

Financial Aid Fraud and FCA Litigation: Court Addresses Notice Requirement for “Fraud Alert” Employees and Relevance of College President’s Knowledge of Whistleblowing

November 29, 2017

A recent decision allowing a False Claims Act claim against a community college to proceed to discovery highlights two issues relating to the requisite degree of employer knowledge that must be plead in retaliation claims by former employees who report financial aid fraud. In Klee v. McHenry County College, the United States District Court for the Northern District of Illinois recognized that the requirement that “fraud-alert” employees notify their employer of a potential FCA violation before bringing a whistleblower suit may no longer apply after the 2009 amendments to the FCA. The court also held that at the pleading stage, a defendant cannot win a motion to dismiss simply by arguing that the defendant’s decision-maker (in this case, the college’s president) lacked knowledge of protected whistleblowing activity.

Background in Klee v. McHenry County College

Plaintiff Dane Klee was the Director for the Office of Financial Aid and Veteran Services at defendant McHenry County College. Klee’s job included advising the College’s Executive Council on all matters related to student financial aid. Klee claimed that he “became aware” that the College was awarding federal student aid to students who were not enrolled in the minimum number of credits over the summer. After making an initial report to his supervisor, Klee requested a report from the College’s IT department of all students who had received federal student loans, and allegedly found numerous students who did not meet the eligibility criteria for such loans. Reports going back to 1995 allegedly showed erroneous aid totaling nearly one million dollars, and Klee emailed these findings to his supervisors.

About two months later, the College’s administration recommended that Klee’s appointment would not be renewed for the following year. The College then terminated Klee immediately for an unrelated reason. Klee alleged that this rationale for termination was pretextual, and he sued the College under both the FCA’s and Illinois state law’s protections against retaliation.

Notice Requirement for “Fraud-Alert” Employees Post FCA Amendments

In considering the College’s motion to dismiss the complaint, the court first addressed an ambiguity surrounding the notice requirements for “fraud-alert” employees. Before the 2009 FCA amendments, the only protected activity supporting a retaliation claim was activity specifically in furtherance of an FCA claim. A so-called “fraud-alert” employee has, as part of the job description, a duty to discover (and report) fraud. So for fraud-alert employees to establish a retaliation claim, they had to plead and prove that they notified their employer not only of the existence of fraud (which was already part of their job duties), but specifically of the potential FCA claim. Courts interpreted this notice requirement as creating a heightened pleading standard for fraud-alert employees.

The 2009 FCA amendments added a second category of protected activity–“other efforts to stop” violations of the FCA. Therefore, the district court in Klee observed that giving notice of a potential FCA lawsuit may not now be necessary to protect fraud-alert employees from retaliation, “since this would in effect collapse the two categories [of protected activity] back into one—it would be hard to imagine activities that would not be efforts in furtherance of an FCA action but would still put an employer on notice of a potential FCA lawsuit.”

In Klee, the court ultimately did not rule on the fraud-alert issue. However, the language in the opinion strongly suggests that the district court would have declined to apply the old heightened pleading standard. Other district courts analyzing the issue have similarly held that the 2009 FCA Amendments render this argument moot. See, e.g., United States ex rel. Mooney v. Americare, Inc., No. 06-CV-1806, 2013 WL 1346022 (E.D.N.Y. Apr. 3, 2013) (noting that post-Amendment “[i]t is sufficient for a plaintiff—even one employed to investigate her employer’s financial practices—to allege that she was investigating matters which are calculated, or reasonably could lead, to a viable FCA action”); see also Malanga v. NYU Langone Med. Ctr., No. 14-cv-9681, 2015 WL 7019819 (S.D.N.Y. Nov. 12, 2015) (same).

FCA Does Not Require Plaintiff to Plead Decision-maker’s Knowledge of Protected Activity

The court next addressed whether the ultimate decision-maker (in this case, the college’s president who signed the plaintiff’s termination letter) knew about the protected activity. The defendant argued that because Klee did not allege that the college’s president knew about the whistleblowing, Klee had failed to plead the requisite retaliatory intent to sustain his retaliation claim. The court rejected this argument, noting that at the pleading stage, the plaintiff did not need to demonstrate that any specific person had retaliatory intent. Rather, he merely had to “supply some plausible evidence that his employer (that is, the College) retaliated at least in part due to his activity.”

Takeaways – No Heightened Pleading Standards for Notice or Knowledge

The Klee court noted that to survive summary judgment, the plaintiff would eventually have to provide evidence as to whether the decision-maker in his termination knew of the plaintiff’s whistleblowing activities, and reiterated that “companies are not liable under the False Claims Act for every scrap of information that someone in or outside the chain of responsibility might have.” Nevertheless, the decision underscores that fact that plaintiffs may survive dismissal at the pleading stage without pointing to either notice of an FCA violation as protected activity or a specific person’s knowledge of their protected activity.

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