United States v. Sanford-Brown, Ltd.

• Decision Date: 17 March 2014
• Docket Number: Case No. 12–CV–775–JPS.
• Citation: 27 F.Supp.3d 940
• Parties: UNITED STATES of America, Plaintiff, and Brent M. Nelson, Relator, v. SANFORD–BROWN, LIMITED, and Ultrasound Technical Services, Inc., Defendants.
• Court: U.S. District Court — Eastern District of Wisconsin

27 F.Supp.3d 940

UNITED STATES of America, PlaintiffandBrent M. Nelson, Relator

v.SANFORD–BROWN, LIMITED, and Ultrasound Technical Services, Inc., Defendants.

Case No. 12–CV–775–JPS.

United States District Court, E.D. Wisconsin.

Signed March 17, 2014.

Jay D. Majors, Michael D. Granston, United States Department of Justice, Renee Brooker, United States Department of Justice, Civil Rights Division, Washington, DC, Keith S. Alexander, Assistant U.S. Attorney, United States Department of Justice, Office of the U.S. Attorney, Milwaukee, WI, for Plaintiff.

Sofia Birgitta Andersson–Stern, Steven Andrew Smith, James H. Kaster, Janet Olawsky, Jason P. Hungerford, Kate A. Fisher, Katherine Ann Manuel, Nichols Kaster PLLP, Minneapolis, MN, Lucas J. Kaster, Kaster Law, Milwaukee, WI, for Relator.

Daniel J. Vaccaro, S. Edward Sarskas, Michael Best & Friedrich LLP, Milwaukee, WI, Melissa H. Burkland, Michael Best & Friedrich LLP, Madison, WI, Derek T. Teeter, Martin M. Loring, Michael E. Norton, Husch Blackwell LLP, Kansas City, MO, Kyle P. Seelbach, Husch Blackwell, LLP, St. Louis, MO, for Defendants.

ORDER

J.P. STADTMUELLER, District Judge.

1. BACKGROUND

Brent M. Nelson, the relator in this qui tam action filed under the False Claims Act, 31 U.S.C. §§ 3729 –33 (“FCA”), brings claims against defendants Sanford–Brown, Limited, and Ultrasound Technical Services, Inc. (together, “Defendants”) for allegedly fraudulent conduct that resulted in the submission of allegedly false claims for federal subsidies under the Higher Education Act. (Docket # 12).¹

Before the Court is Defendants' motion to dismiss Relator's first amended complaint for lack of subject matter jurisdiction. (Docket # 49).²

2. RELATOR'S FIRST AMENDED COMPLAINT

Below, the Court briefly summarizes the factual allegations and legal claims set forth in Relator's first amended complaint. (Docket # 12).

In order to obtain certification of eligibility to participate in programs for federal subsidies under the Higher Education Act, Defendants entered into Program Participation Agreement(s) (“PPA(s)”) with the federal government certifying Defendants' future compliance with, inter alia, “the statutes and regulations for institutional eligibility....” (“Eligibility Requirements”) (Id. at ¶ 3). However, Defendants did so notwithstanding their “actual knowledge that ... their representations of adherence were and are false....” (Id. at ¶ 8).

In particular, Defendants perpetrated the following violations of Eligibility Requirements: (i) “directly compensa[ting employees] based upon success in securing enrollments” in contravention of the incentive compensation restrictions codified at “20 U.S.C. § 1094(a)(20) ” (Id. at ¶¶ 63–67); (ii) providing the Accrediting Council for Independent Colleges and Schools with inaccurate information—“misleading and inflated [job] placement figures and data,” “forg[ed] ... faculty performance reviews,” and grade data reflecting grade inflation—in violation of “20 U.S.C. § 1094(a)(21) ” (Id. at ¶¶ 68–79); (iii) “falsifying student attendance records” in violation of “20 U.S.C. §§ 1091b, 1094 ” (Id. at ¶¶ 54, 57 and 61); and (iv) inflating student grades to “maintain a cumulative C average” in violation of “20 U.S.C. § 1091 ” (Id. at ¶¶ 36 and 48–53).

Moreover, “[d]uring the 2008–2009 school year, and upon information and belief, from 2006 to the present, Defendants submitted or caused to be submitted false claims and/or applications for Title IV/HEA funding.” (Id. at ¶ 32).³

These false claims are actionable under § 3729(a)(1) because of Defendants': (i) causal nexus to the false funding applications; together with (ii) knowledge of: (a) the Eligibility Requirements (by virtue of executing PPA(s) certifying future compliance with such requirements); and (b) on-going violation(s) of one or more of such requirements.

In addition, Defendants fraudulently “used”—within the meaning of § 3729(a)(2) —the PPA(s) (which formed the foundation for their institutional eligibility) when Defendants made (or caused students to make or use) false funding applications because Defendants knew that the PPA(s)' certification(s) of compliance with Eligibility Requirements were not accurate.⁴

3. DEFENDANTS' SECOND MOTION TO DISMISS

Defendants' motion to dismiss Relator's first amended complaint for lack of subject matter jurisdiction argues that: (i) Relator's entire case should be dismissed under the jurisdictional bar set forth in 31 U.S.C. § 3730(e)(4) because Relator's allegations are based upon publicly disclosed allegations and he lacks direct and independent knowledge of the information on which his allegations are based (rendering him ineligible for the so-called “original source” exception to the prior public disclosure bar to suit); and (ii) Relator's claims predicated upon alleged violations of the incentive compensation ban set forth in 20 U.S.C. § 1094(a)(20) should be dismissed under the FCA's first-to-file rule, codified at 31 U.S.C. § 3730(b)(5). (Docket # 49).

In Section Four below, the Court addresses these arguments in turn.

4. DISCUSSION

4.1 Does the Public Disclosure Rule Bar Relator's Claims?

4.1.1 Relevant Statutory Iterations

As noted supra in Section Two, Relator's first amended complaint brings claims for the period from 2006 to the present. (Docket # 12, ¶ 32).

Effective March 23, 2010, the statutory subsection in the FCA embodying the prior public disclosure rule— 31 U.S.C. § 3730(e)(4) —was amended without any clear manifestation of Congressional intent that the changes be applied retroactively. Graham County Soil and Water Conversation Dist. v. U.S. ex rel. Wilson, 559 U.S. 280, 130 S.Ct. 1396, 1400 n. 1, 176 L.Ed.2d 225 (2010) ; see also Hughes Aircraft Co. v. U.S. ex rel. Schumer, 520 U.S. 939, 117 S.Ct. 1871, 1876, 138 L.Ed.2d 135 (1997) and U.S. ex rel. Goldberg v. Rush University Medical Center, 680 F.3d 933, 934 (7th Cir.2012). Therefore, the legal effect of conduct is assessed under the law that existed when the conduct took place. Hughes, 117 S.Ct. at 1876 ; Goldberg, 680 F.3d at 934.

Accordingly, on the face of Relator's complaint, it would appear that both the version of § 3730(e)(4) in effect prior to the March 2010 amendment (“Pre–Amendment Public Disclosure Rule”), and its successor (“Post–Amendment Public Disclosure Rule”), are pertinent to this case because Relator claims that Defendants' alleged fraudulent conduct spanned from 2006 to the present.⁵

4.1.2 Pre–Amendment Public Disclosure Rule

The Pre–Amendment Public Disclosure Rule provided that:

“No court shall have jurisdiction over an [FCA] action ... based upon the public disclosure of allegations or transactions [1] in a criminal, civil, or administrative hearing, [2] in a congressional, administrative, or Government Accounting Office report, hearing, audit, or investigation, or [3] from the news media, unless ... the person bringing the action is an original source of the information.” § 3730(e)(4)(A) [ ].

Graham County, 130 S.Ct. at 1401 ; Pub.L. No. 99–562, § 3, 100 Stat. 3153 (1986).

A separate statutory provision define[d] an “original source” as “an individual who has direct and independent knowledge of the information on which the allegations are based and has voluntarily provided the information to the Government before filing an action under this section which is based on the information.”31 U.S.C. § 3730(e)(4)(B).

Id.

Congress added this [rule] to the FCA in order to avoid the “risk that unnecessary ‘me too’ private litigation would divert funds from the Treasury.” [United States ex rel. Goldberg v. Rush Univ. Med. Ctr., 680 F.3d 933, 934 (7th Cir.2012) ]. With this congressional purpose in mind, [the Seventh Circuit has] previously interpreted the phrase “based upon [a] public disclosure” to mean “substantially similar to publicly disclosed allegations,” in accordance with virtually every other circuit that has interpreted this phrase. [Glaser v. Wound Care Consultants, Inc., 570 F.3d 907, 920 (7th Cir.2009).]

Leveski, 719 F.3d at 828.

4.1.2.1 Allegations “Based Upon” Public Disclosure?

Accordingly, the Court's jurisdictional inquiry in this case begins with a determination of whether Relator's allegations are substantially similar to publicly disclosed allegations. Id. To answer that question, the Court “at this stage [asks] whether [Relator's] allegations ‘rest on genuinely new and material information.’ ” Leveski, 719 F.3d at 835 (citing to Goldberg, 680 F.3d at 936 ).⁶

Here, Relator makes an extraordinarily consequential concession at the outset of his brief opposing Defendants' motion:

In support of their Motion to Dismiss, Defendants attach more than one hundred exhibits that they claim demonstrate that Nelson's allegations have been publically disclosed. For purposes of this motion only, Nelson concedes that his allegations have been “publically disclosed ” pursuant to 31 U.S.C. § 3730(e)(4) [ ].

(Docket # 56, 9–10) (emphasis added). Significantly, Relator excludes from his concession only one of the “more than one hundred exhibits” that Defendants filed. (Docket # 56, 10 n. 5). This lapse by Relator matters because: (i) “[a]t each stage of the jurisdictional analysis, the plaintiff bears the burden of proof,” Glaser v. Wound Care Consultants, Inc., 570 F.3d 907, 913 (7th Cir.2009) (a qui tam case parsing § 3730(e)(4) ); (ii) Relator concedes that his arguments regarding whether his allegations rest on genuinely new and material information —which, under Leveski, is “[a]ll we care about at this stage” 719 F.3d at 835 —account for “only those disclosures specifically addressed in the body of Defendants' memorandum in support of their Motion” “[b]ecause it is not possible to compare every single disclosure in the 30–page limit proscribed by the Court” (Docket # 56, 12 n. 6); and (iii) Relator does not appear (or claim) to have requested leave to file an oversized brief pursuant to Civil Local Rule 56(b)(8)(B).

With the benefit of the foregoing analysis, the Court is obliged to...