U.S. v. Corinthian Colleges, 10–55037.
| Citation | 11 Cal. Daily Op. Serv. 10284,655 F.3d 984,2011 Daily Journal D.A.R. 12316,272 Ed. Law Rep. 852 |
| Decision Date | 08 June 2011 |
| Docket Number | No. 10–55037.,10–55037. |
| Parties | UNITED STATES of America, ex rel., Plaintiff,andNyoka Lee, aka Seal 2; Talala Mshuja, aka Seal 3, Plaintiffs–Appellants,v.CORINTHIAN COLLEGES, aka Seal A; Ernst & Young LLP, aka Seal B; David Moore, aka Seal C; Jack D. Massimino, aka Seal D; Paul St. Pierre, aka Seal E; Alice T. Kane, aka Seal F; Linda A. Skladany, aka Seal G; Hank Adler, aka Seal H; Terry O. Hartshorn, aka Seal I, Defendants–Appellees. |
| Court | U.S. Court of Appeals — Ninth Circuit |
OPINION TEXT STARTS HERE
Scott D. Levy, Law Offices of Scott D. Levy & Associates P.C., Houston, TX, for the appellants.Brad D. Brian, Blanca F. Young, Munger Tolles & Olson LLP, Los Angeles, CA, for appellee Corinthian Colleges, Inc.Timothy J. Hatch, James L. Zelenay, Jr., Gibson, Dunn & Crutcher LLP, Los Angeles, CA; Bruce M. Cormier, Ernst & Young LLP, Washington, DC, for appellee Ernst & Young LLP.Appeal from the United States District Court for the Central District of California, Philip S. Gutierrez, District Judge, Presiding. D.C. No. 2:07–cv–01984–PSG–MAN.Before: BETTY B. FLETCHER and N. RANDY SMITH, Circuit Judges, and RUDI M. BREWSTER, District Judge.**
Nyoka Lee and Talala Mshuja (“Relators”), qui tam relators who bring this action on behalf of the United States government, appeal the district court's judgment dismissing, without leave to amend, their original complaint (“Complaint”) against Corinthian Colleges, Inc. (“Corinthian”); David Moore, Jack D. Massimino, Paul St. Pierre, Alice T. Kane, Linda A. Skladany, Hank Adler, and Terry O. Hartshorn (collectively “Individual Defendants”); and Ernst & Young LLP (“EY”), under Federal Rule of Civil Procedure 12(b)(6). Relators allege that Corinthian, with the help of EY, falsely certified to the Department of Education (“DOE”) its compliance with the Higher Education Act's (“HEA”) ban on recruiter-incentive compensation in order to receive federal education funds, thereby violating the False Claims Act (“FCA”). The district court granted Corinthian's and EY's motions to dismiss the Complaint under Federal Rule of Civil Procedure 12(b)(6). The district court concluded that Relators had failed to allege a false statement and scienter, two elements of the FCA, because Corinthian's recruiter Compensation Program as alleged falls within the HEA Safe Harbor Provision promulgated by the DOE. Relators timely appealed. We have jurisdiction under 28 U.S.C. § 1291, and we reverse and remand.
The federal government distributes funds under Title IV of the HEA, 20 U.S.C. § 1094, in order to assist with the costs of secondary education. In order to receive federal funds under the HEA, schools must enter with the DOE into a Program Participation Agreement, in which they agree to abide by a host of statutory, regulatory, and contractual requirements. U.S. ex rel. Hendow v. University of Phoenix, 461 F.3d 1166, 1168 (9th Cir.2006) (“ Hendow ”); see also 34 C.F.R. § 668.14(a) (2010). Among these requirements is a recruiter-incentive compensation ban, which prohibits institutions from paying recruiters “incentive payments” based on the number of students they enroll. More specifically, this ban prohibits schools from “provid[ing] any commission, bonus, or other incentive payment based directly or indirectly on success in securing enrollments or financial aid to any persons or entities engaged in any student recruiting or admission activities or in making decisions regarding the award of student financial assistance.” 20 U.S.C. § 1094(a)(20). “This requirement is meant to curb the risk that recruiters will ‘sign up poorly qualified students who will derive little benefit from the subsidy and may be unable or unwilling to repay federally guaranteed loans.’ ” Hendow, 461 F.3d at 1168–69 (citation omitted).
In 2002, the DOE amended its previous regulations and created a “safe harbor” provision interpreting and clarifying this ban on recruiter-incentive compensation. The regulation provides that an educational institution may, without violating the ban on incentive compensation, provide “payment of fixed compensation, such as a fixed annual salary or a fixed hourly wage, as long as that compensation is not adjusted up or down more than twice during any twelve month period, and any adjustment is not based solely on the number of students recruited, admitted, enrolled, or awarded financial aid.” 34 C.F.R. § 668.14(b)(22)(ii)(A) (2010) (“Safe Harbor Provision”). Both the ban on incentive compensation and the Safe Harbor Provision were in effect when this suit was filed.1
Corinthian, a public company headquartered in Orange County, California, operates for-profit vocational schools throughout the United States. The Individual Defendants are members of Corinthian's Board of Directors. EY is the independent auditor of Corinthian. Relators are a former employee of and an independent contractor to Corinthian.
On March 26, 2007, Relators filed under seal a qui tam action on behalf of the United States government, 31 U.S.C. § 3729 et seq., against Corinthian, the Individual Defendants, and EY (collectively “Defendants”). See 31 U.S.C. § 3730(b)(1). In their Complaint, Relators assert against Defendants four causes of action under the False Claims Act (“FCA”), 31 U.S.C. § 3729(a)(1), (2), (3), (7) (current version at 31 U.S.C. § 3729(a)(1)(A), (B), (C), (G)). Relators also assert several state law claims. On February 25, 2009, the United States gave notice it would not intervene in the action. As relevant here, the allegations in the Complaint are as follows.
Corinthian receives billions of dollars from the federal government under Title IV of the HEA. Despite the HEA's ban on incentive compensation, Corinthian, “as a matter of corporate practice,” “pay[s] recruiters bonuses amounting to 2.5% to 10% of their base pay based on the number of students they recruit.” More specifically:
As a matter of corporate practice since at least July 2005, recruiters have been required to meet a certain enrollment quota, depending on their salary grade and title. Those recruiters that exceed their quotas receive raises of 2.5% to 10% of their base salary, every six months, depending on the number of new recruits they sign up. The bonus criteria are set forth in a matrix designed by Corinthian. Employees failing to meet their quotas are disciplined, demoted, or terminated.
The promotion guidelines applicable to Corinthian recruiters are presented in a document entitled Corinthian Admissions Representative Compensation Program (“Compensation Program”), which is attached to the Complaint as Exhibit A. Defendants do not contest the authenticity of this document. See Lee v. City of Los Angeles, 250 F.3d 668, 688 (9th Cir.2001).
According to the Complaint, Corinthian and the Individual Defendants are liable to the United States under the FCA because of their
The Complaint also alleges that EY “falsely certified that Corinthian was in compliance with recruiter compensation prohibitions.” EY allegedly “rubber stamped the information provided to it by Corinthian” and “issued its compliance audits and financial statement audit opinions knowing them to be false and/or in reckless disregard of the truth or falsity of the information provided to the United States.” EY thereby “fraudulently caused the United States to pay Title IV, HEA Program funds to Corinthian by such false and fraudulent compliance audit and financial statement audit opinions.”
In essence, then, Relators allege that Corinthian and the Individual Defendants violated the HEA by firing admissions representatives who failed to enroll a minimum number of students, and by compensating admissions representatives based on the number of students they enrolled. Relators additionally allege that Defendants certified to the DOE Corinthian's compliance with the HEA ban on incentive compensation in order to collect federal funds for which they were ineligible, in violation of 31 U.S.C. § 3729(a)(1), (2), (3), and (7) (current version at 31 U.S.C. § 3729(a)(1)(A), (B), (C), (G)).
On August 3, 2009, Corinthian and the Individual Defendants moved to dismiss Relators' Complaint pursuant to Federal Rules of Civil Procedure 12(b)(6), 12(b)(1), and 9(b). On the same day, EY filed a separate motion to dismiss under the same provisions. The district court granted both motions, concluding that Relators failed under Rule 12(b)(6) to state an FCA claim. The district court held that the Complaint failed to allege that Corinthian's Compensation Program violated the HEA, that is, that Corinthian made any false statement to the United States government in certifying their compliance with that statute. The district court reasoned that the challenged recruiter Compensation Program falls within the DOE Safe Harbor Provision because, under its guidelines, increases in recruiter salaries are not awarded “solely” on the basis of the number of new enrollees that the recruiter achieved. The court also reasoned that, because Corinthian reasonably relied upon the Safe Harbor Provision, it could not have acted with scienter as required by the FCA. Because the district court held the FCA claims against the Individual Defendants and EY were “contingent upon Corinthian Collages' liability,” it also dismissed with prejudice the claims against these parties. Finally, the district court dismissed the state law claims on the ground...
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