United States v. Sanford-Brown, Ltd.

• Decision Date: 08 June 2015
• Docket Number: No. 14–2506.,14–2506.
• Parties: UNITED STATES of America, Plaintiff, v. SANFORD–BROWN, LIMITED, et al., Defendants–Appellees. Appeal of Brent M. Nelson.
• Court: U.S. Court of Appeals — Seventh Circuit

788 F.3d 696

UNITED STATES of America, Plaintiff

v. SANFORD–BROWN, LIMITED, et al., Defendants–Appellees.Appeal of Brent M. Nelson.

No. 14–2506.

United States Court of Appeals, Seventh Circuit.

Argued Jan. 8, 2015.

Decided June 8, 2015.

Matthew Dean Krueger, Attorney, Office of the United States Attorney, Milwaukee, WI, Charles W. Scarborough, Attorney, Department of Justice, Washington, DC, for Plaintiff.

James H. Kaster, Attorney, Minneapolis, MN, for Brent M. Nelson.

Martin M. Loring, Attorney, Derek T. Teeter, Attorney, Husch Blackwell LLP, Kansas City, MO, Daniel J. Vaccaro, Attorney, S. Edward Sarskas, Attorney, Michael Best & Friedrich LLP, Milwaukee, WI, for Defendants–Appellees.

Before BAUER, MANION, and ROVNER, Circuit Judges.

Opinion

MANION, Circuit Judge.

Brent Nelson spent six months as the Director of Education at Sanford–Brown College, a for-profit educational institution located in Milwaukee, Wisconsin. After he resigned, Nelson initiated this suit under the False Claims Act. Based on its receipt of federal subsidies from the U.S. Department of Education, Nelson alleges that the college's recruiting and retention practices resulted in the transmission of thousands of false claims to the government, potentially subjecting the college and its corporate parent to hundreds of millions of dollars in liability. After the United States declined to intervene, discovery commenced and the district court pared down Nelson's claims in a series of orders that concluded with a grant of summary judgment in favor of Sanford–Brown.

On appeal, and with support from the United States as, amicus curiae Nelson challenges the district court's application of the False Claim Act's subject matter jurisdictional bar; dismissal of defendant Career Education Corporation for failure to comply with Fed.R.Civ.P. 9(b) ; denial of Nelson's motion for leave to file a second amended complaint; and grant of summary judgment in favor of Sanford–Brown on the merits, including its rejection of the theory of implied false certification. Sanford–Brown has also filed a motion to seal and return in this court. We affirm the judgment of the district court and grant Sanford–Brown's motion to seal and return.

I. Background

The False Claims Act (FCA) is “the primary vehicle by the Government for recouping losses suffered through fraud.” 31 U.S.C. § 3729 et seq. The Attorney General may bring actions under the FCA directly in the name of the United States. 31 U.S.C. § 3730(a). Alternatively, a private person known as a “relator” may bring a qui tam action “in the name of the Government.” 31 U.S.C. § 3730(b)(1). If the qui tam action results in the recovery of money for the government, the relator shares in the award. See 31 U.S.C. § 3730(d).

As relevant here, the FCA imposes civil liability on any person who “knowingly presents, or causes to be presented” to the United States or its representatives “a false or fraudulent claim for payment or approval,” 31 U.S.C. § 3729(a)(1) (2006–2015), or “knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim,” 31 U.S.C. § 3729(a)(1)(B) (2010–15).¹ “Although the FCA uses the seemingly straightforward word ‘knowingly,’ the statute's state of mind element is actually quite nuanced.” U.S. v. King–Vassel, 728 F.3d 707, 712 (7th Cir.2013). To establish liability under the FCA, the defendant must have acted with “actual knowledge,” or with “deliberate ignorance” or “reckless disregard” to the possibility that the submitted claim was false. 31 U.S.C. § 3729(a)(1)(A), (b). Because any of these three states of mind will suffice, the FCA does not require proof of specific intent to defraud. 31 U.S.C. § 3729(a)(1)(B). The FCA imposes civil penalties and treble damages as remedies for each violation. 31 U.S.C. § 3729(a)(1)(G).

A. The Higher Education Act

In order to receive federal education subsidies under Title IV of the Higher Education Act (HEA), an institution must enter into a Program Participation Agreement (PPA) with the U.S. Secretary of Education. 20 U.S.C. § 1094(a). Federal law provides that each PPA “shall condition the initial and continuing eligibility of an institution to participate in a program [for Title IV subsidies] upon compliance with [certain] requirements.” 20 U.S.C. § 1094(a)(1)-(29). These requirements include the obligation to abide by a panoply of statutory, regulatory, and contractual requirements. In sum, the PPA includes certifications of existing facts and forward-looking promises that the institution will abide by certain statutes and regulations attendant to Title IV. We refer to these requirements as “Title IV Restrictions.”

B. The parties

One of the many beneficiaries of the HEA's subsidies, student loan, and grant programs was Career Education Corporation (CEC), the parent company of a nationwide network of for-profit colleges and universities, including Sanford–Brown, Limited (formerly known as Ultrasound Technical Services, Inc.) (SBL), which owned and operated Sanford–Brown College in Milwaukee, Wisconsin (SBC) at all times material to this proceeding.

From June 2008 through January 2009, Brent Nelson was the Director of Education at SBC. Nelson's responsibilities included maintaining accreditation compliance related to academic progress and attendance; developing and implementing retention policies and practices; maintaining a student management database and generating appropriate reports; and completing “Green Files,” which report faculty qualifications and graduate and placement rates to accreditors.

Nelson's tenure at SBC was brief but—according to Nelson—it was not uneventful. During his period of employment at SBC, Nelson concluded that staff, professors, administration, and ownership had engaged in many instances of fraudulent conduct in connection with the admission and retention of students for the purpose of maintaining Title IV HEA funding.

In July 2012, Nelson filed a complaint under seal against the defendants specifically alleging that since 2006, the three defendants (CEC, SBL and SBC) had violated—and were continuing to violate—federal regulations. Specifically, Nelson alleged that these entities violated provisions that: i) prohibited them from paying incentive compensation to certain types of employees involved in admissions and recruiting; ii) required them to maintain accreditation; iii) required them to refund to the U.S. Department of Education portions of Title IV funds for certain students who failed to complete at least 60% of a term; iv) prohibited them from harassing students to attend class; v) required students who received Title IV funds to maintain a minimum GPA or other adequate progress towards graduation; and vi) prevented them from admitting students with remedial needs into accelerated programs (collectively, the “disputed Title IV Restrictions”). In February 2013, the government filed its decision not to intervene and the seal was lifted. In April 2013, Nelson filed his first amended complaint.

C. Proceedings in the district court

Substantial motion practice ensued. On June 11, 2013, the defendants filed a joint motion to dismiss. On June 13, 2013, the district court entered its scheduling order, setting the cut-off date for dispositive motions at January 3, 2014, and set trial for April 14, 2014. On November 22, 2013, the district court granted in part and denied in part the defendants' motion to dismiss. U.S. v. Career Educ. Corp., 2013 WL 6162673 (E.D.Wis., Nov. 22, 2013). The district court granted the motion to dismiss on the harassment and premature admission claims and dismissed co-defendant CEC pursuant to Fed R. Civ. P. 9(b). Id. at *6–9. On November 27, 2013, defendants filed a second motion to dismiss—this time for lack of subject matter jurisdiction.

But before the district court had a chance to rule on defendants' motion to dismiss for lack of subject matter jurisdiction, Nelson filed a motion for leave to file a second amended complaint to bring CEC back into the case based on “recent discovery.” Nelson filed this motion on the court-prescribed deadline for dispositive motions, and defendants objected based on the timing (the motion was filed forty-two days after the court's order dismissing CEC) and on grounds that it would be unduly prejudicial to reel a defendant back in after the parties had proceeded through the end of discovery and the dispositive motion deadline with the understanding that CEC was no longer a defendant in the case. On January 17, 2014, the district court denied Nelson's motion for leave to file a second amended complaint.

The court then turned to the motion to dismiss for lack of subject matter jurisdiction. On March 17, 2014, the district court entered an order concluding that it lacked subject matter jurisdiction over most of Nelson's allegations because they were either based upon publically disclosed allegations (and he lacked independent knowledge of the information on which his allegations were based, rendering him ineligible for the “original source” exception to the prior public disclosure bar), or were barred by the FCA's first-to-file rule. U.S. v. Sanford–Brown, Ltd., 27 F.Supp.3d 940 (E.D.Wis.2014). After referring to this case as “a shadow of its former self,” the district court held that its subject matter jurisdiction would be limited to Nelson's allegations from the start of the 2008 academic school year at SBC until the date he resigned his position in January 2009. Id. at 948.

On March 27, 2014, the district court entered an order reiterating that it retained jurisdiction because Nelson qualified as an original source for some claims, and confirmed that it would proceed to rule on the pending summary judgment motion directed at the merits of those remaining claims. U.S. v. Sanford–Brown, Ltd.,

2014 WL 1272098 (E.D.Wis., March 27, 2014). On June 13, 2014, the district court granted the defendants' motion for summary judgment. U.S. v....