The opinion of the court was delivered by: Claudia Wilken United States District Judge
ORDER GRANTING DEFENDANTS' MOTIONS TO DISMISS
Defendants U.S. Education Corporation (USEC), Silicon Valley Colleges, Western Career Colleges, Greg Nathanson, Ellis C. Gedney, Darryl Lindsey, Barbara Bickett, George Montgomery and Leslie E. Pritchard (collectively, USEC Defendants) move pursuant to Federal Rules of Civil Procedure 12(b)(6) and 9(b) to dismiss the first amended complaint (FAC) of Relators Mounthasone Bott and Susan Newman (collectively, Relators). Defendants Weworski & Associates (Weworski) and Almich & Associates (Almich) each separately move to dismiss the FAC on the same grounds. Relators oppose the motions. The matter was heard on July 1, 2005. Having considered all of the papers filed by the parties and oral argument on the motion, the Court grants the motions to dismiss.
Relators bring this qui tam action under the False Claims Act (FCA), 31 U.S.C. § 3729 et seq, against all Defendants on behalf of the United States to recover all federal educational grants, including Pell Grants, and all payments on federally insured educational loans used to fund students at SVC and WCC.
According to the FAC, SVC and WCC (hereinafter referred to collectively as the Colleges) are California corporations and "'proprietary institution[s] of higher education'" with multiple campuses in the San Francisco Bay Area region. FAC ¶ 24. They are subsidiaries of USEC, also a California corporation. Individual USEC Defendants Nathanson, Gedney, Lindsey, Bickett, Montgomery and Pritchard are executives, owners or administrators of USEC or its subsidiaries. Weworski is a certified public accountancy (CPA) firm in San Diego, California, that has conducted compliance examinations and financial audits for the Colleges. Almich is a CPA firm in Irvine, California, that has also conducted compliance examinations and financial audits for the Colleges.
Relators Bott and Newman were formerly employed as admissions representatives at the San Jose campus of SVC in 2003.
Relators allege that the Colleges falsely certified that they were in compliance with applicable federal law prohibiting incentive payments to admissions representatives. In order to be eligible to participate in the grant and loan programs authorized by Title IV of the Higher Education Act (HEA), 20 U.S.C. § 1070 et seq., an institution must enter into a Program Participation Agreement (PPA) with the Secretary of Education.
20 U.S.C. § 1094(a). The PPA conditions the Colleges' eligibility upon compliance with certain requirements, inter alia,
The institution will not provide 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 . . . .
Id. § 1094(a)(20). The Department of Education (ED) has promulgated "safe harbor" regulations, which clarify that institutions may provide their admissions representatives with 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. For this purpose, an increase in fixed compensation resulting from a cost of living increase that is paid to all or substantially all full-time employees is not considered an adjustment.
34 C.F.R. § 668.14(b)(22)(ii)(A). Nothing in the statute or the regulations addresses the conditions under which an institution may terminate its admissions representatives.
In addition to the PPA, HEA requires that participating institutions submit to the ED the results of annual audits. 20 U.S.C. § 1094(c)(1)(A)(i). These audits must be conducted by a qualified, independent organization "in accordance with standards established by the American Institute of Certified Public Accountants." 20 U.S.C. § 1099c(c)(5).
Relators allege that the Colleges pay their admissions representatives based on an incentive salary structure, in violation of the HEA, 20 U.S.C. § 1094(a)(20). Specifically, according to the FAC, a "so-called 'salary' was paid to Relators, and to all other recruiters employed at the Colleges' campuses, that was directly tied to an enrollment quota for that recruiter." FAC ¶ 47. Pursuant to this arrangement, recruiters who failed to enroll their minimum quota were terminated, while those who exceeded the minimum quota were retained and given raises. In addition, admissions representatives who failed to "convert" a minimum percentage of leads into enrollments were also terminated.
Relators identify two potential categories of resulting false certifications or false statements by USEC Defendants. First is the PPA, in which the Colleges agree to comply with all the requirements of 20 U.S.C. § 1094(a), including the ban on incentive compensation, in order to become eligible for participation in HEA programs. Second, Relators allege that the Colleges' management made false statements of compliance with the HEA to its ...