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United States ex rel Bott v. Silicon Valley Colleges

October 5, 2005


The opinion of the court was delivered by: Claudia Wilken United States District Judge


Defendants U.S. Education Corporation (USEC), Silicon Valley Colleges and Western Career Colleges (the Colleges), and Greg Nathanson, Ellis C. Gedney and Darryl Lindsey (collectively, USEC Defendants) move pursuant to Federal Rules of Civil Procedure 12(b)(6) and 9(b) to dismiss the second amended complaint (SAC) of Relators Mounthasone Bott and Susan Newman (collectively, Relators). Defendant Almich & Associates (Almich) separately moves to dismiss the SAC on the same grounds. Relators oppose the motions. The matters were heard on September 16, 2005.

Having considered all of the papers filed by the parties and oral argument on the motions, 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 the Colleges. The parties and claims are described in the Court's July 13, 2005 Order Granting Defendants' Motions to Dismiss.

As explained in that order, the Colleges must enter into a Program Participation Agreement (PPA) with the Secretary of Education in order to be eligible to participate in grant and loan programs authorized by Title IV of the Higher Education Act (HEA), 20 U.S.C. § 1070 et seq. 20 U.S.C. § 1094(a). The PPA conditions the Colleges' eligibility upon compliance with certain requirements, among others, 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).

In both the first amended complaint (FAC) and the SAC, Relators allege that Defendants falsely certified that the Colleges were in compliance with applicable federal law prohibiting incentive payments to admissions representatives. In the FAC, Relators alleged that they and other recruiters were paid a "so-called 'salary' . . . 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 also alleged in the FAC that Almich and another accounting firm, Weworski & Associates,*fn1 falsely certified in connection with annual audits that the Colleges were in compliance with federal eligibility requirements.

In its July 13, 2005 order, the Court dismissed the FAC pursuant to Rule 12(b)(6) for failure to state a claim and for failure to comply with Rule 9(b)'s requirement that the FCA allegations of fraud be plead with particularity.

The Court found that the FAC failed to state an FCA claim because the USEC Defendants' alleged system of recruitment quotas, in which employees who fail to meet the minimum enrollment quotas are fired and those who exceed the minimum are retained and given raises, fell within the safe harbor provisions of the ED's regulations. The Court reasoned that, although pay adjustments could not be based "solely" on the number of students recruited, the safe harbor provision reflected the ED's understanding that institutions could base salaries or salary increases on merit. The Court found that the regulations did not otherwise address the hiring and firing of admissions representatives or an institution's ability to set mandatory recruitment quotas. The Court found that, in fact, Relators have not alleged any conduct that falls outside the safe harbor regulations. For example, they have not alleged that the Colleges provide more than two salary adjustments in a year not related to cost-of-living, or adjustments based "solely on the number of students" recruited.

July 13 Order at 10. Because the practices alleged were protected by the regulations, the Court concluded that Defendants could not be held liable for fraud under the FCA, even if the ED regulations were inconsistent with the HEA.

In the SAC, Relators allege generally and repeatedly that the Colleges "were paying commissions and other incentive compensation to recruiters based solely on their success at securing enrollments." SAC ¶ 13; see also id. ¶ 17 ("recruiters at SVC were paid substantial raises based solely on their success at securing enrollments"), ¶ 19 ("All Sales Representatives at [SVC] were paid solely based on the number of students they enrolled. . . . The salary of each sales representative was based solely on their enrollments."), ¶ 20 ("the enrollment quotas are assigned to the individual Sales Persons on the basis of the salaries they receive"), ¶ 21 (alleging that Mr. Nathanson informed Ms. Bott that "recruiters were rewarded according to success at securing enrollments") and ¶ 27 (recruiters "were promised they would receive raises based solely on their success in securing enrollments beyond their minimum enrollment quotas . . . All recruiters who failed to meet their minimum enrollment quotas were terminated").

More specifically, Ms. Bott alleges that she had a minimum enrollment quota of approximately twelve students per month, and that she was fired after three months "solely because she failed to meet her enrollment quota." Id. ¶ 18. Relators allege that sales representative Indy De Croos was paid a starting salary of $40,000, and "received a $10,000 raise after his third month of employment solely based on the number of students he recruited. Indy received a second $10,000 raise later in the year based solely on his continued success as [sic] securing enrollments for the company." Id. ¶ 19. Relators also allege that other sales representatives were paid salaries varying between $50,000 and $90,000, but do not allege any additional details suggesting a specific relationship between those salaries and the number of students enrolled. Similarly, Ms. Newman alleges that, after enrolling eight students in her first two weeks of employment, she was told she "would receive a raise based solely on her ability to continue enrolling students" at that rate. Id. ¶ 24. One month later, she was "given a letter . . . stating that she was being ...

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