Fraud Enforcement and Recovery Act of 2009 Increases Risks for Higher Education

At relative lightning speed, Congress passed the “Fraud Enforcement and Recovery Act of 2009” (FERA), which President Obama signed into law on May 20, 2009. By amending the civil False Claims Act, 31 U.S.C. § 3729 et seq, FERA dramatically expands the risk of liability for institutions receiving federal funds. The implications for higher education are troubling, especially in light of the federal government’s intensified focus on colleges and universities.

The False Claims Act penalizes the “knowing” submission of false or fraudulent claims to the United States government. (“Knowing” is defined under the statute to include both actual knowledge and “reckless disregard,” or “deliberate ignorance.”) Penalties are severe. Violators are subject to treble damages plus civil penalties of up to $11,000 for each false claim submitted.

Under certain conditions, the False Claims Act also permits private citizens to file lawsuits on behalf of the United States. These actions are referred to as qui tam or “whistleblower” lawsuits, and the person who brings them is permitted by statute to share in any recovery that is obtained for the government and to recover their attorneys’ fees. These generous monetary rewards provide private plaintiffs with a strong incentive to pursue whistleblower litigation. For violators who regularly conduct business with the government, they may face administrative penalties such as suspension, debarment, or exclusion from participating in federally funded programs, including student financial aid programs.

Expanding the Scope and Enforcement of the False Claims Act

FERA increases the risks to higher education by greatly expanding the scope and enforcement of the False Claims Act, including, among other things:

• Expanding the definition of “claim” to include demands for payments made by subcontractors and subgrantees to entities receiving federal funds. To illustrate, if a college receives a Department of Education funded contract or grant, then a request for payment may be subject to the federal civil False Claims Act. Similarly, when a university receiving federally funded research grants subcontracts with outside vendors to perform portions of that research, those vendors’ claims for payment now explicitly fall within the ambit of the statute. Thus, if the vendor or subcontractor submits a false or inaccurate invoice, or certification of progress, and the university knows of the inaccuracy, or by the exercise of reasonable due diligence would discover the inaccuracy, and nevertheless passes the claim on to the federal government, the university could be held liable under the False Claims Act.
• Expanding the reach of the so-called “reverse false claim” provision to include the retention of overpayments and possibly even the failure to pay administrative fines. Consequently, if a federal research grant permits advances for costs, and the costs associated with the research turn out to be less than anticipated, then it may be a violation of the civil False Claims Act if the recipient does not refund the overpayment.
• Affirmatively allowing the federal government to share information with False Claims Act whistleblowers as well as state agencies named as co-plaintiffs in a False Claims Act lawsuit. This information sharing lowers the barriers and increases the incentives for would-be whistleblowers to bring suit, regardless of the strength of their own evidence.

Until recently, many educational institutions were able to fly under the government’s radar while health care providers and commercial contractors served as primary targets. However, in recent years, universities with medical schools, hospitals, or clinics, or institutions conducting various forms of federally funded research, are gaining the attention of enforcement authorities for various breaches of the legal and regulatory requirements applicable to those programs.

In many instances, the government’s theory of False Claims Act liability rests upon alleged violations of contractual or regulatory provisions. For example, during the past year alone, educational institutions have settled the following False Claims Act allegations:

• New Jersey University Hospital. On June 9, 2009, the Department of Justice announced that the University of Medicine and Dentistry of New Jersey agreed to a $2 million settlement to resolve civil False Claims Act allegations that its hospital defrauded Medicaid. The University Hospital is alleged to have submitted duplicate claims for payment to Medicaid for outpatient physician services that were also being billed by the treating physicians themselves. The whistleblower who initiated the lawsuit will receive $801,000.
• Alta College. On April 20, 2009, Alta College entered a $7 million False Claims Act settlement to resolve allegations that the college made false representations to receive federal student financial aid. Specifically, the whistleblower asserted that Alta College misrepresented that it met Texas state licensing requirements related to (a) state job-placement reporting and (b) program compliance with professional license requirements. The whistleblower who initiated the lawsuit will receive $1.19 million.
• Cornell University, Weill Medical College. On March6, 2009, the Department of Justice and Weill Medical College of Cornell entered into a $2.6 million settlement involving allegations of false statements made to the National Institutes of Health and the Department of Defense in connection with Weill’s federal grant applications. An investigator with Weill allegedly failed to disclose the full extent of her various active research projects, depriving the government of its ability to assess the investigator’s ability to perform the projects described in the grant application. Weill allegedly knew, or should have known, that this investigator failed to fully disclose her active research projects because the totality of her research commitments exceeded 100 percent of her available time.
• Yale University. On December 23, 2008, Yale University agreed to pay $7.6 million to settle two types of allegations that it violated the False Claims Act in managing more than 6,000 federally funded research grants. The first set of allegations charged that some researchers improperly transferred unrelated costs to a federal grant account. The accounting transfers allegedly occurred when the federal grant was about to expire, and any unused funds were to be returned to the government. Secondly, the government alleged that researchers submitted false time and effort reports so that their “summer salaries” were improperly paid from federal grants. The researchers reportedly charged 100 percent of their summer effort to federal grants when, in fact, they expended significant effort on other unrelated work.
• St. Louis University. On July 8, 2008, St. Louis University agreed to a $1 million settlement of a civil False Claims Act lawsuit which alleged that the University’s School of Public Health had defrauded the government by overstating the time certain faculty members were spending on grants received from the Centers for Disease Control and Prevention. The school allegedly failed to comply with federal requirements to maintain a system that accurately tracked hours that were spent on federal grant programs. The whistle-blower who initiated the claim was awarded $190,000.

These five cases demonstrate the potential traps for the unwary in tracking, accounting, and reporting federal funds, and the government’s growing commitment to strictly enforce regulations applicable to federally funded programs. FERA provides the government with an even bigger hammer.

Educational institutions receiving, using, or administering federal dollars face a substantial compliance challenge. Because of FERA, this challenge is even greater. Establishing pro-active, comprehensive and effective compliance policies and procedures to ensure that federal funds are appropriately used and distributed in accordance with the terms and conditions of the institutions’ grants, contracts, or other programs, is the best defense to claims that the institution “knowingly” or “recklessly” mishandled those funds.