False Claims Act Enforcement Continues to Target Education Industry

A recent settlement agreement presents another example of how educational institutions can find themselves facing potential liability under the False Claims Act (FCA). The settlement illustrates how FCA liability remains a risk for universities and other education institutions awarded federal research grants as well as academic medical centers engaged in clinical research trials.

The Justice Department announced in October 2023 that it had entered into a FCA settlement agreement with Stanford University to resolve allegations that the university had submitted research grant proposals to several federal agencies without disclosing that certain faculty serving as principal investigators had received funding from foreign sources.

LIABILITY UNDER THE FALSE CLAIMS ACT

The FCA’s origins date back to the Civil War era, when Congress first enacted the law in the wake of fraud by Union Army suppliers. Today, following transformational amendments in 1986, 2009, and 2010, the FCA is more powerful and prevalent than ever.

Indeed, the FCA has become the federal government’s chief civil fraud enforcement tool, targeting traditional government, aerospace, and defense contractors; healthcare providers charging Medicare/Medicaid and other federal programs; and other business sectors, including education, insurance, banking, mortgage lending and servicing, and life sciences.

The FCA imposes liability for knowingly making false claims for payment to the federal government, with “knowingly” defined to include not only actual knowledge but also deliberate ignorance and reckless disregard. Claims can be false either because of the goods or services sold or because of false certifications concerning eligibility to bill the government.

The FCA further creates liability for so-called “reverse” false claims, which occur when a person knowingly avoids an obligation to pay money to the government, including when the person receives an overpayment from the government and fails to return it.

The FCA uniquely allows for private persons to bring suit in the name of the government. These suits, known as qui tam actions, allow “relators” to receive between 15% and 30% of the proceeds of the action, whether by settlement or judgment. Qui tam cases dominate the FCA docket, with a recent annual average of 600 to 700 new cases.

Upon a finding of liability, the FCA imposes treble damages—i.e., three times the loss sustained by the government because of the violation—plus statutory per-claim penalties ranging from approximately $13,000 to $27,000. Since the 1986 FCA amendments, the government has recovered more than $72 billion, with annual recoveries over the last 10 years averaging approximately $3.7 billion.

While the Justice Department does not separately report recoveries from education institutions or concerning research grants, FCA activity in this space remains steady, as evidenced by court decisions and settlements.

STANFORD’S SETTLEMENT

The conduct giving rise to the Stanford settlement involved research grants awarded by the National Science Foundation (NSF), NASA, the US Navy, the US Army, and the US Air Force. According to the settlement agreement, in which Stanford did not admit liability, the Justice Department alleged that, when applying for the research grants in question, Stanford failed to disclose that its faculty members named as principal investigators on the grant proposals received funding from various foreign sources and that one Stanford faculty member/principal investigator had affiliations with or received funding from a Chinese university.

According to the government, Stanford was required to make these disclosures in its grant proposals. The settlement, under which Stanford agreed to pay $1.9 million, indicates that this was an affirmative FCA action by the Justice Department, meaning no qui tam relator was involved.

OTHER FCA ACTIONS TARGETING EDUCATION INSTITUTIONS

The breadth of FCA activity in the education arena is illustrated by public settlements and litigation, including the following:

• In 2023, Yale University and one of its professors paid $1.5 million to settle claims that they failed to share with the government patent royalties from inventions developed while the professor worked at both the Department of Veterans Affairs and the university.
• In 2019, a university paid $112.5 million to settle FCA liability arising from allegations that it made false statements and falsified data on multiple federal grants issued by the National Institutes of Health (NIH) and US Environmental Protection Agency (EPA) over a 12-year period. A university employee received a “relator’s share” of more than $33 million from the settlement proceeds.
• In 2019, North Greenville University in South Carolina paid $2.5 million to settle FCA liability arising from alleged violations of the federal ban on incentive-based compensation for student recruiters. According to the Justice Department, the university paid a company (partly owned by the school) to recruit students and unlawfully compensated the company based on the number of students recruited. One of the owners of the recruiting company initially raised the allegations in a qui tam complaint and received $375,000 of the settlement proceeds.
• In 2018, the University of North Texas Health Science Center paid $13.1 million to settle claims that it inaccurately measured, tracked, and paid researchers for effort spent on certain NIH grants over a five-year period.
• In 2016, a state university paid $2.2 million to settle allegations by a qui tam relator that university attending physicians falsely billed federal healthcare programs for radiology reports prepared by medical residents.
• In 2015, the University of Florida paid almost $20 million to settle allegations that the university improperly charged the US Department of Health and Human Services (HHS) for salary and administrative costs, including improperly documented effort reports, on hundreds of federal grants over a five-year period.
• In 2012, a teaching university paid $1.1 million to settle FCA liability after making a voluntary disclosure to the government that it had improperly billed federal healthcare programs for medical services rendered by residents rather than by attending physicians.
• In 2012, the chief financial officer of UChicago Argonne, LLC, a wholly owned affiliate of the University of Chicago, which was the Management & Operating (M&O) contractor for the US Department of Energy’s Argonne National Laboratory, filed a qui tam action against the contractor alleging multiple violations of cost accounting standards (CAS) during contract performance.
• In 2009, the University of Phoenix paid $67.5 million to resolve allegations that it accepted federal financial aid while violating federal rules prohibiting the payment of incentive-based compensation tied to the number of students recruited. Two university employees acting as qui tam relators received $19 million from the settlement proceeds.
• In 2006, a relator filed a qui tam action against Cornell University and others alleging that the university submitted false claims to the NIH to obtain general clinical research center funding.
• In 2006, Columbia University paid $5.1 million to settle an FCA claim brought by a relator alleging that its hospital had submitted reimbursement claims to Medicaid for OB/GYN services that another entity provided.

KEY TAKEAWAYS

Education institutions are regular targets of FCA allegations, investigations, and litigation. According to government statistics, federal research and development expenditures to education institutions in FY2022 exceeded $53 billion, including funding from HHS ($30 billion), the Department of Defense ($7.9 billion), and the NSF ($6 billion).

In most instances, federal grant and funding recipients certify their eligibility for such awards, make representations regarding their research capabilities, attest to their compliance with cybersecurity regulations, submit effort reports, and/or certify compliance with other regulations and requirements during the course of performance. These activities remain fertile ground for FCA enforcement, including by persons within these institutions.

Education institutions that receive federal funding should be cognizant of the FCA risks and maintain effective compliance programs designed to educate participants as well as identify issues and conduct appropriate reviews. And when there are signs of a federal investigation, such as receipt of an agency subpoena or Civil Investigative Demand, compliance programs alone are not enough: the legal department within the institution should be promptly notified so that document preservation, internal investigation, voluntary or mandatory disclosures, and outside counsel assistance can be considered.