October 19, 2016

Plaintiffs’ Bar Steps Up Profitable False Claims Act Assault on Higher Education

The plaintiffs’ bar claims to stand for consumers — but they have a funny way of showing it, especially when it comes to those seeking affordable higher education.

First, as we posted about in July, the plaintiffs’ bar has trained its eyes on for-profit colleges and universities, in the form of a newly proposed Department of Education rule that could unleash a torrent of litigation against these educational institutions in the name of “debt relief.”

Now, we learn that the False Claims Act plaintiffs’ bar has stepped up its activity in suing colleges and universities.

As a bit of background, the False Claims Act (FCA) is a Civil War-era law originally meant to prevent profiteering by suppliers to the Union Army. The FCA imposes treble damages and penalties, and is frequently enforced by “whistleblowers” suing in the name of the government.

The FCA, however, has grown into a profit-generating tool that has been used and abused by the plaintiffs’ bar to cash in by suing any organization that does business with the federal government over allegations of fraud.

As three attorneys with WilmerHale point out in a recent Law360 op-ed, “research universities have increasingly become targets for False Claims Act actions, both by private plaintiffs and by the government.”

“Because the FCA began as a statute focused on government procurement and has only more recently been used with any regularity to target recipients of federal grants,” write attorneys Jonathan G. Cedarbaum, Mark B. Rotenberg, Alexandra B. Bonneau and David Beraka. “Many universities may not have focused on the full scope of this kind of potential jeopardy.”

For example, numerous research universities have faced FCA litigation over allegations of “errors on a grant application” or allegations over improper billing.

While fighting fraud and combatting misuse of federal funds is an important and noble cause, the FCA is a blunt instrument and is far from the best way to go about it.

For one thing, upwards of one-third of the dollars from settlements in FCA cases goes to the plaintiffs’ lawyers, rather than back into the taxpayer coffers. How does that benefit the taxpayers, much less the students at the college or university?

Second, even in FCA litigation that the college or university wins, it is forced to spend significant and valuable financial resources on legal costs to defend itself — resources that could otherwise go toward educating its students. 

Further, as ILR’s October 2013 report, Fixing the False Claims Act: The Case for Compliance-Focused Reforms, points out, the FCA has proven ineffective at actually preventing fraud.  

The government estimates that it loses approximately $72 billion to fraud, abuse, and improper payments each year, yet the FCA (as of 2013) had recovered only $35 billion since 1987—a tiny fraction of the estimated money lost over that period.  

ILR has proposed a number of reforms to the FCA, including government incentives for robust compliance programs by corporations (which could also be applied to universities), as well as the creation of more reasonable whistleblower incentives to prevent outrageous awards to whistleblowers and their attorneys.

As the litigious assault on higher education continues, however, it is important to realize that it’s not the students or taxpayers that are benefiting, but rather the plaintiffs’ bar that is cashing in.

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