Ninth Circuit Reverses Dismissal of FCA Suit When Allegations Raised “Strong Inference” False Claims Were Actually Submitted

Posted by Michael D. Mann

On February 13, 2013, the United States Court of Appeals for the Ninth Circuit breathed new life into allegations that a for-profit college owned by Kaplan, Inc., violated the False Claims Act by submitting sham financial aid claims to the U.S. Department of Education. See United States ex rel. Jajdelski v. Kaplan, Inc., No. 11-16651, slip op.

The relator, Charles Jajdelski, a former admissions representative for Kaplan, Inc., alleged that Las Vegas, Nevada-based Heritage College violated the FCA by falsely seeking financial aid for students who either never enrolled at Heritage College or had dropped out of the school. Kaplan acquired Heritage College in May 2003. On October 25, 2003, Jajdelski attended Heritage’s graduation ceremony and allegedly discovered five boxes of diplomas that were never distributed to students. Jajdelski was concerned by the boxes of extra diplomas and made inquiries into the absence of the students. He was allegedly told by the college’s director of education that the diplomas had gone unused because Heritage College admissions representatives were required to sign up a certain quota of applicants per month, despite the fact that only 50% of the enrolled students actually participated in and completed the program. Instructors at the college allegedly kept the students enrolled in the program on their attendance sheets to prevent a return of federal aid funding after a student withdrew from the program. After Jajdelski was allegedly warned to keep his “nose” out of the financial aid status of students, he was terminated a mere ten days later.

Kaplan moved to dismiss the complaint for its failure to allege that Kaplan, the only defendant in the case, submitted false claims for financial aid or explain why Kaplan should be held responsible for conduct that allegedly happened before it acquired or had any ownership interest in Heritage College. The district court agreed and found that Jajdelski had failed, in his sixth amended pleading, to meet the heightened standard required of claims of fraud under Rule 9(b). In its July 7, 2011 Order granting dismissal, U.S. District Judge Kent J. Dawson concluded that “[a]t no point has Plaintiff stated his allegations with sufficient specificity relating to time, place, and the identity of the parties to the alleged fraud to put Kaplan on notice of the ‘particular misconduct which is alleged to constitute the fraud charged.’ Nowhere does Plaintiff identify the false claims that were submitted to the Government, or when or where these false claims were submitted or even by whom. According to the information provided in Plaintiff’s previous and most recent complaint, all of Plaintiff’s fraud allegations occurred at times prior to Defendant acquiring Heritage in May 2003. Under the standards governing successor liability, Defendant cannot be held liable for those activities as alleged in Plaintiff’s Complaint” without some demonstration that Kaplan continued the allegedly fraudulent conduct following its acquisition of Heritage College. See United States ex rel. Jajdelski v. Kaplan, Inc., No. 2:05-CV-1054 (KJD) (GWF) (D. Nev. July 7, 2011).

The Ninth Circuit disagreed and remanded. The Court, adopting the rationale of the Fifth Circuit in United States ex rel. Grubbs v. Kanneganti, 565 F.3d 180, 190 (5th Cir. 2009), found Jajdelski’s fraud claims under Rule 9(b) sufficient in so much as they alleged “particular details of a scheme to submit false claims paired with reliable indicia that lead to a strong inferencegt; that claims were actually submitted.” (Emphasis added). Specifically, Jajdelski met the pleading standard because he “allege[d] his first-hand experience of the scheme unfolding” and “describe[d] in detail, including the date, place, and participants, meetings during which the phantom student scheme was revealed.” The Court determined that the continued enrollment of non-attending students created at least a strong inference that Heritage College, and possibly Kaplan, had submitted financial aid claims for those students. Indeed, it would “stretch the imagination” to believe that “Kaplan employees fastidiously (and secretively) documented fake student enrollment statistics and met about them once the threshold for financial aid eligibility was crossed, ‘only for the scheme to deviate . . . at the last moment’ such that they did not submit those claims to the Department of Education.”

In a dissenting opinion, Judge Consuelo Callahan conceded that Jajdelski’s claims provided at least circumstantial support for his “phantom student” theory, but declined the invitation to “tie the extra diplomas, employee confessions, or wrongdoing by apparently everyone at all times to an actual false claim for financial aid by Kaplan.” (Emphasis in original). Judge Callahan acknowledged that Jajdelski did not have to provide representative examples to support each allegation, but concluded that he did not provide a representative false claim for any of the allegations or even provide a “strong inference” that Kaplan ever actually submitted a false claim.

The decision appears to be a split from the Fourth Circuit’s decision last month in United States ex rel. Nathan v. Takeda Pharmaceuticals North America, Inc., No. 11-2077, slip op. (4th Cir. Jan. 11, 2013), in which the Court rejected the relator’s argument that alleging a fraudulent scheme obviates the need to allege a specific false claim to satisfy Rule 9(b).