Judicial Decisions

United States ex rel. Mackillop v. Grand Canyon Education, Inc., et al., 2022 WL 4084444 (D. Mass.)

Industry: Higher Education

Topics: Materiality, Scienter

In Mackillop, the relator, a university counselor, brought suit against Grand Canyon Education, Inc., an educational service company that provides support services to colleges and universities, and Grand Canyon University (collectively Grand Canyon), alleging that Grand Canyon violated the FCA by applying for and receiving federal grants and financial aid while failing to disclose its violations of the “Incentive Compensation Ban” (Compensation Ban) – a statute and set of Department of Education regulations that prohibit schools from compensating counselors and recruiters on the basis of how many students they enroll.

After the close of discovery, Grand Canyon moved for summary judgment on three grounds: (1) there was no evidence of any violation of the Compensation Ban; (2) there was no triable evidence that representations regarding Grand Canyon’s compliance with the Compensation Ban were material; and (3) there was no triable evidence that Grand Canyon’s misrepresentations were made with knowledge of their falsity.

The court denied Grand Canyon’s summary judgment motion. Regarding Grand Canyon’s argument that there was no evidence of a Compensation Ban violation because its compensation plans were based on tenure, the court found a dispute of material fact as to whether there were such violations given evidence that Grand Canyon’s compensation plans were based on both tenure and sales volume.

Grand Canyon also argued that any such misrepresentation was not material, because the government knew of its alleged violations, including by virtue of the filing of the instant case, and took no action in response. The Court rejected this argument for three reasons. First, the relator’s complaint was merely a set of allegations, and courts should not rely on the government’s response to mere allegations in assessing materiality. Second, the government disputed that it had actual knowledge of Grand Canyon’s alleged violations. Although Grand Canyon asserted that it submitted the compensation plans at issue to the Department of Education, there was a factual dispute as to whether such submissions occurred given the Department of Education’s denials of ever having received them. Third, the court held that even if the government had knowledge, there was evidence that there were legitimate reasons why the government might not withdraw funding even after learning of the non-compliance, such that the government’s knowledge of the wrongdoing was not by itself dispositive on the issue of materiality.

Lastly, Grand Canyon urged the Court to apply the Safeco standard in analyzing scienter and argued that the undisputed facts demonstrated that Grand Canyon intended for the school to comply with the Compensation Ban, as shown by (1) Grand Canyon’s dedication of significant resources towards designing policies for compliance, and (2) that Grand Canyon did not knowingly or recklessly violate the Compensation Ban.

The Safeco standard provides a framework to analyze scienter for legally false claims. Under the standard, a defendant who acted under an incorrect interpretation of the relevant underlying statute or regulation did not act with reckless disregard if, regardless of the defendant’s subjective intent, “(1) the interpretation was objectively reasonable and (2) no authoritative guidance existed that might have warned defendant away from its interpretation.” [1] The court recognized that while some courts have applied the Safeco standard to evaluate scienter, others applied a similar, but distinguishable “gross-negligence” – plus standard, defining recklessness as a “state of mind in which one ‘knows or has reason to know of facts that would lead a reasonable person’ to ascertain that harm is likely.”[2] While recognizing this split, the Court nonetheless did not decide the issue of what standard should apply because it determined that there was a disputed factual issue under either standard, given evidence of Grand Canyon’s ignoring explicit instructions by its attorneys not to engage in the conduct alleged to have violated the Compensation Ban.

Accordingly, the court denied Grand Canyon’s motion for summary judgment in its entirety.

Takeaways: As this decision notes, the circuit split on the applicability of Safeco to the FCA’s “knowledge” element is not a binary one, with the Fourth Circuit having staked out its own position on Safeco in United States ex rel. Sheldon v. Allergan Sales, LLC, 24 F.4th 340, 347–48 (4th Cir. 2022).

This decision also highlights the limitations of arguing the government’s knowledge of the falsity of the claim as a defense against materiality. The court viewed materiality as a disputed issue where even if the government knew of the false claims, there were legitimate reasons for the government not to seek recoupment of the allegedly false claims.…

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