The opinion of the court was delivered by: McVerry, J.
MEMORANDUM OPINION AND ORDER OF COURT
Pending before the Court are DEFENDANTS' MOTION TO DISMISS PURSUANT TO FEDERAL RULES OF CIVIL PROCEDURE 12(b)(1) AND 12(b)(6), AND, IN THE ALTERNATIVE, MOTION TO STRIKE UNDER FEDERAL RULE OF CIVIL PROCEDURE 12(f) (Document No. 145) and DEFENDANTS' MOTION TO DISMISS COMPLAINT IN INTERVENTION BY THE DISTRICT OF COLUMBIA (Document No. 165). Defendants (collectively "EDMC") filed briefs in support of each motion. The United States, Intervenor States and Relators, and the District of Columbia filed briefs in opposition; EDMC filed a consolidated reply brief; Plaintiffs filed a joint sur-reply brief; and EDMC filed a sur-sur-reply brief. Plaintiffs also filed a notice of supplemental authority, to which EDMC responded. Needless to say, the motions are now ripe for disposition. The Court commends counsel for the high quality of their written advocacy.
EDMC is one of the largest providers of post-high school education in America and operates over one hundred schools. Plaintiffs allege that EDMC paid incentive compensation to the employees who recruit new students to attend their numerous affiliated schools, referred to as Associate or Assistant Directors of Admissions ("ADAs"), in violation of Title IV of the Higher Education Act of 1965 ("HEA"), 20 U.S.C. § 1070 et seq., and EDMC's Program Participation Agreements ("PPA"). As a result of EDMC's alleged violation of the "Incentive Compensation Ban," Plaintiffs contend that EDMC falsely represented its eligibility to receive federal student aid funds. Plaintiffs aver that since July 1, 2003, EDMC and/or students enrolled in EDMC schools have wrongfully obtained over eleven billion dollars ($11,000,000,000) in federal student aid funds and millions more in state funds. Plaintiffs seek treble damages under the federal and state False Claims Acts and have also asserted a number of common law claims.
Governmental financial support of students, beginning with the GI Bill,*fn1 has been widely viewed as an enlightened social policy and investment in the nation's future. As explained in In re Brunner, 46 B.R. 752, 756 (S.D.N.Y. 1985): "[T]hose whose past work or credit record might foreclose them from the commercial loan market are able to obtain credit at subsidized rates to advance their education. Those who might obtain loans only at exorbitant rates are similarly able to obtain low cost, deferred loans. . . . it is undeniable that guaranteed student loans have extended higher education to thousands who would otherwise have been forced to forego college or vocational training." The government "offers loans at a fixed rate of interest, and it does so almost without regard for creditworthiness. Indeed, because it bases its loan decisions in part on student need, it arguably offers loans selectively to the worst credit risks." Id. EDMC represents that its students come from traditionally underserved groups, and about half are minorities.
In Association of Accredited Cosmetology Schools v. Alexander, 979 F.2d 859 (D.C. Cir. 1992), the Court provided a succinct summary of how the student loan program is structured:
Under Title IV of the Higher Education Act of 1965, students may obtain "Guaranteed Student Loans" ("GSLs") to pay their post-secondary tuition and expenses. Schools wishing to participate in the GSL program must apply to the Department of Education ("Department") for certification as "eligible institutions" under the HEA. As one might expect, such certification depends on the schools' satisfaction of several statutory and regulatory requirements. If a school's application is approved, the school must sign a contract with the Department called a "Program Participation Agreement." In signing the Agreement, the school agrees, inter alia, "to comply with all the relevant program statutes and regulations governing the operation of each Title IV, HEA Program in which it participates." Program Participation Agreement, at 2. The school also agrees that the Agreement "automatically terminates ... [o]n the date the institution no longer qualifies as an eligible institution." Id. at 6. Once both parties have signed the Program Participation Agreement, participating lenders are authorized to make GSLs to the school's students. State or non-profit agencies guarantee the repayment of the GSLs. The Department, in turn, "reinsures" the guarantee agencies, meaning that it will pay off a defaulted loan with federal funds after specified collection efforts have proven futile.
Id. at 860 (citations omitted). The risk of defaults on student loans is borne not by the educational institution but by the students and taxpayers, who absorb the cost of any defaults. Id.
Because the schools receive payment in full, there is little economic incentive for them to limit student enrollments. This has led to perceived abuses of government funding by some schools. See generally "Abuses in Federal Student Aid Programs," Sen. Rep. No. 102-58 (May 17, 1991) ("Senate Report") (unscrupulous elements have exploited "both the ready availability of billions of dollars of guaranteed student loans and the weak and inattentive system responsible for them, leaving hundreds of thousands of students with little or no training, no jobs, and significant debts that they cannot possibly repay. While those responsible have reaped huge profits, the American taxpayer has been left to pick up the tab for the billions of dollars in attendant losses."); See also Adam J. Williams, Note, "Fixing the "Undue Hardship" Hardship: Solutions for the Problem of Discharging Educational Loans Through Bankruptcy," 70 U. Pitt. L. Rev. 217, 231-32 (2006) ("Currently, over 3,000 schools are considered 'qualified lenders' under federal loan programs with little consideration given to the qualifications for eligibility to the programs. This has created the somewhat undesirable situation in which schools can loan money to students and be guaranteed repayment by the government, allowing them to increase tuition at a more rapid pace. They receive the benefit of full payment while the rest of the population pays the costs of default. For schools, therefore, there is no real risk of default."). Accord United States v. ITT Educational Services, Inc., 2012 WL 266943 at *2 (S.D. Ind. January 30, 2012) (For-profit schools "possess unique characteristics that arguably divorce their productivity from their incentives, potentially encouraging behavior that runs afoul of the HEA.").
The Incentive Compensation Ban was originally enacted by Congress in 1992, shortly after the Senate Report, and remains in place. Specifically, 20 U.S.C. § 1094(a)(20) states: "The institution will not provide any commission, bonus, or other incentive payment based directly or indirectly on success in securing enrollments or financial aid to any persons or entities engaged in any student recruiting or admission activities or in making decisions regarding the award of student financial assistance. . . ." The Incentive Compensation Ban was intended to curb the risk that recruiters will "sign up poorly qualified students who will derive little benefit from the subsidy and may be unable or unwilling to repay federally guaranteed loans." United States ex rel. Main v. Oakland City Univ., 426 F.3d 914, 916 (7th Cir. 2005). In United States ex rel. Lopez v. Strayer Educ., Inc., 698 F. Supp.2d 633, 635 (E.D. Va. 2010), the Court commented:
The underlying concern here is that institutions, motivated by profit rather than a legitimate educational purpose, will recruit unqualified students who will then find themselves unable to repay these loans, causing a significant loss to the U.S. government which: 1) pays the funds directly to the schools on behalf of the students; or 2) guarantees other loans and thus is liable in the event of default.
Thus, the ban on incentive payments and commissions is meant to curb eligible schools from recruiting unqualified students simply to fill quotas and turn a profit, which ultimately works to the detriment of the U.S. government.
Plaintiffs contend that EDMC has pursued such an enrollment-maximization strategy, and had a goal to dramatically increase student enrollment (from 4,500 in 2006 to 50,000 in 2011, Intervenor Complaint ¶ 128(a)). Plaintiffs aver that EDMC accepted all potential students who completed an application, regardless of their high school grades or the quality of their written essay. Intervenor Complaint ¶ 106. As pled, the annual federal student aid funds received by EDMC increased rapidly, from $656 million in 2003-2004 to $2.578 billion in 2010-2011. Intervenor Complaint ¶ 73, 80.
Although Congress enacted the Incentive Compensation Ban to combat perceived abuses of federal student aid funding, it did not completely outlaw the recruiting of students. Indeed, schools have a legitimate need to employ persons to recruit students. As the Strayer Educ. Court noted: "clearly not all compensation violates the Incentive Compensation Ban." 698 F. Supp.2d at 635. Moreover, it should be non-controversial to recognize that an employer is entitled to compensate a productive employee more favorably than a lesser performer. A school may consider a recruiter's success at recruiting students and adjust his/her salary based in part on that success. See 67 Fed. Reg. at 67,053 (HEA not intended to prevent schools from basing salary on "merit"); Accord United States v. Corinthian Colleges, 655 F.3d 984, 992 (9th Cir. 2011) ("Even as broadly construed, the HEA does not prohibit any and all employment-related decisions on the basis of recruitment numbers; it prohibits only a particular type of incentive compensation.")
Moreover, the Department of Education has clarified that certain compensation practices do not violate the Incentive Compensation Ban. In 2002, in response to questions and concerns from institutions, the Department of Education promulgated a regulation to create "Safe Harbors." The Department explained that the Safe Harbors were based on a "purposive reading" of the HEA, 20 U.S.C. § 1094(a)(20), i.e., that it was enacted "with the purpose of preventing an institution from providing incentives to its staff to enroll unqualified students." See 67 Fed. Reg. 67048-01, 67053-54 (November 1, 2002). The Department further explained that various payments to ADAs "constituted legitimate business practices that did not support the enrollment of unqualified students" and, thus, did not violate the Ban. The Department rejected the contention that the Safe Harbors would allow unscrupulous institutions to engage in the kinds of improper recruiting activities that originally gave rise to the Incentive Compensation Ban. Id.
The "Safe Harbor" regulation*fn2 , 34 C.F.R. § 668.14, provided in relevant part as follows:
(b) By entering into a program participation agreement, an institution agrees that-
(1)It will comply with all statutory provisions of or applicable to Title IV of the HEA, all applicable regulatory provisions prescribed under that statutory authority, and all applicable special arrangements, agreements, and limitations entered into under the authority of statutes applicable to Title IV of the HEA, including the requirement that the institution will use funds it receives under any Title IV, HEA program and any interest or other earnings thereon, solely for the purposes specified in and in accordance with that program;
(22)(i) It will not provide any commission, bonus, or other incentive payment based directly or indirectly upon success in securing enrollments or financial aid to any person or entity engaged in any student recruiting or admission activities or in making decisions regarding the awarding of title IV, HEA program funds, except that this limitation does not apply to the recruitment of foreign students residing in foreign countries who are not eligible to receive title IV, HEA program funds.
(ii) Activities and arrangements that an institution may carry out without violating the provisions of paragraph (b)(22)(i) of this section include, but are not limited to:
(A) The payment of fixed compensation, such as a fixed annual salary or a fixed hourly wage, as long as that compensation is not adjusted up or down more than twice during any twelve month period, and any adjustment is not based solely on the number of students recruited, admitted, enrolled, or awarded financial aid. For this purpose, an increase in fixed compensation resulting from a cost of living increase that is paid to all or substantially all full-time employees is not considered an adjustment.
In response to the Incentive Compensation Ban and Safe Harbor, EDMC developed a corporate policy for ADA compensation, called the Admissions Performance Plan (the "Plan"). EDMC provided guidelines and training on the Plan to ADAs and managers (Intervenor Complaint Exh. 4-6, 8). According to its terms, the Plan calculates ADA salaries based on a number of quantitative and qualitative factors, including the manager's evaluation of defined "quality factors" such as job knowledge, business practices and ethics, professionalism, customer service and initiative; the types and quantity of new students recruited over the previous year ("new student points"); an adjustment to reflect differences in labor costs in various markets; an increase for supervising people or projects; and years of service. The "quality points" and "new student points" are placed into a chart, known as the "matrix," that sets annualized baseline salary ranges for ADAs. There are separate provisions for compensation of new ADAs before they qualify to "go on the matrix."
All Plaintiffs assert that the Plan was a sham used to cover up for improper compensation practices. They contend that, as implemented, EDMC's "quality factors are nothing more than window-dressing, used to camouflage a compensation system that, in reality, is driven entirely by student enrollment numbers." The Relators and Intervenor States also allege that the Plan, as written, violates the Incentive Compensation Ban. The United States does not join the "as written" theory of liability.
This case was originally filed in 2007 by Relator Lynntoya Washington, a former ADA at the Art Institute of Pittsburgh Online Division, pursuant to the federal False Claims Act, 31 U.S.C. § 3730(b)(1), and various state-equivalent false claims acts. The case remained under seal for over four years, while the United States evaluated whether or not to intervene. On April 29, 2011, after numerous extensions of time, the United States filed a Notice of its Election to Intervene in this case. California, Florida, Illinois and Indiana also filed notices of intervention as of right, pursuant to their respective state-equivalent false claims acts. On May 2, 2011, Ms. Washington, joined by another relator-plaintiff, Michael Mahoney, a former Director of Training for EDMC (collectively, the "Relators"), filed a redacted version of their Second Amended Complaint (Document No. 84) (the "Relator Complaint").*fn3 The Relator Complaint remains the operative pleading as to claims on behalf of the non-intervening states of Massachusetts, Montana, New Jersey, New Mexico, New York and Tennessee.
On August 8, 2011 the United States, California, Florida, Illinois and Indiana (the "Intervenors"), filed a 16-count Joint Complaint in Intervention (Document No. 128) (the "Intervenor Complaint").*fn4 In addition to claims under the federal and state false claims acts, the Intervenors assert common law claims for mistake of fact, unjust enrichment, and fraud. On September 22, 2011, the State of Minnesota intervened pursuant to its state-equivalent false claims act and filed a separate Complaint (Document No. 141) (the "Minnesota Complaint").*fn5
On October 27, 2011, the District of Columbia ("D.C.") intervened pursuant to its false claims act and filed a separate Complaint (Document No. 155) (the "D.C. Complaint").*fn6 The Court denied a motion for permissive intervention filed by the Commonwealth of Kentucky. On October 5, 2011, the parties entered a Stipulation (Document No. 143) which deferred EDMC's response to Counts 6 and 8-14 of the Relator Complaint. Subject to that Stipulation, Defendants seek dismissal of all four pending complaints.
A motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6) is a challenge to the legal sufficiency of the complaint filed by Plaintiff. The United States Supreme Court has held that "[a] plaintiff's obligation to provide the 'grounds' of his 'entitle[ment] to relief' requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do." Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007) (citing Papasan v. Allain, 478 U.S. 265, 286 (1986)) (alterations in original).
The Court must accept as true all well-pleaded facts and allegations, and must draw all reasonable inferences therefrom in favor of the plaintiff. However, as the Supreme Court made clear in Twombly, the "factual allegations must be enough to raise a right to relief above the speculative level." Id. The Supreme Court has subsequently broadened the scope of this requirement, stating that "only a complaint that states a plausible claim for relief survives a motion to dismiss." Ashcroft v. Iqbal, -- U.S. --, 129 S. Ct. 1937, 1950 (2009).
However, nothing in Twombly or Iqbal has changed the other pleading standards for a motion to dismiss pursuant to Rule 12(b)(6). That is, the Supreme Court did not impose a new, heightened pleading requirement, but reaffirmed that Federal Rule of Civil Procedure 8 requires only a short, plain statement of the claim showing that the pleader is entitled to relief, not "detailed factual allegations." See Phillips v. County of Allegheny, 515 F.3d 224, 231 (3d Cir. 2008) (citing Twombly, 550 U.S. at 552-53). Additionally, the Supreme Court did not abolish the Rule 12(b)(6) requirement that "the facts alleged must be taken as true and a complaint may not be dismissed merely because it appears unlikely that the plaintiff can prove those facts or will ultimately prevail on the merits." Id. (citing Twombly, 550 U.S. at 553). As described in Fowler v. UPMC Shadyside, 578 F.3d 203, 206 (3d Cir. 2009), the Court must first distinguish between factual allegations and legal conclusions in the complaint and then determine whether the well-pleaded factual allegations and favorable inferences drawn therefrom show an entitlement to relief.
The more-rigorous pleading standard in Fed. R. Civ. P. 9(b) also applies to the False Claims Act claims because they allege fraud. United States ex rel Wilkins v. United Health Group, 659 F.3d 295, 301 n.9 (3d Cir. 2011); see also United States ex rel Pilecki-Simko v. Chubb Institute, 443 Fed. Appx. 754, 759 (3d Cir. 2011) (unpublished) (both Rule 8 and Rule 9 apply). Accordingly, plaintiffs "must state with particularity the circumstances constituting fraud or mistake." Id. The imposition of a heightened pleading requirement in fraud actions serves important objectives: "Rule 9(b)'s heightened pleading standard gives defendants notice of the claims against them, provides an increased measure of protection for their reputations, and reduces the number of frivolous suits brought solely to extract settlements." In re Burlington Coat Factory Securities Litigation, 114 F.3d 1410, 1418 (3d Cir. 1997). See also Illinois Nat. Ins. Co. v. Wyndham Worldwide Operations, Inc., 653 F.3d 225, 232-33 (3d Cir. 2011) ("Rule 9(b) exists to insure adequate notice so that defendants can intelligently respond.").
A plaintiff alleging fraud must state the circumstances of the alleged fraud with sufficient particularity to place the defendant on notice of the "precise misconduct with which [it is] charged." Lum v. Bank of America, 361 F.3d 217, 223-224 (3d Cir. 2004) (abrogated on other grounds by Twombly). To satisfy this standard, the plaintiff must plead or allege the date, time and place of the alleged fraud or otherwise inject precision or some measure of substantiation into a fraud allegation. See id. at 224; Frederico v. Home Depot, 507 F.3d 188, 200 (3d Cir. 2007) (same); In re Advanta Corp. Sec. Litig., 180 F.3d 525, 534 (3d Cir. 1999) (noting that plaintiffs averring securities fraud claims must specify "the who, what, when, where, and how: the first paragraph of any newspaper story.").
"Malice, intent, knowledge, and other conditions of a person's mind may be alleged generally." Fed. R. Civ. P. 9(b). The Supreme Court has explained that "generally" is a relative term: "In the context of Rule 9, it is to be compared to the particularity requirement applicable to fraud or mistake. Rule 9 merely excuses a party from pleading discriminatory intent under an elevated pleading standard. It does not give him license to evade the less rigid-though still operative-strictures of Rule 8." Iqbal, 129 S. Ct. at 1954; But see Morganroth & Morganroth v. Norris, McLaughlin & Marcus, P.C., 331 F.3d 406, 414 n.2 (3d Cir. 2003) ("The purpose of Rule 9(b) is to provide notice, not to test the factual allegations of the claim.")
Moreover, in Craftmatic Securities Litigation v. Kraftsow, 890 F.2d 628 (3d Cir. 1989), the Court of Appeals explained that Rule 9 must be applied flexibly to alleged corporate fraud:
Courts must be sensitive to the fact that application of Rule 9(b) prior to discovery "may permit sophisticated defrauders to successfully conceal the details of their fraud." Particularly in cases of corporate fraud, plaintiffs cannot be expected to have personal knowledge of the details of corporate internal affairs. Thus, courts have relaxed the rule when factual information is peculiarly within the defendant's knowledge or control. We agree that rigid enforcement in such circumstances could permit "sophisticated defrauders" to avoid liability. Nonetheless, even under a non-restrictive application of the rule, pleaders must allege that the necessary information lies within defendants' control, and their allegations must be accompanied by a statement of the facts upon which the allegations are based. Id. at 645 (citations omitted).
Except for the claims subject to the parties' stipulation, EDMC moves for complete dismissal of all of the Complaints filed in this case pursuant to Fed. R. Civ. P. 12(b)(6) and moves to strike certain averments pursuant to Fed. R. Civ. P. 12(f). *fn7 EDMC advances the following primary arguments: (1) the Compensation Plan, as written, complies with the Safe Harbor; (2) Plaintiffs failed to adequately plead the details of the alleged fraud to satisfy all the elements a prima facie case under the False Claims Act in support of the "as implemented" theory; (3) the Incentive Compensation Ban was a condition of participation, rather than a condition of payment, and therefore, the appropriate avenue for relief is regulatory enforcement and not the False Claims Act; (4) federal common-law claims are displaced by the complex regulatory regime created by Congress and the Department of Education to enforce the HEA; (5) the governments have received the benefit of their bargain, i.e., the education of students; (6) the state law pleadings fail for similar reasons; and (7) Mahoney's claims should be dismissed because he is a "second filed" relator. In a separate motion and brief, EDMC contends that the Complaint filed by D.C. is untimely. These contentions will be addressed seriatim.
I. Federal False Claims Act Theories
The False Claims Act enables the government to recover losses it has incurred as a result of fraud. ITT Educational, 2012 WL 266943 at * 1. Its roots can be traced to the Civil War, when it was enacted in response to contractors who sold faulty weaponry, rancid food and unseaworthy ships to the government. Id. Because it would be difficult for the government to discover and prosecute all potential violations, the False Claims Act "provides a qui tam enforcement mechanism, which allows a private party (i.e., a relator) to bring a lawsuit on behalf of the government and against an entity to recover money the government paid as a result of fraudulent claims." Id. As an incentive, relators are entitled to keep a percentage of the proceeds from any judgment or settlement in their cases. See 31 U.S.C. § 3730(d)(1) and (2). On the other hand, the statute contains mechanisms to minimize baseless suits brought by opportunistic relators. Id. The United States is entitled to intervene to prosecute the claim(s) on its own behalf, as has occurred in this case. The state law False Claims Acts are similarly structured.
Count I of the Relator Complaint asserts a claim under the federal
False Claims Act. Count I of the Intervenor Complaint is based on a
violation of the False Claims Act, 31 U.S.C. § 3729(a)(1), which was
in effect from July 1, 2003 to May 20, 2009.*fn8
Counts II and III are based on the False Claims Act, as amended by the
Fraud Enforcement and Recovery Act of 2009 ("FERA"), enacted at 31
U.S.C. §§ 3729(a)(1)(A) and (a)(1)(B), respectively.*fn9
The parties have not pointed to substantive differences between the versions of the
statute. *fn10 Under each version, the elements of a
prima facie case under the federal False Claims Act are: (1) the
defendant presented a false or fraudulent claim against the United
States; (2) the claim was presented to an agency or contractor of the
United States; and (3) the defendant knew the claim was false or
fraudulent. See Wilkins, 659 F.3d at 305; United States v. Thayer, 201
F.3d 214, 222--23 (3d Cir. 1999).
Although it is not apparent from the claims asserted in the Complaints, the Relators and Intervening States pursue two distinct theories of fraud under the False Claims Act: (1) that EDMC's written ADA compensation plan violates the Incentive Compensation Ban "as designed"; and (2) that EDMC has used the written compensation plan as a "sham" or coverup for its actual implementation of a compensation system based solely on quantitative ...