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Seventh Circuit Reverses $400,000 Sanction Against Qui Tam Attorney For Recruiting Relators, And Holds That Case Not Barred By Prior Qui Tam Lawsuit Against Same Defendant

Practicing qui tam attorneys may be particularly interested in a Seventh Circuit opinion issued this month in U.S. ex rel. Leveski v. ITT Educ. Servs., Inc., which involved close to $400,000 in sanctions imposed by a District Court on a relator’s counsel for the way in which counsel had recruited his client.  The relator, Barbara Leveski, was a former employee of ITT, a for-profit educational institution that offers post-secondary educational training throughout the United States.  Leveski was recruited to serve as a relator by Mississippi attorney who had identified ITT as a potential target for an FCA case and then hired a private investigator to find former ITT employees who were willing to be adverse to the company.

The District Court dismissed the case for want of jurisdiction under the public disclosure bar, finding Leveski’s allegations wholly “frivolous,” and accusing Leveski’s attorneys of “pluck[ing] a plaintiff out of thin air and tr[ying] to manufacture a lucrative case.”  The Seventh Circuit reversed on all accounts.  Recognizing that lawyers often play “a vital role in encouraging parties to litigate,” the Seventh Circuit held that Leveski’s claims were not barred merely because she “had not contemplated filing suit until Matusheski contacted her.”  The Seventh Circuit then proceeded to apply a stringent standard for dismissing FCA claims under the public disclosure bar.

Leveski alleged that during her tenure at ITT as a student recruiter and then as a financial aid administrator, her performance assessments and salary increases were directly dependent on the number of students she successfully recruited and assisted in obtaining financial aid.  This was in violation of federal regulations promulgated by the Department of Education (“DOE”) under the Higher Education Act (“HEA”), under which institutions that receive federal financial aid award money are prohibited from utilizing such incentive-based compensation.  Leveski’s FCA claims were premised on ITT’s false certifications of their compliance with these regulations.  ITT moved to dismiss Leveski’s claims under the public disclosure bar, asserting that they were similar to allegations raised in a prior lawsuit, United States ex rel. Graves v. ITT Educ. Servs., Inc., 284 F. Supp. 2d 487 (S.D. Tex. 2003).

The Seventh Circuit disagreed.  Although recognizing that at first blush, the Graves allegations were similar to those advanced by Leveski, the Seventh Circuit cautioned courts against viewing FCA claims at a high level of generality.  Reasoning that Leveski had “done more than ‘just add a few allegations’ to the Graves complaint,” the Court pointed to four “critical differences” that brought Leveski’s allegations outside the public disclosure bar:  (1) Leveski had worked for ITT for over a decade (a much longer time period than the Graves relators), and she thus had “greater potential than the Graves relators to possess relevant evidence about ITT’s compensation scheme that could directly impact her FCA claim;” (2) there was no “temporal overlap between the Graves allegations and Leveski’s allegations; (3) because the Graves relators worked only as student recruiters, Leveski was “able to present evidence about ITT practices in a second department, the financial aid office;” and (4) the scheme alleged by Leveski involved “a much more sophisticated—and more difficult to detect—violation of DOE requirements,” in other words, Graves involved first-generation fraud, while Leveski’s allegations appeared to involve second-generation fraud.  Consequently, the Court concluded that Leveski’s allegations were not “substantially similar” to those in the Graves case so as to make them “based on” a prior public disclosure.

Even if they had been, the Court further held that Leveski had direct and independent knowledge of her allegations sufficient to qualify her as an original source.  Reaffirming a prior holding, the Seventh Circuit stated, “[t]he question is whether the relator is an original source of the allegations in the complaint and not, as the district court supposed, whether the relator is the source of the information in the published reports,” here the allegations in Graves, which were brought by other relators.  The Court reasoned that only where a relator has “no knowledge whatsoever of the fraudulent conduct before hearing from an attorney,” is the relator’s knowledge not “direct.”  Similarly, it is only where “the relator would not have learned of the allegation or transactions independently of the public disclosure” that a relator’s knowledge will not be considered “independent.”

The Court found Leveski’s main evidence in support of her FCA claims as “personal and specific to her; it is not second- or third-hand evidence learned from another source like an attorney, a co-worker, or a prior lawsuit.”  In this respect, the Seventh Circuit distinguished Leveski’s claims from similar cases filed by the same Mississippi attorney against other for-profit educational institutions, in which his clients had “possessed little to no knowledge beyond what was already in the public domain,” giving rise to the appearance that the cases had been solely lawyer created.  The Seventh Circuit reasoned, however, that “[a]ttorneys are allowed to advise potential future clients of both the contents of the law and their rights under the law; it is upon that basis that attorneys are permitted to advertise their services. . . . After all, ‘potential clients rarely know in advance what services they do in fact need,’ and in some cases, potential clients do not know that they need any services from an attorney.” The Seventh Circuit’s opinion in U.S. ex rel. Leveski thus recognized the important roles played both by qui tam whistleblowers and by the qui tam lawyers.