Third Circuit Addresses Tension Between Rules 8(a) and 9(b), Concluding That False Claims Act Plaintiffs Were Required to Meet Twombly/Iqbal Standard When Alleging Knowledge

The Third Circuit has made it clear that the Twombly/Iqbal pleading standard — which requires plaintiffs to plead enough facts to state a claim “that is plausible on its face” — applies to allegations of states of mind, such as knowledge and intent, notwithstanding Rule 9(b)’s allowance that such matters “may be alleged generally.”

In the qui tam action United States ex rel. Pilecki-Simko v. Chubb Inst., plaintiffs alleged that Defendants caused false claims to be filed, in violation of the False Claims Act, 31 U.S.C. § 3729 et seq., by making misrepresentations to the Department of Education and its accrediting agencies that enabled The Chubb Institute (“TCI”) to secure student financial aid pursuant to Title IV of the Higher Education Act. Seeking liability under the implied false-certification theory, it was alleged that Defendants falsely certified in the Program Participation Agreement (“PPA”) that TCI had complied with all applicable regulations, including the regulation prohibiting incentive compensation (which prohibits tying employee compensation to success in securing student enrollment), and therefore all student applications for federal financial aid were false claims under the statute. The District Court dismissed the Complaint because it failed to allege that Defendants “knowingly” made false claims to the U.S. government with the particularity required by Rule 9(b).

On appeal, Plaintiffs argued that the District Court wrongly required them “to allege more facts about [Defendants’] scienter than it should have,” because Rule 9(b) allows that “[m]alice, intent, knowledge, and other conditions of a person’s mind may be alleged generally.” But, as the Third Circuit noted, the Supreme Court clarified in Iqbal that “generally,” as it is used in Rule 9(b), “is a relative term” that must be viewed against the backdrop of Rule 9(b)’s particularity requirement for allegations of fraud. In other words, while “knowledge” may be pled “generally,” it must nevertheless meet Rule 8(a)’s still-stringent plausibility standard as described in Twombly and Iqbal. “Knowledge” allegations cannot be conclusory; they must be supported by facts. On this basis, the Third Circuit concluded that Plaintiffs failed to plausibly allege that Defendants “knowingly” made false claims.

The Third Circuit contrasted its holding in Pilecki-Simko with the Ninth Circuit’s decision in U.S. ex rel. Hendow v. Univ. of Phoenix, where the relators alleged that the “University staff openly bragged about perpetrating a fraud, that the University had an established infrastructure to deceive the government, and that the University repeatedly changed its policies to hide the fraud,” thereby avoiding a 12(b)(6) dismissal. Also serving as a counterpoint is the Tenth Circuit’s decision in U.S. ex rel. Lemmon v. Envirocare of Utah, Inc., in which the relators similarly listed “specific instances” of violations.

Pilecki-Simko thus makes clear that, while scienter may be pled more “generally” than other allegations required for a fraud claim, plaintiffs must allege facts showing that it is plausible that the defendant acted with the requisite state of mind.

Notably, the Third Circuit also concluded that Plaintiffs’ veil-piercing claim against the educational institution’s parent company, which was represented by Gibbons attorneys Michael R. McDonald and Christine A. Amalfe, was so bereft of merit as to warrant sanctions for a frivolous appeal under F.R.A.P. 38.

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