Most people are not aware of the recent spate of False Claims Act (FCA) actions against nonprofit entities working through the federal courts. They involve "qui tam claims" brought by a specific relator on behalf of the United States government alleging fraud in the application for and forgiveness of Paycheck Protection Program (PPP) loans during the COVID-19 pandemic. The claims assert that the applicants fraudulently applied for PPP loans, which were statutorily limited to organizations having fewer than 500 employees, when they were not eligible because they had too many employees.
Lawsuit Against Twin Cities Nonprofits
Our team recently became familiar with this category of cases when a Firm client, a nonprofit educational institution, was listed as one of a handful of Twin Cities nonprofits named as defendants. The relator in the suit was an investigative journalist based in Ann Arbor, Michigan, without any disclosed connection to the Twin Cities nonprofits. She alleged that our client had more than 500 employees when applying for a PPP loan. Those allegations were based solely on the relator's review of publicly available information. Specifically, the relator compared the number of employees in our client's public PPP loan application to the number of employees listed on publicly available IRS Form 990s. Form 990 requires nonprofits to list their total number of W-2 employees in a calendar year. The relator based her FCA claims on her observation that the Form 990 total employee numbers were so much higher than the employee number on its PPP applications that the number of employees disclosed on the PPP application must be fraudulent.
A History of Meritless Lawsuits
Prior to filing suit against our client, the relator filed other FCA suits around the country. One such suit, in the Northern District of Texas, alleged that 20 defendants, mostly colleges and universities, also committed PPP fraud. In that case, the United States Attorney concluded that the claims were "not meritorious" and intervened to dismiss the case in December 2024.
Undeterred, the relator amended her Minnesota complaint in February 2025, adding, among other things, a novel new theory called "turnover rate." According to the Amended Complaint, the relator asserted that the numbers of employees listed in the defendants' PPP applications were knowingly false by comparing that number to the total number of employees on the Form 990s and asserting that year-to-year employee turnover was so high it could not explain the difference. By creating the novel turnover rate, the relator ignored applicable Small Business Administration (SBA) guidelines and regulations for PPP applications that: (1) instructed PPP applicants to use their average number of employees per pay period over the 12 months before applying to calculate the employee number and (2) to exclude federal work-study recipients, including many of our client's students.
Meeting the Original-Source Requirement
We were immediately skeptical of whether the relator could meet the requirements of applicable law to maintain the claims against our client. Under Eighth Circuit law, a relator must be an "original source" of the information in the complaint, meaning the relator must have direct and independent knowledge on which the fraud allegations are based. Independent knowledge is first-hand knowledge, whereas second-hand knowledge obtained from an individual with direct knowledge cannot be an original source as required by the FCA. Independent knowledge also cannot be derived from a public disclosure such as publicly available PPP applications and IRS Forms 990. Other than asserting that her supposed knowledge was based on her own experience, analysis and observations, the relator made no claim to have first-hand knowledge. Instead, she claimed that she "possesses direct information that is independent of and materially adds to" any publicly disclosed information. Because the relator did not claim to have, and did not have, any direct knowledge of or relationship with our client, the information that "materially adds to" the publicly available disclosures could only have referred to her novel turnover ratio theory that was based upon publicly disclosed information. We initially explained these concerns about the relator to her counsel and shared our conclusion that her allegations were insufficient under Federal Rule of Civil Procedure 11.
During a subsequent discussion with the relator's counsel, we also confirmed that our client did not have more than 500 employees when filing its PPP application or when seeking to have its PPP loan forgiven. We explained to the relator's counsel that, when our client's employee count was calculated according to the guidance from the SBA and federal regulations and work-study recipients were excluded, our client had at least 100 employees fewer than the 500-employee maximum. A person having direct and independent knowledge of our client and its operations in 2020 would have known as much. However, because the relator relied exclusively on publicly available information and was not an original source with direct and independent knowledge of our client, she relied on a novel and legally flawed theory to assert unsupportable claims in her lawsuit.
After being confronted with the overwhelming legal and factual flaws of her case, and less than six weeks after filing her amended complaint, the relator dismissed our client from her FCA suit. Significantly, the relator dismissed her claims with prejudice.
We understand that the relator and her counsel have filed similar unsupportable FCA complaints in other federal district courts, some of which are still under seal. We hope our client's experience in scrutinizing these allegations early and resisting the relator's untenable FCA claims will encourage other defendants caught up in such unsupportable litigation to do the same.
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