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Ninth Circuit Panel: Escobar Test for Implied Certification Liability Is Mandatory

August 28, 2018

Unless and until the US Court of Appeals for the Ninth Circuit, “en banc, interprets Escobar differently,” a Ninth Circuit panel, relying on past case law, has ruled that relators seeking to establish False Claims Act liability under an implied certification theory must pass the two-part test laid out by the US Supreme Court in Escobar.

The US Supreme Court unanimously held in Universal Health Services, Inc. v. Escobar that the implied certification theory can form a basis for False Claims Act (FCA) liability where at least two conditions are satisfied: “[F]irst, the claim does not merely request payment, but also makes specific representations about the goods or services provided; and second, the defendant’s failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes those representations misleading half-truths.”[1] Noting that the Supreme Court in Escobar “did not state that its two conditions were the only way to establish liability under an implied certification theory,” a panel for the US Court of Appeals for the Ninth Circuit recently announced that it was bound by the court’s post-Escobar cases requiring the two conditions to be met.[2] Thus, on August 24, the Ninth Circuit held that satisfaction of Escobar’s requirements for falsity was mandatory to establish liability in an FCA case predicated on an implied false certification theory.[3]

In US ex rel. Rose v. Stephens Institute, the relators alleged that defendant Stephens Institute, an art school offering both graduate and undergraduate programs, violated the FCA by accepting federal funding provided through Title IV of the Higher Education Act despite its noncompliance with the US Department of Education’s incentive compensation ban (ICB). The ICB is one of several “statutory, regulatory, and contractual requirements” with which “schools must comply” to qualify for Title IV funds.[4] The ICB “prohibits schools from providing ‘any commission, bonus, or other incentive payment based directly or indirectly on success in securing enrollments or financial aid to any person or entities engaged in any student recruiting or admission activities.’”[5] According to the relators, despite receiving Title IV funds, Stephens Institute established policies that provided for incentive payments to “encourage admissions representatives to enroll more students.”[6]

Stephens Institute moved for summary judgment in the US District Court for the Northern District of California, but on May 4, 2016, the district court denied the motion. After the Supreme Court decided Escobar, Stephens Institute filed a motion for reconsideration. The district court denied Stephens Institute’s request, but granted its motion for an interlocutory appeal, certifying several questions regarding Escobar’s effect on Ninth Circuit precedent to the US Court of Appeals for the Ninth Circuit, including whether satisfaction of Escobar’s “two conditions [must] always be satisfied for implied false certification liability under the [FCA].”[7]

A panel of the Ninth Circuit found that two of its post-Escobar decisions—US ex rel. Kelly v. Serco, Inc., 846 F.3d 325 (9th Cir. 2017), and US ex rel. Campie v. Gilead Sciences, Inc., 862 F.3d 890 (9th Cir. 2017)—obligated it to hold that in cases predicated on an implied certification theory of liability under the FCA, relators are required to “satisfy Escobar’s two conditions to prove falsity.”[8] Notably, neither case addressed whether the Ninth Circuit’s pre-Escobar decision in Ebeid ex. rel. United States v. Lungwitz, 616 F.3d 993 (9th Cir. 2010), applying a broader implied certification theory with a lower standard of falsity, remained good law. Thus, in the Ninth Circuit, “unless and until” the US Court of Appeals for the Ninth Circuit, “en banc, interprets Escobar differently,” relators seeking to establish FCA liability under an implied certification theory must prove (1) that the claims at issue “make[] specific representations about the goods or services provided” and (2) that “the defendant’s failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes those representations misleading half-truths.”[9]

Applying Escobar’s materiality standard to the facts presented in Rose, the Ninth Circuit concluded that “[a] reasonable trier of fact could find materiality here because the Department’s payment was conditioned on compliance with the incentive compensation ban, because of the Department’s past enforcement activities, and because of the substantial size of the forbidden incentive payments.”[10]

With respect to the fact that Title IV funding was conditioned on compliance with the ICB, the court explained that the government’s “triple-conditioning of Title IV funds on compliance with the [ICB]” through statute, regulation, and contract was “certainly probative evidence of materiality.”[11]

Regarding the Department’s past enforcement activities, the court found that those activities supported a finding of materiality because the Department’s handling of “32 schools with substantiated violations” including recoupment of payments, detailed in two 2010 Government Accountability Office reports, showed that “the Department did care about violations of the [ICB] and did not allow schools simply to continue violating the ban while receiving Title IV funds.”[12] The court did not, however, analyze whether the “substantiated violations” were similar to the Stephens Institute’s alleged ICB violations.

And, as to the size of the forbidden incentive payments, the court explained that the incentives at issue were not “cups of coffee or $10 gift cards for recruiting higher numbers of students”—in which case “there would be no viable claim under the [FCA]”—but were instead schemes under which admissions representatives could receive “large monetary awards” for meeting certain enrollment goals.[13] The court explained that these “tremendous bonuses” were “precisely the kind of substantial incentive that Congress sought to prevent in enacting the ban on incentive compensation,” and that the size of the incentive payments, therefore, “counsel[ed] against a finding that Defendant’s noncompliance was immaterial.”[14]

In concluding that a reasonable finder of fact could find Stephens Institute’s alleged noncompliance with the ICB material, the court did not analyze whether the government “consistently refuses to pay claims in the mine run of cases based on noncompliance with the [ICB]” or whether it has paid claims despite knowing that the ICB was violated.[15] While Escobar identified those scenarios among the inquiries that “may help courts determine the likely or actual behavior of the government” for purposes of materiality, the court found the record evidence on those issues insufficient and, as a result, those inquiries “did not factor into [its] analysis.”[16]

The implications of the Ninth Circuit’s decision in Rose are twofold. First, the Ninth Circuit’s direction appears to be that, while not dispositive, the government’s designation of statutory, regulatory, or contractual requirements as conditions of payments is nearly dispositive on the question of whether compliance with those requirements is material. As the dissent observes, the majority’s finding of materiality in Rose hinges almost exclusively on “the fact that compliance with the ICB is a condition for payment” and that, as a result, the majority’s materiality inquiry did not meet the “rigorous” standard set forth by the Supreme Court in Escobar.[17] Under Rose, then, the implication is that in implied certification cases alleging noncompliance with statutory, regulatory, or contractual requirements designated as conditions of payment, it will be the defendants’ burden to produce evidence of immateriality, rather than the government’s or the relators’ burden to produce evidence of materiality. Second, by hedging its decision as required by Ninth Circuit precedent—as opposed to being compelled by the Supreme Court’s decision in Escobar—the majority in Rose leaves open the possibility for the Ninth Circuit sitting en banc to interpret Escobar in a manner that does not require Escobar’s definition of falsity to be met in all implied false certification cases.


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[1] 136 S. Ct. 1989, 2001 (2016).

[2] US ex rel. Rose v. Stephens Inst., No. 17-1511, slip op. at 12 (9th Cir. Aug. 24, 2018) (emphasis in original).

[3] Id. at 12.

[4] Id. at 9.

[5] Id. (quoting 20 U.S.C. § 1094(a)(20); 34 C.F.R. § 668.14(b)(22)).

[6] Id. at 7.

[7] Id. at 8 & n.2.

[8] Id. at 12.

[9] Id. at 11-12 (quotation omitted) (emphasis in original).

[10] Id. at 15-16.

[11] Id. at 16-17.

[12] Id. at 19.

[13] Id. at 20.

[14] Id.

[15] Id. at 17-18.

[16] Id. at 14, 17-18.

[17] Id. at 28-29 (Smith, J., dissenting).