Ninth Circuit Analyzes Implied False Certification Standard Under Escobar


On August 24, the U.S. Court of Appeals for the Ninth Circuit, in U.S. ex rel. Scott Rose, et al., v. Stephens Inst., dba Acad. of Art Univ., affirmed the U.S. District Court for the Northern District of California’s order denying the defendant’s motion for summary judgment in a qui tam action brought under the False Claims Act. The Ninth Circuit address questions of law posed in the wake of the U.S. Supreme Court’s decision in Universal Health Serv., Inc. v. United States ex rel. Escobar, regarding the tests for establishing falsity and materiality.

The False Claims Act imposes liability on anyone who “knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval.” The Ninth Circuit, in U.S. ex rel. Hendow v. University of Phoenix, confirmed that a successful False Claims Act claim requires

“(1) a false statement or fraudulent course of conduct,
(2) made with scienter,
(3) that was material, causing
(4) the government to pay out money or forfeit moneys due.”

However, the Ninth Circuit notes that the Supreme Court’ Escobar decision has “unsettled” the state of this circuit’s law with regard to the test for falsity and materiality.

With respect to the first test, a finding of falsity can be satisfied by (1) an express false certification, i.e., “the entity seeking payment [falsely] certifies compliance with a law, rule or regulation as part of the
process through which the claim for payment is submitted,” or (2) an implied false certification, i.e., the “entity has previously undertaken to expressly comply with a law, rule, or regulation [but does
not], and that obligation is implicated by submitting a claim for payment even though a certification of compliance is not required in the process of submitting the claim.”

Under Escobar, the implied certification theory can be a basis for 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.”

In the instant case, the Ninth Circuit went on to reason that

“The [Escobar]Court did not state that its two conditions were the only way to establish liability under an implied false certification theory. But our post-Escobar cases—without discussing
whether Ebeid [ex rel. United States v. Lungwitz] has been fatally undermined—appear to require Escobar’s two conditions nonetheless. We are bound by three-judge panel opinions of this court. We conclude, therefore, that Relators must satisfy Escobar’s two conditions to prove falsity, unless and until our court, en banc, interprets Escobar differently.” (Internal citation omitted.)

Under the instant case, the Ninth Circuit found that

“a reasonable trier of fact could conclude that Defendant’s actions meet the Escobar requirements for falsity. In the Federal Stafford Loan School Certification form, Defendant specifically represented that the student applying for federal financial aid is an ‘eligible borrower’ and is ‘accepted for enrollment in an eligible program.’ Because Defendant failed to disclose its noncompliance with the incentive compensation ban, those representations could be considered ‘misleading half-truths.’ That is sufficient evidence to create a genuine issue of material fact and, therefore, to defeat summary judgment.”

With respect to materiality, in Escobar, the Supreme Court elaborated on what can and cannot establish materiality, clarifying that

“’Whether a provision is labeled a condition of payment is relevant to but not dispositive of the materiality inquiry.’ Therefore, ‘even when a requirement is expressly designated a condition of payment,
not every violation of such a requirement gives rise to liability.’ Instead, the Court explained, “materiality looks to the effect on the likely or actual behavior of the recipient of the alleged misrepresentation, meaning the government.” (Internal citations omitted).

In the instant case, the Ninth Circuit, applying the Escobar standard of materiality, concluded

“Defendant has not established as a matter of law that its violations of the incentive compensation ban were immaterial. 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…. Under Defendant’s 2006–2008 compensation scheme, admissions representatives stood to gain as much as $30,000 and a trip to Hawaii simply by hitting their enrollment goals. And under Defendant’s 2009–2010 scorecard compensation scheme, representatives’ salaries could be adjusted by as much as $23,000 for meeting their enrollment goals. Those large monetary awards are quite unlike a small, occasional perk. Rather, those awards are precisely the kind of substantial incentive that Congress sought to prevent in enacting the ban on incentive compensation.”

Circuit Judge N.R. Smith, in his dissent, confirmed that he agreed with the “Majority’s opinion through Section B of the Discussion Section.” Judge Smith, however, parted ways regarding (1) the validity of Hendow, in light of the Supreme Court’s decision in Escobar and (2) “whether, under Escobar’s ‘demanding’ and ‘rigorous’ materiality standard, there was sufficient evidence of a ‘material’ violation of the Incentive Compensation Ban (ICB) to defeat summary judgment.” Judge Smith went on to confirm that he “would reverse the district court’s materiality finding, vacate the judgment, and remand for additional discovery and further briefing.”