9th Circuit Confirms that Government and Relators Must Satisfy Escobar’s Two Conditions to Establish Implied False Certification Under the False Claims Act

On August 24, 2018, a panel of judges for the Ninth Circuit confirmed its prior rulings in US ex rel. Kelly v. Serco, Inc. and US ex rel. Campie v. Gilead Sciences, Inc., that the government and relators must satisfy the two-part test outlined by the Supreme Court in Universal Health Services, Inc. v. United States ex rel. Escobar in order to proceed under the implied certification theory of the False Claims Act.

The Ninth Circuit in Rose reviewed the district court’s denial of the defendant’s motion for summary judgment in a qui tam action brought under the False Claims Act.  The relators, former admissions officers at a higher education institution, alleged that the defendant school violated an incentive compensation ban that was included in its agreement with the Department of Education to receive federal funding by rewarding admissions representatives for enrolling more students.  While the Ninth Circuit panel affirmed the district court’s order denying the defendant’s motion for summary judgment, it did so by finding that relators must prove Escobar’s two conditions to prove falsity.

In Escobar, the Supreme Court held that the “implied certification theory can be a basis for liability, at least where [the following] two conditions are satisfied:” (i) the claim for payment “does not merely request payment, but also makes specific representations about the goods or services provided;” and (ii) “the defendant’s failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes those representations misleading half-truths.”  Despite arguments by the government and relator’s counsel interpreting the two-part test as sufficient but not necessary, the Ninth Circuit’s recent decision holds that the two conditions are mandatory in all implied false certification cases under the FCA.

Applying Escobar’s two-part test, the Ninth Circuit panel found that, due to the defendant’s failure to disclose its noncompliance with a ban on incentivized compensation, there was a material issue of fact as to whether it was a “half-truth” for the defendant-college to say a student borrower was an eligible borrower and was “accepted for enrollment in an eligible program.”  The Ninth Circuit panel was split 2-to-1 as to whether the false certification was “material.”  Under the FCA, “materiality” means having a natural tendency to influence, or be capable of influencing, the government to pay the claim.  The majority opinion deemed the Supreme Court’s directions as “creating a ‘gloss’ on the analysis of materiality,” and that the Supreme Court’s usage of the words “rigorous” and “demanding” only “give flavor to the [Supreme] Court’s discussion, [and] do not establish the test that the [Supreme] Court requires us to use.” Finding that there was a fact issue on materiality, the Court relied on, among other things, general evidence of the government’s enforcement activities against other education entities.

In a well-reasoned dissenting opinion, Judge N. Randy Smith forcefully disagreed with the majority’s interpretation of Escobar’s materiality requirements, noting that the Supreme Court called materiality “rigorous” and “demanding.”  Judge Smith found the majority’s discussion of materiality lacking such rigor, arguing that instead of adding mere flavoring to the discussion, the “rigorous” and “demanding” standard set forth “are the key in conducting the analysis the Supreme Court has instructed us to do.”

The case is United States ex rel. Rose, et al. v. Stephens Institute.