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FCA Qui Notes
December 5, 2018

Art School Gets No Early Holiday Break From Ninth Circuit in Rose

Qui Notes: Unlocking the False Claims Act

The Ninth Circuit last week delivered a mixed bag of an opinion for defendants when it denied rehearing and rehearing en banc of its August decision affirming denial of summary judgment in U.S. ex rel. Rose v. Stephens Institute. On a positive note, the court reaffirmed that the Escobar two-part falsity test is mandatory in implied certification cases in the Ninth Circuit. But on the other hand, it applied a standard for materiality that the defense bar will say lacks teeth and is lower than the Supreme Court envisioned in Escobar.

The case came up to the Ninth Circuit on interlocutory appeal after both the district court and court of appeals certified three questions regarding falsity and materiality in light of Escobar. In this non-intervened qui tam, relators alleged that the university defendant violated the FCA when it obtained funding from the US Department of Education by falsely certifying compliance with Title IV of the Higher Education Act, which prohibits universities that receive federal funding from providing incentive payments to staff for recruiting students.

In August, the entire three-judge panel signaled its disagreement with two earlier unanimous circuit decisions, United States ex rel. Kelly v. Serco, Inc. and Gilead Sciences, Inc. v. U.S. ex rel. Campie, the second of which found that Escobar's two-part falsity test must be met to form the basis of a viable implied certification case. (Unanimous panel decisions are binding in the Ninth Circuit unless the court overrules the decisions en banc.) The Supreme Court held in Escobar that the implied false certification theory provides a basis for FCA liability "at least" when: (1) the claim not only requests payment but also makes "specific representations" regarding the goods or services provided; and (2) the failure to disclose noncompliance with material requirements makes such representations "misleading half-truths."

Now, even though the judges in Rose indicated that they would have interpreted Escobar differently ("Were we analyzing Escobar anew, we doubt that the Supreme Court's decision would require us to overrule" pre-Escobar circuit law that did not require the two-part test), the court declined to rehear the case en banc, cementing the Ninth Circuit's rule that the Escobar falsity conditions are mandatory to prove false certification.

Regarding materiality, the court followed its earlier pre-Escobar precedent from U.S. ex rel. Hendow v. University of Phoenix, which held that compliance with the Title IV incentive compensation ban was material, and found that the government's failure to limit, suspend, or terminate any school's access to federal student aid in 32 instances where it knew the schools had violated the incentive ban did not negate materiality. We would argue that this is "strong evidence," to borrow from Escobar, of immateriality, but the court found that a reasonable trier of fact could find that defendant's violations of the incentive ban were material because in many of the 32 instances, the government may have paid the claims, but required the non-compliant schools to take corrective action, pay fines, and in one instance, repay improperly awarded funds. This conclusion on materiality drew a dissent from one judge who pointed out that the majority failed to articulate the "demanding" and "rigorous" nature of the materiality standard imposed by Escobar. Our readers will not be surprised to hear that we agree with the dissent here. And now that the Supreme Court almost certainly will not weigh in on materiality in Campie (as we reported), courts very well may continue to reach different conclusions about the impact of the government's decision to pay. While some courts have found that alleged fraud is not material where the government continues to pay claims after learning of fraud, other courts (like the Ninth Circuit in Campie) seem to disagree, concluding that the government may have other reasons unrelated to the alleged fraud for continuing payment.

© Arnold & Porter Kaye Scholer LLP 2018 All Rights Reserved. This blog post is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.