Ninth Circuit Addresses Impact of Escobar’s Falsity and Materiality Requirements On Existing Circuit Precedent

In Escobar, the Supreme Court held that the implied false certification theory of liability is viable under the False Claims Act when “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.” As we have previously discussed here, courts are split as to whether Escobar’s two-part test is a mandatory baseline to demonstrate an implied false certification or merely one way to plead such a claim, leaving open the door for other variants of implied certification claims not explicitly identified by the Supreme Court.  Recently, in United States ex rel. Scott Rose, et al. v. Stephens Institute, No. 17-15111 (9th Cir. Aug. 24, 2018), the Ninth Circuit held that Escobar’s two-part test was mandatory—effectively overruling its pre-Escobar test for establishing implied certification claims outlined in Ebeid ex rel. United States v. Lungwitz, 616 F.3d 993 (9th Cir. 2010).

In Rose, former admissions representatives for Defendant Stephens Institute, doing business as Academy of Art University, alleged that the school fraudulently obtained funds from the U.S. Department of Education (“DOE”) by financially incentivizing its admissions personnel in violation of incentive compensation ban memorialized in the Participant Participation Agreement it signed with the DOE. The district court denied Defendant’s motion for summary judgment, but permitted an interlocutory appeal on the following question: “Must the ‘two conditions’ identified by the Supreme Court in Escobar always be satisfied for implied false certification liability under the False Claims Act, or does Ebeid’s test for implied false certification remain good law?”

Ebeid, unlike Escobar, does not require relators to point to a “specific representation” by a defendant to establish an implied certification claim. Rather, under Ebeid, “a relator must show that ‘(1) the defendant explicitly undertook to comply with a law, rule or regulation that is implicated in submitting a claim for payment and that (2) claims were submitted (3) even though the defendant was not in compliance with that law, rule or regulation.’” The Relators argued that Ebeid remained good law, while the Defendant urged the Ninth Circuit to hold that the Escobar test was mandatory for relators seeking to plead an implied certification claim.

Rose held that this question had already been answered by prior Ninth Circuit panels in United States ex rel. Kelly v. Serco, Inc., 846 F.3d 325 (9th Cir. 2017) (discussed here) and United States ex rel. Campie v. Gilead Sciences, Inc., 862 F.3d 890 (9th Cir. 2017) (discussed here). The Kelly Court “considered only Escobar’s two-part test in determining that the plaintiff’s implied false certification claim failed” and “did not consider whether the claim met the lower standard for falsity enunciated in Ebeid.” In Campie, the Ninth Circuit clearly determined that “in addition to finding that  the implied certification theory can be a basis for False Claims Act liability, the Supreme Court held that its ‘two conditions must be satisfied.’”   Feeling “bound by three-judge panel opinions of this court,” the Rose court concluded that “Relators must satisfy Escobar’s two conditions to prove falsity, unless and until our court, en banc, interprets Escobar differently.”  Notwithstanding its ruling, the panel in Rose made clear that it took a different view of Escobar: “Were we analyzing Escobar anew, we doubt that the Supreme Court’s decision would require us to overrule Ebeid. The Court did not state that its two conditions were the only way to establish liability under an implied false certification theory.” Applying Escobar’s two-part test, the Rose panel thereafter found that a reasonable trier of fact could conclude the Defendant made “specific representations” amounting to “misleading half-truths” in its claims to the government.

Rose also addressed a separate question posed on interlocutory appeal: Whether the materiality analysis established by United States ex rel. Hendow v. Univ of Phoenix, 461 F.3d 1174 (9th Cir. 2006), remained good law after Escobar. In Hendow, the Ninth Circuit held that to establish “materiality” under the FCA, “‘the question is merely whether the false certification . . . was relevant to the government’s decision to confer a benefit.’” (emphasis added). “In concluding that the alleged violations of the incentive compensation ban were material, [Hendow] relied on the fact that the statute, regulation, and program participation agreement all explicitly conditioned payment on compliance with the incentive compensation ban.” In apparent tension with Hendow, Escobar held that “[w]hether a provision is labeled a condition of payment is relevant to but not dispositive of the materiality inquiry.”

Two judges on the Rose panel did not view Hendow as “‘clearly irreconcilable with the reasoning or theory of’ Escobar” because “Hendow did not state that noncompliance is material in all cases” and “Hendow itself may have been decided differently had there been countervailing evidence of immateriality.” On the record before it, the majority thus held that “[a] reasonable trier of fact could find materiality here because the Department 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.” Judge Smith dissented on this issue, reasoning that “Escobar explicitly overruled Hendow’s materiality standard and imposed a new materiality analysis that we must now follow.” In his view, under Escobar’s materiality analysis, “there [was] insufficient evidence to establish that the allegations against Stephens Institute would be considered material” to the government.

A copy of the Ninth Circuit’s opinion can be found here.