Last week’s oral argument in U.S. ex rel. Rose et al. v. Stephens Institute highlighted the Ninth Circuit’s continuing struggle with the Supreme Court’s decision in Escobar.
Stephens Institute involves allegations that the Academy of Art University (AAU) paid bonuses to recruiters in violation of an incentive compensation ban in Title IV of the Higher Education Act. According to the relator, AAU violated the False Claims Act because it implicitly and falsely certified compliance with the ban when it requested federal funds for its students under Title IV.
The Ninth Circuit took up the case on interlocutory appeal after the district court denied summary judgment to the defendants. Oral argument focused on two fundamental questions of law:
- Did Escobar establish a mandatory two-part test for claims brought under an implied false certification theory of FCA liability?
- Does a government’s practice of paying claims despite its knowledge of noncompliance render a defendant’s noncompliance immaterial as a matter of law?
The first question flows from Escobar’s holding that “the implied certification theory can be a basis for liability, at least where two conditions are satisfied”: (1) the defendant submitted a claim that made “specific representations” to the government and (2) the defendant’s noncompliance with material requirements rendered those representations misleading.
AAU argued that the Supreme Court used the phrase “at least” to mean that satisfying Escobar’s two conditions is the minimum a plaintiff must do to establish the defendant’s liability under an implied false certification theory. According to AAU, the relator’s claim failed because the only specific representations the University made to the government were about individual students’ edibility for funding; its noncompliance with the incentive compensation ban did not render those representations false. Therefore, the defendant argued, the relator’s claim did not satisfy Escobar’s two-part test.
A majority of courts agree with AAU that Escobar’s two conditions must be satisfied to establish liability under the implied false certification theory. But other courts have read Escobar as holding that defendants are liable “at least” when those two conditions are met but in other circumstances as well. The relator in Stephens Institute, and the United States as amicus curiae, urged the panel to adopt the minority view even though the Ninth Circuit has issued two decisions essentially assuming that Escobar’s two-part test is mandatory.
At oral argument, Judges Smith and Graber seemed inclined toward the relator’s interpretation. Judge Graber suggested that other Ninth Circuit decisions may have “misinterpreted Escobar” as requiring specific misrepresentations for implied false certification cases. Judge Smith said that he could not find anything in Escobar saying that there is only one way to assert an implied false certification claim. At the same time, he acknowledged language in other Ninth Circuit decisions suggesting that Escobar established a mandatory two-part test. He wondered out loud, “Do I have to go en banc to really resolve this?”
The panel also addressed the implications of government knowledge and practice for the materiality element of relator’s claim. On summary judgment, AAU offered evidence that the Department of Education has fined universities for violating the ban but has never withheld Title IV funds even, with knowledge of a university’s noncompliance. AAU argued that its evidence showed that any noncompliance was immaterial under Escobar. The district court rejected AAU’s argument. It relied in part on pre-Escobar decisions that analyzed Title IV and its implementing regulations and contracts to conclude that compliance with the ban is material. At oral argument, AAU took the position that those pre-Escobar decisions are no longer good law because they did not analyze materiality in terms of the government’s “likely or actual behavior,” which is the focus of the materiality analysis in Escobar.
Judge Graber seemed skeptical of AAU’s argument. She commented that there “could be many reasons why” the government pays a claim despite knowledge of a violation so government inaction should not “negate [materiality], as a matter of law.” She seemed to suggest that the pre-Escobar cases could survive even against evidence that the government does not actually withhold payment based on non-compliance. Or at a minimum, the issue of materiality in AAU’s case was a question of fact that could not be decided on summary judgment.
As our past posts have described, the questions Stephens Institute raises are questions courts across the country have struggled with over the past year. Whatever the outcome, last week’s oral argument illustrates that the Ninth Circuit’s understanding of Escobar is still evolving and Escobar continues to raise at least as many questions as it answered.