Almost two years ago, the Supreme Court in Universal Health Servs. v. U.S. ex rel. Escobar upheld the implied certification theory of liability under the federal False Claims Act (“FCA”).  Applying a two-part test, the Court provided that implied liability would attach where the defendant (1) makes specific representations to the government about goods or services (2) while failing to disclose noncompliance with a material statutory, regulatory, or contractual requirement, rendering those representations “misleading half-truths.”


Many courts post-Escobar have considered this test as the exclusive means for establishing liability under the implied certification theory.  Other courts, however, have held that the test is not a pre-requisite for applying implied certification and that Escobar does not always impose the requirement of “specific representations.”  A group of relators in the Ninth Circuit has recently advocated for this more expansive interpretation.  On December 6, 2017, the Ninth Circuit heard oral argument in U.S. ex rel. Rose et al. v. Stephens Institute.  The parties’ arguments in this case illustrate the continuing debate over the proper bounds of the implied certification theory of liability under Escobar.


Factual Background


The relators in Stephens Institute are former admissions representatives at the Academy of Art University (“AAU”), an art and design school in San Francisco.  AAU receives federal funding under Title IV of the Higher Education Act.  Under Title IV, institutions may receive funds through student loans or grants but are required to comply with a myriad of regulations, including the incentive compensation ban (“ICB”).  The ICB prohibits schools from compensating recruiters based on their success in securing enrollments.  The ICB was intended to prevent for-profit universities from incentivizing recruiters to enroll poorly-qualified students that may not benefit from federal subsidies or that might be unable to repay federal student loans.


The relators claim that AAU violated the ICB by improperly incentivizing recruiters through bonuses and other compensation directly tied to enrollment quotas.  To disguise its ICB violations, the relators claimed that the university would “reverse-engineer” qualitative performance reviews to support payment decisions that were actually based solely on an employee’s enrollment figures.  The relators alleged that AAU submitted legally false claims to the Department of Education (“DOE”) when it requested Title IV program funds for students while in violation of the ICB.


District Court Limits Escobar Test


Upon the close of discovery, AAU filed a motion for summary judgment.  The district court found triable issues as to whether AAU submitted impliedly false claims and, accordingly, denied AAU’s motion as to the theory of implied certification.  The district court, however, granted a stay of proceedings pending the Supreme Court’s decision in Escobar, which considered the scope and viability of the implied certification theory.  As noted above, the Court in Escobar upheld implied certification as a valid basis for FCA liability where “at least” two conditions are met: (1) the request for payment makes specific representations about the goods or services provided; and (2) the failure to disclose noncompliance with a material statutory, regulatory, or contractual requirement makes those representations misleading half-truths.  As to the second of these conditions, the Supreme Court also established a “rigorous” and “demanding” materiality standard.  Thus, under Escobar, courts must evaluate multiple factors when considering an implied certification theory, including among others whether the government pays a claim despite its actual knowledge of a violation.


Following Escobar, AAU filed a motion to reconsider the district court’s summary judgment order, arguing that the relators’ claims failed Escobar’s two-part test.  AAU claimed that because an ICB violation does not result in automatic suspension from Title IV participation, AAU remained an “eligible” institution and, consequently, did not make any misleading representations in requesting funds.  AAU also argued that the “rigorous” materiality standard was not satisfied.  AAU noted that DOE had never refused payment of a claim because of noncompliance with the ICB.  In fact, established DOE policy provided that ICB violations would be treated as instances of regulatory noncompliance and not issues of fraud.


The district court found that AAU was “incorrect as a matter of law that Escobar established a rigid ‘two-part test’ for falsity that applies to every single implied certification claim.”  The district court explained that Escobar did not set forth an absolute requirement for establishing implied certification, but rather left open the possibility of other circumstances triggering liability.  Moreover, even assuming the two-part test applied, the district court determined that AAU’s request for payments was misleading because AAU would not have been an “eligible” institution due to its ICB violations.  The court further found that the ICB violations were material, stating that DOE’s lax enforcement history was “not terribly relevant to materiality.”  The court also noted that DOE had entered into numerous settlement agreements with schools and assessed fines for ICB violations, demonstrating that DOE “cared about the ICB.”  Accordingly, the district court denied AAU’s motion for reconsideration.


Arguments On Appeal


AAU appealed the district court’s denial to the Ninth Circuit, which heard oral argument on December 6, 2017.  The circuit court judges’ questions and comments revealed the difficulty in discerning the scope of Escobar.   In response to arguments from AAU’s counsel, for instance, Judge Smith stated that he “never thought about the False Claims Act in this way before,” requiring him to take an in-depth look at Escobar to determine whether the two-part test supplies the only basis for establishing liability under the implied certification theory.


Despite encountering some difficulty in reconciling the Escobar test with the facts before them, the Ninth Circuit judges nevertheless appeared sympathetic toward the relators’ position.  For example, Judge Smith’s questions focused on whether Escobar contained any language mandating the two-part test in every case.  Although AAU argued that Escobar established a “minimum threshold,” Judge Smith noted that Escobar did not explicitly define the bounds of the test.  In the absence of express language to the contrary, he suggested that Escobar addressed a limited situation rather than imposing a wholesale test for implied certification.  Judge Graber similarly hinted as to the potentially limited applicability of the two-part test, calling into question prior Ninth Circuit opinions that may have “misinterpreted” or “overshot what Escobar requires.”


Like the district court, the Ninth Circuit also questioned the relevance of the government’s past enforcement actions.  In this regard, for instance, Judge Smith suggested that the court should not decide materiality as a matter of law simply because there is no evidence of the government revoking participation in the Title IV program.  The relators agreed with this characterization.  Judge Graber also appeared to sympathize with the relators’ position, stating that there may be many reasons why DOE did not decide to pursue enforcement actions.  Thus, the circuit court indicated that the government’s decision not to enforce a particular requirement or regulation does not necessarily negate its materiality; rather, such a decision remains only one factor for the court’s consideration in determining whether a violation of the FCA by implied certification has occurred.




The Ninth Circuit’s decision will add to the mounting case law debating the scope of Escobar’s two-part test for implied certification.  Assuming courts continue to split over this issue, the Supreme Court may soon have another opportunity to clarify the bounds of implied certification as a basis for FCA liability.