Enacted in 1863, the False Claims Act was the outgrowth of a series of congressional hearings where witnesses painted a sordid picture of how, during the Civil War, “the United States had been billed for nonexistent or worthless goods, charged exorbitant prices for goods delivered, and generally robbed in purchasing the necessities of war.” United States v. McNinch, 356 U.S. 595, 599 (1958). Congress responded by imposing civil and criminal liability for 10 types of fraud on the government, subjecting violators to double damages, forfeiture, and up to five years’ imprisonment. Since then, Congress has repeatedly amended the False Claims Act (“FCA”), with the focus remaining on those who present or directly induce the submission of false or fraudulent claims. See 31 U.S.C. § 3729(a).


Viability Of The Implied False Certification Theory Confirmed In Escobar


As the FCA evolved over time, so too did the creativity of government counsel and relators seeking to broadly interpret the Act’s scope. The implied false certification theory was one such effort to “push the liability envelope.” Under the “implied false certification” theory of FCA liability, an entity is considered to have defrauded the government if it submits a claim that is accurate on its face but fails to disclose the entity’s violation of a statutory, regulatory, or contractual requirement that is material to the claim.  The implied false certification theory is premised on the argument that, simply by virtue of having submitted a claim to the government for payment, the claimant has implicitly certified compliance with statutes, regulations and contract terms that govern the parties’ contractual relationship. Relying upon this theory, the government and relators have argued that any noncompliance is sufficient to trigger FCA liability, regardless of whether the defendant made an express false statement and irrespective of how trivial the regulatory or statutory noncompliance.


In the landmark decision Universal Health Services, Inc. v. U.S. ex rel. Escobar, 136 S. Ct. 1989 (2016), the U.S. Supreme Court held that, under the appropriate circumstances, FCA liability can indeed be imposed for an implicitly false certification. Although recognizing the viability of such a claim, Justice Thomas, writing for a unanimous Court, cautioned that the FCA is not “an all-purpose antifraud statute.” Nor is it a vehicle for imposing treble damages for “garden-variety breaches of contract or regulatory violations.”  In order to avoid morphing the FCA into a general antifraud super statute (whereby a party certifying a claim is suddenly and automatically subject to treble damages for non-compliance with any applicable regulation or contract requirement), the Court adopted a two-part test for determining liability for implied false certification. Specifically, the Court held that liability may exist under an implied false certification theory where “at least” two conditions are satisfied: (1) the defendant’s claim “makes specific representations about the goods or services provided,” and (2) “the defendant’s failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes those representations misleading half-truths.”

The Court emphasized that only material noncompliance with a statutory, regulatory or contractual requirement can trigger FCA liability and the attendant possibility of treble damages. The Court also characterized the materiality requirement as “rigorous” and “demanding,” and defined it by applying principles from both the FCA and the common law. The Court eschewed any “one size fits all” test for “materiality,” but offered the following guidance on this issue:

  • Although not dispositive, the government’s express designation of a requirement as a condition of payment is certainly relevant to the materiality inquiry;
  • Minor or insignificant noncompliance will not be sufficient to find materiality;
  • The fact that the government had the option to refuse to pay a claim if it knew of the noncompliance is insufficient to find materiality; and
  • “[I]f the government regularly pays a particular type of claim in full despite actual knowledge that certain requirements were violated and has signaled no change in position, that is strong evidence that the requirements are not material.”

Escobar’s two-part test (inclusive of its materiality requirement) helps to ensure that relators cannot use the FCA to profiteer from a garden variety regulatory breach where the government itself would not have changed its position on payment even if it had known of the regulatory violation. With the Supreme Court having recognized a claim for implied false certification, and yet having also imposed a somewhat exacting two-part test for its application, a new argument surfaced on the part of relators. Specifically, they argued that Esbobar’s two-part test was not the sole criteria for recognizing liability for a claim of implied false certification but, instead, merely reflected one example of a situation in which such liability would attach.

This argument was laid to rest (at least in the Ninth Circuit) in U.S. ex rel. Rose v. Stephens Institute, 909 F.3d 1012 (9th Cir. 2018), cert. denied, 139 S. Ct. 1464 (April 1, 2019). Specifically, the Ninth Circuit held in Stephens Institute that Escobar sets forth the exclusive test for establishing FCA liability under the theory of implied false certification.  As explained below, however, while confirming that Escobar’s two-part test must always be met to impose liability under the FCA for implied false certification, the Ninth Circuit’s application of that test suggests that the materiality requirement is not quite as “rigorous” and “demanding” as it first seemed.

United States ex rel. Rose v. Stephens Institute

Less than a month before the Supreme Court’s decision in Escobar, the United States District Court for the North District of California was grappling with a claim for false implied certification in United States ex rel. Rose v. Stephens Institute. The defendant was an art school in the San Francisco area that had entered into a Program Participation Agreement (“PPA”) with the Department of Education that required the school to comply with certain regulations, including an incentive compensation ban, to receive federal funding. The relators (former admissions officers of an art university), alleged that the school violated the incentive compensation ban by giving admissions officers salary increases of up to $30,000 in exchange for meeting quantitative enrollment goals.

In denying the school’s summary judgment motion, the district court found that the relators had raised a triable issue of fact as to whether the school in fact compensated admissions officers solely on the basis of their enrollment numbers. The district court allowed the case to proceed because “each of [the school’s] requests for [federal] funds contained an ‘implied certification of continued compliance with the incentive ban’” contained in the PPA, thus satisfying the pre-Escobar test that had previously been applied in the Ninth Circuit. Rose v. Stephens Inst., No. 09-CV-5966-PJH, 2016 WL 2344225, at *9 (N.D. Cal. May 4, 2016).

With the Supreme Court deciding Escobar just a month later, the school moved for reconsideration to have the case decided pursuant to Escobar’s two-prong test for implied false certification under the FCA. In denying the school’s motion, the district court expressly held that Escobar did not establish “a rigid ‘two-part test’ for falsity that applies to every single implied false certification claim,” but nonetheless found that the relators’ allegations raised a triable issue of fact under that standard, as well. The district court thereafter granted interlocutory appeal of its denial order and certified the following question to the Ninth Circuit: “Must the ‘two conditions’ identified by the Supreme Court in Escobar always be satisfied for implied false certification liability under the FCA?”

The Ninth Circuit answered this question in the affirmative, with the three-judge panel unanimously holding that relators must satisfy both of the conditions set forth in Escobar in order to prove a claim for implied false certification under the FCA. Although the panel was unanimous as to the relevant test, the judges split 2-1 as to whether the relators had established a genuine issue of material fact as to falsity under the Escobar standard.

According to the majority, the test had been satisfied because the school had represented on its loan form that the student-borrowers were “eligible” and “enrolled in an eligible program,” whereas the school’s failure to disclose its non-compliance with the incentive compensation ban rendered those representations, in the words of Escobar, “misleading half-truths.” Delving deeper into the “materiality” prong of the test, the majority found that materiality was a triable issue based on the fact that: (i) compliance with the incentive compensation ban was a “condition of payment;” (ii) the government “did care about violations” as it took at least some form of corrective action in 25 of 32 cases in which other schools violated the incentive compensation ban, including requiring schools to cease providing incentives; and (iii) the bonuses at issue were as much as $23,000, as opposed to “cups of coffee or $10 gift cards.”

Balanced against these facts, the evidence showed that – out of the 32 reported instances of known violations of the incentive compensation ban – the government had only pursued recoupment of its payment in one case. Relying on this evidence, together with the Supreme Court’s admonition that the materiality requirement should be viewed as both “rigorous” and “demanding,” the dissent argued that “caring is not enough” under Esbobar’s materiality standard.

The majority’s reasoning begs the question as to whether materiality can be established based simply on evidence that the government “cares about” a violation (at least at some level).  Although by no means the only factor to the materiality equation, Justice Thomas opined that evidence of materiality includes that “the Government consistently refuses to pay claims in the mine run of cases based on noncompliance.”  He further emphasized that “materiality looks to the effect on the likely or actual behavior of” the government.   The evidence before the court in Stephens Institute was that the government failed to pursue recoupment in 31 of the 32 instances where there was a known violation of the incentive compensation ban. With the regulatory professionals charged with enforcing the incentive compensation ban having opted not to pursue recoupment in the “mine run” of incentive ban violations, it is worth asking whether relators should be permitted to tread where the government itself had so rarely gone.

Thus, although Stephens Institute reaffirms the applicability of Escobar’s two-part test, the Ninth Circuit’s application of that test may actually embolden relators who seek to recover (and thus impose) penalties that are far more draconian than deemed appropriate by the government professionals charged with the enforcement of the applicable statutory and regulatory requirements. Going forward, the extent to which relators are able to alter the regulatory framework through recoupment of payments that the government would have never sought to recoup merits careful scrutiny.