United States ex rel. Rose v. Stephens Inst.

• Decision Date: 24 August 2018
• Docket Number: No. 17-15111,17-15111
• Citation: 901 F.3d 1124
• Parties: UNITED STATES ex rel. Scott Rose; Mary Aquino ; Mitchell Nelson; Lucy Stearns, Plaintiffs-Appellees, v. STEPHENS INSTITUTE, dba Academy of Art University, Defendant-Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

901 F.3d 1124

UNITED STATES ex rel. Scott Rose; Mary Aquino ; Mitchell Nelson; Lucy Stearns, Plaintiffs-Appellees,

v.STEPHENS INSTITUTE, dba Academy of Art University, Defendant-Appellant.

No. 17-15111

United States Court of Appeals, Ninth Circuit.

Argued and Submitted December 6, 2017—San Francisco, California

Filed August 24, 2018

Steven M. Gombos (argued), Jacob C. Shorter, and Gerald M. Ritzert, Gombos Leyton PC, Fairfax, Virginia; Leland B. Altschuler, Law Offices of Leland B. Altschuler, Woodside, California; for Defendant-Appellant.

Michael von Lowenfeldt (argued), Kenneth Nabity, Brady R. Dewar, and James M. Wagstaffe, Kerr & Wagstaffe LLP, San Francisco, California; Stephen R. Jaffe, The Jaffe Law Firm, San Francisco, California; for Plaintiffs-Appellees.

Charles W. Scarborough (argued) and Michael S. Raab, Appellate Staff; Chad A. Readler, Acting Assistant Attorney General; Civil Division, United States Department of Justice, Washington, D.C.; for Amicus Curiae United States of America.

John P. Elwood and Ralph C. Mayrell, Vinson & Elkins LLP, Washington, D.C.; Warren Postman and Steven P. Lehotsky, U.S. Chamber Litigation Center, Washington, D.C.; for Amicus Curiae Chamber of Commerce of the United States of America.

Justin S. Brooks, Reuben A. Guttman, and Elizabeth H. Shofner, Philadelphia, Pennsylvania; Asher S. Alavi and David A. Bocian, Kessler Topaz Meltzer and Check LLP, Radnor, Pennsylvania; Daniel Miller, Berger & Montague P.C., Philadelphia, Pennsylvania; David S. Stone, Stone & Magnanini LLP, Berkeley Heights, New Jersey; for Amicus Curiae National Nurses United—California Nurses Association, et al.

Claire M. Sylvia, Phillips & Cohen LLP, San Francisco, California; Jacklyn N. DeMar, Taxpayers Against Fraud Education Fund, Washington, D.C.; Jennifer M. Verkamp, Morgan Verkamp LLC, Cincinnati, Ohio; for Amicus Curiae Taxpayers Against Fraud Education Fund.

Brandon J. Mark, Parsons Behle & Latimer, Salt Lake City, Utah, for Amicus Curiae Veterans Education Success.

Before: Susan P. Graber and N. Randy Smith, Circuit Judges, and Jennifer G. Zipps,^* District Judge.

GRABER, Circuit Judge:

This qui tam action, brought under the False Claims Act, comes to us on interlocutory appeal from the district court's denial of summary judgment so that we can settle questions of law posed in the wake of Universal Health Services, Inc. v. United States ex rel. Escobar , ––– U.S. ––––, 136 S.Ct. 1989, 195 L.Ed.2d 348 (2016). We affirm.

FACTUAL AND PROCEDURAL HISTORY¹

Defendant Stephens Institute, doing business as Academy of Art University, is an art school in San Francisco that offers undergraduate and graduate degrees. Defendant receives federal funding—in the form of federal financial aid to its students—through various funding programs available under Title IV of the Higher Education Act. To qualify for that funding, Defendant entered into a program participation agreement with the Department of Education ("Department"), in which it pledged to follow various requirements, including the incentive compensation ban. The incentive compensation ban prohibits schools from rewarding admissions officers for enrolling higher numbers of students. 20 U.S.C. § 1094(a)(20) ; 34 C.F.R. § 668.14(b)(22).

In 2006, Defendant's admissions department instituted a new policy to encourage admissions representatives to enroll more students. The policy established an enrollment goal for each admissions representative. If a representative succeeded in enrolling that number of students, he or she would receive a salary increase of up to $30,000. Conversely, a representative could have his or her salary decreased by as much as $30,000 for failing to reach the assigned enrollment goal. Defendant characterized those adjustments as dependent on both quantitative success, meaning a representative's enrollment numbers, and qualitative success, meaning the representative's non-enrollment performance. But, in practice, the employees understood that their salary adjustments rested entirely on their enrollment numbers. Defendant rewarded one team of representatives with an expense-paid trip to Hawaii. The team received that reward solely because of their enrollment numbers.

That enrollment incentive policy remained in place until 2009, when Defendant instituted new enrollment goals and a "scorecard" system for calculating salary adjustments. The scorecard system involved separate salary adjustment calculations for qualitative and quantitative performance. An admissions representative could receive an adjustment of as much as $23,000 for quantitative performance alone; adjustments related to qualitative performance topped out at $6,000. Managers were told not to share those scorecards with admissions representatives because of concerns about compliance with the participation agreement. The scorecard policy remained in effect until 2010.

Relators Scott Rose, Mary Aquino, Mitchell Nelson, and Lucy Stearns, who are former admissions representatives for Defendant, brought this False Claims Act action in 2010, claiming that Defendant violated the incentive compensation ban from 2006 through 2010. Defendant filed a motion for summary judgment, which the district court denied on May 4, 2016. But on June 16, 2016, the Supreme Court decided Escobar , in which the Court clarified the law surrounding falsity and materiality in False Claims Act claims. 136 S.Ct. at 1999, 2001. Defendant filed a motion for reconsideration in light of Escobar , which the district court likewise denied. But the district court granted in part Defendant's motion for an interlocutory appeal, certifying to this court several questions relating to Escobar 's effect on our precedent.²

DISCUSSION

A. Legal Background

The Department of Education oversees the grant of Title IV funds to colleges and universities. To qualify for such funds, schools must comply with a number of statutory, regulatory, and contractual requirements. One such requirement is the incentive compensation ban, which is mandated by statute, regulation, and contractual program participation agreements. The incentive compensation ban prohibits schools from providing "any commission, bonus, or other incentive payment based directly or indirectly on success in securing enrollments or financial aid to any persons or entities engaged in any student recruiting or admission activities." 20 U.S.C. § 1094(a)(20) ; 34 C.F.R. § 668.14(b)(22). If individuals become aware of a school's violation of the incentive compensation ban, they can bring a qui tam action on behalf of the United States under the False Claims Act. When the Department becomes aware of such violations, it also can take direct action against noncompliant schools by, among other things, mandating corrective action; reaching a settlement agreement; imposing fines; or limiting, suspending, or terminating a school's participation in federal student aid programs.

The False Claims Act imposes liability on anyone who "knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval." 31 U.S.C. § 3729(a)(1)(A). We articulated the four elements of a False Claims Act claim in United States ex rel. Hendow v. University of Phoenix , 461 F.3d 1166 (9th Cir. 2006), another case that involved alleged violations of the incentive compensation ban. Under Hendow , a successful False Claims Act claim requires: "(1) a false statement or fraudulent course of conduct, (2) made with scienter, (3) that was material, causing (4) the government to pay out money or forfeit moneys due." Id. at 1174. But Escobar has unsettled the state of this circuit's law with regard to two of those elements: falsity and materiality.

B. Implied False Certification

The falsity requirement can be satisfied in one of two ways. The first is by express false certification, which "means that the entity seeking payment [falsely] certifies compliance with a law, rule or regulation as part of the process through which the claim for payment is submitted." Ebeid ex rel. United States v. Lungwitz , 616 F.3d 993, 998 (9th Cir. 2010). The other is by implied false certification, which "occurs when an entity has previously undertaken to expressly comply with a law, rule, or regulation [but does not], and that obligation is implicated by submitting a claim for payment even though a certification of compliance is not required in the process of submitting the claim." Id. (emphasis added).

In Ebeid , we clarified that, to establish a claim under the implied false certification theory, 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." Id. Thus, under Ebeid , a relator bringing an implied certification claim could show falsity by pointing to noncompliance with a law, rule, or regulation that is necessarily implicated in a defendant's claim for payment.

The Supreme Court subsequently addressed implied false certification in Escobar . There, the Supreme Court held that

[t]he implied certification theory can be a basis for liability, at least where two conditions are satisfied: first, 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.

Escobar , 136 S.Ct. at 2001 (emphases added).

We have addressed Escobar in two cases that create uncertainty about the ongoing validity of Ebeid 's test for falsity in implied false certification cases. First, in United States ex rel. Kelly v. Serco, Inc. , 846 F.3d 325, 332 (9th Cir. 2017), we considered only Escobar 's two-part test in determining that the plaintiff's implied false certification claim...