In United States ex rel. Rose v. Stephens Inst., the Ninth Circuit Court of Appeals has recently tried to clarify the circumstances in which a failure to speak can give rise to charges under the False Claims Act.
The Stephens Institute case involved a San Francisco art school that accepted Title IV funds in the form of Pell Grants and government-insured loans issued by third-party lenders. To receive such funding, Stephens Institute (known as Academy of Art University or “AAU”) entered a Participation Agreement with the Department of Education, in which it agreed to abide by the incentive compensation ban (the ICB). The ICB prohibits educational institutions that accept Title IV funding 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.”
Between 2006 and 2010, AAU followed a compensation policy that permitted its admissions representatives to increase their salaries – first by up to $30,000 and later by up to $23,000 – by simply meeting quantitative enrollment goals. Former admissions representatives sued the school arguing that it had violated the ICB and therefore was ineligible to receive Title IV funds. As a result, the former admissions representatives claimed that AAU submitted fraudulent claims when it submitted Pell Grant requests to the Department of Education and when it submitted requests for government-insured loans to private lenders.
The former admissions representatives who filed the case did not argue that AAU made express, affirmative misstatements when it submitted the funding requests. Instead, they argued that AAU was eligible to receive these funds only if it complied with program requirements, including the ICB, and that by submitting the requests it impliedly certified its compliance, which was untrue. By failing to disclose its noncompliance with the ICB, AAU effectively misrepresented its right to receive payments under these funding programs. Such claims rely upon the implied certification theory, which was unanimously recognized by the Supreme Court in Universal Health Services, Inc. v. United States ex rel Escobar.
In Escobar, the Supreme Court found that “when a defendant submits a claim, it impliedly certifies compliance with all conditions of payment. But if the claim fails to disclose the defendant’s violation of a material statutory, regulatory or contractual requirement . . . the defendant has made a misrepresentation that renders the claim ‘false or fraudulent.’”
While Escobar made it clear that implied certification can work as a basis for liability, it left open some questions as to how. In Stephens Institute, the court specifically found that Escobar created two conditions for implied certification liability: (1) in addition to requesting payment, the claim must make specific representations about the goods or services provided; and (2) the failure to disclose noncompliance with applicable statutory, regulatory or contractual requirements makes those representations misleading.
Practically speaking, the first requirement – making representations about the goods or services provided – will often be satisfied because Government claims process forms typically require the claimant to describe its goods or services. In Stephens Institute, the court noted that the Stafford Loans Certification form required the educational institution to certify that the student applying for aid is “accepted for enrollment in an eligible program.” By failing to disclose issues related to its compliance with the ICB, AAU misled the Government about whether it actually was an “eligible program” and that was enough to create a factual dispute regarding the first element.
It is not enough, however, to simply make representations in connection with your claim; those representations must make the claim materially false or misleading. To be material, a misrepresentation must have “a natural tendency to influence, or be capable of influencing the payment or receipt of money or property.” The Stephens Institute court noted that the key question is whether the government would have considered the undisclosed non-compliance to be material to its decision to pay the requested funds. The court noted that while the record showed some cases in which institutions that did not comply with the ICB were paid, the record also revealed many cases in which the DOE recouped funds or refused to pay in full institutions that violated the ban.
The court also noted that the size of the violations is an important factor. Admissions representatives could earn 5-digit pay increases, rather than some de minimis award such as a gift card, based solely on signing up enough qualified students. Given that the ICB was an express condition of payment, the DOE had previously taken action to enforce the ban, and that AAU granted its admissions representatives sizable benefits in violation of the ban, the Ninth Circuit determined there was substantial evidence that AAU’s failure to disclose its violation of the ICB was material; that is, the DOE may have refused disbursement of the Title IV funds had it known about the ICB violations.
Cases such as Stephens Institute show that participants in industries with substantial government dollars in their funding streams (such as Higher Education) must take care to comply with program requirements to avoid sizable liability under the FCA. Failure to comply with a regulatory or contractual requirement can render a claim misleading. While a party can be liable under the FCA only for “knowingly” making a false representation, a defendant’s reckless disregard of the truth can be enough to satisfy that standard. But the analysis applied in Stephens Institute and other cases shows that liability under the implied certification theory is a fact-intensive inquiry, and not every violation of a statutory, regulatory or contractual condition is sufficient to violate the FCA.