Key Notes:

  • The Ninth Circuit’s decision in U.S. ex rel. Scott Rose, et al. v. Stephens Institute holds that the Supreme Court’s two-part test for falsity in FCA implied certification cases is mandatory to establish liability.
  • The court ruled in favor of the plaintiffs, although its legal holding on implied certification is generally favorable to defendants.
  • For now, this ruling settles the issue in the Ninth Circuit in a manner that may be helpful to certain defendants, but the law will likely continue to evolve in this and other circuits.

The Ninth Circuit has ruled that the U.S. Supreme Court’s two-part test for falsity in False Claims Act implied certification cases is mandatory under the Supreme Court decision Universal Health Services v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016). In its decision issued last week in United States ex rel. Scott Rose, et al. v. Stephens Institute, No. 17-15111 (9th Cir. Aug. 24, 2018), the Ninth Circuit found that its prior binding rulings have held that the two-part test is mandatory to establish liability, but the court left open the possibility that the issue may be revisited by the full Ninth Circuit en banc. The court ruled in favor of the whistleblower plaintiffs, although its legal holding on implied certification is generally favorable to defendants.

Absent any appeal, this ruling settles the issue in the Ninth Circuit for now, in a manner that may be helpful to some FCA defendants, but the law will likely continue to evolve in this and other circuits. The U.S. Department of Justice submitted an amicus brief in Stephens Institute arguing the two-part test is not mandatory, reflecting the position that DOJ may take in other cases outside the Ninth Circuit, and which would tend to expand the potential application of the implied certification theory. Where the two-part test is mandatory, circumstances establishing liability are more limited, and implied certification cases must involve the specific representations required by the Supreme Court, which the Ninth Circuit found were present in this case, an aspect of the ruling favorable to the plaintiffs.

Escobar’s Two-Part Test for Falsity

In June 2016, the Supreme Court held in Escobar 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. 1989 at 2001 (emphases added).

Impact on Ninth Circuit Case Law

Prior to the Escobar ruling, the Ninth Circuit adopted a different and broader form of the implied certification theory in Ebeid ex rel. United States v. Lungwitz, 616 F.3d 993, 998 (9th Cir. 2010). Under Ebeid, a relator bringing an implied certification claim had a lower bar to establish liability and could show falsity “by pointing to noncompliance with a law, rule, or regulation that is necessarily implicated in a defendant’s claim for payment.” Stephens Institute, slip op. at 10-11.

In Stephens Institute, the Ninth Circuit noted that it had previously “addressed Escobar in two cases that create uncertainty about the ongoing validity of Ebeid’s test for falsity in implied false certification cases.” Id. at 11. The prior decisions were United States ex rel. Kelly v. Serco, Inc., 846 F.3d 325, 332 (9th Cir. 2017), where the court “did not consider whether the claim met the lower standard for falsity enunciated in Ebeid,” and United States ex rel. Campie v. Gilead Sciences, Inc., 862 F.3d 890, 901 (9th Cir. 2017), which stated that the “Supreme Court held that although the implied certification theory can be a basis for liability, two conditions must be satisfied” (emphasis added) (citing Escobar, 136 S. Ct. at 2000). See slip op. at 11-12.

Ninth Circuit Requires Escobar’s Two-Part Test

In Stephens Institute, the Ninth Circuit stated that the two-part test is required to prove falsity, but the judges implied that they might reach a different conclusion if they were not constrained by precedent:

Were we analyzing Escobar anew, we doubt that the Supreme Court’s decision would require us to overrule Ebeid. The Court did not state that its two conditions were the only way to establish liability under an implied false certification theory. But our post-Escobar cases—without discussing whether Ebeid has been fatally undermined—appear to require Escobar’s two conditions nonetheless. We are bound by three-judge panel opinions of this court.... We conclude, therefore, that Relators must satisfy Escobar’s two conditions to prove falsity, unless and until our court, en banc, interprets Escobar differently.

Slip op. at 12.

The Ninth Circuit’s decision in Stephens Institute is generally helpful for some defendants (in cases where the two-part test is not met) and, absent further appeal, may resolve the issue in the Ninth Circuit, “unless and until [the] court, en banc, interprets Escobar differently.” Defendants must therefore be mindful that the law may still change in the Ninth Circuit, and it continues to evolve in other circuits.

Context of Stephens Institute

The defendant, Stephens Institute, is an art school that offers undergraduate and graduate degrees, and which received federal funding in the form of federal financial aid to its students. Stephens entered into a program participation agreement with the Department of Education, in which Stephens agreed to follow various requirements, including the “incentive compensation ban,” which “prohibits schools from rewarding admissions officers for enrolling higher numbers of students.” Slip op. at 6.

In this case, Stephens Institute appealed after the district court’s denial of summary judgment. The Ninth Circuit found that “on this record, a reasonable trier of fact could conclude that Defendant’s actions meet the Escobar requirements for falsity.... Because Defendant failed to disclose its noncompliance with the incentive compensation ban, [its] representations [in certification forms] could be considered ‘misleading half-truths.’ That is sufficient evidence to create a genuine issue of material fact and, therefore, to defeat summary judgment.” Id. at 12.

Ninth Circuit Considers Materiality Under Escobar

In a separate part of the decision, the Ninth Circuit also ruled on materiality, stating:

Applying the Escobar standard of materiality to the facts here, we conclude that Defendant has not established as a matter of law that its violations of the incentive compensation ban were immaterial. A reasonable trier of fact could find materiality here because the Department [of Education]’s payment was conditioned on compliance with the incentive compensation ban, because of the Department’s past enforcement activities, and because of the substantial size of the forbidden incentive payments.

Id. at 15-16. One judge dissented on the materiality issue, arguing the evidence was insufficient that any alleged misrepresentations here were material under the Escobar standard.

Escobar and Stephens Institute Highlight Risks

While this case concerns federal funding for higher education, as we have discussed in a previous update, Escobar highlights the risks for any participant in government contracts, grants, federal funding and all programs subject to the FCA. As we stated there, government contractors and other participants in federal programs must be prepared to continue to defend themselves against allegations of implied certification where the case falls outside the specific factual circumstances the Supreme Court addressed in Escobar. The Ninth Circuit’s Stephens Institute decision further illustrates those risks, because even though the court ruled that the two-part test is required under Escobar, the court ruled against the defendant, finding that the relators satisfied Escobar’s test in this case.