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United States ex rel. Rose v. Stephens Institute

United States Court of Appeals, Ninth Circuit

August 24, 2018

United States ex rel. Scott Rose; Mary Aquino; Mitchell Nelson; Lucy Stearns, Plaintiffs-Appellees,
v.
Stephens Institute, dba Academy of Art University, Defendant-Appellant.

          Argued and Submitted December 6, 2017 San Francisco, California

          Appeal from the United States District Court for the Northern District of California Phyllis J. Hamilton, Chief Judge, Presiding D.C. No. 4:09-cv-05966-PJH

          Stephen Gombos (argued), Jacob C. Shorter, and Gerald M. Ritzert, Ritzert & 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.

         SUMMARY[**]

         False Claims Act

         The panel affirmed the district court's order denying defendant's motion for summary judgment in a qui tam action brought under the False Claims Act.

         Relators, former admissions representatives for Academy of Art University, an art school in San Francisco, alleged that the school violated an incentive compensation ban included in its program participation agreement with the Department of Education, through which it qualified for federal funding in the form of federal financial aid to its students under Title IV of the Higher Education Act.

         A claim under the False Claims Act 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.

         In Ebeid ex rel. United States v. Lungwitz, 616 F.3d 993 (9th Cir. 2010), this court held that the falsity requirement can be satisfied either by express false certification or by implied false certification, which requires a showing that (1) the defendant explicitly undertook to comply with a law, rule, or regulation that was implicated in submitting a claim for payment and that (2) claims were submitted (3) even though the defendant was not in compliance with the law, rule, or regulation. In Universal Health Servs., Inc. v. United States ex rel. Escobar, 136 S.Ct. 1989 (2016), the Supreme Court held that a showing of implied false certification requires the satisfaction of two conditions: "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." The panel held that under two post-Escobar Ninth Circuit cases, relators must satisfy Escobar's two conditions to prove falsity. The panel concluded that a reasonable trier of fact could conclude that Academy of Art's actions met the Escobar requirements for falsity.

         In Escobar, the Supreme Court also clarified that whether a provision is labeled a condition of payment is relevant to but not dispositive of the materiality requirement; therefore, even when a requirement is expressly designated a condition of payment, not every violation of that requirement gives rise to liability. Instead, materiality looks to the effect on the likely or actual recipient of the alleged misrepresentation, meaning the government. The panel concluded that Escobar did not overrule United States ex rel. Hendow v. Univ. of Phoenix, 461 F.3d 1166 (9th Cir. 2006), which held that, with regard to materiality, the question is whether the false certification was relevant to the government's decision to confer a benefit. Applying the Escobar standard of materiality, the panel concluded that a reasonable trier of fact could find materiality 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.

         The panel further held that, on summary judgment, Academy of Art did not show that any violations of the incentive compensation ban fell within the Department of Education's now-repealed safe harbor provision, which required, among other things, that any adjustment in compensation was not based solely on the number of students recruited, admitted, enrolled, or awarded financial aid.

         Dissenting in part, Judge N.R. Smith agreed with the majority's opinion through its discussion of falsity. Judge Smith disagreed with the majority's analysis of materiality because the majority failed to recognize that Hendow's materiality holding is no longer good law after Escobar; failed to fully articulate the Supreme Court's materiality standard as outlined in Escobar; and applied its erroneous legal standard to the facts at hand, reaching an erroneous conclusion. Judge Smith wrote that he would reverse the district court's materiality finding, vacate the judgment, and remand for additional discovery and further briefing.

          OPINION

          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, 136 S.Ct. 1989 (2016). We affirm.

         FACTUAL AND PROCEDURAL HISTORY[1]

         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 ...


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