United States ex rel. Scott Rose; Mary Aquino; Mitchell Nelson; Lucy Stearns, Plaintiffs-Appellees,
Stephens Institute, dba Academy of Art University, Defendant-Appellant.
and Submitted December 6, 2017 San Francisco, California
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.
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.
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,
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.
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.
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.
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.
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.
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.
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.
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.
GRABER, CIRCUIT JUDGE:
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).
AND PROCEDURAL HISTORY
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. §
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.
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
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.
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.
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 ...