United States v. Corinthian Colleges

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

UNITED STATES OF AMERICA, ex rel., 

Plaintiff,

and

NYOKA LEE, AKA Seal 2; TALALA

MSHUJA, AKA Seal 3,

Plaintiffs-Appellants,

No. 10-55037

v.

D.C. No.

CORINTHIAN COLLEGES, AKA Seal

A; ERNST & YOUNG LLP, AKA

 2:07-cv-01984-

PSG-MAN

Seal B; DAVID MOORE, AKA Seal

C; JACK D. MASSISMINO, AKA Seal OPINION

D; PAUL ST. PIERRE, AKA Seal E;

ALICE T. KANE, AKA Seal F;

LINDA A. SKLADANY, AKA Seal G;

HANK ADLER, AKA Seal H; TERRY

O. HARTSHORN, AKA Seal I,

Defendants-Appellees.



Appeal from the United States District Court

for the Central District of California

Philip S. Gutierrez, District Judge, Presiding

Submitted June 8, 2011*

Pasadena, California

Filed August 12, 2011

*The panel unanimously concludes this case is suitable for decision

without oral argument. See Fed. R. App. P. 34(a)(2).

10719

10720 LEE v. CORINTHIAN COLLEGES

Before: Betty B. Fletcher and N. Randy Smith,

Circuit Judges, and Rudi M. Brewster, District Judge.**

Opinion by Judge B. Fletcher

**The Honorable Rudi M. Brewster, Senior District Judge for the U.S.

District Court for Southern California, San Diego, sitting by designation.

LEE v. CORINTHIAN COLLEGES 10723

COUNSEL

Scott D. Levy, Law Offices of Scott D. Levy & Associates

P.C., Houston, Texas, for the appellants.

Brad D. Brian, Blanca F. Young, Munger Tolles & Olson

LLP, Los Angeles, California, for appellee Corinthian Col-

leges, Inc.

Timothy J. Hatch, James L. Zelenay, Jr., Gibson, Dunn &

Crutcher LLP, Los Angeles, California; Bruce M. Cormier,

Ernst & Young LLP, Washington, DC, for appellee Ernst &

Young LLP.

10724 LEE v. CORINTHIAN COLLEGES

OPINION

B. FLETCHER, Circuit Judge:

Nyoka Lee and Talala Mshuja (“Relators”), qui tam rela-

tors who bring this action on behalf of the United States gov-

ernment, appeal the district court’s judgment dismissing,

without leave to amend, their original complaint

(“Complaint”) against Corinthian Colleges, Inc.

(“Corinthian”); David Moore, Jack D. Massimino, Paul St.

Pierre, Alice T. Kane, Linda A. Skladany, Hank Adler, and

Terry O. Hartshorn (collectively “Individual Defendants”);

and Ernst & Young LLP (“EY”), under Federal Rule of Civil

Procedure 12(b)(6). Relators allege that Corinthian, with the

help of EY, falsely certified to the Department of Education

(“DOE”) its compliance with the Higher Education Act’s

(“HEA”) ban on recruiter-incentive compensation in order to

receive federal education funds, thereby violating the False

Claims Act (“FCA”). The district court granted Corinthian’s

and EY’s motions to dismiss the Complaint under Federal

Rule of Civil Procedure 12(b)(6). The district court concluded

that Relators had failed to allege a false statement and

scienter, two elements of the FCA, because Corinthian’s

recruiter Compensation Program as alleged falls within the

HEA Safe Harbor Provision promulgated by the DOE. Rela-

tors timely appealed. We have jurisdiction under 28 U.S.C.

§ 1291, and we reverse and remand.

I.

A. General Background

The federal government distributes funds under Title IV of

the HEA, 20 U.S.C. § 1094, in order to assist with the costs

of secondary education. In order to receive federal funds

under the HEA, schools must enter with the DOE into a Pro-

gram Participation Agreement, in which they agree to abide

by a host of statutory, regulatory, and contractual require-

LEE v. CORINTHIAN COLLEGES 10725

ments. U.S. ex rel. Hendow v. University of Phoenix, 461 F.3d

1166, 1168 (9th Cir. 2006) (“Hendow”); see also 34 C.F.R

§ 668.14(a) (2010). Among these requirements is a recruiter-

incentive compensation ban, which prohibits institutions from

paying recruiters “incentive payments” based on the number

of students they enroll. More specifically, this ban prohibits

schools from “provid[ing] 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 or in

making decisions regarding the award of student financial

assistance.” 20 U.S.C. § 1094(a)(20). “This requirement is

meant to curb the risk that recruiters will ‘sign up poorly qual-

ified students who will derive little benefit from the subsidy

and may be unable or unwilling to repay federally guaranteed

loans.’ ” Hendow, 461 F.3d at 1168-69 (citation omitted).

In 2002, the DOE amended its previous regulations and

created a “safe harbor” provision interpreting and clarifying

this ban on recruiter-incentive compensation. The regulation

provides that an educational institution may, without violating

the ban on incentive compensation, provide “payment of fixed

compensation, such as a fixed annual salary or a fixed hourly

wage, as long as that compensation is not adjusted up or down

more than twice during any twelve month period, and any

adjustment is not based solely on the number of students

recruited, admitted, enrolled, or awarded financial aid.” 34

C.F.R § 668.14(b)(22)(ii)(A) (2010) (“Safe Harbor Provi-

sion”). Both the ban on incentive compensation and the Safe

Harbor Provision were in effect when this suit was filed.1

1

Since this suit was filed, the DOE has engaged in negotiated rulemak-

ing to reexamine this and other HEA safe harbor provisions. In the final

regulations resulting from this process, which took effect in July 2011, the

DOE eliminated the Safe Harbor Provision for salary-based compensation.

See 75 Fed. Reg. 66832 (Oct. 29, 2010). In commenting on the elimination

of the Safe Harbor Provision, the DOE notes that “the Department’s expe-

rience has demonstrated that unscrupulous actors routinely rely upon these

10726 LEE v. CORINTHIAN COLLEGES

B. Factual and Procedural Background

Corinthian, a public company headquartered in Orange

County, California, operates for-profit vocational schools

throughout the United States. The Individual Defendants are

members of Corinthian’s Board of Directors. EY is the inde-

pendent auditor of Corinthian. Relators are a former employee

of and an independent contractor to Corinthian.

On March 26, 2007, Relators filed under seal a qui tam

action on behalf of the United States government, 31 U.S.C.

§ 3729 et seq., against Corinthian, the Individual Defendants,

and EY (collectively “Defendants”). See 31 U.S.C.

§ 3730(b)(1). In their Complaint, Relators assert against

Defendants four causes of action under the False Claims Act

(“FCA”), 31 U.S.C. § 3729(a)(1), (2), (3), (7) (current version

at 31 U.S.C. § 3729(a)(1)(A), (B), (C), (G)). Relators also

assert several state law claims. On February 25, 2009, the

United States gave notice it would not intervene in the action.

As relevant here, the allegations in the Complaint are as fol-

lows.

Corinthian receives billions of dollars from the federal gov-

ernment under Title IV of the HEA. Despite the HEA’s ban

on incentive compensation, Corinthian, “as a matter of corpo-

rate practice,” “pay[s] recruiters bonuses amounting to 2.5%

to 10% of their base pay based on the number of students they

recruit.” More specifically:

safe harbors to circumvent the intent of [the incentive compensation ban]

of the HEA.” Id. at 66872. According to the DOE, “the safe harbors have

served to obstruct [the objectives of the incentive compensation ban] and

have hampered the Department’s ability to efficiently and effectively

administer the title IV, HEA programs.” Id. Thus, going forward, educa-

tional institutions must comply with the ban on incentive compensation in

order to be eligible for federal grant money, but will no longer be able to

rely on the Safe Harbor Provision to shield compensation programs based

directly or indirectly upon recruitment numbers.

LEE v. CORINTHIAN COLLEGES 10727

As a matter of corporate practice since at least July

2005, recruiters have been required to meet a certain

enrollment quota, depending on their salary grade

and title. Those recruiters that exceed their quotas

receive raises of 2.5% to 10% of their base salary,

every six months, depending on the number of new

recruits they sign up. The bonus criteria are set forth

in a matrix designed by Corinthian. Employees fail-

ing to meet their quotas are disciplined, demoted, or

terminated.

The promotion guidelines applicable to Corinthian recruiters

are presented in a document entitled Corinthian Admissions

Representative Compensation Program (“Compensation Pro-

gram”), which is attached to the Complaint as Exhibit A.

Defendants do not contest the authenticity of this document.

See Lee v. City of Los Angeles, 250 F.3d 668, 688 (9th Cir.

2001).

According to the Complaint, Corinthian and the Individual

Defendants are liable to the United States under the FCA

because of their “use of false statements to obtain HEA, Title

IV loan funds. Specifically, in requesting and receiving

approximately one-half-billion dollars annually, [Corinthian

and the Individual Defendants] falsely represented that Corin-

thian complied with HEA’s prohibitions against using incen-

tive payments for recruiters, which is a core prerequisite to

receive any HEA Title IV funds.”

The Complaint also alleges that EY “falsely certified that

Corinthian was in compliance with recruiter compensation

prohibitions.” EY allegedly “rubber stamped the information

provided to it by Corinthian” and “issued its compliance

audits and financial statement audit opinions knowing them to

be false and/or in reckless disregard of the truth or falsity of

the information provided to the United States.” EY thereby

“fraudulently caused the United States to pay Title IV, HEA

10728 LEE v. CORINTHIAN COLLEGES

Program funds to Corinthian by such false and fraudulent

compliance audit and financial statement audit opinions.”

In essence, then, Relators allege that Corinthian and the

Individual Defendants violated the HEA by firing admissions

representatives who failed to enroll a minimum number of

students, and by compensating admissions representatives

based on the number of students they enrolled. Relators addi-

tionally allege that Defendants certified to the DOE Corinthi-

an’s compliance with the HEA ban on incentive compensation

in order to collect federal funds for which they were ineligi-

ble, in violation of 31 U.S.C. § 3729(a)(1), (2), (3), and (7)

(current version at 31 U.S.C. § 3729(a)(1)(A), (B), (C), (G)).

On August 3, 2009, Corinthian and the Individual Defen-

dants moved to dismiss Relators’ Complaint pursuant to Fed-

eral Rules of Civil Procedure 12(b)(6), 12(b)(1), and 9(b). On

the same day, EY filed a separate motion to dismiss under the

same provisions. The district court granted both motions, con-

cluding that Relators failed under Rule 12(b)(6) to state an

FCA claim. The district court held that the Complaint failed

to allege that Corinthian’s Compensation Program violated

the HEA, that is, that Corinthian made any false statement to

the United States government in certifying their compliance

with that statute. The district court reasoned that the chal-

lenged recruiter Compensation Program falls within the DOE

Safe Harbor Provision because, under its guidelines, increases

in recruiter salaries are not awarded “solely” on the basis of

the number of new enrollees that the recruiter achieved. The

court also reasoned that, because Corinthian reasonably relied

upon the Safe Harbor Provision, it could not have acted with

scienter as required by the FCA. Because the district court

held the FCA claims against the Individual Defendants and

EY were “contingent upon Corinthian Collages’ liability,” it

also dismissed with prejudice the claims against these parties.

Finally, the district court dismissed the state law claims on the

ground that Relators lacked standing to assert them.

LEE v. CORINTHIAN COLLEGES 10729

Relators appealed. In this appeal, they ask us to review the

district court’s conclusion that the allegations in the Com-

plaint do not state a claim under the FCA, and the court’s

decision to dismiss the Complaint with prejudice. They do not

challenge the dismissal of the state law claims.

II.

“The focus of any rule 12(b)(6) dismissal — both in the

trial court and on appeal — is the complaint.” Schneider v.

California Dep’t of Corrections, 151 F.3d 1194, 1197 n.1 (9th

Cir. 1998). “We review dismissals under Rule 12(b)(6) de

novo, accepting as true all well-pleaded allegations of fact in

the complaint and construing them in the light most favorable

to the [Relators].” Zimmerman v. City of Oakland, 255 F.3d

734, 737 (9th Cir. 2001).

Under the pleading requirements of Federal Rule of Civil

Procedure 8, we must determine whether the Complaint con-

tains “sufficient factual matter” that, taken as true, “state a

claim for relief is plausible on its face.” Ashcroft v. Iqbal, 129

S. Ct. 1937, 1949 (2009) (internal citation and quotation

marks omitted). Pursuant to this analysis, only pleaded facts,

as opposed to legal conclusions, are entitled to assumption of

the truth. Id. at 1949-50. “Threadbare recitals of the elements

of a cause of action, supported by mere conclusory state-

ments, do not suffice.” Id. at 1949. If the Complaint does con-

tain such supporting factual allegations, we assume their

veracity and then determine whether they plausibly give rise

to an entitlement to relief. Id. at 1950. “A claim has facial

plausibility when the plaintiff pleads factual content that

allows the court to draw the reasonable inference that the

defendant is liable for the misconduct alleged.” Id. at 1949.

“The plausibility standard is not akin to a ‘probability require-

ment,’ but it asks for more than a sheer possibility that a

defendant has acted unlawfully.” Id.

Furthermore, “[i]n alleging fraud or mistake, a party must

state with particularity the circumstances constituting fraud or

10730 LEE v. CORINTHIAN COLLEGES

mistake.” Fed. R. Civ. P. 9(b). Because they involve allega-

tions of fraud, qui tam actions under the FCA must meet not

only the requirement of Rule 8, but also the particularity

requirements of Rule 9. See Bly-Magee v. California, 236

F.3d 1014, 1018 (9th Cir. 2001). Notably, Rule 9(b) requires

only that the circumstances of fraud be stated with particular-

ity; other facts may be plead generally, or in accordance with

Rule 8. See Iqbal, 129 S. Ct. at 1954; Meijer, Inc. v. Ferring

B.V. (In re DDAVP Direct Purchaser Antitrust Litig.), 585

F.3d 677, 695 (2d Cir. 2009), cert. denied, 130 S. Ct. 3505

(2010).

We can affirm a 12(b)(6) dismissal “on any ground sup-

ported by the record, even if the district court did not rely on

the ground.” Livid Holdings, Ltd. v. Salmon Smith Barney,

Inc., 416 F.3d 940, 950 (9th Cir. 2005).

III.

[1] We first consider whether the facts presented in the

Complaint allege an FCA violation by Corinthian. The FCA

makes liable anyone who “knowingly makes, uses, or causes

to be made or used, a false record or statement” that is mate-

rial to a “false claim for payment or approval” by the United

States government. 31 U.S.C. § 3729(a)(1). A claim under the

FCA can be based on the allegation that a party has falsely

certified compliance with a statute or regulation as a condition

to government payment. See Hendow, 461 F.3d at 1171. The

essential elements of an FCA claim are (1) a false statement

or fraudulent course of conduct, (2) made with requisite

scienter, (3) that was material, causing (4) the government to

pay out money or forfeit moneys due. Id. at 1174.

A. A False Statement

Defendants argue that the Complaint does not allege that

Corinthian made a false statement under the FCA, because, as

a matter of law, the alleged Compensation Program falls

LEE v. CORINTHIAN COLLEGES 10731

within the DOE Safe Harbor Provision and therefore does not

violate the HEA.

As stated above, Relators allege that Corinthian falsely cer-

tified compliance with the HEA’s prohibition against paying

“any commission, bonus, or other incentive payment based

directly or indirectly on success in securing enrollment or

financial aid to any persons or entities engaged in student

recruiting or admissions activities . . . .” The Complaint con-

tains two factual allegations to support the purported violation

of the HEA. First, the Complaint states that, “as a matter of

corporate practice,” Corinthian recruiters receive a 2.5% to

10% salary increase every six months for exceeding certain

enrollment quotas.2 It also states that employees who fail to

meet their enrollment quotas are “disciplined, demoted, or ter-

minated.” We consider these allegations in reverse order.

1. Termination based on recruitment numbers

[2] Relators allege that employees were “disciplined,

demoted, or terminated” on the basis of their recruitment

numbers. This does not state a violation of the incentive com-

pensation ban. Even as broadly construed, the HEA does not

prohibit any and all employment-related decisions on the

basis of recruitment numbers; it prohibits only a particular

type of incentive compensation. Thus, adverse employment

actions, including termination, on the basis of recruitment

numbers remain permissible under the statute’s terms. See

U.S. ex rel. Bott v. Silicon Valley Colleges, 262 F. App’x 810,

812 (9th Cir. 2008) (holding that “[t]he decision to fire an

employee is not covered by the Act because termination is not

a prohibited ‘commission, bonus, or other incentive pay-

ment.’ ” (citing 20 U.S.C. § 1094(a)(20))).3 The Complaint’s

2

Although, elsewhere in the Complaint, Relators refer to these salary

increases as “bonuses,” it is clear from the Compensation Program

attached to the Complaint that the challenged compensation is in the form

of promotion salary increases rather than one-time bonuses.

3

We recognize that U.S. ex rel. Bott v. Silicon Valley Colleges, 262 F.

App’x 810 (9th Cir. 2008), an unpublished disposition, does not serve as

10732 LEE v. CORINTHIAN COLLEGES

allegation that Corinthian imposes adverse employment con-

sequences on the basis of recruitment quotas does not, there-

fore, state a violation of the HEA incentive compensation ban,

and also does not support the claim that a false statement was

made.

2. Compensation based on recruitment numbers

[3] To support an FCA false statement, the Complaint also

alleges that Corinthian awards salary increases on the basis of

recruitment numbers, in violation of HEA’s incentive com-

pensation ban. Defendants argue that Corinthian’s recruiter

compensation policy, as alleged, falls within the DOE Safe

Harbor Provision and does not as a matter of law violate the

HEA. As discussed above, the Safe Harbor Provision allows

institutions to pay semi-annual salary increases to recruiters

only if “any adjustment is not based solely on the number of

students recruited, admitted, enrolled, or awarded financial

aid.” 34 C.F.R § 668.14(b)(22)(ii)(A) (emphasis added).

[4] The Complaint does not expressly use the word “sole-

ly” in alleging that Corinthian awards promotion salary

increases on the basis of recruitment numbers. Nonetheless, it

does allege that the increases in salary are “based on” and

“depend on” the number of students that the recruiter “signs

up.” It then refers to the Corinthian Compensation Program,

which is attached to the Complaint as Exhibit A.4 The Pro-

gram can be summarized as follows:

1. Only those employees with a rating of at least

“Good” are eligible for promotions.

binding precedent. Nonetheless, because we find no precedential decisions

so closely on point, we refer to Bott as persuasive authority where rele-

vant.

4

A district court may consider documents referenced by the Complaint

without converting a 12(b)(6) motion to one for summary judgment. Van

Buskirk v. Cable News Network, Inc., 284 F.3d 977, 980 (9th Cir. 2002).

LEE v. CORINTHIAN COLLEGES 10733

2. Assuming that an employee is eligible for a pro-

motion, the salary increase for which the

employee is eligible is determined by the greater

of (1) the minimum of the salary range for the

position to which they are being promoted

(“category 1”); and (2) a percentage salary

increase related to how successful that recruiter

has been in the previous six-month period

(“category 2”).

3. The category 2 increase that corresponds to a

particular employee is determined by the num-

ber of “net starts” achieved in that six-month

period, combined with his overall performance

rating (“Good” or “Excellent”) for that period.

At first glance, then, it appears that Corinthian’s promotion

and salary increase system does not rely “solely” on recruit-

ment numbers, but also takes into account whether the

employee receives an overall performance rating of “Good”

or “Excellent.” On this basis, Corinthian argues that its

method of awarding salary increases does not violate the

HEA.

[5] The mere inclusion of this performance rating in Corin-

thian’s Compensation Program, however, does not allow us to

conclusively determine whether its method of awarding salary

increases falls within the Safe Harbor Provision. At this stage,

we have no information as to the basis on which a “Good”

versus “Excellent” performance rating is assigned to a Corin-

thian recruiter. Without an understanding what an employee

must do to achieve a rating of “Good,” we cannot determine

whether the rating is based upon substantive requirements that

are separate and distinct from recruitment numbers.5 If, for

5

Notably, Defendants offer no information as to the method by which

the “Good” versus “Excellent” performance review ratings are deter-

mined.

10734 LEE v. CORINTHIAN COLLEGES

example, recruiter performance ratings are awarded on the

basis of the number of students that a recruiter enrolls, then

this rating system would not in fact provide an additional

basis on which compensation decisions are made. Under such

a system, Corinthian would, in essence, make adjustments to

recruiter salaries based “solely” on the number of students

enrolled by that recruiter. Interpreting the Safe Harbor Provi-

sion so that it covers such a system would directly undermine

the HEA express prohibition on “incentive payment based

directly or indirectly on success in securing enrollments,” see

20 U.S.C. § 1094(a)(20).

Moreover, “[w]hen construing a statute or regulation, we

look to the whole law, and to its object and policy, not simply

to a single sentence or member of a sentence.” Owner-

Operator Indep. Drivers Ass’n, Inc. v. Swift Transp. Co., Inc.,

632 F.3d 1111, 1115 (9th Cir. 2011) (internal quotation marks

and citation omitted). “The plain language of a regulation . . .

will not control if clearly expressed administrative intent is to

the contrary or if such plain meaning would lead to absurd

results.” Webb v. Smart Document Solutions, LLC, 499 F.3d

1078, 1085 (9th Cir. 2007) (internal quotation marks and cita-

tion omitted). If the performance rating of at least “Good”

requires an employee merely to fulfill basic performance

requirements that are expected of any employee (such as

showing up on time), then construing the Safe Harbor Provi-

sion so that these ratings serve as an independent basis for

compensation increases would lead to an “absurd result.”

Under such a system, educational institutions could entirely

circumvent the HEA incentive compensation ban by simply

formalizing, through a performance rating system, the basic

requirements expected of any employee, that is, the require-

ments of employment itself.6 Allowing the Safe Harbor Provi-

6

If, by contrast, the “Good” or “Excellent” ratings are driven by con-

crete, merit-based metrics such as those in United States ex. rel. Pilecki-

Simko v. The Chubb Institute, et al., No. 06-3562, 2010 WL 1994794

(D.N.J. May 17, 2010) (holding that a point-based compensation policy

that awarded cumulative points for not only enrollment starts, but also stu-

dent retention, success at recruiting activities, records-keeping, and profes-

sionalism, fell within the DOE Safe Harbor Provision), then the

compensation program could fall within the Safe Harbor Provision.

LEE v. CORINTHIAN COLLEGES 10735

sion to shield such a program from HEA’s recruiter

compensation requirements would render meaningless the

“purpose or objective” of the statute. Owner-Operator Indep.

Drivers Ass’n, 632 F.3d at 1115.

[6] Relators do not allege any facts regarding the meaning

or basis of the “Good” versus “Excellent” performance ratings

included in the Compensation Program attached to the Com-

plaint. As a result, while it is certainly possible that Corinthi-

an’s Compensation Program falls outside the Safe Harbor

Provision (thereby rendering false Corinthian’s certification

of HEA compliance), the Complaint falls short of stating a

plausible claim for relief. This deficiency, however, can read-

ily be cured, and Relators are therefore entitled to amend.

3. Leave to Amend

Although Relators did not seek leave to amend before the

district court, the court expressly contemplated whether

amendment was appropriate. Because the court concluded that

the Compensation Program falls within the Safe Harbor Pro-

vision as a matter of law, it held that leave to amend was

unwarranted.

Because the issue was expressly addressed and decided by

the district court, raised on appeal, and fully briefed by both

parties, it is subject to review by this court. See Kimes v.

Stone, 84 F.3d 1121, 1126 (9th Cir. 1996) (noting that a court

of appeals may consider an issue raised for the first time on

appeal where it presents a purely legal question and consider-

ation of the issue will not prejudice the opposing party); see

also Balistreri v. Pacifica Police Dept., 901 F.2d 696, 701

(9th Cir. 1990).

The trial court’s denial of leave to amend a complaint is

reviewed for an abuse of discretion. See Johnson v. Buckley,

356 F.3d 1067, 1077 (9th Cir. 2004). “When reviewing a dis-

trict court’s decision for abuse of discretion, ‘[w]e first look

10736 LEE v. CORINTHIAN COLLEGES

to whether the trial court identified and applied the correct

legal rule to the relief requested. Second, we look to whether

the trial court’s resolution of the motion resulted from a fac-

tual finding that was illogical, implausible, or without support

in inferences that may be drawn from the facts in the

record.’ ” City of Los Angeles v. San Pedro Boat Works, 635

F.3d 440, 454 (9th Cir. 2011) (quoting United States v. Hink-

son, 585 F.3d 1247, 1263 (9th Cir. 2009) (en banc)).

[7] “The standard for granting leave to amend is gener-

ous.” Balistreri, 901 F.2d at 701. The court considers five fac-

tors in assessing the propriety of leave to amend — bad faith,

undue delay, prejudice to the opposing party, futility of

amendment, and whether the plaintiff has previously amended

the complaint. Johnson, 356 F.3d at 1077. Here, there is no

evidence of delay, prejudice, bad faith, or previous amend-

ments. Therefore, leave to amend turns on whether amend-

ment would be futile.

[8] Under futility analysis, “[d]ismissal without leave to

amend is improper unless it is clear, upon de novo review,

that the complaint could not be saved by any amendment.”

Krainski v. Nevada ex rel. Bd. of Regents of NV. System of

Higher Educ., 616 F.3d 963, 972 (9th Cir. 2010) (internal

citation and quotation marks omitted); see also Lopez v.

Smith, 203 F.3d 1122, 1130 (9th Cir. 2000) (noting that a

court should permit amendment “unless it determines that the

pleading could not possibly be cured by the allegation of other

facts” (internal quotation marks and citation omitted)); Bal-

istreri, 901 F.2d at 701 (noting that leave to amend should be

granted when a court can “conceive of facts” that would ren-

der the plaintiff’s claim viable). Leave to amend is warranted

if the deficiencies can be cured with additional allegations

that are “consistent with the challenged pleading” and that do

not contradict the allegations in the original complaint. Reddy

v. Litton Indus., Inc., 912 F.2d 291, 296-97 (9th Cir. 1990).

Here, we can conceive of additional facts that could, if for-

mally alleged, support the claim that Corinthian made false

LEE v. CORINTHIAN COLLEGES 10737

statements to the DOE. As previously discussed, Relators

could allege that the Corinthian employee performance rating

system is merely a proxy for employee recruitment numbers,

or that the system is based merely on those basic requirements

that any employee would be required to meet.

In addition, Relators repeatedly insist in their briefs that, in

practice, Corinthian recruiters were expected to meet enroll-

ment quotas and understood that this was the basis on which

they would receive promotional salary increases. Relators

could additionally or alternatively allege that, despite the

Compensation Program’s purported or documented reliance

on something other than recruitment numbers, these salary

increases are in practice determined on the sole basis of

recruitment numbers. It is Corinthian’s implementation of its

policy, rather than the written policy itself, that bears scrutiny

under the HEA, and such allegations would require additional

discovery.7

[9] Thus, to the extent that the Complaint insufficiently

alleges a false statement, Relators could provide additional

allegations that would render plausible their claims against

Corinthian. Although the district court correctly identified the

permissive standard for granting leave to amend, it dismissed

with prejudice the Complaint without considering whether

additional facts could cure any deficiencies. We conclude that

the court abused its discretion and that amendment of the

Complaint should have been permitted.

7

Corinthian argues that Relators cannot so amend their Complaint with-

out contradicting their current allegations, because they are bound by the

admission that “corporate practice” is reflected in the attached Compensa-

tion Program. This argument misreads the Complaint. The Complaint

alleges that Corinthian, as a matter of “corporate practice,” increased

recruiter salaries on the basis of recruitment numbers. It then separately

points out that the written Compensation Program is attached as Exhibit

A. The Complaint never states that corporate practice is entirely consistent

with the attached Compensation Program. Thus, the additional allegations

would in no way contradict those already in the Complaint.

10738 LEE v. CORINTHIAN COLLEGES

B. Scienter

Defendants alternatively argue that, even if Relators did or

could allege a false statement, Corinthian’s reliance on the

Safe Harbor Provision negates scienter, another element of

the FCA. The district court agreed.8

[10] Under Rule 9(b), “circumstances constituting fraud or

mistake” must be stated with particularity, but “malice, intent,

knowledge, and other conditions of a persons mind,” includ-

ing scienter, can be alleged generally. See Fed. R. Civ. P.

9(b); see also Zucco Partners, LLC v. Digimarc Corp., 552

F.3d 981, 990 (9th Cir. 2001). Under the False Claim Act’s

scienter requirement, “innocent mistakes, mere negligent mis-

representations and differences in interpretations” will not

suffice to create liability. Hendow, 461 F.3d at 1174 (internal

citations, quotation marks, and alterations omitted). Instead,

Relators must allege that Corinthian knew that its statements

were false, or that it was deliberately indifferent to or acted

with reckless disregard of the truth of the statements. U.S. ex

rel. Hochman v. Nackman, 145 F.3d 1069, 1074 (9th Cir.

1998) (“Absent evidence that the defendants knew that the . . .

Guidelines on which they relied did not apply, or that the

defendants were deliberately indifferent to or recklessly disre-

gardful of the alleged inapplicability of those provisions, no

False Claims Act liability can be found.”).

8

In adopting this reasoning, the district court cited Bott, 262 F. App’x

at 812, for the proposition that “[i]f defendants complied with a facially

valid regulation, relators cannot show the required scienter under the False

Claims Act for actions after the safe harbor regulation was promulgated.”

Thus, the district court apparently assumed that, regardless of whether

Corinthian made a false statement, it believed that its compensation pro-

gram fell within Safe Harbor Provision when certifying compliance with

the HEA. If this assumption of fact is true, Corinthian’s reliance on the

Safe Harbor Provision could indeed negate the allegation that it acted with

fraudulent intent. It is unclear, however, on what basis the court assumed

this fact, since its inquiry is limited to the allegations in the Complaint.

LEE v. CORINTHIAN COLLEGES 10739

In order for Relators to sufficiently plead that Corinthian

acted with fraudulent intent, therefore, they must allege that

(1) Corinthian knew, or acted with reckless disregard of the

fact, that its Compensation Program did not fall within the

DOE Safe Harbor Provision when it certified to the United

States government that it was compliant with the HEA; or,

alternatively, (2) even if it believed that its written Compensa-

tion Program fell under the Safe Harbor Provision, it knew or

acted with reckless disregard of the fact that, in reality,

recruiter compensation decisions were made solely on the

basis of recruitment numbers.

[11] In the operative Complaint, Relators allege that Corin-

thian requested federal grant money from the DOE although

it “knew it was not eligible to receive such funds based on its

recruiting compensation practices, including awarding

bonuses based on the number of students a recruiter signs up.”

Relators also allege, in reciting the FCA counts raised in the

Complaint, that Defendants acted “knowingly” or “in deliber-

ate ignorance or reckless disregard.” The Complaint, there-

fore, does allege that Corinthian acted with scienter. It does

not, however, clearly allege sufficient facts to support an

inference or render plausible that Corinthian acted while

knowing that its Compensation Program fell outside of the

Safe Harbor Provision on which it was entitled to rely.9 See

U.S. ex rel. Oliver v. Parsons Co., 195 F.3d 457, 464 (9th Cir.

1999) (holding that “a [government] contractor relying on a

good faith interpretation of a regulation is not subject to

[FCA] liability . . . because the good faith nature of his or her

action forecloses the possibility that the scienter requirement

is met.”).

9

Relators argue that the Safe Harbor Provision is invalid because it was

promulgated outside of the 360-day time period permitted by the HEA.

This argument has no merit, because the Safe Harbor Provision was pro-

mulgated as an amendment to the original DOE regulations interpreting

the HEA. See 67 Fed. Reg. 51735 (proposed Aug. 8, 2002). The original

regulations were enacted within the permissible 360-day time frame. See

59 Fed. Reg. 22348 (proposed Apr. 29, 1994).

10740 LEE v. CORINTHIAN COLLEGES

[12] Nonetheless, these relatively minor deficiencies can

be cured through amendment. Relators repeatedly argue that

Corinthian certified compliance with the HEA while knowing

that it was in fact compensating recruiters based solely on

their recruitment numbers. Realtors further describe how the

federal government dispenses HEA funds to educational insti-

tutions in accordance with the number of students they enroll

and the degree to which Corinthian depends on such funding.

These facts, if formally alleged, would certainly support an

inference that Corinthian acted with fraudulent intent and did

not, in good faith, rely upon the Safe Harbor Provision.

[13] Under the liberal standards for amending complaints,

Relators should be permitted to plead additional facts that

could cure the Complaint’s deficiencies as to the allegations

that Corinthian made a false statement and acted with the req-

uisite scienter.

IV.

We now consider whether the Complaint sufficiently

alleges a claim against EY and the Individual Defendants.

A. Individual Defendants

[14] The Complaint’s allegations as to the Individual

Defendants do not currently meet the heightened pleading

requirements of Rule 9. “Rule 9(b) does not allow a complaint

to merely lump multiple defendants together but requires

plaintiffs to differentiate their allegations when suing more

than one defendant and inform each defendant separately of

the allegations surrounding his alleged participation in the

fraud.” Swartz v. KPMG LLP, 476 F.3d 756, 764-65 (9th Cir.

2007) (internal citations, quotations marks, and alterations

omitted). “In the context of a fraud suit involving multiple

defendants, a plaintiff must, at a minimum identify the role of

each defendant in the alleged fraudulent scheme.” Id. (internal

citations, quotation marks, and alterations omitted).

LEE v. CORINTHIAN COLLEGES 10741

[15] The Complaint fails to set forth each individual’s

alleged participation in the fraudulent scheme. The Complaint

asserts generally that “Corinthian and its co-defendants are

liable to the United States under the FCA because of the com-

pany’s use of false statements to obtain HEA, Title IV loan

funds.” The only supporting factual allegation involving the

Individual Defendants is that they “monitored and approved

of the illegal recruiter compensation practices as a means to

obtain targeted enrollment levels for the respective Corinthian

campuses.” The Complaint provides no additional detail as to

the nature of the Individual Defendants’ involvement in the

fraudulent acts, but simply attributes wholesale all of the alle-

gations against Corinthian to the Individual Defendants. Rule

9(b) undoubtedly requires more.

Furthermore, the Complaint fails to allege that the Individ-

ual Defendants had any role in making a false statement to the

United States government. While it does assert that the indi-

viduals monitored Corinthian’s recruiter compensation prac-

tices, it does not allege that the Individual Defendants

participated in certifying HEA compliance to the DOE for the

purpose of receiving federal funds.

[16] Nonetheless, because Relators could amend their

Complaint to sufficiently state an FCA claim against Corin-

thian, we cannot conclude that amendment as to the Individ-

ual Defendants would be entirely futile. Additional facts

could render plausible an inference that one or more of Corin-

thian’s Board of Directors oversaw or actively participated in

the alleged fraudulent scheme, including making false state-

ments to the United States government. Relators should have

at least one opportunity to add any such facts to the Com-

plaint. As with Corinthian, the district court dismissed the

Individual Defendants because of the Complaint’s purported

failure to state a false claim, but it failed to consider whether

additional facts could cure any deficiencies. Amendment

should have been permitted.

10742 LEE v. CORINTHIAN COLLEGES

B. Ernst & Young LLP

We now consider the Complaint’s allegations as to EY.

Relators allege that EY submitted “false statements” regard-

ing Corinthian’s compliance with the HEA via two types of

reports — compliance reports (“HEA Compliance Reports” or

“Compliance Reports”) and financial statement audit reports

(“Financial Statement Reports”).

1. Judicial notice

EY first argues that dismissal is warranted because it did

not, as a matter of fact, perform the Compliance Reports certi-

fying Corinthian’s compliance with HEA. It asks us to take

judicial notice of this fact based on a letter, sent to the Board

of Directors of Corinthian from Weworski & Associates,

expressing the opinion that Corinthian had complied in all

material respects with the HEA for the fiscal year ending June

30, 2008. EY further asks the Court to take judicial notice of

the fact that the Financial Statement Reports referenced in the

Complaint do not state any opinion or give any indication as

to Corinthian’s compliance with the HEA.

As a general rule, we “may not consider any material

beyond the pleadings in ruling on a Rule 12(b)(6) motion.”

Lee, 250 F.3d at 688 (internal citation and quotation marks

omitted). We may, however, consider materials that are sub-

mitted with and attached to the Complaint. Id. We may also

consider unattached evidence on which the complaint “neces-

sarily relies” if: (1) the complaint refers to the document; (2)

the document is central to the plaintiff’s claim; and (3) no

party questions the authenticity of the document. Marder v.

Lopez, 450 F.3d 445, 448 (9th Cir. 2006); Lee, 250 F.3d at

688.

Pursuant to Federal Rule of Evidence 201, we may also

take judicial notice of “matters of public record,” Lee, 250

F.3d at 689, but not of facts that may be “subject to reason-

LEE v. CORINTHIAN COLLEGES 10743

able dispute.” Id. at 689. More specifically, we may not, on

the basis of evidence outside of the Complaint, take judicial

notice of facts favorable to Defendants that could reasonably

be disputed. See id. at 689-90.

Here, we can consider the existence of the reports identified

by EY, since the Complaint expressly refers to and “necessar-

ily relies on” them. Nonetheless, we may not, on the basis of

these reports, draw inferences or take notice of facts that

might reasonably be disputed. Whether EY is ultimately

responsible for certifying Corinthian’s compliance with HEA,

and whether the Financial Reports they submitted failed accu-

rately to reflect Corinthian’s HEA-related liabilities, are open

questions requiring further factual development. At the very

least, they are certainly subject to “reasonable dispute.”

Therefore, while EY’s factual assertions with respect to the

reports cited in Relators’ Complaint may ultimately prove

true, we will not decide these disputed factual matters at this

stage. Instead, we focus only on the sufficiency of Relators’

allegations.

2. Sufficiency of the Allegations

In the Complaint, Relators allege that EY “falsely certified

that Corinthian was in compliance with the recruiter compen-

sation prohibitions” and “failed to perform the legally

required evaluation to determine if Corinthian’s recruiter

compensation practices were legal.” The Complaint further

states that EY “issued its compliance audits and financial

statement audit opinions knowing them to be false and/or in

reckless disregard of the truth or falsity of the information

provided to the United States.” It then provides details as to

the particular information that EY omitted from its financial

reports. Finally, the Complaint alleges that EY “fraudulently

caused the United States to pay Title IV, HEA Program funds

to Corinthian by such false and fraudulent compliance audit

and financial statement audit options.”

10744 LEE v. CORINTHIAN COLLEGES

[17] Assuming that the Complaint is amended to suffi-

ciently allege that a false statement was made to the United

States government, we conclude that Relators have met their

burden under Rule 12(b)(6) and Rule 9(b) as to EY. Relators

have alleged all four elements of the FCA with respect to the

company. Moreover, citing to financial accounting standards,

the Complaint provides details as to what practices are being

challenged, namely the omission of information related to

Corinthian’s compliance with the HEA, and what practices

should have been used in their place. See In re Integrated Res.

Real Estate Ltd. P’ships Sec. Litig., 815 F. Supp. 620, 669

(S.D.N.Y. 1993). The Complaint therefore sets forth EY’s

alleged fraudulent act in a “particularized manner.”

[18] The Complaint also sufficiently alleges scienter as to

EY. The Complaint expressly states that EY issued reports

“knowing them to be false and/or in reckless disregard of the

truth or falsity of the information provided to the United

States.” It additionally alleges that EY had knowledge of the

amount of money Corinthian received from HEA funds and

the manner in which this money was spent on recruiter com-

pensation. These facts, taken together, support a “plausible”

inference that the company acted with fraudulent intent. Cf.

Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308,

322-23 (2007) (noting that, under the heightened scienter

requirements of the Private Securities Litigation Reform Act

of 1995, court must consider whether all facts, considered col-

lectively, give rise to a strong inference of scienter).

Assuming that they amend their Complaint to sufficiently

allege a false statement, we conclude that Relators have suffi-

ciently pled an FCA violation as to EY.

V.

In accordance with the analysis above, we reverse the dis-

trict court’s 12(b)(6) dismissal as to Corinthian, the Individual

LEE v. CORINTHIAN COLLEGES 10745

Defendants, and EY, and we remand with instructions to per-

mit leave to amend the Complaint.

REVERSED AND REMANDED.