The opinion
FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
UNITED STATES EX REL. SCOTT No. 17-15111
ROSE; MARY AQUINO; MITCHELL
NELSON; LUCY STEARNS, D.C. No.
Plaintiffs-Appellees, 4:09-cv-05966-
PJH
v.
STEPHENS INSTITUTE, dba Academy OPINION
of Art University,
Defendant-Appellant.
Appeal from the United States District Court
for the Northern District of California
Phyllis J. Hamilton, Chief Judge, Presiding
Argued and Submitted December 6, 2017
San Francisco, California
Filed August 24, 2018
Before: Susan P. Graber and N. Randy Smith, Circuit
Judges, and Jennifer G. Zipps,* District Judge.
Opinion by Judge Graber;
Dissent by Judge N.R. Smith
*
The Honorable Jennifer G. Zipps, United States District Judge for
the District of Arizona, sitting by designation.
2 UNITED STATES EX REL. ROSE V. STEPHENS INST.
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
**
This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
UNITED STATES EX REL. ROSE V. STEPHENS INST. 3
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.
4 UNITED STATES EX REL. ROSE V. STEPHENS INST.
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.
COUNSEL
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.
UNITED STATES EX REL. ROSE V. STEPHENS INST. 5
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.
6 UNITED STATES EX REL. ROSE V. STEPHENS INST.
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 HISTORY1
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).
1
“We review de novo the district court’s denial of summary
judgment. When doing so, we ‘must determine whether the evidence,
viewed in a light most favorable to the non-moving party, presents any
genuine issues of material fact and whether the district court correctly
applied the law.’” Lenz v. Universal Music Corp., 815 F.3d 1145, 1150
(9th Cir. 2016) (quoting Warren v. City of Carlsbad, 58 F.3d 439, 441 (9th
Cir. 1995)). Here, therefore, we view the evidence in the light most
favorable to Relators.
UNITED STATES EX REL. ROSE V. STEPHENS INST. 7
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.
8 UNITED STATES EX REL. ROSE V. STEPHENS INST.
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
2
The three questions certified for interlocutory appeal are:
(1) Must the “two conditions” identified by the
Supreme Court in Escobar always be satisfied for
implied false certification liability under the [False
Claims Act], or does Ebeid’s test for implied false
certification remain good law?
(2) Does an educational institution automatically lose
its institutional eligibility if it fails to comply [with] the
[incentive compensation ban]?
(3) Does Hendow’s holding that the [incentive
compensation ban] is material under the [False Claims
Act] remain good law after Escobar?
Although we structure our discussion differently, we have endeavored to
answer those questions.
UNITED STATES EX REL. ROSE V. STEPHENS INST. 9
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
10 UNITED STATES EX REL. ROSE V. STEPHENS INST.
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 moneys due.” Id. at 1174. But Escobar has unsettled
the state of this circuit’s law with regard to two of those
elements: falsity and materiality.
B. Implied False Certification
The falsity requirement can be satisfied in one of two
ways. The first is by express false certification, which
“means that the entity seeking payment [falsely] certifies
compliance with a law, rule or regulation as part of the
process through which the claim for payment is submitted.”
Ebeid ex rel. United States v. Lungwitz, 616 F.3d 993, 998
(9th Cir. 2010). The other is by implied false certification,
which “occurs when an entity has previously undertaken to
expressly comply with a law, rule, or regulation [but does
not], and that obligation is implicated by submitting a claim
for payment even though a certification of compliance is not
required in the process of submitting the claim.” Id.
(emphasis added).
In Ebeid, we clarified that, to establish a claim under the
implied false certification theory, a relator must show that
“(1) the defendant explicitly undertook to comply with a law,
rule or regulation that is implicated in submitting a claim for
payment and that (2) claims were submitted (3) even though
the defendant was not in compliance with that law, rule or
regulation.” Id. Thus, under Ebeid, a relator bringing an
implied certification claim could show falsity by pointing to
UNITED STATES EX REL. ROSE V. STEPHENS INST. 11
noncompliance with a law, rule, or regulation that is
necessarily implicated in a defendant’s claim for payment.
The Supreme Court subsequently addressed implied false
certification in Escobar. There, the Supreme Court held 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. at 2001 (emphases added).
We have addressed Escobar in two cases that create
uncertainty about the ongoing validity of Ebeid’s test for
falsity in implied false certification cases. First, in United
States ex rel. Kelly v. Serco, Inc., 846 F.3d 325, 332 (9th Cir.
2017), we considered only Escobar’s two-part test in
determining that the plaintiff’s implied false certification
claim failed; we did not consider whether the claim met the
lower standard for falsity enunciated in Ebeid. Then, in
United States ex rel. Campie v. Gilead Sciences, Inc., we
noted that Escobar “‘clarif[ied] some of the circumstances in
which the False Claims Act imposes liability’ under [an
implied false certification] theory.” 862 F.3d 890, 901 (9th
Cir. 2017) (emphasis added) (quoting Escobar, 136 S. Ct. at
1995), petition for cert. filed, 86 U.S.L.W. 3519 (U.S. Dec.
26, 2017) (No. 17-936). But we then stated that the
12 UNITED STATES EX REL. ROSE V. STEPHENS INST.
“Supreme Court held that although the implied certification
theory can be a basis for liability, two conditions must be
satisfied.” Id. (emphasis added) (citing Escobar, 136 S. Ct.
at 2000).
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. Miller v.
Gammie, 335 F.3d 889, 899 (9th Cir. 2003) (en banc). We
conclude, therefore, that Relators must satisfy Escobar’s two
conditions to prove falsity, unless and until our court, en
banc, interprets Escobar differently.
On this record, a reasonable trier of fact could conclude
that Defendant’s actions meet the Escobar requirements for
falsity. In the Federal Stafford Loan School Certification
form, Defendant specifically represented that the student
applying for federal financial aid is an “eligible borrower”
and is “accepted for enrollment in an eligible program.”
Because Defendant failed to disclose its noncompliance with
the incentive compensation ban, those representations could
be considered “misleading half-truths.” That is sufficient
evidence to create a genuine issue of material fact and,
therefore, to defeat summary judgment.
UNITED STATES EX REL. ROSE V. STEPHENS INST. 13
C. Materiality
Under the False Claims Act, “the term ‘material’ means
having a natural tendency to influence, or be capable of
influencing, the payment or receipt of money or property.”
31 U.S.C. § 3729(b)(4). In Hendow, we held that the relators
had alleged adequately that the University of Phoenix
“engaged in statements or courses of conduct that were
material to the government’s decision with regard to
funding.” 461 F.3d at 1177. In concluding that the alleged
violations of the incentive compensation ban were material,
we relied on the fact that the statute, regulation, and program
participation agreement all explicitly conditioned payment on
compliance with the incentive compensation ban. Id. We did
not explicitly consider any other factors in determining that
the relators properly pleaded the materiality of the
university’s violations. Id. We noted, with regard to
materiality, that “the question is merely whether the false
certification . . . was relevant to the government’s decision to
confer a benefit.” Id. at 1173.
In Escobar, the Supreme Court elaborated on what can
and cannot establish materiality in the context of the False
Claims Act. The Court clarified that “[w]hether a provision
is labeled a condition of payment is relevant to but not
dispositive of the materiality inquiry.” Escobar, 136 S. Ct. at
2001 (emphases added). Therefore, “even when a
requirement is expressly designated a condition of payment,
not every violation of such a requirement gives rise to
liability.” Id. at 1996. Instead, the Court explained,
“materiality looks to the effect on the likely or actual
behavior of the recipient of the alleged misrepresentation,”
14 UNITED STATES EX REL. ROSE V. STEPHENS INST.
meaning the government. Id. at 2002 (internal quotation
marks and brackets omitted).3
The Supreme Court then laid out three scenarios that may
help courts determine the likely or actual behavior of the
government with regard to a given requirement. First, “proof
of materiality can include, but is not necessarily limited to,
evidence that the defendant knows that the Government
consistently refuses to pay claims in the mine run of cases
based on noncompliance with the particular statutory,
regulatory, or contractual requirement.” Id. at 2003. Second,
the Court explained that, “if the Government pays a particular
claim in full despite its actual knowledge that certain
requirements were violated, that is very strong evidence that
those requirements are not material.” Id. (emphasis added).
Third, “if the Government regularly pays a particular type of
claim in full despite actual knowledge that certain
requirements were violated, and has signaled no change in
position, that is strong evidence that the requirements are not
material.” Id. at 2003–04 (emphasis added). The Court
further noted that materiality “cannot be found where
noncompliance is minor or insubstantial.” Id. at 2003.
In our view, Hendow is not “clearly irreconcilable with
the reasoning or theory of” Escobar and, therefore, has not
been overruled. Miller, 335 F.3d at 893. It is true that
Hendow explicitly considered only the facts that the
3
The dissent maintains that we have ignored the Supreme Court’s
assertion that the materiality standard is “rigorous” or “demanding.”
Dissent at 24–25. Those adjectives, while they give flavor to the Court’s
discussion, do not establish the test that the Court requires us to use. The
actual test to be applied is the one that we quote and apply in text: what
is the effect of a misrepresentation on the likely or actual behavior of the
government. We have, in our view, applied that test rigorously.
UNITED STATES EX REL. ROSE V. STEPHENS INST. 15
defendant had violated a statute, regulation, and contract—by
not complying with the incentive compensation ban—and
that payment was conditioned on compliance with the ban.
461 F.3d at 1175. But Hendow did not state that
noncompliance is material in all cases. For instance, Hendow
itself may have been decided differently had there been
countervailing evidence of immateriality.4 After Escobar, it
is clear that noncompliance with the incentive compensation
ban is not material per se. Nor does noncompliance
automatically revoke institutional eligibility. Rather, we must
examine the particular facts of each case. In other words, we
view Escobar as creating a “gloss” on the analysis of
materiality. But the four basic elements of a False Claims
Act claim, set out in Hendow, remain valid. See supra p. 10.
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’s payment was
conditioned on compliance with the incentive compensation
ban, because of the Department’s past enforcement activities,
4
The dissent claims that Hendow explicitly rejected “the
‘countervailing evidence’ [of immateriality] before it” when determining
that the incentive compensation ban is material. Dissent at 23. Hendow
did not do so. The opinion contains no suggestion whatsoever that any
countervailing evidence existed. Rather, the dissent quotes from a passage
in which the opinion considers the parties’ legal arguments concerning the
extent of the enforcement powers of the Department of Education; did “its
authority to take ‘emergency action’ . . . mean[] that the statutory
requirements are causally related to its decision to pay out moneys due”?
Hendow, 461 F.3d at 1175. Hendow simply does not discuss the relevance
of evidence that, for example, the Department refused to impose sanctions
on schools that violated the incentive compensation ban. Hendow and
Escobar, therefore, are not clearly irreconcilable. Miller, 335 F.3d at 893.
16 UNITED STATES EX REL. ROSE V. STEPHENS INST.
and because of the substantial size of the forbidden incentive
payments.5
1. Funds Conditioned on Compliance
We consider first the same factor that Hendow did: the
government conditioned the payment of Title IV funds on
compliance with the incentive compensation ban through
statute, regulation, and contract. Had Defendant not certified
in its program participation agreement that it complied with
the incentive compensation ban, it could not have been paid,
because Congress required as much.6 After Escobar, that
triple-conditioning of Title IV funds on compliance with the
incentive compensation ban may not be sufficient, without
5
In concluding that the existing record is insufficient to create an
issue of fact as to materiality, the dissent demands more certainty than
Escobar and general principles governing summary judgment require. For
example, the dissent argues that the government’s responses to other
schools’ similar misrepresentations is insufficient to demonstrate that the
government “would find” the misrepresentations material in this case.
Dissent at 27 (emphasis added). But Escobar speaks in terms of “likely,”
as well as “actual,” behavior. 136 S. Ct. at 2002. As another example, the
dissent states that “[s]ignificant materiality questions remain,” the answers
to which “are required before liability” can attach. Dissent at 27–28. But
the only question that we are called on to answer in this summary
judgment appeal is whether there is a genuine issue of material fact; we
need not and do not decide whether Relators do or should prevail.
6
Defendant argues that the incentive compensation ban is expressly
identified as a condition of participation in the government’s Title IV
programs, not as a condition of payment. We addressed that argument in
Hendow and concluded that it is “a distinction without a difference.”
461 F.3d at 1176. Because no subsequent Supreme Court or Ninth Circuit
en banc case has undermined our holding, we cannot, and do not, revisit
that determination now.
UNITED STATES EX REL. ROSE V. STEPHENS INST. 17
more, to prove materiality, but it is certainly probative
evidence of materiality.
2. Past Department Actions
We next consider how the Department has treated similar
violations. We look to the three scenarios bearing on
materiality that the Supreme Court enunciated in Escobar,
though none of them is necessarily required or dispositive.
See Escobar, 136 S. Ct. at 2003–04 (laying out scenarios that
can constitute proof of materiality or immateriality, but
noting that such proof “is not necessarily limited to” those
scenarios).
First, we ask whether there is “evidence that the defendant
knows that the Government consistently refuses to pay claims
in the mine run of cases based on noncompliance” with the
incentive compensation ban, because such a showing can help
establish that the requirement was material. Escobar, 136 S.
Ct. at 2003. There is no such evidence in this case and,
therefore, that inquiry does not factor into our analysis.
Second, we ask whether the Department has paid “a
particular claim in full despite its actual knowledge that” the
incentive compensation ban was violated, because “that is
very strong evidence that [the incentive compensation ban is]
not material.” Id. (emphasis added). The record does not
establish that, during the relevant time period, the Department
had actual knowledge that Defendant was violating the
incentive compensation ban. We cannot, therefore, analyze
the Department’s behavior here to determine whether
18 UNITED STATES EX REL. ROSE V. STEPHENS INST.
compliance with the incentive compensation ban was
material.7
Third, we examine whether the Department “regularly
pays a particular type of claim in full despite actual
knowledge that certain requirements were violated, and has
signaled no change in position, [because] that is strong
evidence that the requirements are not material.” Id. at
2003–04 (emphasis added). To show that the Department
does regularly pay claims in full despite knowing about
violations of the incentive compensation ban, Defendant
points to two 2010 Government Accountability Office
(“GAO”) reports. The first report identifies 32 instances in
which schools violated the incentive compensation ban
between 1998 and 2009, and the second documents the
Department’s responses to those 32 violations. Because the
Department “did not limit, suspend, or terminate any [of
those] school[s’] access to federal student aid,” Defendant
argues, the Department regularly paid claims in full despite
actual knowledge of violations of the incentive compensation
ban.
7
Defendant points to the Department’s 2011 program review of
Defendant, which took place after Relators filed this action. Defendant
argues that the program review, which made no findings regarding the
incentive compensation ban and resulted in no action against Defendant
for noncompliance, is proof that the incentive compensation ban was not
material to the Department. But the letter closing the review cautioned
that the review’s determination “does not relieve [Defendant] of its
obligation to comply with all of the statutory or regulatory provisions
governing the Title IV, [Higher Education Act] programs,” and
specifically noted that “compensation must not be based in any way on the
number of students enrolled.” (Emphases added.) Further, at the
summary judgment stage, the presence of some contrary evidence does not
negate the existence of an issue of fact on materiality.
UNITED STATES EX REL. ROSE V. STEPHENS INST. 19
Defendant’s argument does not tell the whole story. Of
the 32 schools with substantiated violations, the Department
ordered 25 of them to take corrective action, which included
terminating bonus payments to recruiters and ending referral
fees to students. And 2 of those 25 schools were required to
pay fines as a penalty, which together totaled $64,000. The
Department also identified a liability of more than $187
million in misspent student aid funds at 1 of the 32 schools,
meaning that the Department required the school to repay
improperly awarded federal funds. The Department recouped
more than $16 million of the total liability. The GAO reports
also show that the Department took no further enforcement
action at six schools with violations. But, of those six
schools, three of them closed, two were terminated for other
reasons, and one school’s violations fell within a “safe harbor
provision.” The GAO reports further reveal that the
Department reached settlement agreements with 22 additional
schools, which allowed it to recoup funds totaling more than
$59 million in payments.
There is evidence, then, that the Department did care
about violations of the incentive compensation ban and did
not allow schools simply to continue violating the ban while
receiving Title IV funds. And in many cases, through one
means or another, the Department recouped many millions of
dollars from the violating schools, showing that it was not
prepared to pay claims “in full” despite knowing of violations
of the incentive compensation ban. The Department can
demonstrate that requirements, such as the incentive
compensation ban, are material without directly limiting,
suspending, or terminating schools’ access to federal student
aid. A full examination of the Department’s past enforcement
habits in similar cases, therefore, reveals that a reasonable
20 UNITED STATES EX REL. ROSE V. STEPHENS INST.
trier of fact could find that Defendant’s violations of the
incentive compensation ban were material.
3. Magnitude of Violation
As mentioned, the Supreme Court also noted in Escobar
that materiality does not exist “where noncompliance is
minor or insubstantial.” 136 S. Ct. at 2003. For instance,
were a school to offer admissions representatives cups of
coffee or $10 gift cards for recruiting higher numbers of
students, there would be no viable claim under the False
Claims Act. That is not the case here. Under Defendant’s
2006–2008 compensation scheme, admissions representatives
stood to gain as much as $30,000 and a trip to Hawaii simply
by hitting their enrollment goals. And under Defendant’s
2009–2010 scorecard compensation scheme, representatives’
salaries could be adjusted by as much as $23,000 for meeting
their enrollment goals.
Those large monetary awards are quite unlike a small,
occasional perk. Rather, those awards are precisely the kind
of substantial incentive that Congress sought to prevent in
enacting the ban on incentive compensation. Therefore, the
tremendous bonuses that Defendant’s admissions
representatives could receive by achieving their enrollment
goals (and the similar decreases that could result from falling
short of the targets set by Defendant) also counsel against a
finding that Defendant’s noncompliance was immaterial.
Overall, then, when we construe the evidence in the light
most favorable to Relators, we conclude that a reasonable
trier of fact could find that Defendant’s noncompliance with
the incentive compensation ban was material.
UNITED STATES EX REL. ROSE V. STEPHENS INST. 21
D. Safe Harbor
Finally, Defendant argues that, even if there is a question
of fact as to one or more of Hendow’s four requirements for
claims under the False Claims Act, it should win on summary
judgment because any violations of the incentive
compensation ban fell within the Department’s safe harbor
provision. The now-repealed safe harbor provision was in
effect from 2003 through 2010. Compare Federal Student
Aid Programs, 67 Fed. Reg. 67,048-01, 67,072 (Nov. 1,
2002), with 34 C.F.R. § 668.14(b)(22)(i)(B). That provision
required, among other things, that “any adjustment [in
compensation] is not based solely on the number of students
recruited, admitted, enrolled, or awarded financial aid.”
Federal Student Aid Programs, 67 Fed. Reg. at 67,072.
Defendant’s argument fails, at least on summary
judgment. Viewed in the light most favorable to Relators, the
record contains evidence that Defendant did make
compensation adjustments based solely on admissions
representatives’ enrollment numbers.
AFFIRMED.
22 UNITED STATES EX REL. ROSE V. STEPHENS INST.
N.R. SMITH, Circuit Judge, dissenting in part:
I agree with the Majority’s opinion through Section B of
the Discussion Section, however we part ways regarding:
(1) the validity of United States ex rel. Hendow v. University
of Phoenix, 461 F.3d 1166 (9th Cir. 2006), in light of the
Supreme Court’s decision in Universal Health Services, Inc.
v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016); and
(2) whether, under Escobar’s “demanding” and “rigorous”
materiality standard, there was sufficient evidence of a
“material” violation of the Incentive Compensation Ban
(ICB) to defeat summary judgment, id at 1996, 2003. Instead,
I would reverse the district court’s materiality finding, vacate
the judgment, and remand for additional discovery and
further briefing. Why?
The Majority makes three errors in its analysis. First, it
fails to recognize that Hendow’s materiality holding is no
longer good law after Escobar. Second, it fails to fully
articulate the Supreme Court’s materiality standard as
outlined in Escobar. Finally, the Majority applies its
erroneous legal standard to the facts at hand, reaching an
erroneous conclusion. Let me explain.
I. Escobar overruled the logic of Hendow’s materiality
holding.
The Majority erroneously concludes that it can still
rely—at least in some regard—on Hendow’s materiality
holding, because it “may have been decided differently had
there been countervailing evidence of immateriality.” Maj.
Op. at 14–15. Escobar, the Majority concludes, merely
“creat[ed] a ‘gloss’ on the analysis of materiality.” Maj. Op.
at 15. I disagree. Instead, Escobar explicitly overruled
UNITED STATES EX REL. ROSE V. STEPHENS INST. 23
Hendow’s materiality standard and imposed a new materiality
analysis that we must follow and apply.
The Majority’s theory that Hendow could have reached a
different conclusion in light of “countervailing evidence”
does not acknowledge Hendow’s own reasoning. Hendow
explicitly rejected the “countervailing evidence” before it:
“questions of enforcement power are largely academic,
because the eligibility of the University under Title IV and
the Higher Education Act of 1965 . . . is explicitly
conditioned, in three different ways, on compliance with the
[ICB].” Hendow, 461 F.3d at 1175 (last emphasis original).
Put another way: the government’s enforcement
power—much less what it actually did with that power—did
not matter. Rather, Hendow clearly held that “expressly
condition[ing] [payment] in three different ways” on
compliance with the ICB was sufficient to make compliance
with the ICB material. Id. at 1177.
However, Escobar rejected this Hendow materiality
standard. In Escobar, the First Circuit followed Hendow and
concluded that the “express and absolute language of the
regulation in question, in conjunction with the repeated
references to supervision throughout the regulatory scheme,
constitute[d] dispositive evidence of materiality.” United
States ex rel. Escobar v. Universal Health Servs., Inc., 780
F.3d 504, 514 (1st Cir. 2015) (citations and quotation marks
omitted), vacated and remanded by Escobar, 136 S. Ct. at
1996. Rejecting that reasoning, the Supreme Court instead
held that “the label the Government attaches to a
requirement” is not dispositive. Escobar, 136 S. Ct. at 1996.
Accordingly, the Supreme Court outlined that the proper
inquiry is “whether the defendant knowingly violated a
requirement that the defendant knows is material to the
24 UNITED STATES EX REL. ROSE V. STEPHENS INST.
Government’s payment decision.” Id. at 1996 (emphasis
added); see also id. at 2001 (“[S]tatutory, regulatory, and
contractual requirements are not automatically material, even
if they are labeled conditions of payment.”); id. at 2003 (“In
sum, when evaluating materiality under the False Claims Act,
the Government’s decision to expressly identify a provision
as a condition of payment is relevant, but not automatically
dispositive.”).
Thus, under Escobar, the analysis focuses not on whether
payment is conditioned on compliance, but whether the
Government would truly find such noncompliance material
to a payment decision. Because Hendow does not follow that
analysis, the Majority opinion should conclude that Hendow’s
materiality holding is “clearly irreconcilable with the
reasoning and theory of” Escobar and explicitly overrule
Hendow to that extent. Miller v. Gammie, 335 F.3d 889, 893
(9th Cir. 2003).
II. The Majority fails to articulate the “demanding” and
rigorous” nature of the materiality standard imposed
by Escobar.
There is no question that the Majority outlines part of the
Escobar materiality standard. However, it leaves out two very
significant aspects, both of which are required to determine
whether a misrepresentation is actually material.
First, the Supreme Court stated four times that the
materiality test was “rigorous” or “demanding.” Escobar,
136 S. Ct. at 1996 (“We clarify below how that rigorous
materiality requirement should be enforced.” (emphasis
added)); id. at 2002 (“[The materiality and scienter]
requirements are rigorous.” (emphasis added)); id. at 2003
UNITED STATES EX REL. ROSE V. STEPHENS INST. 25
(“The materiality standard is demanding.” (emphasis added));
id. at 2004 n.6 (“The standard for materiality that we have
outlined is a familiar and rigorous one.” (emphasis added)).
The Majority states that these descriptors of the analysis
merely “give flavor to the Court’s discussion,” but otherwise
ascribes no use to them. Maj. Op. at 14, n.3. Descriptions of
how the test is to be applied are not just “flavor[ing],” they
are the key in conducting the analysis the Supreme Court has
instructed us to do. Anything less is insufficient and the
Majority’s application of Escobar reveals its lack of rigor.
Second, the Supreme Court provided a very clear standard
for evaluating whether the misrepresentation was “material to
the Government’s payment decision.” Id. at 1996; see also id.
at 2002–03. The Supreme Court stated that the primary
inquiry “looks to the effect on the likely or actual behavior of
the recipient of the alleged misrepresentation.” Id. at 2002
(emphasis added and quotation marks omitted). To illustrate
what the inquiry looks like, the Supreme Court then explicitly
referenced both tort and contract law materiality standards.
These standards require an analysis of what, for example, “a
reasonable man would attach importance to . . . in
determining his choice of action in the transaction” or
whether “the defendant knew or had reason to know that the
recipient of the representation attaches importance to the
specific matter in determining his choice of action, even
though a reasonable person would not.” Id. at 2002–03
(quotation marks omitted) (citing Restatement (Second) of
Torts § 538 at 80); see also id. at 2003 n.5.1 Again, similar to
1
Indeed, the Supreme Court’s illustrations of the inquiry outline the
required specificity. It held that “proof of materiality can include”
evidence that: (1) “the defendant knows that the Government consistently
refuses to pay claims in the mine run of cases based on noncompliance
26 UNITED STATES EX REL. ROSE V. STEPHENS INST.
the “demanding” and “rigorous” nature of the inquiry, the
Majority does not even mention the contract or tort
guideposts provided by the Supreme Court. Id. at 1996, 2003.
In sum, though expressly suggesting that payment can be
relevant, Escobar requires that the primary inquiry of
whether a misrepresentation is material mandates a
“rigorous” and “demanding” inquiry into the “likely or actual
behavior” of the Government to determine whether it “would
attach importance [to the misrepresentation] in determining
[its] choice of action in the transaction.” Id. at 2002–03
(quotation marks omitted). Stated differently, the evidence
(regarding the government’s response to a misrepresentation)
must be specific or directly analogous to the current alleged
misrepresentation. Anything else would not be sufficiently
“demanding” or “rigorous” to determine the Government’s
“likely or actual behavior.” Id.
III. The Majority erroneously concludes that, on this
record, there are sufficient questions of material
fact to defeat summary judgment.
The Majority, like the district court, fails to properly
apply the “demanding” and “rigorous” Escobar standard to
the evidence in this case. Id. at 2002–03.
with the particular statutory, regulatory, or contractual requirement”; or
(2) “the Government pays a particular claim in full despite its actual
knowledge that certain requirements were violated . . . .” Escobar, 136 S.
Ct. at 2003–04 (emphasis added). Actual knowledge of regular, repeated
nonpayment or actual knowledge of violations are both particular and
demanding standards.
UNITED STATES EX REL. ROSE V. STEPHENS INST. 27
First, there is simply no evidence before us regarding how
the Government would respond to the specific ICB violations
alleged against Stephens Institute. At most, the Majority
relies on aggregate data regarding the Government’s general
enforcement of the ICB.2 The Majority concludes that this is
sufficient: “There is evidence, then, that the Department did
care about violations of the incentive compensation ban and
did not allow schools simply to continue violating the ban
while receiving Title IV funds.” Maj. Op. at 17. Certainly, the
Majority is correct that this evidence demonstrates that the
Government cares in a broad sense. But, caring is not enough
to make it material under the Escobar standard. Whether
aggregate data demonstrates that the Government cares is not
evidence that, in this case, the Government would find these
alleged misrepresentations material. Significant materiality
questions remain, for example: Does a fine for
noncompliance represent a “material” aspect? Or, are fines
only imposed for minor regulatory violations, which Escobar
explicitly stated were not material? Escobar, 136 S. Ct. at
2003 (“The False Claims Act is not . . . a vehicle for
punishing garden-variety breaches of contract or regulatory
violations.”). If the fines are material, were they imposed for
more or less egregious behavior than the alleged Stephens
2
Plaintiffs establish no more. A plaintiff bears the burden to present
sufficient evidence from which a jury could conclude the
misrepresentations were material to the government’s payment decision.
Here, Plaintiffs alleged Stephens Institute knowingly paid significant
compensation to recruiters for meeting certain enrollment goals. Yet, the
record also indicates that the ICB is only one of many (if not hundreds) of
the regulations with which the Department of Education (DOE) requires
schools to comply and that the DOE has generally doled out only minor
penalties for ICB violations—particularly for several seemingly
significant violations. In this light, I think a jury would be left to speculate
how important the alleged misrepresentations actually are.
28 UNITED STATES EX REL. ROSE V. STEPHENS INST.
Institute behavior? The aggregate data answers none of these
questions and yet their answers are required before liability
under the “demanding” and “rigorous” Escobar standard may
be imposed. Id. at 2002–03.3
Second, with no specific evidence regarding how the
Government would respond to the instant allegations, the
only “relevant” evidence that remains is the fact that
compliance with the ICB is a condition for payment. Indeed,
to reach its conclusion, the Majority appears to invoke the all
or nothing Hendow analysis, which the Supreme Court
squarely rejected. And, the Majority steps beyond such
evidence being “relevant” and concludes that the
Government’s triple-conditioning of ICB compliance is
“probative evidence of materiality.” Maj. Op. at 16–17.
3
The Majority faults my dissent for stating that answers to these
questions are required before “liability . . . may be imposed.” Maj. Op. at
16, n.5. Particularly, it argues that on summary judgment, we must only
determine whether there are questions of material fact, not whether
“liability . . . may be imposed.” The Majority’s argument misreads my
dissent and confuses the standard. Like we must on summary judgment,
I am “view[ing] the evidence in the light most favorable to the non-moving
party.” Vos. v. City of Newport Beach, 892 F.3d 1024, 1030 (9th Cir.
2018) (emphasis added) (quoting Lal v. California, 746 F.3d 1112,
1115–16 (9th Cir. 2014)). In this case, there is no real dispute about what
the evidence is, but whether the evidence proffered is—viewed in the light
most favorable to the non-moving party—sufficient to even go to trial, i.e.,
impute liability in the best case Plaintiffs have. Here, the evidence
proffered is simply not enough under Escobar—there is no evidence about
what the Government would actually do in this case (or even in a similar
case). “The court shall grant summary judgment if the movant shows that
there is no genuine dispute as to any material fact and the movant is
entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a).
UNITED STATES EX REL. ROSE V. STEPHENS INST. 29
However, the sole fact that compliance is a condition of
payment is not enough. Escobar, 136 S. Ct. at 2003 (“In sum,
when evaluating materiality under the False Claims Act, the
Government’s decision to expressly identify a provision as a
condition of payment is relevant, but not automatically
dispositive.” (emphasis added)). Yes, certification of
compliance with the ICB is required for payment, but so is
certification of compliance with a host of additional statutes,
regulations, and contractual requirements. There is no
indication that the Government holds the ICB out as an
exceptionally important requirement and, under Escobar,
misrepresentations regarding compliance “must be material
to the Government’s payment decision.” Id. at 1996.
Therefore, absent additional evidence demonstrating that in
this situation, the Government treated a violation as material,
and in that situation, it did not, conditioning compliance with
the ICB is simply not enough to prove materiality. Id. at 2003
& n.5 (holding the misrepresentation must go “to the very
essence of the bargain” (quoting Junius Constr. Co. v. Cohen,
178 N.E. 672, 674 (N.Y. 1931))).
As such, all we have before us is (1) general, aggregate
evidence that the Government cares about ICB violations (not
that what Stephens Institute is specifically accused of doing
is, indeed, material such that it would influence a payment
decision by the Government), and (2) the fact that payment is
triple-conditioned on compliance with the ICB. This is not
enough to meet the “rigorous” and “demanding” inquiry into
the “likely or actual behavior” of the Government to
determine whether it “would attach importance to [the
misrepresentation] in determining [its] choice of action in the
transaction.” Id. at 2002–03 (quotation marks omitted).
30 UNITED STATES EX REL. ROSE V. STEPHENS INST.
IV. Conclusion.
It is apparent from both the district court’s order and the
parties’ briefing that there was confusion regarding the
materiality question, particularly the role of Hendow in light
of Escobar. And, there is insufficient evidence to establish
that the allegations against Stephens Institute would be
considered material. However, the clarification of the
interaction between Hendow and Escobar could change what
the parties seek in discovery and the district court’s ultimate
conclusion. Therefore, in light of the clarified reasoning, I
would reverse the district court’s denial of Stephens
Institute’s motion for summary judgment, vacate the
judgment, and remand for (1) additional discovery to develop
the summary judgment record; (2) additional briefing; and,
after that, (3) a re-examination by the district court.