United States ex rel. Rose v. Stephens Inst.
909 F.3d 1012
| 9th Cir. | 2018Background
- Academy of Art University (Stephens Institute) participated in Title IV federal student-aid programs and entered a program participation agreement that included the statutory/regulatory incentive compensation ban (ICB).
- From 2006–2010 the school implemented compensation schemes rewarding admissions staff based on enrollment goals (large bonuses up to ~$30,000 and trips to Hawaii), and employees understood pay changes were tied to enrollment numbers.
- Relators (former admissions reps) sued under the False Claims Act (FCA), alleging the school submitted claims while violating the ICB; district court denied summary judgment and certified interlocutory questions after the Supreme Court's decision in Escobar.
- Key legal questions: whether implied false certification requires Escobar’s two-part test or Ebeid’s formulation; whether noncompliance with the ICB is material for FCA purposes (Hendow’s holding vs Escobar’s materiality standard); whether the Department’s safe-harbor/regulatory practice precludes liability.
- The Ninth Circuit majority held relators could meet Escobar’s falsity requirements via implied certification and that materiality was a triable issue given (1) Title IV payments were conditioned on ICB compliance, (2) DOE enforcement history showed substantive responses to ICB violations, and (3) the substantial size of the incentives alleged.
- Dissent argued Hendow is overruled by Escobar, that Escobar requires a demanding/rigorous inquiry focused on the government’s likely/actual behavior, and that the record lacks the specific evidence needed to show materiality; would remand for further discovery.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Standard for implied false certification (Ebeid vs Escobar) | Ebeid permits falsity if defendant expressly undertook compliance with a law implicated by submitted claims | Escobar's two-part test is the necessary standard for implied certification | Ninth Circuit applied Escobar's two-part framework (panel bound to post-Escobar panel precedent) and found sufficient evidence to create a factual dispute on falsity |
| Materiality of ICB violations under FCA (Hendow vs Escobar) | Hendow supports that conditioning payment on ICB makes noncompliance material; relators rely on statute/regulation/contract + enforcement history + magnitude | Stephens contends Escobar imposes a rigorous demand requiring specific evidence government would decline payment; Hendow is inconsistent with Escobar | Court held Hendow not clearly irreconcilable with Escobar; materiality is fact-specific and here a reasonable jury could find materiality |
| Government enforcement history as evidence of materiality | Relators point to DOE actions, GAO reports, settlements and recoupments showing DOE treats ICB violations seriously | Defendant points to instances of limited enforcement or program review with no ICB finding to show immateriality | Court found DOE's past enforcement (corrective actions, fines, recoupments) and lack of routine full-payment despite violations creates a triable issue on materiality |
| Safe-harbor and insufficiency-of-proof defense | N/A (relators oppose) | Defendant asserts its practices fell within the (then-repealed) DOE safe-harbor allowing adjustments not based solely on enrollment | Court denied summary judgment on safe-harbor defense because record, viewed for plaintiffs, contained evidence adjustments were based solely on enrollment |
Key Cases Cited
- Ebeid ex rel. United States v. Lungwitz, 616 F.3d 993 (9th Cir. 2010) (articulates Ebeid test for implied false certification)
- Hendow v. University of Phoenix, 461 F.3d 1166 (9th Cir. 2006) (sets Fourth-Element/Hendow framework re: falsity and materiality for ICB cases)
- Kelly v. Serco, Inc., 846 F.3d 325 (9th Cir. 2017) (post-Escobar panel application regarding implied certification)
- Campie v. Gilead Sciences, Inc., 862 F.3d 890 (9th Cir. 2017) (discusses Escobar's impact on implied-certification theory)
- United States ex rel. Escobar v. Universal Health Servs., 780 F.3d 504 (1st Cir. 2015) (First Circuit decision addressed and vacated by Supreme Court; discussed by Ninth Circuit in analyzing Escobar)
- Miller v. Gammie, 335 F.3d 889 (9th Cir. 2003) (panel-precedent rule cited regarding binding nature of prior Ninth Circuit panels)