The opinion filed on August 24, 2018, and published at
On slip opinion page 10, begin the first full paragraph with: "As relevant here, the falsity requirement can be satisfied in one of two ways."
With this amendment, Judges Graber and Zipps have voted to deny Appellant's petition for panel rehearing, and Judge Smith has voted to grant it. Judge Graber has voted to deny Appellant's petition for rehearing en banc, and Judge Zipps has so recommended. Judge Smith has recommended granting the petition for rehearing en banc.
The full court has been advised of the petition for rehearing en banc, and no judge of the court has requested a vote on it.
Appellant's petition for panel rehearing and rehearing en banc is DENIED . No further petitions for panel rehearing or rehearing en banc may be filed.
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 , --- U.S. ----,
FACTUAL AND PROCEDURAL HISTORY
Defendant Stephens Institute, doing business as Academy of Art University, *1016is 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.
In 2006, Defendant's admissions department instituted a new policy to encourage admissions representatives to enroll more students. The policy established an enrollment goal for each admissions representative. If a representative succeeded in enrolling that number of students, he or she would receive a salary increase of up to $30,000. Conversely, a representative could have his or her salary decreased by as much as $30,000 for failing to reach the assigned enrollment goal. Defendant characterized those adjustments as dependent on both quantitative success, meaning a representative's enrollment numbers, and qualitative success, meaning the representative's non-enrollment performance. But, in practice, the employees understood that their salary adjustments rested entirely on their enrollment numbers. Defendant rewarded one team of representatives with an expense-paid trip to Hawaii. The team received that reward solely because of their enrollment numbers.
That enrollment incentive policy remained in place until 2009, when Defendant instituted new enrollment goals and a "scorecard" system for calculating salary adjustments. The scorecard system involved separate salary adjustment calculations for qualitative and quantitative performance. An admissions representative could receive an adjustment of as much as $23,000 for quantitative performance alone; adjustments related to qualitative performance topped out at $6,000. Managers were told not to share those scorecards with admissions representatives because of concerns about compliance with the participation agreement. The scorecard policy remained in effect until 2010.
Relators Scott Rose, Mary Aquino, Mitchell Nelson, and Lucy Stearns, who are former admissions representatives for Defendant, brought this False Claims Act action in 2010, claiming that Defendant violated the incentive compensation ban from 2006 through 2010. Defendant filed a motion for summary judgment, which the district court denied on May 4, 2016. But on June 16, 2016, the Supreme Court decided Escobar , in which the Court clarified the law surrounding falsity and materiality in False Claims Act claims.
*1017DISCUSSION
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."
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."
B. Implied False Certification
As relevant here, 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 ,
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."
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 ,
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. ,
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 ,
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.
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."
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 ,
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."
In our view, Hendow is not "clearly irreconcilable with the reasoning or theory of" Escobar and, therefore, has not been overruled. Miller ,
*1020After 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. 1017.
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, and because of the substantial size of the forbidden incentive payments.
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.
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 *1021required or dispositive. See Escobar ,
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 ,
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."
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."
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 *1022no 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 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."
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.
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,
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.
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 ,
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 1019. Escobar , the Majority concludes, merely "creat[ed] a 'gloss' on the analysis of materiality." Maj. Op. at 1020. I disagree. Instead, Escobar explicitly overruled 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 ,
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. ,
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 ,
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 ,
Second, the Supreme Court provided a very clear standard for evaluating whether the misrepresentation was "material to the Government's payment decision."
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."
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.
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.
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 1020.
However, the sole fact that compliance is a condition of payment is not enough. Escobar ,
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 *1027action in the transaction." Id. at 2002-03 (quotation marks omitted).
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.
"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. ,
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.
The dissent maintains that we have ignored the Supreme Court's assertion that the materiality standard is "rigorous" or "demanding." Dissent at 1024. 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.
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 1023. 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 ,
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 1025 (emphasis added). But Escobar speaks in terms of "likely," as well as "actual," behavior.
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."
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.
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 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 ,
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.
The Majority faults my dissent for stating that answers to these questions are required before "liability ... may be imposed." Maj. Op. at 1020, 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 ,