Mandatory Two Part Test for Implied Falsity as Decided by the Ninth Circuit

August 28th, 2018 by Pamela Coyle Brecht

What Happened?

In United States ex rel. Rose v. Pjh Stephens Inst., the United States Court of Appeals for the Ninth Circuit affirmed the district court’s order denying Defendant’s motion for summary judgment, and determined that the two part test created in States ex rel. Escobar for showing implied false certification under the False Claims Act is mandatory.

The Rundown

To bring a qui tam action under the False Claims Act, relators have to establish the following four elements: (1) an implied or expressed false statement or fraudulent course of conduct, (2) made with the intent or knowledge of wrongdoing, (3) that was material, causing (4) the government to pay out money or forfeit moneys due. Ebeid ex rel. Unisted States v. Lungwitz, 616 F.3d 993 (9th Cir. 2010). In 2010, Ebeid established that implied false certification could be proven simply by showing that defendant requested payment from the government, said payment was dependent on compliance with a law, rule, or regulation, and defendant was not compliant. However, in 2016 Escobar laid out its own two part test for implied falsity: (1) defendant must make specific representations about the services provided and (2) defendant’s failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes those representations misleading half-truths. States ex rel. Escobar, 136 S. Ct. 1989 (2016). The emergence of this test that required defendants to do more than simply request payment caused confusion as to what the standard for implied falsity should be.

The Ninth Circuit was forced to decide this quandary in United States ex rel. Rose v. Pjh Stephens Inst., on August 24, 2018. In Rose, the Academy of Art University is accused of violating the False Claims Act by providing bonuses and docking admissions representatives’ pay up to $30,000 based upon their enrollment numbers from 2006-2010. These allegations brought by former admissions representatives violates the incentive compensation ban which prohibits schools from providing any incentive payments based on securing enrollments or financial aid to any person engaged in admissions activities. 20. U.S.C. The University agreed to abide by this ban in order to qualify for federal funding under Title IV of the Higher Education Act.

The Court of Appeals decided that in order to prove implied falsity, Escobar’s two part test must be met. Using this standard the Court determined that the Defendant met this standard as the University failed to disclose its noncompliance with the incentive compensation ban even though they continued to receive federal financial aid.

For the Record

The three judge panel agreed with the decision to mandate Escobar’s two part test in regards to implied falsity, however, Judge Smith disagreed with the majority’s analysis of materiality. Material is defined under the False Claims Act as having a natural tendency to influence, or be capable of influencing, the payment or receipt of payment. 31. US.C. § 3729(b)(4). Concerning materiality for implied falsity, materiality was dependent on whether the falsity was relevant to the government’s decision to confer a benefit. United States ex rel. Hendow v. Univ of Pheonix, 461 F.3d 1174 (9th Cir. 2006). Judge Graber and Judge Zipps agreed that this test was met due to the Department of Education’s past enforcement of the incentive compensation ban and the substantial size of the incentive payments. Judge Smith argued that his fellow judges applied the wrong standard of materiality since Escobar introduced a more rigorous standard that looks to the effect on the behavior of the recipient of the alleged misrepresentation. He concluded that he would reverse and the district court’s materiality finding “because the majority failed to recognize that Hendow’s materiality holding is no longer good law after Escobar,” and remand the case for additional discovery.

The Take Away

After Escobar was decided in 2016, the standard for proving implied false certification under the False Claims Act was unclear. Escobar determined that in order for implied falsity to be found, the defendant must make specific representations about goods or services, and their failure to disclose noncompliance makes those representations misleading half-truths. However, the court in Escobar did not specifically say that Ebeid’s standard which only required realtors to point to the fact that defendant request payment while being noncompliant was no longer good law. On August 24th, 2017, the Court of Appeals for the Ninth Circuit settled this debate in Rose, and determined that Escobar’s two part test was indeed mandatory. The question as to materiality is still ongoing and will undoubtedly be the topic of litigation in the future.

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