In late August, the U.S. Court of Appeals for the Ninth Circuit issued a long-awaited decision in U.S. ex rel. Rose v. Stephens Institute that interprets key aspects of the implied false certification theory of False Claims Act (FCA) liability under the Supreme Court’s 2016 Escobar decision. As the Ninth Circuit explains in its decision, Escobar “unsettled” Ninth Circuit law related to the standard for proving falsity and materiality in an FCA case. The Ninth Circuit therefore sought to reconcile its precedents with Escobar in Rose, which was before it on an interlocutory appeal from a denial of summary judgment sought by the defendant.

The Rose case concerns allegations of non-compliance by an art school in San Francisco with federal law prohibiting incentive compensation to admissions officers. The alleged non-compliance implicates the FCA because the school receives federal funding from the Department of Education in the form of federal financial aid to students. The relators allege that the school violated federal law and regulations by improperly rewarding admissions officers for increasing enrollment at the school via enrollment goal bonuses and salary adjustments based on scorecards that heavily weighted enrollment numbers, and then falsely certified its compliance with those requirements to the Department of Education.


The foremost issue in Rose concerns the proper interpretation of the Supreme Court’s language in Escobar that the implied certification theory can be a basis for FCA 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.” The Ninth Circuit was asked to determine whether that language in Escobar makes satisfying those two requirements a necessary precondition to proving falsity under the implied false certification theory, or whether the antecedent “at least where” to the establishment of the two-part test indicates that while satisfying that test is sufficient to establish falsity, it is not mandatory.

Unfortunately, the Ninth Circuit did not actually analyze this question in depth, but instead looked to its two prior decisions interpreting Escobar and determined that they “appear to require Escobar’s two conditions.” The court therefore held that “Relators must satisfy Escobar’s two conditions to prove falsity, unless and until our court, en banc, interprets Escobar differently.” And it concluded that because the school certified that it was an eligible program for the receipt of financial aid, but failed to disclose its noncompliance with the incentive compensation ban, there is sufficient evidence to create a genuine issue of material fact and defeat summary judgment.


The Ninth Circuit next analyzed the effect of Escobar’s materiality holding – that “materiality looks to the effect on the likely or actual behavior of the recipient of the alleged misrepresentation” – on Ninth Circuit law. The court first noted that under Escobar, “noncompliance with the incentive compensation ban is not material per se.” The majority explained that Escobar provides “a “gloss” on the analysis of materiality” that requires the court to review the “particular facts of each case.” Here, the Ninth Circuit determined that the allegations in Rose were sufficient to establish materiality because:

  1. payment to the school was conditioned on compliance with the incentive compensation ban, which the court characterized as “certainly probative evidence of materiality” even if it was not singularly dispositive following Escobar;
  2. evidence shows that the Department of Education took enforcement actions against schools found to have violated the incentive compensation ban; and
  3. the school’s alleged noncompliance with the ban – including bonuses of up to $30,000 and trips to Hawaii – was not “minor or insubstantial” and therefore was fair game under the FCA.

The Ninth Circuit thus affirmed the trial court’s denial of summary judgment for the defendant.