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RJO’s Aaron Silberman Shares Insights On Ninth Circuit Ruling Regarding Escobar’s Implied Certification and Materiality Requirements In Education False Claims Case

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Shareholder Aaron Silberman was quoted in a recent Federal Contracting News article about a Ninth Circuit ruling in a False Claims Act (FCA) whistleblower case.

While allowing the whistleblowers to proceed with their fraud case against the Academy of Art University in San Francisco, the court confirmed its adoption of U.S. Supreme Court’s two-part test in Escobar for falsity in implied certification FCA cases.

Mr. Silberman explained that the court’s ruling helps false claims defendants “because it affirms the narrowing of implied certification cases that will pass muster under Escobar,” but he added that “it also demonstrates that it is possible, on the right facts, to plead an FCA violation meeting the two-part test for falsity.”

Mr. Silberman also said that the court’s decision may not bode well for FCA defendants in future decisions, in this or other courts. While this ruling is consistent with the court’s two prior rulings holding “that the two-part test is exclusive,” the court made this portion of its latest decision  “half-heartedly so.”

The ruling states that a whistleblower must meet two conditions proving falsity under a Supreme Court precedent. However, “a reasonable trier of fact could conclude that Academy of Art University’s actions met those requirements,” according to Federal Contracting News article.

The case is United States ex rel. Rose v. Stephens Inst., 9th Cir., No. 17-15111, 8/24/18.

Further Comments From Aaron Silberman

In Escobar, the Supreme Court held that there are “at least” two conditions in which implied false certifications may be found to support the falsity element for False Claims Act liability: 1) the claim must not only request payment but also make specific representations about the goods or services provided and 2) the defendant’s failure to disclose noncompliance with material requirements (statutory, regulatory, or contractual) makes those representations misleading.  The “at least” language has led courts to split on whether these two conditions are exclusive, i.e., only allegations of both will plead falsity under the FCA, or merely examples, i.e., there are other implied certifications that may be false under the Act.

US ex rel. Rose v. Stephens Inst. is the third Ninth Circuit decision since January 2017, joining US ex rel. Campie v. Gilead Scis., Inc., 862 F.3d 890, 901 (9th Cir. 2017) and US ex rel. Kelly v. Serco, Inc., 846 F.3d 325, 332 (9th Cir. 2017), to hold that the two conditions identified in Escobar are exclusive. The Seventh Circuit has held the same (US v. Sanford-Brown, Ltd., 788 F.3d 696, 712 (7th Cir. 2015), cert. granted, judgment vacated, 136 S. Ct. 2506 (2016)), while the Fourth Circuit has suggested that Escobar’s two-prong test does not exhaust the circumstances under which there may be implied certification liability (US ex rel. Badr v. Triple Canopy, Inc., 775 F.3d 628 (4th Cir. 2015), cert. granted, judgment vacated, 136 S. Ct. 2504 (2016)).  The District Court cases remain divided.

It is notable that, while the Rose court decision is consistent with Campie and Kelly, it is half-heartedly so.  The court says it must follow those prior three-judge panel decisions, even though, if it were interpreting Escobar anew, it would likely conclude that it is not exclusive.  This may be helpful to the government and relators arguing in other Circuits (or before the Supreme Court), that those courts should reject the Campie, Kelly and Rose line of cases.

Also, while the holding in Rose is helpful to FCA defendants because it affirms the narrowing of implied certification cases that will pass muster under Escobar, it also demonstrates that it is possible, on the right facts, to plead an FCA violation meeting the two-part test for falsity. As it did in Campie (reversing grant of a motion to dismiss), the Ninth Circuit in Rose found that the qui tam relators had alleged sufficient facts to support claims that the defendant, doing business as the Academy of Art University, had made in its specific representations regarding the services provided (stating in the applicable form that the student applying for federal financial aid was an “eligible borrower” and “accepted for enrollment in an eligible program”) and its noncompliance with the US Department of Education’s incentive compensation ban (defendant gave admissions employees large bonuses based solely on quantity of enrollment) rendered those representations to be “misleading half-truths.”  Given how indirect the connection between the alleged representations in the applications and the alleged non-compliances, this gives the Escobar elements a broader meaning than might be expected.

The entire Federal Contracting News article can be found here.

About Aaron Silberman

Aaron Silberman is a member of RJO’s Construction and Government Contracts Practice Groups and is the Immediate Past Chair of the ABA Public Contract Law Section. He has specialized in construction and public contracts advice and litigation since 1992. He has represented contractors, subcontractors, suppliers and design professionals in the construction, defense, technology, telecom and service industries. His experience includes contracts for federal, state and local public entities and for private, commercial projects. More information about Mr. Silberman can be found at the RJO website.

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