FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
UNITED STATES OF AMERICA, ex rel.,
Plaintiff,
and
NYOKA LEE, AKA Seal 2; TALALA
MSHUJA, AKA Seal 3,
Plaintiffs-Appellants,
No. 10-55037
v.
D.C. No.
CORINTHIAN COLLEGES, AKA Seal
A; ERNST & YOUNG LLP, AKA
2:07-cv-01984-
PSG-MAN
Seal B; DAVID MOORE, AKA Seal
C; JACK D. MASSISMINO, AKA Seal OPINION
D; PAUL ST. PIERRE, AKA Seal E;
ALICE T. KANE, AKA Seal F;
LINDA A. SKLADANY, AKA Seal G;
HANK ADLER, AKA Seal H; TERRY
O. HARTSHORN, AKA Seal I,
Defendants-Appellees.
Appeal from the United States District Court
for the Central District of California
Philip S. Gutierrez, District Judge, Presiding
Submitted June 8, 2011*
Pasadena, California
Filed August 12, 2011
*The panel unanimously concludes this case is suitable for decision
without oral argument. See Fed. R. App. P. 34(a)(2).
10719
10720 LEE v. CORINTHIAN COLLEGES
Before: Betty B. Fletcher and N. Randy Smith,
Circuit Judges, and Rudi M. Brewster, District Judge.**
Opinion by Judge B. Fletcher
**The Honorable Rudi M. Brewster, Senior District Judge for the U.S.
District Court for Southern California, San Diego, sitting by designation.
LEE v. CORINTHIAN COLLEGES 10723
COUNSEL
Scott D. Levy, Law Offices of Scott D. Levy & Associates
P.C., Houston, Texas, for the appellants.
Brad D. Brian, Blanca F. Young, Munger Tolles & Olson
LLP, Los Angeles, California, for appellee Corinthian Col-
leges, Inc.
Timothy J. Hatch, James L. Zelenay, Jr., Gibson, Dunn &
Crutcher LLP, Los Angeles, California; Bruce M. Cormier,
Ernst & Young LLP, Washington, DC, for appellee Ernst &
Young LLP.
10724 LEE v. CORINTHIAN COLLEGES
OPINION
B. FLETCHER, Circuit Judge:
Nyoka Lee and Talala Mshuja (“Relators”), qui tam rela-
tors who bring this action on behalf of the United States gov-
ernment, appeal the district court’s judgment dismissing,
without leave to amend, their original complaint
(“Complaint”) against Corinthian Colleges, Inc.
(“Corinthian”); David Moore, Jack D. Massimino, Paul St.
Pierre, Alice T. Kane, Linda A. Skladany, Hank Adler, and
Terry O. Hartshorn (collectively “Individual Defendants”);
and Ernst & Young LLP (“EY”), under Federal Rule of Civil
Procedure 12(b)(6). Relators allege that Corinthian, with the
help of EY, falsely certified to the Department of Education
(“DOE”) its compliance with the Higher Education Act’s
(“HEA”) ban on recruiter-incentive compensation in order to
receive federal education funds, thereby violating the False
Claims Act (“FCA”). The district court granted Corinthian’s
and EY’s motions to dismiss the Complaint under Federal
Rule of Civil Procedure 12(b)(6). The district court concluded
that Relators had failed to allege a false statement and
scienter, two elements of the FCA, because Corinthian’s
recruiter Compensation Program as alleged falls within the
HEA Safe Harbor Provision promulgated by the DOE. Rela-
tors timely appealed. We have jurisdiction under 28 U.S.C.
§ 1291, and we reverse and remand.
I.
A. General Background
The federal government distributes funds under Title IV of
the HEA, 20 U.S.C. § 1094, in order to assist with the costs
of secondary education. In order to receive federal funds
under the HEA, schools must enter with the DOE into a Pro-
gram Participation Agreement, in which they agree to abide
by a host of statutory, regulatory, and contractual require-
LEE v. CORINTHIAN COLLEGES 10725
ments. U.S. ex rel. Hendow v. University of Phoenix, 461 F.3d
1166, 1168 (9th Cir. 2006) (“Hendow”); see also 34 C.F.R
§ 668.14(a) (2010). Among these requirements is a recruiter-
incentive compensation ban, which prohibits institutions from
paying recruiters “incentive payments” based on the number
of students they enroll. More specifically, this ban prohibits
schools from “provid[ing] 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 or in
making decisions regarding the award of student financial
assistance.” 20 U.S.C. § 1094(a)(20). “This requirement is
meant to curb the risk that recruiters will ‘sign up poorly qual-
ified students who will derive little benefit from the subsidy
and may be unable or unwilling to repay federally guaranteed
loans.’ ” Hendow, 461 F.3d at 1168-69 (citation omitted).
In 2002, the DOE amended its previous regulations and
created a “safe harbor” provision interpreting and clarifying
this ban on recruiter-incentive compensation. The regulation
provides that an educational institution may, without violating
the ban on incentive compensation, provide “payment of fixed
compensation, such as a fixed annual salary or a fixed hourly
wage, as long as that compensation is not adjusted up or down
more than twice during any twelve month period, and any
adjustment is not based solely on the number of students
recruited, admitted, enrolled, or awarded financial aid.” 34
C.F.R § 668.14(b)(22)(ii)(A) (2010) (“Safe Harbor Provi-
sion”). Both the ban on incentive compensation and the Safe
Harbor Provision were in effect when this suit was filed.1
1
Since this suit was filed, the DOE has engaged in negotiated rulemak-
ing to reexamine this and other HEA safe harbor provisions. In the final
regulations resulting from this process, which took effect in July 2011, the
DOE eliminated the Safe Harbor Provision for salary-based compensation.
See 75 Fed. Reg. 66832 (Oct. 29, 2010). In commenting on the elimination
of the Safe Harbor Provision, the DOE notes that “the Department’s expe-
rience has demonstrated that unscrupulous actors routinely rely upon these
10726 LEE v. CORINTHIAN COLLEGES
B. Factual and Procedural Background
Corinthian, a public company headquartered in Orange
County, California, operates for-profit vocational schools
throughout the United States. The Individual Defendants are
members of Corinthian’s Board of Directors. EY is the inde-
pendent auditor of Corinthian. Relators are a former employee
of and an independent contractor to Corinthian.
On March 26, 2007, Relators filed under seal a qui tam
action on behalf of the United States government, 31 U.S.C.
§ 3729 et seq., against Corinthian, the Individual Defendants,
and EY (collectively “Defendants”). See 31 U.S.C.
§ 3730(b)(1). In their Complaint, Relators assert against
Defendants four causes of action under the False Claims Act
(“FCA”), 31 U.S.C. § 3729(a)(1), (2), (3), (7) (current version
at 31 U.S.C. § 3729(a)(1)(A), (B), (C), (G)). Relators also
assert several state law claims. On February 25, 2009, the
United States gave notice it would not intervene in the action.
As relevant here, the allegations in the Complaint are as fol-
lows.
Corinthian receives billions of dollars from the federal gov-
ernment under Title IV of the HEA. Despite the HEA’s ban
on incentive compensation, Corinthian, “as a matter of corpo-
rate practice,” “pay[s] recruiters bonuses amounting to 2.5%
to 10% of their base pay based on the number of students they
recruit.” More specifically:
safe harbors to circumvent the intent of [the incentive compensation ban]
of the HEA.” Id. at 66872. According to the DOE, “the safe harbors have
served to obstruct [the objectives of the incentive compensation ban] and
have hampered the Department’s ability to efficiently and effectively
administer the title IV, HEA programs.” Id. Thus, going forward, educa-
tional institutions must comply with the ban on incentive compensation in
order to be eligible for federal grant money, but will no longer be able to
rely on the Safe Harbor Provision to shield compensation programs based
directly or indirectly upon recruitment numbers.
LEE v. CORINTHIAN COLLEGES 10727
As a matter of corporate practice since at least July
2005, recruiters have been required to meet a certain
enrollment quota, depending on their salary grade
and title. Those recruiters that exceed their quotas
receive raises of 2.5% to 10% of their base salary,
every six months, depending on the number of new
recruits they sign up. The bonus criteria are set forth
in a matrix designed by Corinthian. Employees fail-
ing to meet their quotas are disciplined, demoted, or
terminated.
The promotion guidelines applicable to Corinthian recruiters
are presented in a document entitled Corinthian Admissions
Representative Compensation Program (“Compensation Pro-
gram”), which is attached to the Complaint as Exhibit A.
Defendants do not contest the authenticity of this document.
See Lee v. City of Los Angeles, 250 F.3d 668, 688 (9th Cir.
2001).
According to the Complaint, Corinthian and the Individual
Defendants are liable to the United States under the FCA
because of their “use of false statements to obtain HEA, Title
IV loan funds. Specifically, in requesting and receiving
approximately one-half-billion dollars annually, [Corinthian
and the Individual Defendants] falsely represented that Corin-
thian complied with HEA’s prohibitions against using incen-
tive payments for recruiters, which is a core prerequisite to
receive any HEA Title IV funds.”
The Complaint also alleges that EY “falsely certified that
Corinthian was in compliance with recruiter compensation
prohibitions.” EY allegedly “rubber stamped the information
provided to it by Corinthian” and “issued its compliance
audits and financial statement audit opinions knowing them to
be false and/or in reckless disregard of the truth or falsity of
the information provided to the United States.” EY thereby
“fraudulently caused the United States to pay Title IV, HEA
10728 LEE v. CORINTHIAN COLLEGES
Program funds to Corinthian by such false and fraudulent
compliance audit and financial statement audit opinions.”
In essence, then, Relators allege that Corinthian and the
Individual Defendants violated the HEA by firing admissions
representatives who failed to enroll a minimum number of
students, and by compensating admissions representatives
based on the number of students they enrolled. Relators addi-
tionally allege that Defendants certified to the DOE Corinthi-
an’s compliance with the HEA ban on incentive compensation
in order to collect federal funds for which they were ineligi-
ble, in violation of 31 U.S.C. § 3729(a)(1), (2), (3), and (7)
(current version at 31 U.S.C. § 3729(a)(1)(A), (B), (C), (G)).
On August 3, 2009, Corinthian and the Individual Defen-
dants moved to dismiss Relators’ Complaint pursuant to Fed-
eral Rules of Civil Procedure 12(b)(6), 12(b)(1), and 9(b). On
the same day, EY filed a separate motion to dismiss under the
same provisions. The district court granted both motions, con-
cluding that Relators failed under Rule 12(b)(6) to state an
FCA claim. The district court held that the Complaint failed
to allege that Corinthian’s Compensation Program violated
the HEA, that is, that Corinthian made any false statement to
the United States government in certifying their compliance
with that statute. The district court reasoned that the chal-
lenged recruiter Compensation Program falls within the DOE
Safe Harbor Provision because, under its guidelines, increases
in recruiter salaries are not awarded “solely” on the basis of
the number of new enrollees that the recruiter achieved. The
court also reasoned that, because Corinthian reasonably relied
upon the Safe Harbor Provision, it could not have acted with
scienter as required by the FCA. Because the district court
held the FCA claims against the Individual Defendants and
EY were “contingent upon Corinthian Collages’ liability,” it
also dismissed with prejudice the claims against these parties.
Finally, the district court dismissed the state law claims on the
ground that Relators lacked standing to assert them.
LEE v. CORINTHIAN COLLEGES 10729
Relators appealed. In this appeal, they ask us to review the
district court’s conclusion that the allegations in the Com-
plaint do not state a claim under the FCA, and the court’s
decision to dismiss the Complaint with prejudice. They do not
challenge the dismissal of the state law claims.
II.
“The focus of any rule 12(b)(6) dismissal — both in the
trial court and on appeal — is the complaint.” Schneider v.
California Dep’t of Corrections, 151 F.3d 1194, 1197 n.1 (9th
Cir. 1998). “We review dismissals under Rule 12(b)(6) de
novo, accepting as true all well-pleaded allegations of fact in
the complaint and construing them in the light most favorable
to the [Relators].” Zimmerman v. City of Oakland, 255 F.3d
734, 737 (9th Cir. 2001).
Under the pleading requirements of Federal Rule of Civil
Procedure 8, we must determine whether the Complaint con-
tains “sufficient factual matter” that, taken as true, “state a
claim for relief is plausible on its face.” Ashcroft v. Iqbal, 129
S. Ct. 1937, 1949 (2009) (internal citation and quotation
marks omitted). Pursuant to this analysis, only pleaded facts,
as opposed to legal conclusions, are entitled to assumption of
the truth. Id. at 1949-50. “Threadbare recitals of the elements
of a cause of action, supported by mere conclusory state-
ments, do not suffice.” Id. at 1949. If the Complaint does con-
tain such supporting factual allegations, we assume their
veracity and then determine whether they plausibly give rise
to an entitlement to relief. Id. at 1950. “A claim has facial
plausibility when the plaintiff pleads factual content that
allows the court to draw the reasonable inference that the
defendant is liable for the misconduct alleged.” Id. at 1949.
“The plausibility standard is not akin to a ‘probability require-
ment,’ but it asks for more than a sheer possibility that a
defendant has acted unlawfully.” Id.
Furthermore, “[i]n alleging fraud or mistake, a party must
state with particularity the circumstances constituting fraud or
10730 LEE v. CORINTHIAN COLLEGES
mistake.” Fed. R. Civ. P. 9(b). Because they involve allega-
tions of fraud, qui tam actions under the FCA must meet not
only the requirement of Rule 8, but also the particularity
requirements of Rule 9. See Bly-Magee v. California, 236
F.3d 1014, 1018 (9th Cir. 2001). Notably, Rule 9(b) requires
only that the circumstances of fraud be stated with particular-
ity; other facts may be plead generally, or in accordance with
Rule 8. See Iqbal, 129 S. Ct. at 1954; Meijer, Inc. v. Ferring
B.V. (In re DDAVP Direct Purchaser Antitrust Litig.), 585
F.3d 677, 695 (2d Cir. 2009), cert. denied, 130 S. Ct. 3505
(2010).
We can affirm a 12(b)(6) dismissal “on any ground sup-
ported by the record, even if the district court did not rely on
the ground.” Livid Holdings, Ltd. v. Salmon Smith Barney,
Inc., 416 F.3d 940, 950 (9th Cir. 2005).
III.
[1] We first consider whether the facts presented in the
Complaint allege an FCA violation by Corinthian. The FCA
makes liable anyone who “knowingly makes, uses, or causes
to be made or used, a false record or statement” that is mate-
rial to a “false claim for payment or approval” by the United
States government. 31 U.S.C. § 3729(a)(1). A claim under the
FCA can be based on the allegation that a party has falsely
certified compliance with a statute or regulation as a condition
to government payment. See Hendow, 461 F.3d at 1171. The
essential elements of an FCA claim are (1) a false statement
or fraudulent course of conduct, (2) made with requisite
scienter, (3) that was material, causing (4) the government to
pay out money or forfeit moneys due. Id. at 1174.
A. A False Statement
Defendants argue that the Complaint does not allege that
Corinthian made a false statement under the FCA, because, as
a matter of law, the alleged Compensation Program falls
LEE v. CORINTHIAN COLLEGES 10731
within the DOE Safe Harbor Provision and therefore does not
violate the HEA.
As stated above, Relators allege that Corinthian falsely cer-
tified compliance with the HEA’s prohibition against paying
“any commission, bonus, or other incentive payment based
directly or indirectly on success in securing enrollment or
financial aid to any persons or entities engaged in student
recruiting or admissions activities . . . .” The Complaint con-
tains two factual allegations to support the purported violation
of the HEA. First, the Complaint states that, “as a matter of
corporate practice,” Corinthian recruiters receive a 2.5% to
10% salary increase every six months for exceeding certain
enrollment quotas.2 It also states that employees who fail to
meet their enrollment quotas are “disciplined, demoted, or ter-
minated.” We consider these allegations in reverse order.
1. Termination based on recruitment numbers
[2] Relators allege that employees were “disciplined,
demoted, or terminated” on the basis of their recruitment
numbers. This does not state a violation of the incentive com-
pensation ban. Even as broadly construed, the HEA does not
prohibit any and all employment-related decisions on the
basis of recruitment numbers; it prohibits only a particular
type of incentive compensation. Thus, adverse employment
actions, including termination, on the basis of recruitment
numbers remain permissible under the statute’s terms. See
U.S. ex rel. Bott v. Silicon Valley Colleges, 262 F. App’x 810,
812 (9th Cir. 2008) (holding that “[t]he decision to fire an
employee is not covered by the Act because termination is not
a prohibited ‘commission, bonus, or other incentive pay-
ment.’ ” (citing 20 U.S.C. § 1094(a)(20))).3 The Complaint’s
2
Although, elsewhere in the Complaint, Relators refer to these salary
increases as “bonuses,” it is clear from the Compensation Program
attached to the Complaint that the challenged compensation is in the form
of promotion salary increases rather than one-time bonuses.
3
We recognize that U.S. ex rel. Bott v. Silicon Valley Colleges, 262 F.
App’x 810 (9th Cir. 2008), an unpublished disposition, does not serve as
10732 LEE v. CORINTHIAN COLLEGES
allegation that Corinthian imposes adverse employment con-
sequences on the basis of recruitment quotas does not, there-
fore, state a violation of the HEA incentive compensation ban,
and also does not support the claim that a false statement was
made.
2. Compensation based on recruitment numbers
[3] To support an FCA false statement, the Complaint also
alleges that Corinthian awards salary increases on the basis of
recruitment numbers, in violation of HEA’s incentive com-
pensation ban. Defendants argue that Corinthian’s recruiter
compensation policy, as alleged, falls within the DOE Safe
Harbor Provision and does not as a matter of law violate the
HEA. As discussed above, the Safe Harbor Provision allows
institutions to pay semi-annual salary increases to recruiters
only if “any adjustment is not based solely on the number of
students recruited, admitted, enrolled, or awarded financial
aid.” 34 C.F.R § 668.14(b)(22)(ii)(A) (emphasis added).
[4] The Complaint does not expressly use the word “sole-
ly” in alleging that Corinthian awards promotion salary
increases on the basis of recruitment numbers. Nonetheless, it
does allege that the increases in salary are “based on” and
“depend on” the number of students that the recruiter “signs
up.” It then refers to the Corinthian Compensation Program,
which is attached to the Complaint as Exhibit A.4 The Pro-
gram can be summarized as follows:
1. Only those employees with a rating of at least
“Good” are eligible for promotions.
binding precedent. Nonetheless, because we find no precedential decisions
so closely on point, we refer to Bott as persuasive authority where rele-
vant.
4
A district court may consider documents referenced by the Complaint
without converting a 12(b)(6) motion to one for summary judgment. Van
Buskirk v. Cable News Network, Inc., 284 F.3d 977, 980 (9th Cir. 2002).
LEE v. CORINTHIAN COLLEGES 10733
2. Assuming that an employee is eligible for a pro-
motion, the salary increase for which the
employee is eligible is determined by the greater
of (1) the minimum of the salary range for the
position to which they are being promoted
(“category 1”); and (2) a percentage salary
increase related to how successful that recruiter
has been in the previous six-month period
(“category 2”).
3. The category 2 increase that corresponds to a
particular employee is determined by the num-
ber of “net starts” achieved in that six-month
period, combined with his overall performance
rating (“Good” or “Excellent”) for that period.
At first glance, then, it appears that Corinthian’s promotion
and salary increase system does not rely “solely” on recruit-
ment numbers, but also takes into account whether the
employee receives an overall performance rating of “Good”
or “Excellent.” On this basis, Corinthian argues that its
method of awarding salary increases does not violate the
HEA.
[5] The mere inclusion of this performance rating in Corin-
thian’s Compensation Program, however, does not allow us to
conclusively determine whether its method of awarding salary
increases falls within the Safe Harbor Provision. At this stage,
we have no information as to the basis on which a “Good”
versus “Excellent” performance rating is assigned to a Corin-
thian recruiter. Without an understanding what an employee
must do to achieve a rating of “Good,” we cannot determine
whether the rating is based upon substantive requirements that
are separate and distinct from recruitment numbers.5 If, for
5
Notably, Defendants offer no information as to the method by which
the “Good” versus “Excellent” performance review ratings are deter-
mined.
10734 LEE v. CORINTHIAN COLLEGES
example, recruiter performance ratings are awarded on the
basis of the number of students that a recruiter enrolls, then
this rating system would not in fact provide an additional
basis on which compensation decisions are made. Under such
a system, Corinthian would, in essence, make adjustments to
recruiter salaries based “solely” on the number of students
enrolled by that recruiter. Interpreting the Safe Harbor Provi-
sion so that it covers such a system would directly undermine
the HEA express prohibition on “incentive payment based
directly or indirectly on success in securing enrollments,” see
20 U.S.C. § 1094(a)(20).
Moreover, “[w]hen construing a statute or regulation, we
look to the whole law, and to its object and policy, not simply
to a single sentence or member of a sentence.” Owner-
Operator Indep. Drivers Ass’n, Inc. v. Swift Transp. Co., Inc.,
632 F.3d 1111, 1115 (9th Cir. 2011) (internal quotation marks
and citation omitted). “The plain language of a regulation . . .
will not control if clearly expressed administrative intent is to
the contrary or if such plain meaning would lead to absurd
results.” Webb v. Smart Document Solutions, LLC, 499 F.3d
1078, 1085 (9th Cir. 2007) (internal quotation marks and cita-
tion omitted). If the performance rating of at least “Good”
requires an employee merely to fulfill basic performance
requirements that are expected of any employee (such as
showing up on time), then construing the Safe Harbor Provi-
sion so that these ratings serve as an independent basis for
compensation increases would lead to an “absurd result.”
Under such a system, educational institutions could entirely
circumvent the HEA incentive compensation ban by simply
formalizing, through a performance rating system, the basic
requirements expected of any employee, that is, the require-
ments of employment itself.6 Allowing the Safe Harbor Provi-
6
If, by contrast, the “Good” or “Excellent” ratings are driven by con-
crete, merit-based metrics such as those in United States ex. rel. Pilecki-
Simko v. The Chubb Institute, et al., No. 06-3562, 2010 WL 1994794
(D.N.J. May 17, 2010) (holding that a point-based compensation policy
that awarded cumulative points for not only enrollment starts, but also stu-
dent retention, success at recruiting activities, records-keeping, and profes-
sionalism, fell within the DOE Safe Harbor Provision), then the
compensation program could fall within the Safe Harbor Provision.
LEE v. CORINTHIAN COLLEGES 10735
sion to shield such a program from HEA’s recruiter
compensation requirements would render meaningless the
“purpose or objective” of the statute. Owner-Operator Indep.
Drivers Ass’n, 632 F.3d at 1115.
[6] Relators do not allege any facts regarding the meaning
or basis of the “Good” versus “Excellent” performance ratings
included in the Compensation Program attached to the Com-
plaint. As a result, while it is certainly possible that Corinthi-
an’s Compensation Program falls outside the Safe Harbor
Provision (thereby rendering false Corinthian’s certification
of HEA compliance), the Complaint falls short of stating a
plausible claim for relief. This deficiency, however, can read-
ily be cured, and Relators are therefore entitled to amend.
3. Leave to Amend
Although Relators did not seek leave to amend before the
district court, the court expressly contemplated whether
amendment was appropriate. Because the court concluded that
the Compensation Program falls within the Safe Harbor Pro-
vision as a matter of law, it held that leave to amend was
unwarranted.
Because the issue was expressly addressed and decided by
the district court, raised on appeal, and fully briefed by both
parties, it is subject to review by this court. See Kimes v.
Stone, 84 F.3d 1121, 1126 (9th Cir. 1996) (noting that a court
of appeals may consider an issue raised for the first time on
appeal where it presents a purely legal question and consider-
ation of the issue will not prejudice the opposing party); see
also Balistreri v. Pacifica Police Dept., 901 F.2d 696, 701
(9th Cir. 1990).
The trial court’s denial of leave to amend a complaint is
reviewed for an abuse of discretion. See Johnson v. Buckley,
356 F.3d 1067, 1077 (9th Cir. 2004). “When reviewing a dis-
trict court’s decision for abuse of discretion, ‘[w]e first look
10736 LEE v. CORINTHIAN COLLEGES
to whether the trial court identified and applied the correct
legal rule to the relief requested. Second, we look to whether
the trial court’s resolution of the motion resulted from a fac-
tual finding that was illogical, implausible, or without support
in inferences that may be drawn from the facts in the
record.’ ” City of Los Angeles v. San Pedro Boat Works, 635
F.3d 440, 454 (9th Cir. 2011) (quoting United States v. Hink-
son, 585 F.3d 1247, 1263 (9th Cir. 2009) (en banc)).
[7] “The standard for granting leave to amend is gener-
ous.” Balistreri, 901 F.2d at 701. The court considers five fac-
tors in assessing the propriety of leave to amend — bad faith,
undue delay, prejudice to the opposing party, futility of
amendment, and whether the plaintiff has previously amended
the complaint. Johnson, 356 F.3d at 1077. Here, there is no
evidence of delay, prejudice, bad faith, or previous amend-
ments. Therefore, leave to amend turns on whether amend-
ment would be futile.
[8] Under futility analysis, “[d]ismissal without leave to
amend is improper unless it is clear, upon de novo review,
that the complaint could not be saved by any amendment.”
Krainski v. Nevada ex rel. Bd. of Regents of NV. System of
Higher Educ., 616 F.3d 963, 972 (9th Cir. 2010) (internal
citation and quotation marks omitted); see also Lopez v.
Smith, 203 F.3d 1122, 1130 (9th Cir. 2000) (noting that a
court should permit amendment “unless it determines that the
pleading could not possibly be cured by the allegation of other
facts” (internal quotation marks and citation omitted)); Bal-
istreri, 901 F.2d at 701 (noting that leave to amend should be
granted when a court can “conceive of facts” that would ren-
der the plaintiff’s claim viable). Leave to amend is warranted
if the deficiencies can be cured with additional allegations
that are “consistent with the challenged pleading” and that do
not contradict the allegations in the original complaint. Reddy
v. Litton Indus., Inc., 912 F.2d 291, 296-97 (9th Cir. 1990).
Here, we can conceive of additional facts that could, if for-
mally alleged, support the claim that Corinthian made false
LEE v. CORINTHIAN COLLEGES 10737
statements to the DOE. As previously discussed, Relators
could allege that the Corinthian employee performance rating
system is merely a proxy for employee recruitment numbers,
or that the system is based merely on those basic requirements
that any employee would be required to meet.
In addition, Relators repeatedly insist in their briefs that, in
practice, Corinthian recruiters were expected to meet enroll-
ment quotas and understood that this was the basis on which
they would receive promotional salary increases. Relators
could additionally or alternatively allege that, despite the
Compensation Program’s purported or documented reliance
on something other than recruitment numbers, these salary
increases are in practice determined on the sole basis of
recruitment numbers. It is Corinthian’s implementation of its
policy, rather than the written policy itself, that bears scrutiny
under the HEA, and such allegations would require additional
discovery.7
[9] Thus, to the extent that the Complaint insufficiently
alleges a false statement, Relators could provide additional
allegations that would render plausible their claims against
Corinthian. Although the district court correctly identified the
permissive standard for granting leave to amend, it dismissed
with prejudice the Complaint without considering whether
additional facts could cure any deficiencies. We conclude that
the court abused its discretion and that amendment of the
Complaint should have been permitted.
7
Corinthian argues that Relators cannot so amend their Complaint with-
out contradicting their current allegations, because they are bound by the
admission that “corporate practice” is reflected in the attached Compensa-
tion Program. This argument misreads the Complaint. The Complaint
alleges that Corinthian, as a matter of “corporate practice,” increased
recruiter salaries on the basis of recruitment numbers. It then separately
points out that the written Compensation Program is attached as Exhibit
A. The Complaint never states that corporate practice is entirely consistent
with the attached Compensation Program. Thus, the additional allegations
would in no way contradict those already in the Complaint.
10738 LEE v. CORINTHIAN COLLEGES
B. Scienter
Defendants alternatively argue that, even if Relators did or
could allege a false statement, Corinthian’s reliance on the
Safe Harbor Provision negates scienter, another element of
the FCA. The district court agreed.8
[10] Under Rule 9(b), “circumstances constituting fraud or
mistake” must be stated with particularity, but “malice, intent,
knowledge, and other conditions of a persons mind,” includ-
ing scienter, can be alleged generally. See Fed. R. Civ. P.
9(b); see also Zucco Partners, LLC v. Digimarc Corp., 552
F.3d 981, 990 (9th Cir. 2001). Under the False Claim Act’s
scienter requirement, “innocent mistakes, mere negligent mis-
representations and differences in interpretations” will not
suffice to create liability. Hendow, 461 F.3d at 1174 (internal
citations, quotation marks, and alterations omitted). Instead,
Relators must allege that Corinthian knew that its statements
were false, or that it was deliberately indifferent to or acted
with reckless disregard of the truth of the statements. U.S. ex
rel. Hochman v. Nackman, 145 F.3d 1069, 1074 (9th Cir.
1998) (“Absent evidence that the defendants knew that the . . .
Guidelines on which they relied did not apply, or that the
defendants were deliberately indifferent to or recklessly disre-
gardful of the alleged inapplicability of those provisions, no
False Claims Act liability can be found.”).
8
In adopting this reasoning, the district court cited Bott, 262 F. App’x
at 812, for the proposition that “[i]f defendants complied with a facially
valid regulation, relators cannot show the required scienter under the False
Claims Act for actions after the safe harbor regulation was promulgated.”
Thus, the district court apparently assumed that, regardless of whether
Corinthian made a false statement, it believed that its compensation pro-
gram fell within Safe Harbor Provision when certifying compliance with
the HEA. If this assumption of fact is true, Corinthian’s reliance on the
Safe Harbor Provision could indeed negate the allegation that it acted with
fraudulent intent. It is unclear, however, on what basis the court assumed
this fact, since its inquiry is limited to the allegations in the Complaint.
LEE v. CORINTHIAN COLLEGES 10739
In order for Relators to sufficiently plead that Corinthian
acted with fraudulent intent, therefore, they must allege that
(1) Corinthian knew, or acted with reckless disregard of the
fact, that its Compensation Program did not fall within the
DOE Safe Harbor Provision when it certified to the United
States government that it was compliant with the HEA; or,
alternatively, (2) even if it believed that its written Compensa-
tion Program fell under the Safe Harbor Provision, it knew or
acted with reckless disregard of the fact that, in reality,
recruiter compensation decisions were made solely on the
basis of recruitment numbers.
[11] In the operative Complaint, Relators allege that Corin-
thian requested federal grant money from the DOE although
it “knew it was not eligible to receive such funds based on its
recruiting compensation practices, including awarding
bonuses based on the number of students a recruiter signs up.”
Relators also allege, in reciting the FCA counts raised in the
Complaint, that Defendants acted “knowingly” or “in deliber-
ate ignorance or reckless disregard.” The Complaint, there-
fore, does allege that Corinthian acted with scienter. It does
not, however, clearly allege sufficient facts to support an
inference or render plausible that Corinthian acted while
knowing that its Compensation Program fell outside of the
Safe Harbor Provision on which it was entitled to rely.9 See
U.S. ex rel. Oliver v. Parsons Co., 195 F.3d 457, 464 (9th Cir.
1999) (holding that “a [government] contractor relying on a
good faith interpretation of a regulation is not subject to
[FCA] liability . . . because the good faith nature of his or her
action forecloses the possibility that the scienter requirement
is met.”).
9
Relators argue that the Safe Harbor Provision is invalid because it was
promulgated outside of the 360-day time period permitted by the HEA.
This argument has no merit, because the Safe Harbor Provision was pro-
mulgated as an amendment to the original DOE regulations interpreting
the HEA. See 67 Fed. Reg. 51735 (proposed Aug. 8, 2002). The original
regulations were enacted within the permissible 360-day time frame. See
59 Fed. Reg. 22348 (proposed Apr. 29, 1994).
10740 LEE v. CORINTHIAN COLLEGES
[12] Nonetheless, these relatively minor deficiencies can
be cured through amendment. Relators repeatedly argue that
Corinthian certified compliance with the HEA while knowing
that it was in fact compensating recruiters based solely on
their recruitment numbers. Realtors further describe how the
federal government dispenses HEA funds to educational insti-
tutions in accordance with the number of students they enroll
and the degree to which Corinthian depends on such funding.
These facts, if formally alleged, would certainly support an
inference that Corinthian acted with fraudulent intent and did
not, in good faith, rely upon the Safe Harbor Provision.
[13] Under the liberal standards for amending complaints,
Relators should be permitted to plead additional facts that
could cure the Complaint’s deficiencies as to the allegations
that Corinthian made a false statement and acted with the req-
uisite scienter.
IV.
We now consider whether the Complaint sufficiently
alleges a claim against EY and the Individual Defendants.
A. Individual Defendants
[14] The Complaint’s allegations as to the Individual
Defendants do not currently meet the heightened pleading
requirements of Rule 9. “Rule 9(b) does not allow a complaint
to merely lump multiple defendants together but requires
plaintiffs to differentiate their allegations when suing more
than one defendant and inform each defendant separately of
the allegations surrounding his alleged participation in the
fraud.” Swartz v. KPMG LLP, 476 F.3d 756, 764-65 (9th Cir.
2007) (internal citations, quotations marks, and alterations
omitted). “In the context of a fraud suit involving multiple
defendants, a plaintiff must, at a minimum identify the role of
each defendant in the alleged fraudulent scheme.” Id. (internal
citations, quotation marks, and alterations omitted).
LEE v. CORINTHIAN COLLEGES 10741
[15] The Complaint fails to set forth each individual’s
alleged participation in the fraudulent scheme. The Complaint
asserts generally that “Corinthian and its co-defendants are
liable to the United States under the FCA because of the com-
pany’s use of false statements to obtain HEA, Title IV loan
funds.” The only supporting factual allegation involving the
Individual Defendants is that they “monitored and approved
of the illegal recruiter compensation practices as a means to
obtain targeted enrollment levels for the respective Corinthian
campuses.” The Complaint provides no additional detail as to
the nature of the Individual Defendants’ involvement in the
fraudulent acts, but simply attributes wholesale all of the alle-
gations against Corinthian to the Individual Defendants. Rule
9(b) undoubtedly requires more.
Furthermore, the Complaint fails to allege that the Individ-
ual Defendants had any role in making a false statement to the
United States government. While it does assert that the indi-
viduals monitored Corinthian’s recruiter compensation prac-
tices, it does not allege that the Individual Defendants
participated in certifying HEA compliance to the DOE for the
purpose of receiving federal funds.
[16] Nonetheless, because Relators could amend their
Complaint to sufficiently state an FCA claim against Corin-
thian, we cannot conclude that amendment as to the Individ-
ual Defendants would be entirely futile. Additional facts
could render plausible an inference that one or more of Corin-
thian’s Board of Directors oversaw or actively participated in
the alleged fraudulent scheme, including making false state-
ments to the United States government. Relators should have
at least one opportunity to add any such facts to the Com-
plaint. As with Corinthian, the district court dismissed the
Individual Defendants because of the Complaint’s purported
failure to state a false claim, but it failed to consider whether
additional facts could cure any deficiencies. Amendment
should have been permitted.
10742 LEE v. CORINTHIAN COLLEGES
B. Ernst & Young LLP
We now consider the Complaint’s allegations as to EY.
Relators allege that EY submitted “false statements” regard-
ing Corinthian’s compliance with the HEA via two types of
reports — compliance reports (“HEA Compliance Reports” or
“Compliance Reports”) and financial statement audit reports
(“Financial Statement Reports”).
1. Judicial notice
EY first argues that dismissal is warranted because it did
not, as a matter of fact, perform the Compliance Reports certi-
fying Corinthian’s compliance with HEA. It asks us to take
judicial notice of this fact based on a letter, sent to the Board
of Directors of Corinthian from Weworski & Associates,
expressing the opinion that Corinthian had complied in all
material respects with the HEA for the fiscal year ending June
30, 2008. EY further asks the Court to take judicial notice of
the fact that the Financial Statement Reports referenced in the
Complaint do not state any opinion or give any indication as
to Corinthian’s compliance with the HEA.
As a general rule, we “may not consider any material
beyond the pleadings in ruling on a Rule 12(b)(6) motion.”
Lee, 250 F.3d at 688 (internal citation and quotation marks
omitted). We may, however, consider materials that are sub-
mitted with and attached to the Complaint. Id. We may also
consider unattached evidence on which the complaint “neces-
sarily relies” if: (1) the complaint refers to the document; (2)
the document is central to the plaintiff’s claim; and (3) no
party questions the authenticity of the document. Marder v.
Lopez, 450 F.3d 445, 448 (9th Cir. 2006); Lee, 250 F.3d at
688.
Pursuant to Federal Rule of Evidence 201, we may also
take judicial notice of “matters of public record,” Lee, 250
F.3d at 689, but not of facts that may be “subject to reason-
LEE v. CORINTHIAN COLLEGES 10743
able dispute.” Id. at 689. More specifically, we may not, on
the basis of evidence outside of the Complaint, take judicial
notice of facts favorable to Defendants that could reasonably
be disputed. See id. at 689-90.
Here, we can consider the existence of the reports identified
by EY, since the Complaint expressly refers to and “necessar-
ily relies on” them. Nonetheless, we may not, on the basis of
these reports, draw inferences or take notice of facts that
might reasonably be disputed. Whether EY is ultimately
responsible for certifying Corinthian’s compliance with HEA,
and whether the Financial Reports they submitted failed accu-
rately to reflect Corinthian’s HEA-related liabilities, are open
questions requiring further factual development. At the very
least, they are certainly subject to “reasonable dispute.”
Therefore, while EY’s factual assertions with respect to the
reports cited in Relators’ Complaint may ultimately prove
true, we will not decide these disputed factual matters at this
stage. Instead, we focus only on the sufficiency of Relators’
allegations.
2. Sufficiency of the Allegations
In the Complaint, Relators allege that EY “falsely certified
that Corinthian was in compliance with the recruiter compen-
sation prohibitions” and “failed to perform the legally
required evaluation to determine if Corinthian’s recruiter
compensation practices were legal.” The Complaint further
states that EY “issued its compliance audits and financial
statement audit opinions knowing them to be false and/or in
reckless disregard of the truth or falsity of the information
provided to the United States.” It then provides details as to
the particular information that EY omitted from its financial
reports. Finally, the Complaint alleges that EY “fraudulently
caused the United States to pay Title IV, HEA Program funds
to Corinthian by such false and fraudulent compliance audit
and financial statement audit options.”
10744 LEE v. CORINTHIAN COLLEGES
[17] Assuming that the Complaint is amended to suffi-
ciently allege that a false statement was made to the United
States government, we conclude that Relators have met their
burden under Rule 12(b)(6) and Rule 9(b) as to EY. Relators
have alleged all four elements of the FCA with respect to the
company. Moreover, citing to financial accounting standards,
the Complaint provides details as to what practices are being
challenged, namely the omission of information related to
Corinthian’s compliance with the HEA, and what practices
should have been used in their place. See In re Integrated Res.
Real Estate Ltd. P’ships Sec. Litig., 815 F. Supp. 620, 669
(S.D.N.Y. 1993). The Complaint therefore sets forth EY’s
alleged fraudulent act in a “particularized manner.”
[18] The Complaint also sufficiently alleges scienter as to
EY. The Complaint expressly states that EY issued reports
“knowing them to be false and/or in reckless disregard of the
truth or falsity of the information provided to the United
States.” It additionally alleges that EY had knowledge of the
amount of money Corinthian received from HEA funds and
the manner in which this money was spent on recruiter com-
pensation. These facts, taken together, support a “plausible”
inference that the company acted with fraudulent intent. Cf.
Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308,
322-23 (2007) (noting that, under the heightened scienter
requirements of the Private Securities Litigation Reform Act
of 1995, court must consider whether all facts, considered col-
lectively, give rise to a strong inference of scienter).
Assuming that they amend their Complaint to sufficiently
allege a false statement, we conclude that Relators have suffi-
ciently pled an FCA violation as to EY.
V.
In accordance with the analysis above, we reverse the dis-
trict court’s 12(b)(6) dismissal as to Corinthian, the Individual
LEE v. CORINTHIAN COLLEGES 10745
Defendants, and EY, and we remand with instructions to per-
mit leave to amend the Complaint.
REVERSED AND REMANDED.