Whistleblowers may proceed with their False Claims Act case against a San Francisco art school accused of violating a Department of Education incentive compensation ban for admissions officers, even though the appeals court’s ruling adopted a two-part falsity test pushed by the defendant.

The U.S. Court of Appeals for the Ninth Circuit said a whistleblower must satisfy the two conditions to prove falsity under Supreme Court precedent, but that a reasonable trier of fact could conclude that Academy of Art...