Supreme Court to hear case concerning the scope of the FCA where private dollars are involved

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Supreme Court to hear case concerning the scope of the FCA where private dollars are involved

24 June 2024

Earlier this month, the U.S. Supreme Court agreed to hear an appeal in the telecommunications case Wisconsin Bell, Inc. v. United States ex rel. Heath, No. 23-1127, to assess whether reimbursement requests submitted to the Federal Communications Commission's $4.5 billion E-rate program are “claims” under the False Claims Act.[1]

The case involves funding for discounted telecommunications services to eligible schools and libraries under the Schools and Libraries Universal Service Support Program, or E-rate Program.[2] The program is run by a private, nonprofit corporation, the Universal Service Administrative Company (USAC), and is funded exclusively by legally mandated contributions from private telecommunications carriers.[3]

The E-rate program requires a telecommunications carrier to charge schools and libraries its “lowest corresponding price,” which is the price the provider charges for comparable services to a non-residential customer that is “similarly situated” to the school or library with respect to geography, traffic volume, contract length, and other cost factors.⁴ After an eligible school or library receives E-rate services, it either pays the service provider full price and submits a request to the USAC for reimbursement for the eligible discount amount, or pays the service provider a discounted price, and the service provider submits a reimbursement request to the USAC to cover that discount amount.⁵

Relator Todd Heath, who operated two businesses that assisted schools in uncovering telecommunications-related billing errors, first filed suit in 2008 against defendant Wisconsin Bell, a wholly owned subsidiary of AT&T.⁶ Heath alleged that Wisconsin Bell overcharged schools and libraries by charging prices that exceeded the lowest corresponding price, and accordingly each E-rate reimbursement was a false claim.⁷ Wisconsin Bell countered that the False Claims Act does not cover the E-rate program, as it is funded by private dollars from telecommunications carriers and administered by a private non-profit organization.⁸ The government declined to intervene in the suit.

The United States District Court for the Eastern District of Wisconsin granted summary judgment⁹ to Wisconsin Bell, finding Heath failed to offer evidence of falsity or scienter; it did not rule on Wisconsin Bell’s argument that requests under the E-rate program are not actionable False Claims Act claims.¹⁰ The U.S. Court of Appeals for the 7th Circuit reversed, finding Heath had presented sufficient evidence of falsity and scienter to proceed to trial. The court summarily noted that whether government funds were involved in the payments was an issue for the jury.¹¹

Wisconsin Bell sought rehearing en banc, flagging problems in the False Claims Act analysis, including that the Fifth Circuit has held that false statements in the E-rate program would not support a False Claims Act action.¹² The Seventh Circuit panel issued an amended opinion reaching the same result as its earlier decision, but adding more in-depth analysis of the issue.¹³

In seeking certiorari review from the Supreme Court, Wisconsin Bell argued that the Seventh Circuit decision conflicts with a ruling by the Fifth Circuit that the False Claims Act does not apply to reimbursement requests submitted to the E-rate program because “the United States does not have a financial stake” in money allegedly lost.¹⁴ In opposing certiorari review, Relator argued that a portion of the funds in the Universal Service Fund are traceable to the U.S. Treasury, the USAC acts as an agent of the U.S., and there is no real conflict between the Seventh and Fifth Circuits. Relator’s sought to disavow the circuit split by asserting that many facts about how the Universal Service Fund operates, including the links between federal treasury dollars and the E-Rate program, were discovered only after the Fifth Circuit’s ruling.¹⁵ In the Relator’s view, if the Fifth Circuit were ruling on the facts known today, it would be aligned with the Seventh Circuit.¹⁶

The Supreme Court granted review and will hear arguments in Wisconsin Bell this fall.

Potential import of SCOTUS review in Wisconsin Bell:

A win for the relator in Wisconsin Bell could have the effect of significantly expanding the FCA’s reach. On the other hand, a win for the defendant has the potential of implicating the very constitutionality of the FCA’s qui tam provisions.

Potential expansion of FCA liability

A ruling affirming the Seventh Circuit’s judgment could expand the FCA’s reach to other claims involving private monies and private entities operating in highly-regulated spaces.

In particular, the case could expose communications providers to FCA litigation and greater liability risks through not only the E-Rate program but also other Universal Service Fund programs, including the Rural Health Care, Lifeline, and High Cost programs, as well the Telecommunications Relay Service Fund.

Wisconsin Bell could also create new forms of FCA liability for companies outside of the communications industry. As one amicus brief supporting the cert petition explained, the Seventh Circuit’s definition of a government “agent” in the FCA context could be read to cover claims submitted to Fannie Mae and Freddie Mac (“Fannie and Freddie”).¹⁷ Fannie and Freddie are private companies, which are “sponsored or chartered by the federal government” and have been under conservatorship by the Federal Housing Finance Agency (“FHFA”) since the 2008 housing crisis.¹⁸ In Adams, the Ninth Circuit determined that, despite these strong indicators of the FHFA’s control over Fannie and Freddie, they were not government agents.¹⁹ FCA liability therefore could not attach when certain lenders allegedly made fraudulent representations regarding loans purchased by Fannie and Freddie.²⁰

The Seventh Circuit considered USAC to be an agent of the government because its “actions are subject to the ultimate control of” the Federal Communications Commission (“FCC”).²¹ If the FCC’s control over the USAC makes the FCC an agent of USAC, the same might be said for Fannie and Freddie, which are arguably even under tighter government control than USAC by virtue of their conservatorships.²²

Companies in industries supported by federal government programs should watch this case, which could open the door to burdensome litigation and significantly expand potential liability for non-compliance.

Organizations that are participating, have participated, or may participate in these programs will need to consider the potentially severe financial consequences of the FCA, including treble damages, mandatory civil penalties, and litigation costs. It is crucial that companies in the communications industry and beyond consider their exposure and factor in these risks when assessing their involvement in these programs, calibrating their compliance programs accordingly.

Constitutionality of the FCA Qui Tam provisions

Lastly, it is notable that the defendant’s cert petition invokes Justice Thomas’ dissent from a year ago in United States, ex rel. Polansky v. Exec. Health Res., Inc., 599 U.S. 419 (2023).²³ There, Justice Thomas noted that the FCA’s qui tam provisions may be “inconsistent with Article II” because the executive power, which relators may wield in a qui tam suit, rests solely with the President.²⁴

In opposing cert, Relator took the position that the cert petition’s arguments about Article II were first raised in a motion for rehearing en banc at the Seventh Circuit and therefore not a proper issue for Supreme Court review. The issue was unaddressed at both the district and appellate levels.²⁵

Given this case history and the formulation of the “Question Presented,” which makes no reference to the constitutionality of the qui tam provisions,²⁶ it is unclear if or whether the petitioner will brief and the Supreme Court will consider the constitutionality of the FCA qui tam provisions. However, the issue — including any other non-binding insights from Justices regarding those provisions’ constitutionality — is something the Hogan Lovells team will continue to monitor.

Authored by Jonathan Diesenhaus, Ari Fitzgerald, Emily Lyons, Hunter Davis, Jesse Suh, Ryan Thompson, and Jess Ellsworth.