USF Fraud Cases Under False Claims Act May Go to High Court, Attorney Says
The Supreme Court could eventually review USF False Claim Act (FCA) litigation, a lawyer in one of the cases said at an FCBA seminar Wednesday. Vinson & Elkins attorney Jeremy Marwell said fraud allegations against recipients of USF support don’t qualify under the FCA, but he acknowledged it’s a “close question,” particularly in light of mixed court rulings to date. While Marwell was on the winning side of a July 2014 E-rate decision by the 5th U.S. Circuit Court of Appeals, which ruled the FCA doesn’t apply to USF programs (United States ex rel. Shupe v. Cisco, No. 13-40807), other cases are pending in the 7th Circuit and D.C. Circuit, which could create a circuit split. Marwell said he “wouldn’t be surprised” if the cases go to the high court.
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The question of whether USF fraud is subject to the FCA is likely to grow in importance, another panelist suggested. More FCA cases alleging USF fraud are coming, said Chris Miller, Verizon associate general counsel-regulatory affairs. The FCA facilitates the government’s ability to fight fraud and recover misspent funds, including by applying treble damages and empowering -- and even encouraging -- lawsuits by private qui tam whistleblowers, who can sue on behalf of the government and reap a share of the proceeds. Miller said qui tam plaintiffs haven't focused on USF because it’s a small program of about $9 billion a year compared to other government programs, such as Medicare and Medicaid, spending hundreds of billions a year. But he said USF is relatively young and the rules are evolving, inviting complications. “I’m sure we’ll see more cases,” he said, though he added: not in the 5th Circuit as long as the Shupe ruling holds.
Watts Guerra attorney Travis Headley debated Marwell and argued USF fraud allegations should be subject to FCA litigation. Headley, who was on the losing side in the 5th Circuit case, said the key issue is whether the U.S. government “provides” funds under the E-rate program. Because the statute doesn’t define that word and Congress intended the FCA’s scope to be broad, he said “provides” should be read to mean “makes the funds available.” The E-rate USF subsidies do that because they're a federal levy, administered federally to achieve federal objectives, he said. The E-rate, which supports schools and libraries through discounted telecom services, was mandated by Congress in the Telecom Act and is overseen by the FCC, with authority delegated to the Universal Service Administrative Co. (USAC).
Although the 5th Circuit acknowledged the FCC has some regulatory interest in E-rate funding, Headley said, the court denied the government has a stake in fraudulent losses to the program, which he called “astounding.” He said a judge in the case in the 7th Circuit (United States ex rel. Heath v. Wisconsin Bell, No. 08-cv-0724) properly said the government controls USAC, and losses to the fund are losses for the government. Qui tam plaintiff Todd Heath also won a June procedural decision in another suit in the D.C. Circuit (United States ex. rel. Heath v. AT&T, No. 14-7094).
Marwell said the question is: “Does the United States government provide the money?” He said USAC was a Delaware-incorporated company, not a federal agency, and if it has a shortfall, it must borrow like other companies. He said “the decisions to make this a private entity have consequences” and one of those consequences is that the FCA doesn’t cover the E-rate. He said Congress was careful to classify funding for USF programs as not a tax. The FCC requires telecom providers to make contributions to USF and allows them to recover their costs from subscribers, but “this is not taxpayer money” and doesn’t come from the U.S. Treasury, Marwell said.
Miller said an FCA case “is a very significant litigation event,” raising major issues and potential consequences. He said avoiding a suit through strong regulatory compliance policies is the best course. One of the difficulties, he said, is that a case can remain under court seal for some time, complicating company legal preparations and financial plans -- for instance, it’s hard to “ballpark reserve funds" for accounting purposes, he said. Companies often don’t find out they are under investigation until they’re hit with a subpoena, from qui tam plaintiffs, federal agencies, or the Department of Justice, which can bring or intervene in cases, he said.
Companies hit with an FCA-related subpoena need to investigate the matter thoroughly and prepare their defense carefully, Miller said. If it’s a qui tam case, he said, a key issue is whether the DOJ will take over the case. DOJ intervention makes the defense much harder, he said. Companies then have to decide whether they’re going to litigate or settle, he said.
Settlements have been made more difficult in recent months by a Sept. 9 memo from Deputy U.S. Attorney General Sally Quillian Yates, said John Boese, an attorney at Fried Frank. He said the “Yates Memo” is holding up three potential settlements his firm is handling. It toughened the DOJ’s stance toward corporate fraud and other misconduct in various ways, including by placing more attention and accountability on individuals within a company. Not only can the interests of companies and individuals diverge, but companies that settle corporate charges can also still be held liable for the misconduct of their employees, he said.