The peace of mind enjoyed by E-rate service providers following the Fifth Circuit’s decision that the False Claims Act (FCA) does not apply to the E-rate Program may be fleeting. A case pending in the Eastern District of Wisconsin, U.S. ex. rel. Todd Heath v. Wisconsin Bell, Inc., is poised to challenge the Fifth Circuit’s ruling, and the possibility of a circuit split is looming.

The E-rate Program is a federal subsidy program that provides assistance to public schools and libraries in acquiring telecommunication services,  Internet access, and  internal network connections. The E-rate  Program  is funded by telecommunications services taxes that are paid into the Universal Service Fund (USF) and is administered by the Universal Service Administrative Company (USAC). Although USAC operates under direction of the Federal Communications Commission (FCC), it is a private nonprofit corporation. Given this structure of the E-rate Program, questions have arisen regarding whether the FCA applies to the E-rate Program. Although the Fifth Circuit previously held that it does not, that decision may soon lose some bite if the Eastern District of Wisconsin, and ultimately the Seventh Circuit, disagree.

In U.S. ex rel. Shupe v. Cisco Systems, Inc., et al., the Fifth Circuit held that the E-rate Program does not trigger FCA liability because the program does not involve federal funds and because USAC is not a government entity.4 The Fifth Circuit addressed whether the E-rate Program satisfies the FCA liability prerequisite that the government “provide” a portion of funds. The court determined that because the USF, which funds the E-rate Program, does not come from the United States Treasury, the government does not provide funding for the program. Secondly, the Fifth Circuit addressed whether the entity providing the money, USAC, is part of the government. The court explained that while the FCC oversees USAC and the E-rate Program, USAC is a private corporation—not the government. Thus, although the United States has a regulatory interest in the E-rate Program, the federal government has no financial stake in the program’s fraudulent losses, and therefore FCA liability does not attach.

In effect, the Shupe decision lessened the federal government’s role in overseeing the E-rate Program by removing the threat of FCA claims against service providers and provided some relief to service providers still trying to navigate the murky rules and regulations of the E-rate Program. However, in light of the Wisconsin Bell case pending in the district court, this relief may be short-lived.

In Wisconsin Bell, the relator filed a qui tam complaint under the FCA, alleging that Wisconsin Bell, an E-rate service provider, was overcharging school districts and libraries for E-rate services. FCC regulations prohibit service providers from offering or charging schools and libraries a price above the “lowest corresponding price” (LCP)—i.e., “the lowest price that a service provider charges to non-residential customers who are similarly situated to a particular school, library, or library consortium for similar services.”5 The relator alleges that Wisconsin Bell failed to comply with the LCP requirement by offering and charging school districts and libraries prices above the LCP, and in doing so, violated the FCA. More specifically, the relator claims that Wisconsin Bell caused the school districts and libraries to submit false claims for payment to USAC and concealed and avoided or decreased its own obligation to pay or transmit money to the USF.

Wisconsin Bell initially moved to dismiss the case under the FCA’s public disclosure bar. The district court agreed with Wisconsin Bell and dismissed the case, holding that the relator based his allegations on a public disclosure. On appeal, the Seventh Circuit reversed the dismissal, finding that the allegations were not based on publicly disclosed information, and remanded the case.

While the Wisconsin Bell public disclosure dismissal was pending before the Seventh Circuit, the Fifth Circuit issued its decision Shupe. Thus, following remand, Wisconsin Bell moved to dismiss a second time, now arguing that the case must be dismissed because the FCA does not apply to the E-rate Program.

To date, the district court has not yet ruled on Wisconsin Bell’s motion; however, the motion has been fully briefed. In opposition, the relator has argued, among other points, that regardless of the federal or private nature of the funds, the FCA applies to E-rate because Congress intended for the FCA to govern false payment demands made to programs administered by United States “agents,” including USAC.

The United States, although not a party to the case because it previously opted not to intervene, filed a statement of interest in response to the motion, arguing that the Fifth Circuit wrongly decided Shupe, and that the court should apply the FCA to E-rate funds because the USF holds funds provided by a federal agency, the FCC. The United States points to case law suggesting that the funds were “provided by” the federal government and contends that the permanent appropriation for USF funds in the United States’ budget makes these monies subject to FCA claims.

The U.S. Chamber of Commerce filed an amicus brief in support of Wisconsin Bell, in which it argues that rather than “provide” funds under the FCA, which connotes a direct provision of government funds, the government merely established a scheme through which funds are transferred. The Chamber takes the position that USAC is not a government entity, money distributed from USF is not provided by the government, and USAC is furthermore not a government “agent” because it does not act on the government’s behalf or subject to its control. The relator filed a response to the Chamber’s brief, arguing that the threshold question is in fact whether USAC is an “agent” of the government for FCA purposes, and the relator contends that it is. Additional replies by the United States and the relator have been filed, and the parties now await a decision.

Whether the FCA applies to the E-rate Program is a significant issue for service providers who are presently operating in the still cloudy waters of E-rate, where a lack of clear regulatory guidance could lead to inadvertent compliance issues and potential exposure under the FCA, if the FCA ultimately applies. For now, the focus is on the Eastern District of Wisconsin and the impending question of whether the court will follow the Fifth Circuit or instead find that the FCA does apply to the E-rate Program. Regardless of how the district court rules, the decision will likely be appealed, thus setting up a potential circuit split between the Fifth Circuit and the Seventh Circuit or consistency between circuits that would be more challenging for the government to overcome.

As a result, although the Fifth Circuit decision in Shupe gave E-rate services providers a reason to breathe a sigh of relief, in light of the Wisconsin Bell case, service providers are well-advised to hold that breath, at least for the time being.

U.S. ex rel. Shupe v. Cisco Systems, Inc., et al. 759 F.3d 379 (5th Cir. 2014)