Are claims submitted to a privately funded and administered program subject to the False Claims Act  (“FCA”) simply because the program is mandated by the federal government? Yesterday, the Fifth Circuit  answered no, rejecting the United States’ aggressive interpretation of the FCA. The decision is a  potentially significant limit on the FCA liability of persons who receive money from private programs  operating under government mandates.

In United States ex rel. Shupe v. Cisco Systems, Inc., No. 13-40807 (5th Cir. July 7, 2014) (per curiam), the United States argued that it “provides” money under the FCA when it mandates that private parties collect and spend private funds. Under that view, the FCA could be violated even if no money was paid from the United States Treasury, and even though no claim was submitted to a government entity. The Fifth Circuit disagreed, holding that FCA liability requires that some money (at least “a drop”) must “flow from” the Treasury, or that a claim must be submitted to a government entity.

In the case, the defendants provided communications services to schools and libraries in Texas. The schools and libraries are eligible for discounted services under the Education Rate Program (“E-Rate”), a program funded by the Universal Service Fund (the “Fund”) made up of “mandatory contributions” from telecommunications carriers. The Fund is administered by the Universal Service Administration Company, which is an independent, non-for-profit corporation – not a governmental entity. The plaintiff (a former project manager for a telecommunications installer) alleged that the defendants falsely claimed eligibility for the E-Rate program.

The district court refused to dismiss the complaint, holding that the United States “provides” money whenever it requires private parties to collect and disburse private monies. The defendants took an interlocutory appeal to the Fifth Circuit, and the United States (which had declined to intervene) filed a brief supporting the plaintiff. The United States argued that “provides” means “to make available,” and the government “makes money available when it directs the collection and disbursement of funds.” The United States also contended that its regulatory control over E-Rate justified FCA liability.

The Fifth Circuit reversed. Although it observed that the FCA “shadows every aspect of the administrative state,” it held that the key statutory term—“provides”—requires that “United States Treasury dollars flow to the defrauded entity” or that “false claim is submitted to a Government entity.” The money in the Fund, however, is “provided by private telecommunications providers,” and the Fund itself is administered by a private entity. Accordingly, the FCA does not apply to monies paid from the Fund or to claims submitted to the private administrator.

In rejecting the government’s contrary argument, the court observed that such a position would allow FCA liability even without any threat of financial loss to the government; that the government’s theory would allow its regulatory interest (rather than its financial interest) to provide the toehold for FCA liability; that the government’s argument would apply to funds in private hands because of “a tax break”; and that the government could not eat its cake and have it too by opting both for “private administration” and for FCA coverage of the privately administered and funded program. The court also noted that contributions to the Fund were not “taxes”—inconveniently for the government, the bill establishing the program originated in the Senate. See U.S. Const., Art. I, § 7.1.

Though the Fifth Circuit’s decision involved the pre-2009 FCA, the court pointed out that the key statutory term (“provided”) remains the same in the revised FCA. The court’s resounding rejection of the government’s view that it “provides” money by requiring private parties to spend theirs is likely to be significant in future cases involving private schemes mandated, but not funded or administered, by the United States.