Fifth Circuit: False Claims for USF Funds Are Not Subject to False Claims Act Suits

Court holds that USF funds, administered by a private corporation, are not “federal funds” within meaning of False Claims Act.

One weapon in the government’s anti-fraud arsenal – the False Claims Act – will no longer be available to the Feds in their efforts to combat bogus claims made to the Universal Service Fund (USF) if a recent decision out of the U.S. Court of Appeals for the Fifth Circuit sticks.

The USF, of course, is the multi-billion dollar cash reservoir used to subsidize a variety of programs designed to assure that all Americans have affordable access to essential telecommunications services. Created by Congress in 1996 (but having roots dating back to 1934), the USF is funded by mandatory contributions from telecom carriers, who in turn pass the charges along to their customers. If you haven’t heard of it, take a look at your phone bill, which has a surcharge of more than 15% to cover your share of your carrier’s mandatory contribution to the USF. Since pretty much every phone bill every month to every customer everywhere includes that line item, the cash coming into the USF is not chickenfeed. (Illustrative examples: Annual USF disbursements exceeded $8.5 billion in 2012; earlier this month the Commission expanded the funds available to the Education Rate (E-rate) component of USF – which supports communications technology (e.g., Wi-fi) in schools and libraries – to more than $3 billion annually for the next two years.)

The USF is administered by the Universal Service Administrative Company (USAC), a non-profit corporation established to oversee the day-to-day operation of the USF. Contributions go directly to the USAC, which then distributes them back out to service providers in furtherance of USF programs.

When so much money is doled out anywhere, you can pretty much count on people trying to get their hands on more than they’re entitled to.

And sure enough, there has historically been no shortage of fraudulent claims presented for USF disbursements. In response, the Commission has brought many enforcement actions and levied large forfeitures. It recently established a “strike force” to step up efforts root out USF-related fraud.

But the FCC isn’t the only possible enforcement agency. The Department of Justice can sue suspected wrong-doers, and even if DoJ declines that opportunity, private citizens can bring “qui tam” actions on the government’s behalf.  (“Qui tam” is a bit of Latin legalese which describes a lawsuit brought by a private individual to enforce a government claim. The benefit to the individual: she or he gets a piece of any recovery.) That’s what happened in Texas last year.

In 2013, a project manager for a telecom company filed a lawsuit under the federal False Claims Act (FCA), 31 U.S.C. §3729. He accused a number of telecom companies of tampering with mandatory equipment procurement procedures (which require competitive bidding), “gold plating” equipment provided to schools, and substituting E-Rate-ineligible equipment for eligible equipment. The complainant said that the alleged bad guys were in effect lying to the government and, thus, making a false claim for government funds, i.e., E-rate payments.

The targeted defendants (who included, among others, Cisco) moved to dismiss the complaint, arguing that there was no legitimate FCA claim, because the FCA applies only to claims made for federal funds, and the USF is not comprised of federal funds. That argument didn’t get any traction with the trial court, so the defendants appealed to the Fifth Circuit.

Yup, the Court of Appeals said, funds administered by the USAC – i.e., USF funds – are not federal funds, so no claim arising from alleged E-rate fraud may be made under the FCA. As the Court saw it, the USAC is a private entity, even if it was created to administer a government program. And the fact that the FCC directs the USF programs for which disbursements are made by the USAC doesn’t matter. None of the USF contributions made by the carriers go into the U.S. Treasury; rather, those contributions are paid directly to the USAC, which then distributes the funds directly to eligible claimants. In other words, the money never passes through U.S. government hands. Since the U.S. Treasury doesn’t fund USAC, and the Federal government isn’t on the hook for any of USAC’s obligations, the U.S. government suffers no loss as a result of E-Rate fraud and thus “does not have a financial stake” in such losses. To sustain an FCA claim, the Court said, the Federal government must have financial exposure to losses arising from the alleged fraud.

For an FCC that just established a “strike force” to attack USF fraud, this decision is not good news. The FCC’s own ability to directly attack fraud may not be impaired, but beyond that the government’s remedies are now limited. The Commission can levy forfeitures and bar vendors from further participation in USF programs, but the threat of prosecution under the FCA – an alternative that provided a nice deterrent to the mix – now appears to be off the table.

We don’t know yet whether the government plans to pursue this issue further. It could seek rehearing (or rehearing en banc) in the Fifth Circuit, or it could even take the case to the Supreme Court. It might also try similar litigation in other federal circuits, looking for contrary decisions that might increase the likelihood of Supreme Court review. Perhaps legislative relief could be sought. The Justice Department may also have a thing or two to say, since the decision likely has implications for other federal grant programs. We’ll have to wait and see what happens.

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J Clifford Curley - July 21, 2014 9:33 PM

i understand the thought behind the ruleing but certainly dont agree that "thats that". there still should be a remedy to keep the wolfs on edge.... the cell phone sceme, promoted on TV,radio and some newspapers to give away free phones for "limited essential" communication(250 minutes a month, forever) is a give away jackpot in itself, much less ripping off the payers who have no choice or oversight on this project. Where there is big money, in non profits, the government or charities, there is fraud....and ya dont have to look to hard to find it. In 2009 the FCC gave away coupons for DTV boxes so the public could see free tv on their analogue tv sets, there was absolutely no oversight to get two 60 dollar coupons. so people i know got the 60 dollar DTV coupons to put the boxes on their 45 foot boat! not exactly the intent. JCC

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