The Supreme Court Will Consider What Constitutes a “Claim” Under the False Claims Act
The Supreme Court will once again address the False Claims Act (FCA) in its next term, this time to consider the FCA’s definition of a “claim.” Specifically, the Court will decide whether allegedly false submissions made to the Federal Communication Commission’s E-Rate program were “claims” implicating federal funds such that they are actionable under the False Claims Act. While the circumstances in Wisconsin Bell and the E-Rate program are unique, the Court could take the opportunity to opine more broadly on what constitutes an actionable claim under the FCA.
Context
To establish a violation of the False Claims Act, the government (or a qui tam relator standing in the government’s shoes) must establish:
1. A False Claim: The defendant must make, or cause another to make, a false or fraudulent claim for payment or approval that involves federal funds.
2. Scienter (knowledge): The defendant must act with actual knowledge, reckless disregard, or deliberate ignorance.
3. Materiality: The claim must have the natural tendency to influence the decision to pay the funds.
The Supreme Court has issued impactful decisions addressing the scienter, materiality, and falsity elements in recent years. See U.S. ex rel. Schutte v. SuperValu Inc., 143 S. Ct. 1391 (2023); Universal Health Services Inc. v. U.S. ex rel. Escobar, 136 S. Ct. 1989 (2016). Wisconsin Bell concerns the threshold element of whether the defendant’s claims are for federal funds.
The FCC’s E-Rate Program and Wisconsin Bell’s Alleged False Claims
Under the Federal Communication Commission’s (FCC) E-Rate program, schools and libraries receive subsidies for telecommunications and information services. The amount of those subsidies range from 20% to 90% of the schools’ and libraries’ charges from providers, depending on the income level of the surrounding community and whether the school or library is in an urban or rural area. Because the amount of each subsidy provided by the E-Rate program is based on a percentage of the amount the service provider charges the school or library, the E-Rate program pays a larger subsidy when services providers charge more. Under the E-Rate program, service providers are required to offer schools and libraries the lowest price charged to non-residential customers who are similarly situated. 47 C.F.R. § 54.500.
Wisconsin Bell provided services to many schools and libraries eligible for E-Rate program subsidies under the E-Rate program and submitted many claims to the E-Rate program fund. Relator alleged that Wisconsin Bell knowingly failed to ensure that it charged qualifying schools and libraries the lowest price it charged to similarly situated customers. Accordingly, relator alleged, many of the claims that Wisconsin Bell submitted to the E-Rate program were false and fraudulent and resulted in providers receiving improperly inflated payments.
Seventh Circuit: Wisconsin Bell’s Claims to the E-Rate Program Were Actionable Under the False Claims Act.
Wisconsin Bell argued on appeal to the Seventh Circuit that the False Claims Act should not apply to claims to the E-Rate program because private telecommunication companies contribute the money for the E-Rate program fund by paying annual fees to the Universal Service Administrative Company (USAC), the entity that administers the E-Rate program fund. Therefore, according to Wisconsin Bell, the funds at issue are not federal funds and fraudulent claims for those funds cannot violate the FCA.
The Seventh Circuit held that there were three independent reasons why the FCA should apply to the E-Rate program funds. First, the Court pointed to the portion of the FCA’s definition of a “claim” that expressly includes claims for funds “if the federal government provides ‘any portion’ of the money or property in question.” U.S. ex rel. Heath v. Wisconsin Bell, Inc., 92 F.4th 654, 667 (7th Cir. 2024). The government proffered evidence that the E-Rate program fund had received approximately $100 million from the U.S. Treasury. The Court held that since the government provided a portion of the funds at issue, the funds therefore came within the FCA’s definition of a claim.
Second, the Court relied on the portion of the FCA definition of “claim” that includes claims “presented to an officer, employee, or agent of the United States” and applies “whether or not the United States has title to the money or property.” 31 U.S.C. 3729(b)(2)(A)(i). The Court ruled that USAC is an agent of the government.
Third, the Court held that the high degree of government involvement in the E-Rate program demonstrated a “sufficiently close nexus” between the program and the government “such that a loss to the former is effectively a loss to the latter.” Id., quoting U.S. ex rel. Yesudian v. Howard Univ., 153 F.3d 731, 738–39 (D.C. Cir. 1998). The Court held that the FCA “does not require relators to trace fraudulently obtained funds back to the Treasury,” but that in this case the government provided funding to the defrauded entities. Id. citing United States ex rel. Kraus v. Wells Fargo & Co., 943 F.3d 588 (2nd Cir. 2019).
Wisconsin Bell’s Petition to the Supreme Court for a Writ of Certiorari
The Supreme Court granted Wisconsin Bell’s request for it to hear the case. In its petition to the Supreme Court, Wisconsin Bell argued that the Seventh Circuit’s ruling conflicted with a decade-old Fifth Circuit holding that said the FCA did not apply to the E-Rate Program. U.S. ex rel. Shupe v. Cisco Sys., Inc., 759 F. 3d. 379 (5th Cir. 2014). The Fifth Circuit reasoned that there were no federal funds involved in the E-Rate program and that the USAC is not a government entity. In Wisconsin Bell, the Seventh Circuit noted that the Fifth Circuit in Shupe did not address the federal money that was included in the E-Rate program fund, which may turn out to be a significant difference between the two cases.
Wisconsin Bell also argues that the Seventh Circuit’s ruling was wrong because, it argues, telecommunications companies alone provide money to the fund. It argues that the federal funds cited by the Seventh Circuit (delinquent debts, penalties, and interest, civil settlements, and criminal restitution) should not count as federal funds because they are revenue neutral to the government, who is simply the debt collector for the USAC. Wisconsin Bell argues that this debt collection should not “convert private money owed to the fund … into public money.” Petition for Cert p. 23. Citing Shupe, it argues that the USAC is not an agent of the U.S. but is instead a private corporation owned by an industry trade group. Petition for cert, p. 25.
The Seventh Circuit and Fifth Circuit opinions diverged in several respects, and that may be among the reasons that the Supreme Court agreed to hear this case.
Conclusion
The Supreme Court’s ruling in this case should provide guidance on where the line falls between claims for federal funds that implicate the False Claims Act, and claims for purely private funds that do not. The Court’s ruling could potentially have implications for any federal programs that are funded with money that is kept outside of the Treasury.
John T. Crutchlow is a Partner at Youman & Caputo who represents whistleblowers. Crutchlow is a former Assistant United States Attorney who focused on False Claims Act cases for the DOJ and a former SEC Enforcement Division attorney.
