The Continuing Far Reach of the False Claims Act

by Dorsey & Whitney LLP

Since 2009, when Congress preserved and expanded the reach of the False Claims Act (“FCA”) through the Fraud Enforcement and Recovery Act (“FERA”), Government contractors have seen a vast increase in FCA lawsuits and questions continue to loom regarding the extent the aggressive FCA amendments will be enforced.

Recently, the Fifth Circuit held that the False Claims Act does not extend to claims submitted under the Education Rate (“E-Rate”) Program.  While this decision is narrowly focused on a quasi-government program, the Court’s discussion on the application of the FCA, both pre-and post-FERA amendments, provides some insight on the application of the law to seemingly private contracts.

On July 7, 2014, in U.S. ex rel. Shupe v. Cisco Systems, Inc., 759 F.3d 379 (2014), the Fifth Circuit held that the E-Rate program was not subject to the reach of the FCA because (1) no Government funds were at issue; and (2) the program is not administered by a Governmental entity.

The case involved a qui tam action that alleged that the defendant telecommunication companies had violated the FCA in connection with contracts to install and operate communications networks for schools and libraries in Texas.  Partial funding for the contracts came from the E-Rate program, which is administered by the Universal Service Administrative Company (“USAC”) with funds from the Universal Service Fund.

The USAC was created in part by the Federal Communications Commission (“FCC”) but is an independent, not-for-profit corporation owned by an industry trade group.  The USCA collects mandatory contributions, which are required under federal and FCC regulations, for the Fund from telecommunications carriers.

The Fifth Circuit’s decision ultimately turned on the fact that no federal money was used in the E-Rate program and no claim was made to a Governmental entity.  However, in reaching this conclusion, the Court affirmed that, when any amount of United States treasury dollars flow to the defrauded entity, FCA liability is triggered.  Additionally, the Court held that no claim had been submitted to a Government entity because, while the USCA was created and operates pursuant to various federal regulations, it is not itself a Governmental entity.

The Cisco decision affirms that FCA liability comes into play when “the Government has given even a drop of treasury money to the defrauded entity.”  Thus, the decision is a continuing reminder to contractors that, even if you are not directly contracting with the federal Government, if your contract is partially funded by federal money, then the FCA is in play.  However, what is particularly notable about the case is the fact that at the District Court level, the Court had held the fact that no federal money was involved was not determinative.  The District Court held that, because the USAC operated under Government mandate to collect the money and disbursed the funds according to FCC regulations, the USAC was a “grantee, recipient, and agent” of the Government and the FCA applied.  Based on this reasoning, the District Court denied the telecommunication contractors’ motion to dismiss and the appeal to the Fifth Circuit followed.

While Cisco does not necessarily set new precedent, it does illustrate that potential FCA liability reaches far beyond direct contracts or subcontracts with the federal Government.  This is combined with the fact that the FERA amendments provided protection to whistleblowers by adding anti-retaliation provisions to the law.  Additionally, the FERA amendments permitted whistleblowers to gain access to the information provided by a company being investigated under the FCA, allowing the whistleblowers to actively participate in the investigation.  Therefore, like in Cisco, a FCA action may be brought and maintained by a whistleblower, without Government intervention, in any arena where federal funds may be involved.  Further, even if no Government funds are involved, there is enough ambiguity in the law that courts may not be inclined to dismiss cases if there is the guise of federal Government involvement.

The reach and effect of the post-2009 FCA is still being debated and evaluated by the courts.  The Cisco decision is an example of the type of lawsuit that may become more and more common under the expanded FCA.  Although the contractors in that case ultimately prevailed, it was only after a lengthy and, undoubtedly, costly appeals process.  The decision serves as a continued reminder to contractors – even those who do not work on federal contracts – of the importance of maintaining accurate records, compliance with contract requirements, and ensuring the accuracy of any claims for payment.



DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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