Just how broad is the scope of the False Claims Act (FCA)? That is the basic question posed in Wisconsin Bell, Inc. v. U.S. ex rel. Heath, No. 23-1127. Put more directly, the case addresses whether reimbursement requests under the Schools and Libraries Universal Service Support program—better known as the E-Rate program—are actionable “claims” exposed to liability under the FCA. But when the US Supreme Court hears oral argument next month, the justices will grapple with broader questions with implications far beyond this case: (1) when does the government “provide” money in any transaction or program so that FCA liability attaches; (2) when is an independent government-sponsored enterprise (e.g., Fannie Mae/Freddie Mac) acting as an “agent” of the United States for FCA purposes; and (3) to what extent do those who deal with private entities established or chartered pursuant to federal law need to watch this case to determine their potential exposure under the FCA and its panoply of enforcement mechanisms?
Because the money in the E-Rate program at the center of this dispute doesn’t come from taxpayers, the case stands to challenge the long-held understanding that the FCA is a tool designed to protect taxpayer money against fraud, waste, and abuse. Here, the money at issue comes from the Universal Services Fund (USF or Fund). The USF is funded by contributions from telecommunications carriers, not by taxpayer dollars from the government fisc. Moreover, the USF is overseen and administered by an independent not-for-profit entity called the Universal Service Administrative Company (USAC). So, with that in mind, how exactly is the FCA applicable to the USF and the E-Rate program?
Specific Program at Issue – E-Rate/Universal Service Fund
The core mission of the Federal Communications Commission (FCC) is to promote universal service to ensure that all people in the US have access to telecommunications services at reasonable prices. Pursuant to the Telecommunications Act of 1996, the FCC established a set of universal service programs, which the USF finances. The statute requires carriers to contribute to that fund pursuant to rules established by the FCC. A private nonprofit organization, the USAC, administers the Fund. All the money contributed to the USF comes from carriers, not the government fisc. However, under FCC’s rules, the FCC, Department of Justice (DOJ), and Treasury are authorized to pursue carriers that fail to pay their contributions and collect penalties and interest on delinquent payments into the USF.
The Schools and Libraries Universal Support program is one of the USF programs established by the FCC. The program (commonly known as E-Rate or Education Rate) subsidizes Internet access and other services for schools and libraries. Carriers are required to charge libraries and schools the “lowest corresponding price” for telecommunications services. That means they must charge the lowest price for similarly situated nonresidential customers for similar services. When a school or library receives services under the E-Rate program, it pays the full price and submits a request for reimbursement from the Fund, or it pays a discounted price, and the service provider itself submits a request to USAC for the rest.
The Seventh Circuit Decision Conflicts Squarely with Earlier Fifth Circuit Ruling
Todd Heath, the relator, alleges that Wisconsin Bell, a common carrier that provides services to schools and libraries, among other customers, receives subsidies under the E-Rate program. Heath further alleges that Wisconsin Bell charged these schools and libraries more than the lowest corresponding price—making all of its reimbursement requests to the USF program “false claims” under the FCA because they carried purported certifications of compliance with the program requirements.
On summary judgment, the US District Court for the Eastern District of Wisconsin granted summary judgment for Wisconsin Bell premised on Heath failing to demonstrate falsity or scienter, critical elements of proof under the FCA. Heath appealed, and the Seventh Circuit reversed in an opinion that found as a matter of law that reimbursement requests under the E-Rate program counted as actionable claims under the FCA.
The Seventh Circuit provided three alternative bases for its conclusion. First, it found that the USF—while funded by fees paid by the telecommunications companies, as directed by the FCC—also received funds from the US Treasury, which collects delinquent debts to the Fund, penalties and interest, and civil settlement and criminal restitution payments. Since a claim under the FCA applies if the government provides “any portion” of the funds, the Seventh Circuit said that this federal money was sufficient to bring E-Rate reimbursement requests under the umbrella of the FCA. Second, the Seventh Circuit found that the FCC created the USAC to administer the Fund and thus was an agent of the United States, bringing the E-Rate program within the post-2009 definition of claim. (Before a 2009 amendment of the FCA, a claim had to be submitted to a contracting officer or the government. But the law was expanded to include claims submitted to “agents” of the government.) Finally, the Seventh Circuit found that the degree of government involvement in the E-Rate program—from Congress ordering the FCC to collect the fees to fund the program to the FCC setting the fee amounts to the FCC establishing the USAC to manage the Fund—was sufficient to say that the United States “provided” the money in the E-Rate program, again meeting the definition of a claim under the FCA.
In arriving at its decision, the Seventh Circuit contradicted an earlier ruling by the Fifth Circuit in U.S. ex rel. Shupe v. Cisco Sys., Inc., 759 F.3d 379, 383-85 (5th Cir. 2014). In Shupe, the Fifth Circuit went the other way, finding that the E-Rate program did not fall under the FCA’s purview. It ruled that the USAC was “explicitly a private corporation owned by an industry trade group,” even if it was created by the actions of Congress and the FCC, and that the money in the USF was “provided by private telecommunication providers because of a mandatory contribution scheme established by the FCC and Congress” and was, therefore, not a tax. See Shupe, 759 F.3d at 387-88 (“The money in the USF is provided by private telecommunication providers because of a mandatory contribution scheme established by the FCC and Congress, Congress has not declared this a tax, and the origination of the bill in the Senate undermines the argument that it is one.”) As such, the Fifth Circuit found that because there were “no federal funds involved in the program, and [the USAC was] not itself a government entity,” the federal government did not provide any portion of the E-Rate funds. Id. “. . . [A]lthough the United States may have a regulatory interest in the E-Rate program, the United States does not have a financial stake in its fraudulent losses. That recovery for an unquantifiable regulatory interest falls outside of the scope of FCA protection is further supported by the FCA’s damages provision, which provides a penalty of 3 times the amount of damages which the Government sustains.” Id. at 385, quoting 31 U.S.C. §3729(a) (emphasis added).
Interestingly (and seemingly in contradiction of its ruling in Shupe), the Fifth Circuit just recently ruled en banc that the funding mechanism for the USF is unconstitutional under the nondelegation doctrine because it effectively delegates to the FCC and USAC the power to levy taxes on telecommunications carriers, which is a uniquely governmental prerogative. See Consumers’ Rsch. v. Fed. Commc’ns Comm’n, 109 F.4th 743, 786 (5th Cir. 2024). The FCC has already filed a writ of certiorari with the Supreme Court to challenge this decision, which raises a host of fascinating constitutional and telecommunications law questions beyond this article’s scope. But the nondelegation concerns surfaced in the Consumers’ Research case should not affect the outcome or resolution of the FCA questions before the Court in Wisconsin Bell.
Arguments Now Before SCOTUS
The two principal arguments advanced by Wisconsin Bell in its brief are, first, that all the USF moneys come from carriers, not the government fisc. Because the government does not “provide” money for the program, it is beyond the FCA’s scope. The FCC’s Universal Services Fee may “provide for” such funds, but that is not the language of the FCA statute, nor is that the historical or legislative intent of the FCA, which is meant to apply only when the US government suffers a loss. Second, Wisconsin Bell argues that USAC is not an “agent” of the FCC or the federal government because USAC has no power to bind the government, and the government has no role in USAC’s day-to-day affairs. Thus the standard legal understanding of an agency relationship does not apply here.
The relator (joined by the solicitor general as amicus) argues that the term “claim” in the FCA is defined in sweeping terms. They argue further that the government “provides” all the money in the USF by requiring its creation in the first instance and deciding how collected funds should be allocated. The government “provides” the money at issue (and thus the money is subject to FCA liability) by creating the E-Rate program in federal regulations and specifying who must contribute and in what amounts. Moreover, they argue that FCC, DOJ, and Treasury collected approximately $100 million in civil penalties and interest from delinquent carriers, and thus, there is a direct contribution from the federal fisc that separately qualifies the USF for FCA liability.
On the agency issue, the relator and the government assert that the USAC is an agent of the federal government because (1) the FCC appointed the USAC to administer the USF and USAC accepted that appointment, and (2) the USAC acts directly on the FCC’s behalf by effectuating FCC regulations in billing carrier contributors and disbursing funds according to program requirements. Thus, they argue that notwithstanding the USAC’s inability to bind the federal government, the USAC is nevertheless an “agent” of the FCC for FCA purposes.
Potential Ramifications of Decision
Relators and the government are always pressing to expand the boundaries of the FCA as one of the most powerful tools available to reward the identification of, and punishment for, corruption, fraud, waste, and abuse in connection with the public fisc. But here, the USF and the E-Rate program do not deal with taxpayer funds—all money in the USF is collected from the telecommunications carriers themselves. Indeed, even the penalties and interest collected by government ultimately come from the carriers themselves and not from taxpayers, even if they were contributed to the USF after a collections process pursued by government authorities. The link back to the public purse and federal spending is tenuous at best.
This case pushes the outer limits of what most consider the purpose and intent of the FCA, and the statute’s language in what it means for the government to “provide” the funds subject to an allegedly false claim and for the government to suffer a “loss.” If taken to its absurdist limits, the dollar is a fiat currency and the government ultimately “provides” all the money in our economy. The decision in Wisconsin Bell would suggest there is almost no limit to what moneys potentially bear the risk of exposure to claims for treble damages and civil penalties under the FCA. But where should the court draw the line?
One of the amici, the Washington Legal Foundation, pointed out that under the Seventh Circuit’s reasoning, Fannie Mae and Freddie Mac are other private, federally chartered companies like the USAC, and thus perhaps “agents” of the United States for FCA purposes. Fannie and Freddie insure about 60 percent of the mortgages in this country. Some of the mortgages that Fannie Mae and Freddie Mac insure would not exist absent the government’s implicit backing. For example, no rational bank would offer competitive interest rates to a borrower who cannot put 3 percent down to buy a home. Yet many mortgage companies do so because Freddie Mac insures such mortgages. If the mortgage companies knew they could face treble damages and criminal penalties for an incorrect certification or mortgage insurance application to Freddie Mac, they might be less likely to participate in such programs. Or if they did participate, they may offer the product to fewer customers and raise rates for some borrowers.
Numerous other examples abound throughout the economy of transactions that may have at least a tangential connection to the government or a government-sponsored enterprise, but have no connection with funds from the government fisc or do not pose a direct risk of loss to the government itself. Overly broad or vaguely defined boundaries for FCA liability might encourage would-be relators to accuse a wide swath of businesses and individuals with FCA violations—forcing putative defendants to confront expensive litigation while denying those same businesses and individuals the ability to know with confidence whether the entities they are dealing with are actually “agents” of the government or are recipients of funds “provided” by the government.
Wisconsin Bell poses fascinating and perhaps draconian implications for a large cross-section of the US economy that operates in spaces adjacent to federal oversight and regulation. But beyond that, it further underscores the manner in which the government, through enforcement and legislative proposals, is becoming even more enamored of this 150-year-old law and the bounties it may promise by increasing its scope and focus—even to areas never contemplated when the FCA was originally signed into law by Abraham Lincoln.