Fifth Circuit rules that E-Rate program funds were not provided by the federal government, and so not subject to False Claims Act

by Ben Vernia | July 10th, 2014

On Julu 7, the Court of Appeals for the Fifth Circuit, in U.S. ex rel. Shupe v. Cisco Systems, Inc., et al. reversed on interlocutory appeal a district court’s denial of telecommunication companies’ motion to dismiss a qui tam suit. The relator had alleged that the defendant companies violated the False Claims Act in bidding for and being awarded communication network contracts in South Texas public schools, financed by the Education Rate (E-Rate) program, which is administered by an independent non-profit company, USAC, designated by the FCC to administer the program. E-Rate is funded by “mandatory contributions” from telecommunication carriers to a Universal Service Fund (USF).

The defendants argued that claims for USF funds were not subject to the False Claims Act because those monies were not provided by the federal government. The Fifth Circuit agreed. After surveying caselaw concerning the scope of the FCA, the court concluded:

The money in the USF is untraceable to the United States Treasury. Accordingly, although 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.

The court went on to reject the government’s argument that the FCC’s control over the program sufficed to establish the jurisdiction of the FCA, noting that other courts had rejected similar control-based arguments. Instead, the court must look to the statute creating the program, it wrote, and it had, in a prior case, recognized the independence of the program from the government, and it noted that “Congress has not declared [E-Rate contributions] a tax, and the origination of the bill in the Senate undermines the argument that it is one.

The court reversed the district court and remanded for further proceedings.

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