Supreme Court Allows Treble-Damage False Claims Actions To Proceed Against E-Rate Service Providers

Broadband and telecommunications service providers should redouble efforts to comply with the rules of the FCC's "E-Rate" program that subsidizes service to schools and libraries as a result of a Supreme Court ruling that allows private citizens to sue under the False Claims Act ("FCA") to recover overcharges to the government. Defendants found to have violated the FCA by seeking excess reimbursement could be liable for treble damages, statutory penalties, and attorney's fees.

The FCA encourages private parties to bring lawsuits (sometimes called qui tam actions) to recover misspent government funds by sharing amounts recovered in the lawsuits with the private parties. In this case, Wisconsin Bell v. US ex. rel. Heath, the defendant telephone company had argued that the FCA did not apply because E-Rate is funded by service providers through their universal service fund contributions rather than through taxes. The court unanimously rejected that claim.

Todd Heath (the "Relator" in the case), an auditor of telecommunications bills, alleged that the service provider failed to comply with the FCC's "lowest corresponding price" ("LCP") rule that requires providers to charge an E-Rate applicant a price that is no higher than it would charge a "similarly situated" customer. According to the auditor, who filed the suit as a private party, for more than a decade (from 2002 to 2015) the provider charged some schools a higher price than it charged other, similarly situated customers, leading the E-Rate fund to overpay. In FCA terms, Heath alleged that the provider, by seeking reimbursement in excess of the LCP, had submitted false and fraudulent "claims" to the E-Rate program. That claim will now return to the district court for adjudication.

Although the possibility of FCA claims existed prior to this new case, plaintiffs may now have more awareness and more confidence in bringing claims. Many types of violations other than the LCP rule might be the basis for an allegation that a provider sought reimbursement in violation of the FCA. As a result, E-Rate service providers should carefully review their E-Rate compliance to insulate themselves from potentially costly FCA litigation. In such cases, approval of the funding by the Universal Service Administrative Company ("USAC") will not necessarily be sufficient to disprove allegations of false claims.

The E-Rate Program

The E-Rate program provides federal support to schools and libraries to allow them to obtain affordable broadband and telecommunications services. One of several subsidy programs under the FCC's overall universal service program, the E-Rate program subsidizes between 20%-90% of a school's total charges for eligible internet and telecommunications services, with higher percentages for schools in rural or low-income areas. Total E-Rate funding for fiscal year 2024 exceeded $2 billion.

Under the E-Rate program, schools and libraries solicit bids from service providers for broadband internet and telecommunications services. Service providers are subject to many rules intended to ensure a fair and transparent process and terms and the selection of "cost-effective" services. One of those rules is the LCP rule, which effectively requires service provider schools to offer their best price to a school or library to minimize the amount of the E-Rate subsidy.

Civil Actions Under the FCA

The court's opinion in Wisconsin Bell considers the reach of the FCA, a federal statute that protects government funds and programs by imposing civil liability on any person who knowingly presents to the government a false or fraudulent claim for payment. Specifically, the FCA enables private parties to bring civil actions on the government's behalf and to share in any monetary recovery. A defendant is liable under the Act if it knowingly presents, or causes to be presented, a false or fraudulent "claim for payment" where the government provides or has provided any portion of the money requested.

The question before the court was whether payments under the E-Rate program constituted a claim for payment under the FCA. The court ruled that the E-Rate payments at issue in the case did constitute a claim for payment because those E-Rate payments were made, at least in part, from government funds. Thus, the court allowed claims for alleged violations of the FCA to proceed with liability and damages to be determined on remand back to the trial court.

As noted above, the FCA allows private parties (individuals or organizations) to bring civil actions on the government's behalf, and to share in any monetary recovery. If a defendant is found to have violated the FCA, potential liability includes treble damages; statutory penalties (between $14,308 and $28,619 – adjusted annually for inflation) for each false or fraudulent "claim" submitted to the government; and reasonable attorney's fees and costs. The statute of limitations under the FCA is six years, but that period can be tolled if the government does not become aware of the alleged fraud until later (three years after the government becomes aware), but in no event more than 10 years from when the conduct occurred.

The scienter requirement for a civil FCA violation is "knowingly," which means that the person, with respect to the information, has actual knowledge of the information, acts in deliberate ignorance of the truth or falsity of the information, or acts in reckless disregard for the truth or falsity of the information. That said, we generally expect courts to hold E-Rate providers responsible for understanding FCC rules, and an FCA claim does not require willfulness or intent to defraud the government. In addition, note that the Wisconsin Bell decision involved the civil False Claims Act statute. A separate federal statute makes it a criminal offense to submit false claims to the government, 18 U.S.C. § 287. The criminal FCA statute carries a five-year maximum sentence.

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The court made clear that it was not addressing any of the issues in a separate case pending at the court, Consumers' Research v. FCC, which challenges the constitutionality of the core mechanism used to finance E-Rate subsidies (and other universal service programs), how it is managed by USAC, and how USAC bills and collects contributions from providers that fund distributions to program beneficiaries. That case is scheduled for argument on March 26.

If you have any questions about the E-Rate program or Universal Service Fund, please contact us.