This week DOJ announced the formation of a COVID-19 Fraud Enforcement Task Force “to marshal the resources of the Department of Justice in partnership with agencies across government to enhance enforcement efforts against COVID-19 related fraud.” In addition to components of DOJ, key agencies overseeing pandemic relief programs will participate, as well as the Special Inspector General for Pandemic Relief and the Pandemic Response Accountability Committee.
Posted by Ellyce Cooper and Christopher Munsey
In a case decided last week, United States ex rel. Lesinski v. South Florida Water Management District, No. 12-16082, 2014 U.S. App. LEXIS 14 (11th Cir. January 2, 2014), the Eleventh Circuit Court of Appeals affirmed the dismissal of a qui tam suit against the South Florida Water Management District, holding that the District is an arm and instrumentality of the state of Florida, and therefore not a “person” under the False Claims Act. The relator alleged that the District violated the FCA by fraudulently claiming FEMA reimbursements for ineligible repairs to the area’s canals. The district court granted the District’s motion to dismiss on the ground that the District is an arm of the state of Florida. The relator appealed, arguing that the District is a municipal, rather than state, agency. Under relevant Supreme Court authority, local governments and municipalities constitute “persons” who can be sued under the FCA, but states and agencies acting as arms of the state cannot. Compare Vt. Agency of Natural Res. v. United States ex rel. Stevens, 529 U.S. 765, 780 (2000), and Cook County v. United States ex rel. Chandler, 538 U.S. 119, 134 (2003).
The Eleventh Circuit, joining the Fourth, Fifth, Ninth, and Tenth Circuits, held that the Eleventh Amendment “arm of the state” analysis is the proper test for determining whether a state entity is a “person” under the FCA. After analyzing the test’s four factors – (1) how state law defines the entity; (2) what degree of control the state maintains over the entity; (3) where the entity derives its funds; and (4) who is responsible for judgments against the entity – the court concluded that the District is an arm of the state of Florida, and affirmed the dismissal. The court placed particular weight on the fact that the state’s control of the District was “pervasive and substantial.” 2014 U.S. App LEXIS 14 at *11. The circuit court declined to address the District’s argument that it was immune from suit in federal court under the Eleventh Amendment, although it specifically noted that the analysis is identical to that for the FCA “person” question. Id. at *18 n.9.
Posted by Kristin Graham Koehler and Brian Morrissey
Allegations of fraud in the student lending industry have led to a wave of False Claims Act litigation in that sector of the economy in recent years. On occasion, state agencies chartered to provide student loan financing and other assistance have been named as defendants in these suits. Last week, in United States ex rel. Oberg v. Kentucky Higher Educ. Student Loan Corp., 681 F.3d 575 (4th Cir. Jul. 18, 2012), the Fourth Circuit was asked to decide whether such agencies are “persons” subject to liability under the FCA. See 31 U.S.C. § 3729(a)(1)(a).
Relator sued four state agencies, including the Kentucky Higher Education Student Loan Corporation, alleging that they had defrauded the U.S. Department of Education by improperly inflating their loan portfolios eligible for federal student loan interest subsidies. The state agencies moved to dismiss, arguing that they are not “persons” subject to liability under the FCA.
The FCA does not define the term “person,” but the Supreme Court has concluded that it does not cover states. In Vermont Agency of Natural Resources v. United States ex rel. Stevens, 529 U.S. 765 (2000), the Court held that the word “‘person’ does not include the sovereign” and, thus, does not “does not subject a State (or a state agency) to liability.” Id. at 787-88, 780. On the other hand, the Supreme Court held that corporations are “presumptively covered by the term ‘person'” and, as a result, municipal corporations—i.e., cities and counties—are “persons” subject to suit under the FCA. Cook County v. United States ex rel. Chandler, 538 U.S. 119 (2003).
In Ogberg, the Fourth Circuit was asked to determine how to categorize state agencies that provide student loan financing. The court refused to adopt a hard and fast rule. Instead, it concluded that the “critical inquiry” is whether a state agency is subject to “sufficient state control” to render it part of the state and, thus, “not a ‘person'” under the FCA. 681 F.3d at 579. To determine the degree of “state control,” the Fourth Circuit adopted the same test courts apply to decide whether state agencies are “arms of the state” that qualify for sovereign immunity under the Eleventh Amendment. Id. That test involves several factors, including whether the state would pay any judgment against the defendant, and whether the state has the power to appoint the defendant’s officers and directors, control its funding, or veto its actions. The Fourth Circuit remanded to allow the district court to apply the test in the first instance.
In the last decade, three other circuits—the Fifth, Ninth, and Tenth—have addressed the question whether a state agency qualifies as a “person” under the FCA and, so far, all have agreed that the Eleventh Amendment “arm of the state” test is the proper route to the answer. As qui tam relators continue to pursue novel theories of liability in the student lending industry and other financial services contexts, additional state agencies are likely to face suits, and the “arm of the state” analysis will be critical in challenging those lawsuits.