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Defense Bar Overstates Impact of the Fifth Circuit’s Decision in Shupe

On July 7, 2014, the Fifth Circuit decided an interlocutory appeal in United States ex rel. Shupe v. Cisco Systems, Inc., No. 13-40807, 2014 WL 3057093 (5th Cir. July 7, 2014), reversing the trial court’s decision that the False Claims Act (FCA) applied to E-Rate funds administered by the Universal Service Administrative Company (USAC), a privately funded non-profit organization established by the Federal Communications Commission (FCC).  The defense bar has heralded this decision as a stunning loss for whistleblowers and a landmark decision that reshapes the FCA landscape.  Yet, a close examination of the decision reveals the opposite.  The Fifth Circuit’s narrow ruling comports with the well-established boundaries of the FCA—namely, that the FCA does not apply to claims that involve zero federal funds and were submitted to a non-governmental entity.

In Shupe, the relator alleged that the defendants violated the FCA by presenting false requests for reimbursement to USAC, the defrauded entity.  The USAC collects mandatory contributions from telecommunications carriers and then distributes the funds to schools and libraries through the E-Rate program.  Defendants argued that the FCA did not apply because the funds collected by USAC are not deposited into the U.S. Treasury, the United States does not receive any of the funds, and they are administered and distributed by USAC, a private non-governmental organization.

The trial court disagreed with the defendants in Shupe and refused to dismiss the case.  For the trial court, it was sufficient that “the funds administered by the USAC are collected under a mandate from the federal government set forth by Congress in the Communications Act, and the funds are distributed in accordance with regulations established by the FCC.”  In reversing, the Fifth Circuit focused on two key facts:  (1) every penny of the funds held in the Universal Service Fund was contributed by private telecommunications companies, not the U.S. treasury, and (2) the allegedly false claims were submitted to USAC, a non-government entity.

According to the Fifth Circuit, these two facts combined necessitated its conclusion that the FCA did not apply:  “Importantly, however, courts have identified programs that do not trigger FCA protection because they do not receive federal funds and they have too tenuous of a relationship to the Government to be considered a Government entity.”  Shupe, 2014 WL 3057093 at *4.  Standing alone, the presence of one of these facts does not negate FCA coverage.  For instance, if an entity is a government body, it is covered by the FCA even if it does not receive federal funds.  Or, if the defrauded entity is not part of the government, but even a penny of the money requested flowed from the U.S. Treasury, the FCA applies.

The Fifth Circuit rejected the Government’s core argument in favor of FCA coverage—that the FCA applies because of the extent of the FCC’s control over the USAC’s E-Rate program—because the test for whether an entity is a part of the Government is not tied to the amount of supervision that the Government exercises over the entity but, rather, the originating statute for the entity and/or program.  Id. at *5.    Since Congress explicitly established that the USF was to be administered by the USAC—a private corporation owned by an industry trade group—and rejected the FCC’s request to directly administer the funds, the USAC could not then be considered a government body protected by the FCA.

The fundamental message of the Shupe decision—that the FCA does not apply to defrauded private entities receiving private monies—is not surprising and does not upend FCA jurisprudence.  In enacting the FCA, “the objective of Congress was broadly to protect the funds and property of the Government from fraudulent claims.”  Rainwater v. U.S, 356 U.S. 590, 592 (1958) (emphasis added).   The Fifth Circuit’s decision in Shupe declining to extend FCA protection to private entities receiving private funds simply honors that longstanding purpose.