Supreme Court Weighs High-Stakes Fraud Issue for E-Rate Program

Could schools see greater protections against getting overcharged by some telecommunications companies under the E-rate program?

That is a question that will surely arise among K-12 ed-tech leaders following a lively Nov. 4 argument in the U.S. Supreme Court in The justices seemed inclined to allow a fraud case over a telecommunications company's alleged overcharging of schools under the E-rate program—which helps fund schools' internet connections and other technology services—to move forward.

But they seemed to favor a narrow rationale that the federal government directly "provides" a small portion of the money in the $4 billion program. At least a few justices seemed wary of ruling that all the money in the $4 billion program was tied to the federal government given that the Federal Communications Commission has delegated the operation of the program to a private company that collects mandatory contributions from telecom companies.

"If we go ... to the broader argument, there are potentially large and a lot of potentially unintended consequences we have no idea about," Justice Brett M. Kavanaugh said.

The question before the court is whether funds under the E-rate and related programs administered by the Universal Service Administrative Company are subject to the False Claims Act, a Civil War-era statute aimed at rooting out fraud in federal programs and contracting.

That question is important for the E-rate program, which the Government Accountability Office has found in a series of reports (including this 2020 analysis) to be at serious risk for fraud. The Schools, Health & Libraries Broadband Coalition joined a friend-of-the-court brief supporting application of the False Claims Act to the E-rate program because that will enhance the program for schools, it said.

The Wisconsin Bell case includes allegations that the telecom company did not comply from 2008 through 2015 with the E-rate program's requirement that schools be offered the "lowest corresponding price" for services and that the company failed to train its sales representatives about the rule or put in place any mechanism to comply with it until 2009. That resulted in some Wisconsin schools being overcharged for telephone lines and internet connections, the underlying lawsuit alleges.

Telecom company argues that E-rate money is not government money

Wisconsin Bell's chief defense is that the money in the E-rate program is not provided by the federal government and thus the program is not subject at all to the False Claims Act.

"The program could have been funded with public money and administered by a government agency, but the political branches chose private funding and a private administrator," Allyson N. Ho, a Dallas lawyer representing Wisconsin Bell, which is a subsidiary of AT&T Corp., told the justices.

She quickly ran into difficulty when justices began citing a fallback argument of the federal government and the lawyers for Todd Heath, the private whistleblower who is pressing the fraud claims against Wisconsin Bell.

Both the government and Heath point out that in contrast to regular contributions to the Universal Service Fund, which are collected and distributed by USAC, the federal government has accrued some $100 million over several years in certain collections, such as interest and penalties, from delinquent telecom companies under the program. Those funds are at least briefly held in Department of the Treasury accounts before eventually being returned to USAC.

"That seems somewhat at odds with your argument that it's not the government's money," Justice Clarence Thomas told Ho. "How could it be collected under the [Telecommunications] Act if it is not owed to the government?"

Ho said the delinquent amounts were no different than the E-rate contributions themselves, and she compared them to child support collected by the government from one parent and given to another, or to a sheriff collecting a court judgment from a private party.

Justice Elena Kagan had a different scenario for Ho.

"If I have a sick friend and I arrange for Uber to bring that sick friend chicken soup, I mean, in some ways, it's the deliveryman who provides the soup, but I provided the soup because I paid for it and I told the deliveryman to go deliver it," Kagan said. "And, here, the mandate is coming from the federal government in the same way."

Kagan said that schools benefiting from the E-rate program might thank the federal government more than the telecom companies for the services they received.

"I think the school might say: Thank you to Congress and the FCC for setting up this program that enables us to, you know, get these services in our schools, because everybody understands that the carriers aren't doing it from the goodness of their hearts," she said.

Justice Ketanji Brown Jackson told Ho that in her view the purpose of the False Claims Act went beyond potential financial fraud to include a goal of maintaining trust in government programs.

"As I read the history of the FCA [False Claims Act], the purpose is broader than just trying to protect the public fisc," Jackson said, using a word for a public treasury. She added that even in recent updates to the law Congress was concerned with things such as "the loss of confidence in government programs" and "incidents in which the beneficiaries of the program did not get the benefits that Congress wanted them to get. So it was clearly beyond the fiscal impact."

E-rate advocates push for a broader ruling on the federal government's role

Tejinder Singh, a Washington lawyer representing Heath, argued that all the funding under the E-rate program should be subject to the False Claims Act, and he urged the court to decide the case on that broader ground rather on the basis of the $100 million in delinquent funds that the government has directly collected.

"When Wisconsin Bell requests E-rate funds, the government provides the money," he said. "The administrator pays on the government's behalf using money the government collects and controls to advance a federal program that the government created."

He added, "I think it will also provide more clarity for other cases that aren't just about the E-rate program if folks understand that when the government funds its programs, even if it does so through this direct efficient mechanism instead of an inefficient mechanism, the False Claims Act still applies."

Thomas, despite having expressed doubts to Ho about some of her arguments, seemed more strongly on Wisconsin Bell's side in his comments to Singh.

"This is private money from private parties to another private party, and it's very difficult to see what the government's financial stake is," Thomas said. "It looks like private funds."

Vivek Suri, an assistant to the U.S. solicitor general arguing in support of Heath, said that despite offering the fallback argument based on the $100 million collections, the government believes such a narrow rationale for False Claims Act coverage would lead to more questions about the scope of damages available to those who bring such fraud claims.

"If the court were to rule in our favor, we'd prefer to win on the ground that the United States provides all of the money in the Universal Service Fund," Suri said.

But a middle bloc of the court seemed most comfortable ruling for Heath and the federal government on the narrower $100 million basis, even if the justices themselves seemed unclear on what impact the more narrow rationale would have on FCA cases versus the broader view that all the money in the program was federal money.

"It seems pretty aggressive to me to go beyond the $100 million," Kavanaugh told Singh. "And not prudent because we don't even know what we're getting into."

A larger E-rate case looms at the high court

There was one reference during the Nov. 4 arguments to another E-rate case that the court is weighing whether to take up—one that has even more sweeping implications for the school subsidy program.

In July, a federal appeals court ruled that the funding mechanism for the E-rate and its related universal service programs was unconstitutional. The U.S. Court of Appeals for the 5th Circuit, in New Orleans, said that Congress' delegation of its taxing power to the Federal Communications Commission, and the FCC's "subdelegation" of that power to USAC, violated separation-of-powers principles under Article I of the U.S. Constitution.

The Biden administration has appealed that ruling to the Supreme Court, as has the Schools, Health, & Libraries Broadband Coalition in a separate filing . The group challenging the funding mechanism, Consumers' Research, has also asked the high court to take up the issue despite having won in the appeals court.

Ordinarily, that would make the case a likely one to be granted. But the federal government also pointed out to the justices in its brief in that any ruling in the Wisconsin Bell case about the FCC's relationship with USAC and whether the federal government provides the funding could hold implications for the broader challenge. So the court might want to hold onto those appeals until Wisconsin Bell is decided, the U.S. solicitor general said.

Chief Justice John G. Roberts Jr. told Singh during the Wisconsin Bell arguments that the GAO has labeled the E-rate funding mechanism "a backdoor appropriation," which Roberts suggested was meant pejoratively.

"The reason, I think, is because you do get a very large amount of money without going through the normal appropriations process," the chief justice said. "If you can take and spend for whatever purposes you would like any amount of money so long as you require a private entity to pay it into a fund and then you exercise whatever authority you want to dispose of it in a particular way, that seems to me a significant exception to the normal appropriations process, and I wonder if that's a concern at all."

Singh said such issues don't affect whether the False Claims Act applies to E-rate funds.

"If you have concerns about how the program is structured, those are really concerns for another case, not this one," Singh said.

A decision in the case is expected by next June.