Thursday, July 26, 2012

Are State Organized Corporations Subject to the False Claims Act?

The U.S. Court of Appeals for the Fourth Circuit recently addressed the question of what legal test should be applied to determine whether and when state organized corporations are in fact "state agencies" and thus not subject to suit under the False Claims Act. See US ex rel Oberg v. Kentucky Higher Education Student Loan Corporation et al, No. 10-2320, June 18, 2012.  In Oberg, the relator brought suit against against four state created corporations (the Kentucky Higher Education Student Loan Corp., Pennsylvania Higher Education Assistance Agency, Vermont Student Assistance Corp., and Arkansas Student Loan Authority) alleging that these entities made fraudulent claims to the U.S. Department of Education ("DOE") "by engaging in various non-economic transactions" in order "to inflate their loan portfolios" and make these entities "eligible for federal student loan interest subsidies."  The relator claimed that the DOE had overpaid "millions" to these entities.

The state created corporations moved to dismiss the FCA claims against them on the grounds that they were "state agencies" and thus not "persons" subject to FCA claims.  The FCA provides an action against "any person" who "undertakes certain fraudulent behavior, including 'knowingly present[ing], or caus[ing] to be presented, a false or fraudulent claim for payment or approval' to an officer, employee, or agent of the United States." 31 U.S.C.  sec. 3729(a)(1)(A).  In Vermont Agency of Natural Resources v. United States ex rel. Stevens, 529 U.S. 765, 780, 787-88 (2000), the Supreme Court held that the FCA "does not subject a State (or state agency) to liability" due to the "longstanding interpretive presumption that 'person' does not include the sovereign." Corporations, the Court observed, are "presumptively covered by the term 'person," id. at 782, and in Cook County v. U.S. ex rel Chandler, 538 U.S. 119, 125 (2003), the Court went further and found that municipal corporations are also persons subject to qui tam suits under the FCA.  The District Court in Oberg dismissed the case, finding that the state created corporations were state agencies. In so doing, the Fourth Circuit observed, it "did not apply any stated legal test" and instead "looked to state statutory provisions" to determine "each entity's status as a 'state agency.'"

The Fourth Circuit reversed the District Court's dismissal, and remanded the matter, saying "the critical inquiry is whether appellees are truly subject to sufficient state control to render them a part of the state, and not a "person," for FCA purposes."  To determine whether an agency is part of the state, the Court employed what it called the "arm-of-the-state-analysis used in the Eleventh Amendment context" and analyzed four "non-exclusive factors:"  (i) whether the state would pay any judgment rendered against the agency; (ii) the degree of autonomy exercised by the entity, including whether the state can veto the entity's actions; (iii) whether the entity is "involved with" state concerns as opposed to non-state or local issues; and (iv) and how the entity is treated under state law.  Applying these factors, the Court explained, should assist in determining whether the state-created entity functions independently of the state or functions as an arm or alter-ego of the state.

Overall, the decision is short and straightforward.  The Fourth Circuit does not claim to be breaking new ground in applying this test to FCA claims and state organized corporations, as it cites the 9th, 10th, and 5th Circuits for support.

A. Brian Albritton
July 26, 2012

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