• Too Broad, Too Narrow, or Just Right: The Fourth Circuit Applies an Arm-of-the-State Analysis to Determine Liability Under the False Claims Act, 31 U.S.C. §§ 3729 et seq.
  • July 5, 2012
  • Law Firm: Semmes Bowen Semmes A Professional Corporation - Baltimore Office
  • United States ex rel. Oberg v. Kentucky Higher Education Student Loan Corp., United States Court of Appeals for the Fourth Circuit, No. 10-2320 (4th Cir. Jun. 18, 2012)

    In a qui tam action brought under the False Claims Act (FCA), the United States Court of Appeals for the Fourth Circuit vacated and remanded the district court’s grant of Defendants' Motions to Dismiss on the ground that they were "state agencies" and therefore not subject to suit under the FCA. Writing for the Court, Judge Motz stated that the critical inquiry was not whether Defendants were corporations with “independent legal personalities” or whether they were deemed “state agencies” by State legislatures or courts. Rather, the focus of the Court should be on whether Defendants are truly subject to sufficient state control to render them a part of the State and not a “person,” for purposes of the FCA.

    On behalf of the United States, Dr. Jon Oberg sued several corporate entities—namely, the Kentucky Higher Education Student Loan Corporation, Pennsylvania Higher Education Assistance Agency, Vermont Student Assistance Corporation, and Arkansas Student Loan Authority, as well as other nonparty defendants (collectively, “Corporations”)—under the FCA, 31 U.S.C. §§ 3729 et seq. In his Complaint, Oberg alleged that the Corporations, which were organized by their respective States to improve the availability of higher educational student loans, defrauded the United States Department of Education by engaging in various non-economic transactions to inflate their loan portfolios in hopes of receiving greater federal student loan subsidies. In so doing, Oberg claimed that the Department of Education overpaid millions of dollars to the Corporations. Each Corporation moved to dismiss Oberg’s Complaint, contending that it was a “state agency,” immune from suit under the FCA. The district court agreed and dismissed the Complaint as to all four (4) Corporations, relying only upon state statutory provisions. Oberg appealed to the United States Court of Appeals for the Fourth Circuit, which reviewed the case de novo pursuant to Federal Rule of Civil Procedure 12(b)(6). The sole issue before the Court was whether each of the Corporations constituted a “person” subject to liability under the FCA.

    The FCA provides a cause of 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. § 3729(a)(1)(A). In beginning its analysis, the Fourth Circuit noted that although the relevant provisions of the FCA do not define the term “person,” helpful guidance may be found in the Supreme Court case, Vermont Agency of Natural Resources v. United States ex rel. Stevens, 529 U.S. 765 (2000). In Stevens, the Supreme Court held that “the False Claims Act does not subject a State (or state agency) to liability.” Id. at 787-88. The Court determined that the term “person” in the FCA did not include States for purposes of qui tam liability. Conversely, the Court noted that “the presumption with regard to corporations is just the opposite of the one governing here,” and as such, corporations “are presumptively covered by the term ‘person.’” Id. at 782. Similarly, in Cook County v. United States ex rel. Chandler, 538 U.S. 119 (2003), decided three (3) years after Stevens, the Supreme Court held that municipal corporations are “persons” subject to qui tam suits under the FCA. Id. at 125.

    From Stevens and Chandler, the parties arrived at very different conclusions about whether each Corporation was a proper FCA defendant. On one hand, Oberg relied heavily upon Chandler in arguing that any corporation, regardless of its association with a State, is “a legal personality independent of ‘the State’” and, presumptively, a “person” for purposes of the FCA. The Fourth Circuit, however, viewed Oberg’s position as creating too broad a rule, rendering every corporation a “person” under the FCA irrespective of its relationship to a State. On the other hand, the Corporations interpreted Chandler to hold that only local governments, unlike States and state agencies, are persons under the FCA. The Fourth Circuit rejected this argument as too narrow, stating that nothing in Stevens suggests that a corporation labeled as a “state agency” by a State legislature or court immunizes that corporation from suit under the FCA.

    Acknowledging that the parties attempted to oversimplify the question, the Court of Appeals posited that the critical inquiry is whether the State’s control over the Corporations was sufficient to render them a part of the State and not a “person.” The Court referred to several sister circuits, which recognized that the arm-of-the-state analysis used in the context of the Eleventh Amendment provides the appropriate legal framework for this inquiry. Applying this analysis, the Fourth Circuit considered four (4) nonexclusive factors for determining whether an entity is an agency of the State and not subject to suit under the FCA: (1) whether the State or the entity will pay the adverse judgment; (2) the degree of autonomy exercised by the entity; (3) whether the entity is involved with state concerns as distinct from non-state concerns; and (4) how the entity is treated under state law. S.C. Dep’t of Disabilities & Special Needs v. Hoover Universal, Inc., 535 F.3d 300 (4th Cir. 2008). If a Corporation functions as an arm of the state, Stevens dictates that it is not a “person” under the FCA, and therefore, not subject to FCA liability. If, by contrast, the Corporation functions independently of the State, it is subject to suit under the FCA.

    Because the district court did not employ the arm-of-the-state analysis in determining whether each of the Corporations was a state agency subject to suit under the FCA, the Fourth Circuit vacated the district court’s judgment and remanded the case for application of this analysis.