Contract – False Claims Act – Student Loan Corporations – ‘Arm of the State’ Analysis

U.S. ex rel. Jon H. Oberg v. Kentucky Higher Educ. Student Loan Corp. (Lawyers Weekly No. 001-136-12, 9 pp.) (Motz, J.) No. 10-2320, June 18, 2012; USDC at Alexandria, Va. (Anderson, J.) 4^th Cir. Click here for the full-text opinion.

Holding: A district court did not use the correct test when analyzing whether student loan corporations formed by four different states may be sued in a qui tam action alleging they defrauded the U.S. Department of Education; the 4^th Circuit vacates a lower court’s dismissal of the suit on the ground that the corporations were “state agencies” not subject to suit under the False Claims Act, and remands for the district court to apply an “arm of the state” analysis.

In the relator’s complaint, he alleges appellees knowingly made fraudulent claims to the U.S. Department of Education by engaging in various non-economic transactions to inflate their loan portfolios eligible for Special Allowance Payments (SAP), a federal student loan interest subsidy. As a result, according to the relator, the DOE overpaid millions of dollars of SAP to appellees.

The question is whether each of the appellees – various state-created corporate entities intended to facilitate the issuance of student loans – constitutes a “person” subject to liability under the FCA, 31 U.S.C. § 3729(a)(1)(A). In Vermont Agency of Nat. Resources v. U.S. ex rel. Stevens, 529 U.S. 765 (2000), the court held that the FCA does not subject a state or state agency to qui tam liability. However, in Cook County v. U.S. ex rel. Chandler, 538 U.S. 119 (2003), the court expressly held that, unlike states and state agencies, municipal corporations are “persons” subject to qui tam suits under the FCA. Here, 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.

Several of our sister circuits have recognized that the arm-of-the-state analysis used in the 11^th Amendment context provides the appropriate legal framework for this inquiry, as there is a “virtual coincidence of scope” between the statutory inquiry under the FCA and the 11^th Amendment sovereign immunity inquiry.

In applying the arm-of-the-state analysis, we consider four nonexclusive factors: whether any judgment will be paid by the state or any recovery by plaintiff will inure to the state’s benefit; the degree of autonomy by the entity; whether the entity is involved with state concerns, including local concerns; and how the entity is treated under state law.

Because the district court did not employ this arm-of-the-state analysis in determining whether each of the appellees is a state agency subject to suit under the FCA, we vacate its judgment and remand the case for the court to apply this analysis in the first instance.

Vacated and remanded.