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USAC's E-Rate Bark Just Lost Some of Its Bite

If you pay a telephone bill, then you have seen, and have paid, the "Universal Service" charge. Where does that money go? You may have thought it went to the Federal Government, but actually it does not.
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If you pay a telephone bill, then you have seen, and have paid, the "Universal Service" charge. Where does that money go? You may have thought it went to the Federal Government, but actually it does not. Congress, in its infinite wisdom, decided that those funds go to and will be administered by a private entity rather than the Federal Communications Commission ("FCC"). Ultimately those funds are used (in part) for the E-Rate Schools and Libraries Program ("E-Rate Program") that provides eligible K-12 public schools and libraries discounts on approved telecommunication services, internet access and internal connections.

The Universal Service Administrative Company ("USAC") is that private entity, and a recent federal court decision might slow the FCC's march toward bludgeoning small and large businesses who participate in the program with enforcement tools that are far more damaging than effective, like a chainsaw in surgery instead of a scalpel.

The FCC's and USAC's efforts to turn up the heat on E-Rate enforcement appear to have been cooled some by a recent Fifth Circuit Court of Appeals decision, which found that E-Rate funds are outside the reach of the False Claims Act ("FCA"). The FCA is a statute that allows whistleblowers and the government alike to institute fraud-like litigation against businesses, with penalties and trebling of damages that often lead to initial claims well into the seven or eight figures. For decades, plaintiffs lawyers and government agencies have been trying, sometimes successfully, to expand the reach of the FCA to ordinary regulatory programs, and the E-Rate program has been a frequent target.

One of the rules governing the E-Rate Program is that E-Rate service providers cannot charge school and library participants more than the "lowest corresponding price" ("LCP"). The LCP is "the lowest price that a service provider charges to non-residential customers who are similarly situated to a particular school, library, or library consortium for similar services." 47 C.F.R. § 54.500(f).

Over the past few months, as part of its efforts to ensure compliance with E-Rate rules, USAC has issued Payment Quality Assurance ("PQA") assessments to E-Rate Service Providers. The PQA Program is essentially an auditing program under which USAC reviews certain funding payments to determine if the payments were accurate, properly documented, and in compliance with applicable regulations.

This round of PQAs specifically targeted the LCP by requiring Service Providers (for the first time) to certify compliance with the LCP rule. The LCP rule, however, has been a source of significant confusion because there is very little regulatory guidance available on the scope and meaning of it. Further, the FCC has yet to provide any clarification despite seeking public comment on a number of LCP-related issues. As a result, expressly certifying compliance with the LCP rule in response to the PQAs presents a substantial risk for Service Providers whom the USAC might find to be noncompliant, despite their good faith efforts.

One of the biggest concerns for Service Providers in meeting the LCP requirement is possible exposure to FCA liability. But, with the lack of available guidance from the FCC, there is little they can do to reduce this risk, and lack of specific intent to defraud is no defense. With the Fifth Circuit's recent ruling, however, the risk of FCA liability is greatly reduced, if not entirely gone.

In a qui tam case under the FCA -- U.S. ex rel. Shupe v. Cisco Systems, Inc., et al., Case No. 13-40807 (S.D. Tex) -- the Fifth Circuit held that the FCA does not apply to claims for payment under the E-Rate Program because E-Rate Program funds are not "provided by" the federal government for purposes of FCA liability. The Court of Appeals concluded that because the money in the Universal Service Fund is untraceable to the U.S. Treasury, no federal funds are involved. Further, the Court of Appeals held that although USAC was created by a congressional mandate and is regulated heavily by the FCC, it is nonetheless a private corporation and not the government. Because there are no federal funds involved, and because USAC is not itself the government, alleged fraud in the E-Rate Program cannot be policed under the anti-fraud provisions of the FCA, the Court held.

Although not yet final, as it may be subject to further appellate review, the Fifth Circuit's decision is grounded in a common sense interpretation of the plain language of the FCA, and represents an important limitation on the reach of the FCA and on the enforcement of E-Rate regulations. Until the Fifth Circuit's decision, the combination of the LCP certification and the FCA loomed as a perfect storm for out-of-control qui tam litigation in the E-Rate area -- a storm that could cost large businesses hundreds of thousands in legal fees to merely defend these claims, and put small businesses out of business.

Fortunately, the Court of Appeals weighed in, which will encourage the FCC and USAC to use other means to enforce the regulatory requirements of the E-Rate program. USAC has, for example, contractual remedies, and issues "commitment adjustments" that are subject to administrative protest procedures. These are the proper surgical tools to address E-Rate regulatory compliance, rather than the FCA buzz saw.