Todd Heath v. Wisconsin Bell, Inc.

In the

United States Court of Appeals

For the Seventh Circuit

____________________

No. 22-1515

UNITED STATES OF AMERICA ex rel. TODD HEATH,

Relator-Appellant,

v.

WISCONSIN BELL, INC.,

Defendant-Appellee.

____________________

Appeal from the United States District Court for the

Eastern District of Wisconsin.

No. 2:08-cv-00724-LA — Lynn Adelman, Judge.

____________________

ARGUED FEBRUARY 9, 2023 — DECIDED AUGUST 2, 2023

AMENDED ON PETITION FOR REHEARING JANUARY 16, 2024

____________________

Before EASTERBROOK, HAMILTON, and LEE, Circuit Judges.

HAMILTON, Circuit Judge. Congress established the Schools

and Libraries Universal Service Support program to keep tel-

ecommunications services affordable for schools and libraries

in rural and economically disadvantaged areas. The program

subsidizes services and requires providers to charge these

customers rates less than or equal to the lowest rates they

2 No. 22-1515

charge to similarly situated customers. Relator Todd Heath

brought this qui tam action under the False Claims Act,

31 U.S.C. § 3729 et seq., alleging that defendant Wisconsin

Bell charged schools and libraries more than was allowed un-

der the program, causing the federal government to pay more

than it should have. The district court granted summary judg-

ment in favor of Wisconsin Bell.

Heath’s briefing and evidence focused more on which

party bore the burden of proving violations than on identify-

ing specific violations in his voluminous exhibits and lengthy

expert report. We understand how the district court could

look at this record and rule in Wisconsin Bell’s favor. Never-

theless, Heath identified enough specific evidence of discrim-

inatory pricing to allow a reasonable jury to find that Wiscon-

sin Bell, acting with the required scienter, charged specific

schools and libraries more than it charged similarly situated

customers. Accordingly, we reverse the judgment of the dis-

trict court and remand the case for trial. We are issuing this

amended opinion upon consideration of Wisconsin Bell’s pe-

tition for rehearing and denial of its petition for rehearing en

banc.

I. Factual and Procedural Background

In 1996, Congress created the E-rate program (known

more formally as the Schools and Libraries Universal Service

Support program) to help schools and libraries across the

country afford telecommunications and information services.

See Telecommunications Act of 1996, Pub. L. No. 104-104, 110

Stat. 56. As part of the program, schools and libraries receive

federal subsidies for 20 to 90 percent of charges on a sliding

scale that depends on the income level in the surrounding

community and whether the community is urban or rural.

No. 22-1515 3

47 C.F.R. § 54.505(b) & (c). Under Federal Communications

Commission regulations implementing the E-rate program,

service providers must follow what is known as the “lowest-

corresponding-price” rule and offer schools and libraries “the

lowest price … charge[d] to non-residential customers who

are similarly situated.” 47 C.F.R. § 54.500.

The regulations do not impose a specific formula to deter-

mine when a school or library is similarly situated to a partic-

ular non-residential customer for purposes of comparing

prices. Yet the FCC has long made clear that service providers

cannot escape their obligation to provide the lowest price

charged to similarly situated customers simply “by arguing

that none of their non-residential customers are identically

situated to a school or library.” In re Federal-State Joint Board

on Universal Service, Report and Order, 12 FCC Rcd. 8776,

¶ 488 (1997) (“First Order”), adopted by FCC at Universal Ser-

vice, 62 Fed. Reg. 32862 §§ 290–97 (June 17, 1997). Differences

in rates between similarly situated customers are acceptable

only when “providers can show that they face demonstrably

and significantly higher costs” in serving the school or library

due to differences between the customers “that clearly and

significantly affect the cost of service, including mileage from

switching facility[,] … length of contract,” “traffic volumes,”

and “any other factor that the state public service commission

has recognized.” Id., ¶¶ 488–89.

Wisconsin Bell has provided services to at least hundreds

of eligible schools and libraries. Those customers have sub-

mitted claims to the FCC requesting reimbursement for Wis-

consin Bell’s services, and Wisconsin Bell has submitted reim-

bursement claims directly for eligible services provided to E-

rate program customers.

4 No. 22-1515

As the E-rate program began, Wisconsin Bell’s parent

company helped develop industry proposals about its imple-

mentation. Wisconsin Bell admitted during this lawsuit that it

had been aware of the lowest-corresponding-price rule from

the rule’s inception in the 1990s. In 2001, a future leader of

Wisconsin Bell’s legal and regulatory group recommended to

an industry trade group representing Wisconsin Bell that the

group withdraw its request to the FCC for clarification of the

lowest-corresponding-price rule. He advised in an email that

the rule “is a non-issue. We support not raising [it] …. Let a

sleeping dog lie; it needs to keep a low profile unless it starts

to cause problems for us.”

Despite being aware of the E-rate program and its pricing

rule, Wisconsin Bell did not train its sales representatives on

the rule, nor did it put into place any mechanism to comply

with it, until 2009. Wisconsin Bell admits there was no differ-

ence between the way it treated pricing contracts with schools

and libraries versus with private businesses or any other cus-

tomers. By Wisconsin Bell’s own testimony, these practices in-

cluded instructing sales representatives to offer the highest

prices “whenever possible.” Employees responsible for train-

ing Wisconsin Bell’s salesforce testified that they had never

heard of the lowest-corresponding-price rule before 2009.

In 2009, Wisconsin Bell developed a plan for complying

with the rule. It did so after its parent company settled a De-

partment of Justice and FCC investigation of its E-rate prac-

tices in Indiana through a monetary payment and a compli-

ance agreement. Wisconsin Bell admits that, beginning in

2009, it used “interim policies and processes for at least two

years” and that these policies did not reach a “steady state”

until 2011. Wisconsin Bell also admits that it considered the

No. 22-1515 5

prices charged to similarly situated customers “as just one fac-

tor among many in deciding what price” to charge an E-rate

customer even after 2009.

Under the False Claims Act, a private citizen may sue as a

“relator” in a qui tam action to recover funds fraudulently ob-

tained from the United States government. 31 U.S.C.

§ 3729(a)(1)(A). Such suits are brought in the name of the gov-

ernment and for its benefit, but a successful relator may re-

cover a significant portion of any recovery. See generally

United States ex rel. Polansky v. Executive Health Resources, Inc.,

143 S. Ct. 1720, 1726–28 (2023) (summarizing qui tam litigation

under the Act); Vermont Agency of Natural Resources v. United

States ex rel. Stevens, 529 U.S. 765, 774–77 (2000) (holding that

qui tam relator has Article III standing and noting that qui tam

actions appear to have originated in England in 13th century,

had long tradition in both England and the American Colo-

nies, and were “prevalent” immediately before and after

framing of Constitution).

Todd Heath filed this qui tam action under the False

Claims Act in 2008. He alleged that Wisconsin Bell submitted

false claims and caused others to submit false claims for more

money than was allowed to be charged, as well as expressly

and implicitly false certifications of compliance with E-rate

program rules. In 2011, the federal government decided not

to intervene. The district court then granted Wisconsin Bell’s

motion to dismiss for lack of subject matter jurisdiction. This

court reversed. United States ex rel. Heath v. Wisconsin Bell, Inc.,

760 F.3d 688, 692 (7th Cir. 2014). Heath filed his Second

Amended Complaint in 2015. The parties engaged in discov-

ery, and Heath hired an expert to analyze the extensive and

detailed pricing data. Wisconsin Bell moved for summary

6 No. 22-1515

judgment, and the district court granted that motion. United

States ex rel. Heath v. Wisconsin Bell, Inc., 593 F. Supp. 3d 855,

861–62 (E.D. Wis. 2022). This appeal followed.

II. Analysis

A company violates the False Claims Act if it “knowingly

presents, or causes to be presented, a false or fraudulent claim

for payment or approval” that is material to the government’s

decision on the use of federal funds. 31 U.S.C. § 3729(a)(1)(A);

Universal Health Servs., Inc. v. United States ex rel. Escobar, 579

U.S. 176, 193 (2016) (§ 3729(a)(1)(A) requires falsity regarding

material issue). Thus, a False Claims Act case requires proof

of falsity, knowledge, materiality (meaning whether the al-

leged misrepresentations had the natural tendency to influ-

ence the payment or receipt of funds), and the involvement of

federal funds. The district court granted summary judgment

for Wisconsin Bell, finding that Heath did not show a genuine

dispute as to a material fact concerning either falsity or

knowledge. In its summary judgment ruling, the district court

did not reach the issues of materiality or whether the E-rate

program involves federal funds, though the court had ad-

dressed these issues in prior orders.

Summary judgment is proper when there is no genuine

dispute about any material fact. Fed. R. Civ. P. 56(a); Celotex

Corp. v. Catrett, 477 U.S. 317, 322 (1986). We review de novo

the district court’s grant of summary judgment. E.g., Anderson

v. Nations Lending Corp., 27 F.4th 1300, 1304 (7th Cir. 2022). We

give Heath the benefit of conflicting evidence and draw rea-

sonable inferences from the evidence in his favor. Id. The

question is whether he offered evidence raising “some genu-

ine issue for trial such that a reasonable jury could return a

verdict” agreeing with him that Wisconsin Bell knowingly

No. 22-1515 7

caused the submission of claims that overcharged schools or

libraries and that those overcharges were material to a pay-

ment decision involving federal funds. United States v. King-

Vassel, 728 F.3d 707, 711 (7th Cir. 2013) (quotation omitted).

We address four issues in turn: (A) falsity; (B) knowledge or

scienter; (C) materiality; and (D) involvement of federal funds.

A. Falsity

The district court found that Heath failed to show falsity

because he did not “show that any customers that were

charged the lower rates were similarly situated to those who

were charged a higher rate.” Heath, 593 F. Supp. 3d at 860.

Heath’s briefing and the district court’s opinion focused pri-

marily on which party bore the burden of identifying simi-

larly situated customers as proper comparators to determine

compliance with E-rate price rules.

In the district court’s eyes, Heath waived the crucial argu-

ment that the customers he analyzed who were charged dif-

ferent prices were in fact similarly situated. Id. at 859 & n.1.

The court wrote that Heath’s expert witness, James Webber,

did not “describe what factors” he used to conclude that cus-

tomers were similarly situated and thus proper comparators

for rates charged. Id. at 859 n.1. The court acknowledged that

Webber compared at least one school directly paying “a rate

more than three times higher than the rate charged to” an-

other customer but said that this comparison did not “attempt

to show that the two customers were similarly situated.” Id.

at 860.

Heath’s heavy focus on persuading the district court that

Wisconsin Bell should have had the burden to identify simi-

larly situated customers seems to have distracted from the

8 No. 22-1515

fact that he did muster quite specific evidence showing that

certain schools and libraries were charged more than certain

non-residential customers and that those pairs of customers

appeared to be similarly situated. See Pl. Br. in Opp’n to

Summ. J., at 14, Dkt. 311; Decl. of James D. Webber ¶ 7, Dkt.

308. Heath’s evidence also showed that his expert did in fact

take into account key factors, including contract duration, ur-

ban versus rural location, size of contracting entity, and dis-

tance from the provider. There is no complete list of which

factors may be considered in deciding whether two customers

are similarly situated. But Heath offered evidence that his ex-

pert considered those that the parties continue to identify in

their briefing as relevant. Expert Report of James D. Webber,

at 76–81, Dkt. 279, Ex. 111. 1

We do not doubt that Heath could have better presented

his evidence to walk the district judge through the parts of his

expert’s report that directly compared customers who all

known factors indicated were similarly situated. But critiqu-

ing advocacy is not our role. For our purposes, the critical

points are that this specific evidence was in the expert report

and that Heath’s briefing spelled it out with sufficient expla-

nation and argument. For example, Heath’s brief opposing

the motion for summary judgment and his statement of facts

included a chart showing wide-ranging pricing for the same

1 One chart was reproduced in briefing before this court that was not

filed under seal. Additional evidence of comparisons indicating that dif-

ferently charged customers appear similarly situated is in the district court

record but still under seal. On remand it will be appropriate for the district

court to ask whether any portions of the evidence, especially prices and

contract terms from so many years ago, should be kept under seal any

longer.

No. 22-1515 9

circuit product. All customers in the chart were in Wisconsin,

and at least some were identified as being in the same city.

The chart also displayed each contract’s duration and the

number of products purchased by each customer. Thus, the

chart accounted for the key factors determining whether cus-

tomers are similarly situated.

The differences in pricing are not disputed (or even ex-

plained) by Wisconsin Bell, at least so far. For example, one

school in Milwaukee, Bruce Guadalupe Community School,

paid $1,110 per month for each of two telecommunications

circuits on a month-to-month contract. At the same time, an-

other school in Milwaukee, Messmer High School, paid $743

per month for one circuit, also on a month-to-month contract.

Meanwhile, the Lake Geneva-Genoa City School District paid

$459 per month for one circuit on a 36-month contract while a

private business, Automatic Data, paid only $337 per month

for one circuit on a contract of the same length. These com-

parisons and the fact that Wisconsin Bell did not dispute them

or provide any explanation for the price differences present

genuine factual disputes over whether Wisconsin Bell was

charging schools and libraries the lowest price it was charging

similarly situated customers. 2

2 As discussed at oral argument and in supplemental submissions by

the parties, Heath could have used statistical evidence to support his

claim. We have recognized that statistical analyses may be used to support

False Claims Act cases. See United States ex rel. Absher v. Momence Meadows

Nursing Ctr., Inc., 764 F.3d 699, 713–14 (7th Cir. 2014) (vacating jury verdict

where there was no “evidence—statistical or otherwise—from which the

jury could determine (at least approximately) how many of [the] docu-

ments contained false certifications”). Here, even without statistics, Heath

has done enough to proceed past summary judgment because he

10 No. 22-1515

This same chart was reproduced in Webber’s declaration,

filed under seal. Though we do not go into detail here about

the contents of that sealed document, it makes clear that the

$1,110 monthly price charged to Bruce Guadalupe Commu-

nity School was higher than would be expected from looking

at prices charged to other customers of the same circuit that

same year. Further, Webber showed that in 2009 Wisconsin

Bell entered a new contract with that school and dropped the

price significantly.

In another chart, Webber calculated the overcharges to

schools and libraries per year based on the lowest rate

charged for the same service to a customer in Wisconsin. Web-

ber went on to adjust this basic calculation based on the fac-

tors that might justify different prices: contract duration, ur-

ban versus rural location, customer size (in terms of number

of employees), and distance between the customer and the

provider. Even when Webber limited his overcharges calcula-

tion by directly comparing schools and libraries only to cus-

tomers who shared these factors, the schools and libraries

were still charged more every single year. Expert Report of

James D. Webber, at 81, Dkt. 279, Ex. 111.

Alongside this evidence was Wisconsin Bell’s admission

that it had no methods or procedures in place to comply spe-

cifically with the E-rate program prior to 2009, as well as the

email sent on behalf of a trade organization representing Wis-

consin Bell suggesting that the company withdraw a petition

to the government asking for clarification on the E-rate pro-

gram and instead “let a sleeping dog lie; [the rule] needs to

identified customers who appear similarly situated yet were charged dif-

ferent rates in apparent violation of the lowest-corresponding-price rule.

No. 22-1515 11

keep a low profile unless it starts to cause problems for us.”

Webber’s specific comparisons against this factual backdrop

were enough to raise a genuine dispute about the central issue

of whether schools or libraries were charged more than simi-

larly situated non-residential customers. In response, Wiscon-

sin Bell provided no evidence showing that these specifically

compared customers were either not similarly situated or that

cost differences justified the pricing. 3

Rather than explain why the apparent price differences

were acceptable, Wisconsin Bell argued generally that Heath

never showed that any two customers were similarly situated.

But Wisconsin Bell indisputably had schools and libraries eli-

gible for the program as customers, including the schools

identified in the chart discussed above. The FCC’s guidance

makes clear that providers cannot escape the E-rate program

pricing rules by simply arguing that no customers are simi-

larly situated. First Order, § 488. Wisconsin Bell’s assertion

that Heath never identified any similarly situated customers

3 Wisconsin Bell argues that it complied with the E-rate program rules

by complying with separate federal and state rules more generally prohib-

iting discriminatory pricing. See 47 U.S.C. § 202(a); Wis. Stat.

§ 196.60(1)(a). The theory is not persuasive. The federal nondiscrimination

rule prohibits “unjust or unreasonable discrimination in charges,” and the

state rule uses similar language. Both rules apply a different standard than

the E-rate program created for school and library pricing. In fact, the FCC

says that schools and libraries are “eligible for preferential rates … not-

withstanding the nondiscrimination requirements of section 202(a).” First

Order, ¶ 483. Even if Wisconsin Bell could show absolute compliance with

the nondiscrimination rules, that showing would not necessarily defeat a

claim that schools and libraries were overcharged in violation of the E-rate

program requirements.

12 No. 22-1515

throughout the lengthy expert analysis comes very close to

that impermissible escape.

In sum, Heath used the information provided by Wiscon-

sin Bell in discovery to identify seemingly similarly situated

customers. He identified individual schools that, when com-

pared against each other, look like they were charged differ-

ent rates under comparable contract terms for the same prod-

ucts in the same geographic areas. Wisconsin Bell made no

attempt to show how those identified customers were not

similarly situated or why the schools and libraries were

charged apparently higher prices for similar services, let

alone to establish those points beyond reasonable dispute, as

would be needed to resolve the issue as a matter of law on a

motion for summary judgment. Heath offered evidence suffi-

cient to show falsity as to whether Wisconsin Bell impermis-

sibly charged schools and libraries more than it charged sim-

ilarly situated customers. 4

B. Scienter

The False Claims Act imposes liability for the knowing sub-

mission of false claims. The Act provides that a person acts

“knowingly” if that person “with respect to information—

(i) has actual knowledge of the information; (ii) acts in delib-

erate ignorance of the truth or falsity of the information; or

(iii) acts in reckless disregard of the truth or falsity of the in-

formation.” 31 U.S.C. § 3729(b)(1)(A). To show the defendant

4 We refer in this opinion to a few specific examples of Heath identi-

fying similarly situated customers. As the case progresses on remand,

Heath should not be limited to proving overcharges for only those cus-

tomers identified in this opinion.

No. 22-1515 13

acted knowingly, the plaintiff is not required to prove “spe-

cific intent to defraud.” Id.

The district court, applying circuit precedent that has since

been reversed by the Supreme Court, ruled that even if Heath

had offered evidence of falsity, his claims would nonetheless

fail on the knowledge element. Heath, 593 F. Supp. 3d at 860.

The district court said that Wisconsin Bell’s interpretation of

the lowest-corresponding-price rule—that it could use “cost-

based factors when determining which customers are simi-

larly situated and to allow it to offer different rates to different

E-rate customers”—was “objectively reasonable” and “con-

sistent with the plain language of the [lowest-corresponding-

price] rule and the FCC guidance.” Id. at 861. The district court

was following United States ex rel. Schutte v. SuperValu Inc.,

9 F.4th 455, 463–65 (7th Cir. 2021), which held that knowledge

under the False Claims Act could not be shown if the defend-

ant’s interpretation of the regulation was objectively reasona-

ble and no authoritative guidance warned against that inter-

pretation, regardless of evidence of subjective intent and ac-

tual knowledge.

After oral argument in this appeal, the Supreme Court is-

sued its decision in United States ex rel. Schutte v. SuperValu,

Inc., 598 U.S. 739 (2023), vacating this court’s judgment. The

Supreme Court made clear that the knowledge analysis under

the False Claims Act “refers to respondents’ knowledge and

subjective beliefs—not to what an objectively reasonable per-

son may have known or believed.” Id. at 749.

Under this reasoning, Wisconsin Bell’s own conduct at

least raises a genuine question as to whether it acted in reck-

less disregard of the truth or falsity of the claims submitted.

“Reckless disregard” encompasses “defendants who are

14 No. 22-1515

conscious of a substantial and unjustifiable risk that their

claims are false, but submit the claims anyway.” Id. at 751; see

also King-Vassel, 728 F.3d at 713 (“a person acts with reckless

disregard ‘when the actor knows or has reason to know of

facts that would lead a reasonable person to realize’ that harm

is the likely result of the relevant act,” quoting Black’s Law Dic-

tionary 540–41 (9th ed. 2009)). A relator may of course rely on

circumstantial evidence to prove scienter under the False

Claims Act. United States ex rel. Taylor-Vick v. Smith, 513 F.3d

228, 231 (5th Cir. 2008).

Heath has offered evidence that could support a reasona-

ble inference of scienter here. Wisconsin Bell admits that it

knew of the lowest-corresponding-price rule at the rule’s in-

ception. Heath has offered evidence that Wisconsin Bell for

many years did not have any methods or processes in place

even to determine whether it was complying with the law in

pricing services for schools and libraries. Not until 2009, when

Wisconsin Bell’s parent company signed a compliance agree-

ment after a Department of Justice and FCC investigation in

another state, did Wisconsin Bell even inform its employees

responsible for negotiating rates with schools and libraries

that the lowest-corresponding-price rule existed.

Wisconsin Bell also did not have a system for identifying

similarly situated customers within the meaning of the E-rate

program rules. Wisconsin Bell does not present any compel-

ling explanation for how it could have known whether the

prices it was charging those schools and libraries were con-

sistent with the lowest-corresponding-price rule without the

ability to know what the lowest corresponding price was.5

5 Wisconsin Bell asserts that even before 2009, it instructed employees

responsible for pricing to “consider” what “similarly situated customers”

No. 22-1515 15

Drawing inferences in Heath’s favor, this behavior indicates

at least a genuine question as to whether Wisconsin Bell was

acting with reckless disregard of the possibility that it was

charging E-rate eligible customers in violation of the lowest-

corresponding-price rule and thus submitting false claims

and causing others to submit false claims.

The evidence of knowledge after Wisconsin Bell imple-

mented its new policies in 2009 may not be as strong but is

still sufficient to reach a jury. Heath’s expert reported that es-

timated overcharges increased from 2008 through 2010 before

dropping in 2011, even controlling for differences in custom-

ers based on contract duration, rural versus urban location,

size of customer, and distance from Wisconsin Bell facilities.

This evidence is enough to create a genuine issue as to

whether Wisconsin Bell continued acting with reckless disre-

gard for the lowest-corresponding-price rule during its

rollout of new compliance procedures. With this evidence, a

jury could reasonably infer that Wisconsin Bell acted in reck-

less disregard of whether the prices it was charging schools

and libraries were above the prices charged to similarly situ-

ated customers. We therefore cannot affirm summary judg-

ment on the issue of scienter.

C. Materiality

The district court’s decision on summary judgment did

not reach the issue of materiality, but Wisconsin Bell asks us

to affirm on that alternative basis, which was briefed in the

were charged. But this vague instruction to “consider” other customers

falls short of the requirements of the E-rate program, which were to ensure

that schools and libraries would in fact be charged the lowest price charged

to a similarly situated customer.

16 No. 22-1515

district court. Wisconsin Bell argues that Heath failed to

demonstrate a factual dispute over whether the alleged falsity

of the claims was material to the government’s payment deci-

sions for two reasons. The first is that the lowest-correspond-

ing-price rule is not expressly identified as a condition of pay-

ment on relevant forms. The second is that the government

has continued to pay E-rate claims in Wisconsin while aware

of Heath’s allegations. We reject both arguments.

First, the False Claims Act defines “material” as “having a

natural tendency to influence, or be capable of influencing,

the payment or receipt of money or property.” 31 U.S.C.

§ 3729(b)(4). The materiality analysis is not controlled by

whether the government expressly designated the legal re-

quirement at issue as a condition of payment. “What matters

is not the label the Government attaches to a requirement, but

whether the defendant knowingly violated a requirement that

the defendant knows is material to the Government’s pay-

ment decision.” Escobar, 579 U.S. at 181. A defendant can be

liable for “submit[ting] a claim for payment that makes spe-

cific representations about the goods or services provided,

but knowingly fails to disclose … noncompliance with a stat-

utory, regulatory, or contractual requirement … if the omis-

sion renders those representations misleading.” Id.

Wisconsin Bell argues that materiality is not satisfied

because “the government has never required E-rate program

participants to expressly certify their compliance with the

[lowest-corresponding-price] rule.” Relying on Escobar,

Wisconsin Bell asserts that this fact shows a lack of

materiality. But Escobar taught clearly that “the Government’s

decision to expressly identify a provision as a condition of

payment is relevant, but not automatically dispositive.” 579

No. 22-1515 17

U.S. at 194. Escobar warned against an expansive view of the

False Claims Act that would impose liability, for example,

where a company providing health services failed to comply

with a random hypothetical provision of the U.S. Code

requiring all government contractors to use American-made

staplers. Id. at 195–96. That example involved compliance

with a requirement not directly related to the claim or the

underlying services.

Here, the subsidies for school and library communications

costs are tied directly to the lowest-corresponding-price rule.

Escobar does not suggest that violating such a relevant re-

quirement of a government subsidy program should be found

immaterial under the False Claims Act. The government cre-

ated the E-rate program to keep these services affordable for

schools and libraries. The lowest-corresponding-price rule is

one mechanism to accomplish that purpose and to control the

cost of government subsidies. Express certification of compli-

ance should not have been necessary for a provider to under-

stand that the rule is important to the program’s functioning

and thus that noncompliance could influence reimbursement

decisions. A jury might also reasonably infer that the im-

portance of this rule was in fact understood by those who

wanted to leave it undisturbed as a “sleeping dog,” anticipat-

ing that if this dog woke up, it might bark or even bite.

Second, Wisconsin Bell argues that “the company’s sup-

posed misstatements made no difference to any payment de-

cision” because E-rate program payments have been “consist-

ently made … despite the government’s … full awareness of

Heath’s allegations.” Wisconsin Bell does not come close to

mustering the kind of evidence that would defeat a False

Claims Act case at summary judgment on such a theory

18 No. 22-1515

regarding materiality. The argument seeks to erase the differ-

ence between allegations and conclusive proof. None of Wis-

consin Bell’s evidence suggests that the government has rou-

tinely paid claims “in full despite actual knowledge” that E-

rate pricing rules were violated. See Escobar, 579 U.S. at 195

(noting that such evidence would be “strong evidence that the

requirements are not material”).

The government’s knowledge of a pending lawsuit mak-

ing allegations simply does not indicate actual knowledge of

actual violations. The entire purpose of the E-rate program is

to keep costs low. Draining the program’s resources through

higher prices for services affects the government’s ability to

subsidize services for schools and libraries across the country.

It is reasonable to infer that if the government knew of actual

overcharges, it would not approve claims. At the very least, a

genuine question of material fact exists on this issue. It does

not offer an alternative basis for affirming summary judg-

ment.

D. Government Funds

As another ground for affirming summary judgment, Wis-

consin Bell contends that any allegedly fraudulent claims for

payment of subsidies under the E-Rate program do not even

amount to “claims” under the False Claims Act. Wisconsin

Bell’s theory is that private parties, not the federal govern-

ment, contribute the money that funds the E-Rate program by

paying annual fees to a private entity, the Universal Service

Administrative Company (USAC), that administers the pro-

gram. Wisconsin Bell argues that the private nature of this

funding structure means that the government does not “pro-

vide” the program’s funds within the meaning of the False

Claims Act and is not hurt by fraud in the program. The Fifth

No. 22-1515 19

Circuit agreed with this argument and affirmed dismissal of

a similar False Claims Act case alleging fraud in the E-Rate

program in United States ex rel. Shupe v. Cisco Systems, Inc., 759

F.3d 379 (5th Cir. 2014), though apparently without the bene-

fit of critical evidence and legal arguments available to us in

this case.

Earlier in this case, Judge Adelman rejected Wisconsin

Bell’s argument and Shupe’s holding in a persuasive opinion

denying a motion to dismiss. United States ex rel. Heath v. Wis-

consin Bell, Inc., 111 F. Supp. 3d 923, 926–28 (E.D. Wis. 2015).

We agree with his reasoning, which is consistent with the stat-

utory language and the broader sweep of case law under the

False Claims Act, particularly as applied to a variety of spe-

cialized government funds and funding mechanisms. E.g.,

United States ex rel. Kraus v. Wells Fargo & Co., 943 F.3d 588 (2d

Cir. 2019) (citing Heath with approval and holding that alleg-

edly fraudulent loan requests submitted to any of twelve Fed-

eral Reserve Banks were “claims” under False Claims Act).

We therefore respectfully decline to follow Shupe on this is-

sue. 6

To explain our reasoning in detail, we start by parsing the

definitions of a “claim” under the Act both before and after a

clarifying amendment of the Act in 2009. We then trace three

6 This amended opinion has been circulated to all judges of this court

in regular active service considering Wisconsin Bell’s petition for rehear-

ing en banc and Heath’s answer to it. No judge in regular active service

requested a vote on rehearing en banc, including the question whether to

disagree with Shupe on this point. Judge Rovner and Judge Kirsch did not

participate in consideration of the petition for rehearing en banc.

20 No. 22-1515

independent paths for treating the fraudulent subsidy re-

quests here as false claims under the Act.

1. Statutory Language

Before 2009, the False Claims Act defined a claim this way:

For purposes of this section, “claim” in-

cludes any request or demand, whether under a

contract or otherwise, for money or property

which is made to a contractor, grantee, or other

recipient if the United States Government provides

any portion of the money or property which is re-

quested or demanded, or if the Government will

reimburse such contractor, grantee, or other re-

cipient for any portion of the money or property

which is requested or demanded.

31 U.S.C. § 3729(c) (2008) (emphasis added).

The Fraud Enforcement and Recovery Act of 2009, P.L.

111-21, amended 31 U.S.C. § 3729. Among other things,

Section 4 rewrote the definition of claim under the Act:

(2) the term ‘claim’—

(A) means any request or demand, whether un-

der a contract or otherwise, for money or prop-

erty and whether or not the United States has

title to the money or property, that—

(i) is presented to an officer, employee, or

agent of the United States; or

(ii) is made to a contractor, grantee, or other

recipient, if the money or property is to be spent

or used on the Government's behalf or to

No. 22-1515 21

advance a Government program or interest, and

if the United States Government—

(I) provides or has provided any portion of the

money or property requested or demanded; or

(II) will reimburse such contractor, grantee,

or other recipient for any portion of the money

or property which is requested or demanded;

and

(B) does not include requests or demands for

money or property that the Government has

paid to an individual as compensation for Fed-

eral employment or as an income subsidy with

no restrictions on that individual's use of the

money or property….

31 U.S.C. § 3729(b)(2) (as amended effective May 20, 2009)

(emphases added).

The pre-2009 definition reached false claims submitted to

“a contractor, grantee, or other recipient if the United States

Government provides any portion of the money or property

which is requested or demanded….” The post-2009 definition

similarly reaches false claims for money if the United States

Government “provides or has provided any portion of the

money or property requested or demanded.” (The 2009

amendment also addressed claims presented to agents of the

federal government, discussed below.)

2. Three Paths to Apply the False Claims Act

a. The U.S. Treasury Provides a Portion of Funds

Under both the pre-2009 and post-2009 definitions of a

claim, the Act can apply if the federal government provides

22 No. 22-1515

“any portion” of the money or property in question. The por-

tion need not be large. Even “a drop of treasury money” given

to the defrauded entity will establish liability under the False

Claims Act. Shupe, 759 F.3d at 383, citing United States ex rel.

DRC, Inc. v. Custer Battles, LLC, 562 F.3d 295, 303–04 (4th Cir.

2009), and United States ex rel. Shank v. Lewis Enterprises, Inc.,

2006 WL 1207005, at *7 (S.D. Ill. May 3, 2006).

Relator Heath and the federal government have offered

evidence that the Universal Service Fund receives funds di-

rectly from the U.S. Treasury, in addition to the fees that tele-

communications companies paid into the Fund as directed by

the FCC. Those Treasury funds came from collections of de-

linquent debts to the Fund, along with penalties and interest,

as well as civil settlements and criminal restitution payments

collected by the Treasury.

The details are set forth in the briefs and supporting affi-

davits from FCC and USAC financial officials supplementing

the United States’ statement of interest. See ECF 111, 112, &

113. Over years relevant to this case, from 2003 to 2015, the

Universal Service Fund received more than $100 million di-

rectly from the U.S. Treasury: approximately $50 million in

collections of delinquent debts to the Fund, along with penal-

ties and interest, and another $50 million in settlements and

criminal restitution payments collected by the Treasury. Wis-

consin Bell has not raised any factual dispute on this point.

The $100 million means that some portion of the Universal

Service Fund is comprised of government funds. That means

that fraudulent claims on the Fund were “claims” within the

meaning of the False Claims Act under both the pre- and post-

2009 statutory definitions of a “claim.” This reasoning does

not conflict with the reasoning of Shupe, which acknowledged

No. 22-1515 23

the “any portion” language and cases, 759 F.3d at 383–84, but

apparently without having learned about the $100 million in

the Universal Service Fund that came directly from Treasury

accounts.

b. The USAC as Agent of Federal Government

The second path for applying the False Claims Act focuses

on language in the amendment in 2009. The amended defini-

tion reaches a claim “presented to an officer, employee, or

agent of the United States,” and applies “whether or not the

United States has title to the money or property.” 31 U.S.C.

§ 3729(b)(2)(A)(i). The allegedly false claims in this case were

submitted to the USAC, which as noted administers the E-

Rate program for the FCC.

As the Second Circuit explained in Wells Fargo, a principal-

agent relationship requires (1) manifestation by the principal

that the agent shall act for him; (2) the agent’s acceptance of

the undertaking; and (3) the understanding of the parties that

the principal is to be in control of the undertaking. 943 F.3d at

598 (holding that Federal Reserve Banks extended emergency

loans to banks as “agents of the United States” within mean-

ing of False Claims Act); accord, Restatement (Third) of

Agency § 1.01 (2006); Lady Di’s, Inc. v. Enhanced Services Bill-

ing, Inc., 654 F.3d 728, 735 (7th Cir. 2011) (endorsing this defi-

nition of agency).

The legal structure of the E-Rate program established by

Congress and the FCC establishes all three of these elements.

By creating the USAC to administer the Universal Service

Fund, 47 C.F.R. § 54.701(a), the United States (through the

FCC) manifested its assent for the USAC to act on the govern-

ment’s behalf. The USAC likewise manifested its consent to

24 No. 22-1515

this relationship. For years, the USAC has administered the E-

Rate program and acted according to the statutory framework

and implementing regulations, and the statute and regula-

tions leave no room to deny that the FCC controls the USAC.

Wisconsin Bell disagrees, arguing that because the USAC

“may not make policy, interpret unclear provisions of the stat-

ute or rules, or interpret the intent of Congress,” see 47 C.F.R.

§ 54.702(c), it cannot alter the United States’ legal obligations

and therefore does not act as an agent. That argument misun-

derstands agency law and attempts to read extra require-

ments into the statute and regulations that are not in the texts.

The USAC can be an agent even if it does not have final

power to take those actions or to alter the federal govern-

ment’s legal obligations. The USAC is empowered to bill con-

tributing telecommunications companies, to collect contribu-

tions from them, and to distribute funds to eligible recipients.

47 C.F.R. § 54.702(b). Each of these tasks alters the relation-

ships between the United States and third parties. For exam-

ple, third-party telecommunication companies owe the

United States legally enforceable debts after the USAC bills

them. The United States, through the FCC or Treasury, can

later collect on these debts only because the USAC previously

altered the financial relationship between the United States

and the debtor. All of the USAC’s actions are subject to the

ultimate control of the principal, the FCC, acting as a part of

the United States government. That means that all reimburse-

ment claims subject to the 2009 amendment are subject to the

Act because the USAC is an agent of the federal government.

No. 22-1515 25

c. Government Funds “Provided”

For the third path, even aside from the direct Treasury

payments to the Universal Service Fund and the “agent”

amendment in 2009, the federal government’s role in estab-

lishing and overseeing the E-Rate program is sufficient to ap-

ply the False Claims Act here.

We reach this conclusion based on the structure and gov-

ernance of the Fund and the E-Rate program. Congress or-

dered the FCC to collect fees from telecommunication compa-

nies to fund the program. 47 U.S.C. § 254(d). Pursuant to this

mandate, the FCC sets the percentage of revenue that tele-

communication companies must contribute to the E-Rate pro-

gram. 47 C.F.R. § 54.709. These funds are collected and stored

in an account known as the Universal Service Fund. The FCC

established the USAC to administer the E-Rate program and

to manage the Universal Service Fund under FCC direction.

The USAC makes initial decisions about distributing the

money by reviewing subsidy applications from eligible tele-

communication providers, but the FCC reviews denials of

subsidy applications, 47 C.F.R. § 54.719(b), offers final guid-

ance on policy and interpretation questions, 47 C.F.R.

§ 54.702(c), and helps to collect overdue debts owed by tele-

communications companies. ECF 111, 112, & 113.

The False Claims Act targets fraud committed against the

federal government, “regardless of the particular form, or

function, of the government instrumentality upon which such

claims were made.” Rainwater v. United States, 356 U.S. 590,

592 (1958). In deciding whether to apply the False Claims Act

to alleged fraud aimed at a variety of agency and funding

structures, courts have asked whether there is a “sufficiently

close nexus” between the defrauded entity or program and

26 No. 22-1515

the federal government “such that a loss to the former is ef-

fectively a loss to the latter.” United States ex rel. Yesudian v.

Howard Univ., 153 F.3d 731, 738–39 (D.C. Cir. 1998) (federal

grants to Howard University meant that false claims submit-

ted to university would cause loss to federal government and

were actionable under the Act).

The high degree of government involvement in the E-Rate

program demonstrates that such a nexus exists here. The FCC

is responsible for implementing the program’s funding struc-

ture, and the U.S. Treasury maintains an active role in collect-

ing the program’s unpaid debts. As Judge Adelman wrote:

“The federal government required the common carriers to

pay into the Fund; in the absence of such a requirement, the

carriers would not have made any payments. Thus, the fed-

eral government made the funds available.” Heath, 111 F.

Supp.3d at 926. Moreover, the FCC recognizes the E-Rate pro-

gram’s funds as a “permanent indefinite federal appropria-

tion,” a conclusion with which the U.S. Government Account-

ability Office has agreed. See GAO Report, Telecommunica-

tions: Applications of the Antideficiency Act and Other Fiscal Con-

trols to FCC’s E-Rate Program (Apr. 11, 2005), available at

https://perma.cc/G6ZX-GGSL.

The government’s involvement in the E-Rate program is

far greater than in other situations where courts have held

that the government did not “provide” money for purposes

of the False Claims Act. For example, in Costner v. URS Con-

sultants, Inc., 153 F.3d 667 (8th Cir. 1998), the Eighth Circuit

held that false payment requests submitted to a private trust

fund created to finance a Superfund clean-up project did not

qualify as “claims” under the False Claims Act. Even though

the funds might not have existed if the federal government

No. 22-1515 27

had not helped negotiate the trust fund’s creation, the court

still held that the government did not “provide” the funds

due to the combination of factors: none of the funds ever came

from the Treasury; the government did not have access to the

trust fund; and the government did not control the trust

fund’s disbursement. Id. at 677. In short, the relationship be-

tween the federal government and the funds was too tenuous

to support False Claims Act liability.

Similarly, in Hutchins v. Wilentz, Goldman & Spitzer, 253

F.3d 176 (3d Cir. 2001), the Third Circuit held that the submis-

sion of fraudulent legal bills for approval by a United States

bankruptcy court did not state a “claim” under the False

Claims Act. The money would not have been disbursed if the

court did not approve the legal bills, but no government

money was involved and there was no possible risk of finan-

cial loss to the government itself. Id. at 184. The bankruptcy

court acts as referee among various claimants, and that role is

not remotely comparable to the E-Rate program and the Uni-

versal Service Fund administered by the USAC for the FCC.

In contrast to these two cases, the Second Circuit held in

United States ex rel. Kraus v. Wells Fargo & Co., 943 F.3d 588 (2nd

Cir. 2019), that the federal government “provides” money to

Federal Reserve Banks, such that fraudulent applications for

emergency loans submitted to those banks were liable under

the False Claims Act. As the court noted, Federal Reserve

Banks do not lend out funds given to them by the Treasury.

Instead, they make new funds “at a keystroke”:

When the Fed makes a $100 million loan to a

bank, the bank is credited with $100 million of

reserves . . . No preexisting “source” of funds

exists. Crediting the loan amount to the

28 No. 22-1515

borrowing bank’s reserve account creates new

reserves, increasing the overall level of reserves

in the banking system by exactly the amount

lent.

Id. at 603. The court’s thorough opinion explicitly rejected the

idea that False Claims Act coverage necessarily hinges on

whether funds derive from the Treasury. It reasoned that by

delegating the power to create funds to the Federal Reserve,

Congress was the ultimate “source of the purchase power

conferred on [] banks when they borrow from the Fed’s emer-

gency lending facilities.” Id.

The federal government’s involvement in the E-Rate pro-

gram resembles its role in Wells Fargo much more closely than

in either Costner or Hutchins. In Costner and Hutchins, the gov-

ernment merely approved the provision of funds. But in Wells

Fargo and here, the government’s fingerprints appear at al-

most every step leading up to those funds being made availa-

ble. A single touchpoint may not be enough to say that the

government “provided” funds, but an entire statutory and

regulatory scheme designed to distribute funds through a

federal program is sufficient.

The Fifth Circuit took a contrary view in United States ex

rel. Shupe v. Cisco Systems, Inc., 759 F.3d 379 (5th Cir. 2014),

which reversed denial of a motion to dismiss a False Claims

Act claim based on allegedly false claims to the USAC for re-

imbursement from the Universal Service Fund. We disagree

with Shupe’s holding for three reasons.

First, as discussed above, Shupe did not acknowledge that

funds in the E-Rate program can be traced back directly to the

Treasury. The Treasury collects unpaid debts owed to the E-

No. 22-1515 29

Rate program, as well as criminal restitution payments and

civil settlements stemming from the program. Any sums that

the Treasury collects pass through Treasury accounts before

being transferred into the E-Rate program’s private account.

So, quite literally, the Treasury provides money to the E-Rate

program—if it were not for the Treasury’s collection efforts,

those funds would not be circulating in the E-Rate program.

Second, the 2009 amendment to reach fraudulent claims

submitted to agents of the federal government applies at least

to Heath’s claims of fraud subject to that amendment because

the USAC acts as an agent of the federal government.

Third, receipt of Treasury funds is a sufficient but not nec-

essary basis for applying the False Claims Act. Conditioning

application on the receipt of Treasury funds departs from the

text of the False Claims Act. The Act does not require relators

to trace fraudulently obtained funds back to the Treasury. In-

stead, it requires only that the federal government provide

funding to these entities. See Wells Fargo, 943 F.3d at 602. In

most cases, this is a distinction without a difference—federal

funds are generally stored in the Treasury, see 31 U.S.C.

§ 3302(b), so asking whether the funds derive from the Treas-

ury frequently serves as an effective proxy for determining

whether the federal government “provided” the funds. But

Congress sometimes chooses to fund federal programs in less

direct ways, and the funding may not come from the Treasury

straightaway. See Wells Fargo, 943 F.3d at 603–04; Kate Stith,

Congress’ Power of the Purse, 97 Yale L. J. 1343, 1366 (1988) (cer-

tain “statutory exceptions expressly permit particular federal

agencies to receive and spend funds from private and other

nongovernment sources, rather than deposit them into the

Treasury for subsequent appropriation by Congress.”). Even

30 No. 22-1515

in these more indirect circumstances, the federal government

can be deemed to “provide” money for purposes of the False

Claims Act by maintaining an active role in its collection and

distribution, as is the case here. 7

Our original opinion treated this government funds issue

much more briefly and said that the issue presented factual

disputes that would need to be resolved at trial. 75 F.4th 778,

789. Upon further consideration prompted by Wisconsin

Bell’s petition for rehearing and rehearing en banc, we con-

clude that the government funds issue can be resolved as a

matter of law, at least in the absence of a genuine dispute

about the evidence showing that Treasury funds have flowed

directly to the Universal Service Fund administered by the

USAC.

For the foregoing reasons, the judgment of the district

court is REVERSED and the case is REMANDED to the dis-

trict court for further proceedings consistent with this opin-

ion.

7 In CFPB v. Community Financial Services, Corp., No. 22-448 (argued

Oct. 3, 2023), the Supreme Court is considering an Appropriations Clause

challenge to the funding structure of the Consumer Finance Protection Bu-

reau. Wisconsin Bell has not argued that the E-Rate program violates the

Appropriation Clause. Neither party here objects to reimbursement of

non-fraudulent claims from the Universal Service Fund.