By Jordan Crews

Today, in United States v. Pennsylvania Higher Education Assistance Agency, the Fourth Circuit vacated and remanded the decision of the district court, holding that the plaintiff had alleged sufficient facts that Pennsylvania Higher Education Assistance Agency (“PHEAA”) is a “person” for purposes of the False Claims Act (“FCA”).

The plaintiff, Dr. Oberg, as relator for the United States, brought action against PHEAA (a Pennsylvania Corporation), among others, alleging that it defrauded the Department of Education by submitting false claims for Special Allowance Payments (“SAP”), a federal student loan interest subsidy.  According to Dr. Oberg, PHEAA engaged in “noneconomic sham transactions to inflate [its] loan portfolio eligible for SAP, and the Department of Education overpaid hundreds of millions of dollars to [PHEAA] as a result of the scheme.”  Thus, Dr. Oberg alleged that PHEAA violated the FCA when it knowingly submitted these false SAP claims.

The FCA provides a cause of action against “any person” who engages in certain fraudulent conduct, including “knowingly presenting, or causing to be presented, a false or fraudulent claim for payment or approval” to an officer, employee, or agent of the United States.  The FCA does not define “person,” but the Supreme Court has held that a state or state agency does not constitute a “person” subject to liability under the FCA.  By contrast, corporations are presumptively covered by the term “person.”  Municipal corporations like counties are “persons” subject to suit under the FCA.  The legal framework for this inquiry is the “arm-of-the-state” analysis used in the Eleventh Amendment context.  The district court concluded that PHEAA is part of its respective state and thus not a “person” under the FCA; accordingly, it granted PHEAA’s motion to dismiss.

In applying the arm-of-the-state analysis, four nonexclusive factors are considered to determine whether an entity is “truly subject to sufficient state control to render it a part of the state.”  The Fourth Circuit explained the factors as follows:

First, when an entity is a defendant, we ask “whether any judgment against the entity as defendant will be paid by the State.” . . .  Second, we assess “the degree of autonomy exercised by the entity, including such circumstances as who appoints the entity’s directors or officers, who funds the entity, and whether the State retains a veto over the entity’s actions.” . . .  Third, we consider “whether the entity is involved with state concerns as distinct from non-state concerns, including local concerns.” . . .  Fourth, we look to “how the entity is treated under state law, such as whether the entity’s relationship with the State is sufficiently close to make the entity an arm of the State.”

In applying the first factor, whether Pennsylvania would pay a judgment against PHEAA in this case, the Court stated that this factor weighed “decidedly against holding that PHEAA is an arm of the state.”  Pennsylvania law expressly provides that obligations of PHEAA are not binding on the state.  The state “explicitly disavows liability for all of PHEAA’s debts.”

When looking at the second factor, the degree of autonomy exercised by PHEAA, the Court noted that this is a much closer question.  PHEAA’s board of directors is composed of gubernatorial appointees and state legislators or officials, and as the Court noted, such an arrangement “frequently indicates state control.”  Additionally, state officials exercise some degree of veto power over PHEAA’s operations.  However, other factors strongly suggested that PHEAA is not an arm of the state.  Significantly, PHEAA is financially independent, and receives no operational funding from the state.  PHEAA also has the power to enter into contracts, to sue and be sued, and to purchase and sell property in its own name–all of which suggest operational autonomy.  The Court found that this factor also counseled against holding that PHEAA is an arm of the state.

The third factor, whether PHEAA is involved with statewide, as opposed to local or other non-state concerns, weighed in favor of recognizing PHEAA as an arm of the state.  The state created PHEAA to finance, make, and guarantee loans for higher education, and “higher education is an area of quintessential state concern and a traditional state government function.”

The fourth and final factor, how PHEAA is treated under state law, also supported a finding that PHEAA is an arm of the state.  A state statute provides that “the creation of [PHEAA] was in all respects for the benefit of the people . . . and [PHEAA] performs an essential governmental function.”  Moreover, Pennsylvania state courts have concluded that PHEAA is a state agency for jurisdictional purposes.

In sum, the third and fourth factors suggested that PHEAA is an arm of the state, while the first and second pointed in the opposite direction.  Thus, at this point in the case, “Dr. Oberg [had] alleged sufficient facts that PHEAA is not an arm of the state, but rather a ‘person’ for FCA purposes.”

The Fourth Circuit vacated the judgment of the district court and remanded to permit limited discovery on the question of whether PHEAA is “truly subject to sufficient state control to render it a part of the state.”