D.C. Circuit Reverses, Remands Dismissal of E-Rate Fraud Suit Against AT&T

"The appellate court’s decision concerns a procedural issue and does not address the alleged merits of the case," an AT&T spokesman emailed. "The fact is, we comply fully with the E-Rate requirements, including the lowest corresponding price rule, and no court has ever ruled otherwise. Here, the appellate court only decided, as a procedural matter, that the plaintiff may go forward to try to prove his case. We will vigorously defend against these allegations."

Todd Heath, who runs a business that audits telecom charges, filed a qui tam or whistleblower suit (on behalf of the government) against AT&T alleging the company and its subsidiaries fraudulently overbilled the E-rate USF program from 1997 to 2009, said the D.C. Circuit opinion written by Judge Patricia Millett. Heath alleged AT&T implemented a "corporate-wide scheme" to submit false claims depriving schools and libraries of the "lowest corresponding price for services" -- an E-Rate requirement -- and the schools and libraries, unaware of those overcharges, then submitted those "inflated costs" to the federal government for reimbursement. AT&T began to require employees to take E-Rate training in 2005, but the telco "knowingly or recklessly" didn't train them in the lowest-corresponding-price obligation, Heath alleged. The company became aware of its past violations in 2009 but concealed that information from USF administrators, he alleged. Heath called AT&T a "recidivist E-Rate program violator," having been investigated on multiple occasions, with one case leading to a $500,000 FCC settlement.

Millett said Heath filed another False Claims Act suit against Wisconsin Bell, an AT&T subsidiary, in 2008 (U.S. ex rel. Heath v. Wisconsin Bell, Inc., No. 08-cv-00876). There, Heath said he found Wisconsin Bell charged some school districts more than others and generally deprived them of the favorable pricing it offered other state agencies and universities, Millett said. AT&T acknowledged the arrangements after Heath uncovered a state contract; last year, the 7th U.S. Circuit Court of Appeals reversed a lower court dismissal and remanded the case to the U.S. District Court in the Eastern District of Wisconsin (U.S. ex rel. Heath v. Wisconsin Bell, No. 08-cv-00724).

AT&T asked District Court in Washington to dismiss the current Heath complaint, arguing it was barred by both a False Claims Act "first-to-file" restriction and a civil procedure public-disclosure rule, Millett wrote. The court dismissed the complaint for lack of jurisdiction, "holding that the previously filed Wisconsin Bell case barred Heath's suit under the first-to-file rule," she wrote. The first-to-file rule is intended to discourage opportunistic and abusive lawsuits that attempt to piggyback on related suits.

But the D.C. Circuit panel said the lawsuit wasn't barred under the first-to-file rule because the previous case alleged fraud by "rogue" individual AT&T employees in Wisconsin while the current case alleges fraud and concealment driven by "centralized and nationwide corporate policy," constituting a distinct type of alleged fraud, Millett wrote. "The Wisconsin Bell Complaint alerted the federal government only to a limited scheme by Wisconsin Bell to defraud the E-Rate program within Wisconsin. That alleged fraud was accomplished, in part, through affirmative misrepresentations by Wisconsin Bell employees to schools and libraries within Wisconsin, in which those employees openly denied the existence of a state contract with a lower corresponding price," Millett wrote. "In contrast, the AT&T Nationwide Complaint alleges a different and more far-reaching scheme to defraud the federal government through service contracts entered into across the Nation, and then to cover up that fraud. Critically, the alleged fraud was accomplished not through affirmative misrepresentations about the lowest corresponding price, but through institutionalized disregard of the lowest-corresponding-price requirement altogether in AT&T’s employee-training and billing procedures."

The panel also said the suit wasn't barred under the public-disclosure rule, which requires complaints to allege fraud "with sufficient particularity," an issue the district court didn't rule on. "Heath’s complaint passes that test," Millett wrote. "He provides factual specificity concerning the type of fraud, how it was implemented, and the training materials used." These details were "corroborated by the concrete example" of an audit of AT&T's bills to Detroit schools in 2005 to 2010 "documenting the very type of overbilling that follows the complaint’s pattern."