In its continued efforts to “modernize” the federal E-rate program, the Federal Communications Commission recently adopted a Report and Order and Further Notice of Proposed Rulemaking (the “Modernization Order”), which made certain changes to the E-rate program, including the “lowest corresponding price” requirement and price transparency.

The Schools and Libraries Program component of E-rate is a federal effort that provides eligible K-12 public schools and public libraries discounts of 10 percent to 90 percent, depending on need, on approved telecommunications services, broadband Internet access and internal network connections. A key component of the E-rate program is the rule that providers of eligible services cannot charge the schools and libraries a price above the “lowest corresponding price”. 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.”

Both the FCC (News - Alert) and Universal Service Administrative Company, the private entity that administers the E-rate program, have taken recent steps to ensure that E-rate service providers are complying with the LCP requirement. This past spring, USAC issued payment quality assurance assessments to E-rate service providers, which for the first time forced service providers to certify compliance with the LCP requirement. Among other perils, this untethered certification requirement put service providers on alert for a wave of fraud investigations and claims under the False Claims Act. On the heels of the PQAs, the FCC, through the Modernization Order, sought to reinforce the LCP requirement, further step up enforcement of the LCP rule, and increase price transparency generally.

Until recently, this was the LCP requirement:

Providers of eligible services shall not charge schools, school districts, libraries, library consortia, or consortia including any of these entities a price above the lowest corresponding price for supported services, unless the commission, with respect to interstate services or the state commission with respect to intrastate services, finds that the lowest corresponding price is not compensatory.

In other words, as the FCC points out in the Modernization Order, the LCP rule prohibits an E-rate service provider from charging E-rate applicants a price higher than the lowest price the provider charges to similarly situated, non-residential customers.

The FCC’s Modernization Order, however, amends this regulation to further tighten the reins on service providers. Recognizing that 47 C.F.R. § 54.511(b) makes no mention of an obligation to offer applicants the LCP, and to ensure that applicants receive the best possible bids from service providers, the FCC amended the regulation, effective Sept. 18, 2014, to add that service providers cannot “submit bids for” a price above the LCP for E-rate services. In other words, the regulation now expressly states that service providers must offer and charge applicants the lowest corresponding price.

The FCC also stated in the Modernization Order that stepped-up enforcement of the LCP requirement is needed. It therefore directed the Enforcement Bureau to devote additional resources to investigating LCP compliance and bringing enforcement actions against service providers that violate the LCP rule. Additionally, in an even further effort to ensure that schools and libraries are purchasing cost-effective services, the FCC ordered that information regarding the specific services and equipment purchased by schools and libraries, as well as their line item costs, be made publicly available on USAC’s website. Although some current contracts may be exempt from this rule, all contracts executed after Sept. 18, 2014, are subject to this transparency requirement.

While the Modernization Order does not impose drastically new requirements on E-rate service providers, the adoption of this order, especially on the heels of USAC’s PQAs, increases the pressure from the FCC and serves as a strong warning to service providers to ensure that they are both offering and charging E-rate applicants the LCP. This is particularly concerning for service providers, however, as there is little regulatory guidance available on the scope and meaning of the rule.

As the FCC and USAC ramp up LCP enforcement via administrative oversight, a recent Fifth Circuit Court of Appeals decision has mitigated the potentially draconian impact of the combination of the LCP rules with the False Claims Act. Although service providers that fail to comply with the LCP rule may still be subject to contractual liability, commitment adjustments (COMADs), and administrative protest procedures, the Fifth Circuit has concluded that service providers are not subject to liability under the FCA for E-rate related work.

In U.S. ex rel. Shupe v. Cisco (News - Alert) Systems, Inc., et al., Case No. 13-40807 (S.D. Tex. July 7, 2014) – a qui tam case under the FCA – the Fifth Circuit concluded that the E-rate program does not trigger FCA liability because it does not involve federal funds, and USAC’s relationship to the government is too tenuous.

With regard to the question of whether E-rate funds were “provided” by the government, the Fifth Circuit explained that the FCA applies when the government “provides any portion” of the money requested or demanded. In the case of the E-rate program, the court concluded that because the money in the Universal Service Fund, from which E-rate funds are derived, is untraceable to the U.S. Treasury, “the government does not have a financial stake in its fraudulent losses,” and thus no FCA liability can attach.

Further, the Fifth Circuit held that government oversight of USAC was not enough to make false or fraudulent claims submitted to USAC fall within the scope of the FCA. Notwithstanding that the FCC maintains regulatory supervision over USAC and the E-rate program, USAC is a private corporation, not the government nor an agent of the government.

Ultimately, the Fifth Circuit concluded that because there are no federal funds involved in the E-rate program, and because USAC is not the government or an agent of the government, alleged fraud in the E-rate program cannot be policed under the anti-fraud provisions of the FCA. The court therefore reversed the district court’s decision on this, which resulted in a dismissal with prejudice of the case in the district court. 

Despite the FCC and USAC’s recent attempts to up the ante on LCP compliance, the Fifth Circuit’s decision has all but eliminated the False Claims Act as a tool that the FCC, Inspector General, and Department of Justice may use to ensure E-rate programmatic compliance. Because the FCA allows for significant civil penalties in the form of three times actual damages and penalties up to $11,000 per false claim, this decision comes as a significant relief to service providers trying to navigate the still murky waters of E-rate. Service providers should not view the Fifth Circuit’s decision as a free pass, of course, as PQA, “red light” or “Code 9” audits could lead to substantial clawbacks and COMADs, and even programmatic debarments. With both USAC’s and the FCC’s increased focus on the LCP requirement, service providers should expect heightened scrutiny of their E-rate pricing even in the absence of the FCA.

Jeff Belkin is an attorney within Alston & Bird Construction & Government Contracts Practice.