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U.S. ex. rel. OBERG v. PA. HIGHER EDUC. ASSISTANCE AGENCY, NO. 15-1093

Decided: October 21, 2015

 In a False Claims Act (FCA) case, the Fourth Circuit held that Pennsylvania Higher Education Assistance Agency (PHEAA) was not an arm of the State of Pennsylvania.  As such, PHEAA was not immune to suit under the 11th Amendment.  On this basis, the Fourth Circuit vacated the District Court’s grant of summary judgment to PHEAA, and remanded for further proceedings.

Oberg brought suit under the False Claims Act against PHEAA and other state-created student-loan providers alleging that from 2002 to 2006, the providers had fraudulently claimed federal student loan interest-subsidy payments.  Over the history of the lawsuit, the other defendants settled or were dismissed, leaving PHEAA as sole defendant.  On its first decision in this case, the Fourth Circuit held that the District Court erred by concluding PHEAA was a state agency, and dismissing the complaint without applying arm-of-state analysis.  On a subsequent appeal, after the District Court applied arm-of-state analysis, the Fourth Circuit found that the District Court erred in dismissing the case against PHEAA, because Oberg had alleged enough to claim that PHEAA was not an arm-of-state.  The Fourth Circuit engaged in an arm-of-state analysis, and found the factors mixed, but sufficient to overcome PHEAA’s motion for dismissal.  On remand, after discovery, PHEAA moved for summary judgment on the arm-of-state issue, and the District Court granted the motion, finding that all factors in the analysis pointed towards PHEAA being an arm-of-state.  The sole issue on appeal before the Fourth Circuit in the instant case was whether PHEAA was an arm-of-state of Pennsylvania, and thus immune from FCA liability.

The Fourth Circuit analyzed four factors to decide whether PHEAA was an arm-of-state.  First, an entity is an arm-of-state if judgments against the entity will be paid by the state.  This factor encompasses both legal and functional liability.  Second, an entity is an arm-of-state if it is not autonomous from the state.  Third, an entity is an arm-of-state if it is involved with state concerns rather than non-state concerns.  Fourth, an entity is an arm-of-state if state law treats it as such.

The Fourth Circuit found that the first factor, liability, strongly suggested that PHEAA was not an arm-of-state.  In its previous decision, the Fourth Circuit had found that Pennsylvania was not legally liable for judgments against PHEAA, and that finding remained controlling in regards to legal liability.  The Fourth Circuit found in the instant case that Pennsylvania was not functionally liable for judgments against PHEAA.  The Fourth Circuit made this finding based on PHEAA’s financial strength and independence, including gubernatorial recognition of PHEAA as having control over its own monies, PHEAA’s ability to settle previous suits against it, and PHEAA’s creation of its own charitable organization.  Despite some degree of control over PHEAA funds, such as requiring that commercial funds be deposited in the State Treasury and that the Treasurer approve payments, the Fourth Circuit found, based on state law and the actual Treasury approval process, that these elements did not make PHEAA funds into state funds.

The Fourth Circuit found that the second factor – autonomy – also suggested PHEAA was not an arm-of-state.  Because PHEAA was financially independent, granted broad statutory powers, and operated largely free of legislative interference, the Fourth Circuit found that PHEAA was autonomous from the state.  The Fourth Circuit found that this independence outweighed factors which suggested state control, such as Attorney General review of contracts over $20,000, requiring commercial funds be deposited in the state treasury, and PHEAA being subject to state laws.  

With respect to the state concerns factor, the Fourth Circuit found that the factor pointed weakly towards PHEAA being an arm-of-state.  Although on remand, a discovery violations sanction established that PHEAA’s revenue should be considered majority out-of-state from 2002 to 2014, the Fourth Circuit found that PHEAA provides services to Pennsylvania citizens, and provides an “‘essential government function.’”

On the fourth factor, the Fourth Circuit found that PHEAA’s treatment under state law pointed towards it being an arm-of-state.  The Fourth Circuit noted that the District Court found that PHEAA was created by, and its powers came from, the General Assembly, that PHEAA was exempt from state tax, subject to state law, and that PHEAA employees were state employees.  The District Court thus found that this factor weighed heavily in favor of PHEAA being an arm-of-state.  The Fourth Circuit agreed that the factor weighed in favor of PHEAA being an arm of Pennsylvania, but didn’t find the factor as weighty.

The Fourth Circuit’s analysis of the four factors was thus mixed.  With that mixed analysis, the Fourth Circuit considered the purpose of 11th Amendment immunity – protecting state treasuries, and respecting the sovereignty of states.  Given those purposes, and the mixed arm-of-state analysis here, the Fourth Circuit found that PHEAA should not be considered an arm-of-state, and thus should be subject to FCA liability.  On this basis, the Fourth Circuit vacated the district court’s grant of summary judgment, and remanded for further proceedings.  

Full Opinion

Katherine H. Flynn