High Court Ruling Makes Districts Liable for 'False Claims'

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Local governments such as cities and school districts may be sued under a federal law designed to root out fraud in federal spending programs, a unanimous U.S. Supreme Court ruled last week.

The court said local governments are "persons" subject to suit under the law, just as individuals and private corporations are. The law was adopted during the Civil War to help stem fraud by federal military contractors.

It authorizes private citizens to sue in the name of the federal government to root out fraud in federal contracts. Those who bring suit can receive up to 30 percent of the amount recovered, with the rest going back to the federal treasury.

A number of such suits have targeted districts in recent years. But a key legal question has been whether cities, counties, and school districts can be sued at all under the law.

A federal appeals court in 2001 threw out a jury's verdict in favor of two auditors who sued the 71,000- student Orleans Parish district in Louisiana over alleged fraud in workers' compensation and unemployment insurance claims. The U.S. Court of Appeals for the 5th Circuit, in New Orleans, held that local governments could not be sued under the law, the False Claims Act.

Meanwhile, the U.S. Court of Appeals for the 7th Circuit, in Chicago, ruled in a case about alleged fraud in a county medical program last year that local governments could indeed be sued under the act. The Supreme Court agreed to resolve the split in Cook County v. United States ex rel. Chandler (Case No. 01-1572).

Writing for the high court on March 10, Justice David H. Souter said it was clear that local governments were considered "persons" when the False Claims Act was passed in 1863. He rejected Cook County's argument that Congress intended to shield local governments from liability when it amended the law in 1986 to stiffen penalties.

"The basic purpose of the 1986 amendments was to make the FCA a more useful tool against fraud in modern times," Justice Souter wrote.

The high court ruling could be bad news for about 50 Texas districts that were named as defendants in a lawsuit alleging that they benefited from fraud related to the federal Medicaid program. A suit by a former state employee alleged that the Texas Department of Health and the school districts had defrauded the federal government through a state school health-services program.

A federal district judge in Houston dismissed the districts as defendants last year on the grounds that they could not be sued under the False Claims Act. Stuart M. Nelkin, the lawyer representing the plaintiff, said last week he was preparing a motion for the judge to reconsider that ruling in light of the high court decision.

The 5th Circuit precedent against local-government liability "just went down the drain," he said.

Jeffery R. Horner, a Houston lawyer who represents several districts involved in the Texas case, said that despite the high court's ruling, "I don't think you are going to see an avalanche of False Claims Act suits against school districts."

Protest Slogan

In a separate action on March 10, the justices declined to hear the appeal of Carmine and Maria Scicchitano, who had challenged the strict dress code of the 1,800-student Mount Carmel, Pa., school district on behalf of two of their children.

The Mount Carmel district in 2000 adopted a dress code requiring boys to wear red, white, or blue shirts with khaki or dark slacks, while girls had to wear blouses or shirts and pants or skirts in the authorized colors. The district prohibited jeans, cargo pants, and any logos except that of the school.

Ms. Scicchitano began sending her children to school wearing protest slogans ironed on their shirts, such as "Looking alike is absurd." Administrators eventually agreed to allow the protest decals, but they strongly objected to one that said: "Followers wear uniforms; Leaders Don't." That slogan demeaned other students, the district argued. ("Court Throws Out Lawsuit in Uniform Fracas," Sept. 25, 2002.)

One Scicchitano boy was on the verge of being expelled when his parents removed their children from the district and began home schooling them. The family then sued the district in federal court, alleging that school officials had trampled on their First Amendment rights of free expression.

The U.S. Court of Appeals for the 3rd Circuit, in Philadelphia, appeared eager to address the First Amendment issues last year, but ruled that the family no longer had legal standing to challenge the policy because the children had left the school system.

The justices declined without comment to hear the appeal in Scicchitano v. Mount Carmel Area School Board (No. 02-1009).

Vol. 22, Issue 27, Page 18

Published in Print: March 19, 2003, as High Court Ruling Makes Districts Liable for 'False Claims'
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