California Supreme Court Considers Whether Public Entities, Including School Districts, May Sue And Be Sued Under The False Claims Act

The California Supreme Court recently considered two cases which raised the issue of whether a public entity, including a school district, charter school, city, or county, is a “person” within the meaning of the California False Claims Act (“CFCA”) and thus can sue or be sued for obtaining fraudulent payments from the state. The Supreme Court found that agencies of state and local government, including public school districts, may not be sued under the CFCA, but charters schools may be sued under the CFCA. (Wells v. One2One Learning Foundation, (— Cal.Rptr.3d —, 2006 WL 2506355, Cal., Aug. 31, 2006).) The Supreme Court also concluded that a political subdivision may not bring qui tam actions on behalf of the state or another political subdivision under the CFCA. (State of California ex rel. Harris v. PricewaterhouseCoopers LLP, (— Cal.Rptr.3d —, 2006 WL 2506376, Cal., Aug. 31, 2006).)

Christian M. Keiner of KMTG’s education practice group represented respondent Camptonville Union Elementary School District before the California Supreme Court in Wells v. One2One Learning Foundation.

Facts

Wells v. One2One Learning Foundation
Joey Wells and other students enrolled in three different charter schools brought a lawsuit against the schools and three school districts that approved their charters, the Sierra Plumas Joint Unified School District, Mattole Unified School District, and Camptonville Union Elementary School District, for violation of, among other things, the CFCA. The students alleged that the schools requested funds from the State of California based on average daily attendance records that did not accurately reflect the number of students enrolled in and receiving services from the schools. The trial court dismissed the students’ lawsuit based on a general rule that bars lawsuits for educational malfeasance against public schools.

The students appealed the trial court’s decision to a California Court of Appeal, which determined that the students’ allegations under the CFCA were not for educational malfeasance and were not barred by the general rule. The CFCA provides civil penalties for anyone who knowingly presents a false claim for payment or approval to the State of California or a political subdivision. The Court of Appeal concluded that the CFCA applies to public entities and that the students should be able to proceed with their claim that the charter schools and districts submitted false claims to the State.

State of California ex rel. Harris v. PricewaterhouseCoopers LLP
The City and County of San Francisco brought a lawsuit against Old Republic Title Company (“Old Republic”) under the False Claims Act alleging that it failed to honor its obligation to escheat dormant funds to the State of California under an unclaimed property law. They later named PricewaterhouseCoopers (“Pricewaterhouse”) as an additional defendant alleging that the accounting firm fraudulently issued a clean audit for Old Republic even though it knew that the company’s officers had kept millions of dollars in funds that it should have paid to the State of California. Old Republic and Pricewaterhouse asked the trial court to dismiss the lawsuit arguing that San Francisco, as a public entity, did not have standing to bring the lawsuits because it was not a “person” entitled to bring a lawsuit under the CFCA. They alleged that only private persons can bring such lawsuits. The trial court found that the City and County of San Francisco had standing to bring an action under the CFCA. The Court of Appeal affirmed the trial court’s decision that the City and County are persons within the meaning of the CFCA.

Decisions

In Wells v. One2One Learning Foundation, the Supreme Court held that agencies of state and local government, including school districts, are not “persons” subject to suit under the CFCA. The term “person” is defined under the CFCA to “include any natural person, corporation, firm, association, organization, partnership, limited liability company, business, or trust.” (Gov. Code, § 12650, subd. (b)(5).) The Supreme Court concluded there is no evidence the Legislature intended to include school districts or other public agencies within the definition of the term “person.”

The Court opined that, in light of revenue and budget restraints, exposing governmental entities “to the draconian liabilities of the CFCA would significantly impede their fiscal ability to carry out their core public missions.” In particular, exposing school districts to liability under the CFCA would interfere with their ability to provide constitutionally- mandated free public education. Furthermore, laws that divert the limited educational funds away from public education constitute an obvious interference with the state’s sovereign power.

However, the Court concluded that charter schools are “persons” within the meaning of the CFCA. It noted that section 12650 provides no exemptions for corporations organized under the Nonprofit Public Benefit Corporation Law or for other corporations, limited liability companies, organizations, or associations that operate charter schools under the Charter Schools Act. The Court concluded that charter schools are not entitled to the same immunity as their chartering districts. Although charter schools are considered to be part of the public schools for some purposes, such as academics and state funding eligibility, and public school officials provide some oversight, charter schools are not operated by the public school system, but by outside entities “that are given substantial freedom to achieve academic results free of interference by the public educational bureaucracy.” The Court found that the state’s sovereign power over public education is not infringed upon if the CFCA is applied to charter schools.

In State of California ex rel. Harris v. PricewaterhouseCoopers LLP, the Supreme Court held that a political subdivision is not a “person” who, as qui tam plaintiff, may bring a lawsuit under the CFCA to recover funds on behalf of the state or another political subdivision. Under the CFCA, the Attorney General may bring an action if state funds are involved in a false claim and the prosecuting authority for a political subdivision may bring an action if funds of the political subdivision are involved. If funds from both the state and a political subdivision are involved in a false claim, “each of these officials may intervene, on behalf of the public entity he or she represents, in an action initiated by the other.”

The CFCA also provides for a third type of plaintiff: “A ‘person’ with independent knowledge of the facts, who gets to the courthouse first, may bring a qui tam action for and in the name of the state (if state funds are involved), or a political subdivision (where the political subdivision’s funds are involved), or both.” In this case, the City and County of San Francisco claimed that, although they were not asserting any allegations of false claims against their own funds, they were “persons” with standing to sue on behalf of the state as a qui tam plaintiff.

The Court noted that the CFCA “carefully separated the officials who may bring false claims actions, on behalf of the public entities they represent, when those particular entities’ funds are involved in the alleged false claims, from the ‘persons’ who, partly in hopes of self-enrichment, may bring such actions regardless of the particular entity whose funds are involved.” The Legislature sought to delineate boundaries and “to preclude one government agency’s false claims jurisdiction from intruding on another’s.” The Court concluded that there is nothing in the CFCA that implies “cross-agency investigation and intrusion may nonetheless occur through the indirect device of qui tam actions by one public entity on behalf of another.”

The Court opined that allowing a public entity to sue under the CFCA in the circumstance presented by the City and County of San Francisco “provides an opportunity for public entities, acting in their financial self-interest, to withhold pertinent information that fellow agencies of government have been defrauded, then race their colleagues to the courthouse in hopes of obtaining a ‘cut’ of the proceeds that would otherwise accrue to the defrauded entities and their prosecuting authorities.”

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