By Amanda Whorton
On October 21, 2015, the Fourth Circuit issued a published opinion in the civil case United States ex rel. Oberg v. Pennsylvania Higher Education Assistance Agency. The court held that the Pennsylvania Higher Education Assistance Agency (“PHEAA”) is an independent political division, and not an “arm” or “alter ego” of Pennsylvania, and is therefore not subject to state immunity. Rather, PHEAA is a “person” subject to liability under the False Claims Act.
PHEAA was established by Pennsylvania to administer grants and scholarship programs on behalf of the state and is “one of the nation’s largest providers of student financial aid services.” Dr. John H. Oberg (“Oberg”) sued PHEAA and other private and state-funded student loan organizations, alleging that defendants violated the False Claims Act (“FCA”) by fraudulently claiming millions of dollars in federal student loan interest-subsidy payments. The other defendants settled or were dismissed from the suit, leaving PHEAA as the sole defendant.
The “Arm of the State” Factors
The FCA renders “any person” who makes or presents a false claim for payment to the federal government civilly liable. Corporations, including cities and counties, are “persons” under the FCAA, but states and state agencies are not. Cities and counties are political divisions, which, although created by the state, operate independently and do not fall under state immunity.
To determine whether PHEAA is a “person” under the FCA, the court must first look at whether PHEAA is an “arm” or “alter ego” of Pennsylvania. There are four factors the court considers in this analysis: (1) whether any judgment against the organization will be paid by the State, (2) the degree of autonomy exercised by the organization, (3) whether the organization is involved with state concerns, as opposed to non-state or local concerns, and (4) how the organization is treated under state law.
Summary of Appeals
The district court originally held that PHEAA was a state agency without applying the “arm of the state” factors and dismissed Oberg’s complaint. The Fourth Circuit, in their first opinion (“Oberg I”), held that the district court erred in dismissing the complaint and remanded.
The district court then went through the “arm of the state” analysis and again granted PHEAA’s motion to dismiss, stating that PHEAA was not a “person” under FCA. Oberg again appealed and the Fourth Circuit again, in their second opinion (“Oberg II”), held that the district court erred in dismissing the claims. In Oberg II, the Fourth Circuit held that Oberg alleged sufficient facts that PHEAA was not an “arm of the state” but was a “person” under FCA. Therefore, the Fourth Circuit remanded the case again to the district court.
On remand, the parties engaged in limited discovery to determine whether PHEAA was truly an “arm of the state.” When PHEAA moved for summary judgment, the district court granted the motion, holding that all four factors weighed in favor of PHEAA being an “arm of the state” and that PHEAA was therefore not subject to suit under FCA.
Oberg once again appealed, stating that the district court failed to apply the “arm of the state” factors consistently with the Fourth Circuit’s Oberg II decision.
Analysis of the “Arm of the State” Factors
(1) Whether Any Judgment Against the Organization will be Paid by the State
In Oberg II, the Fourth Circuit held that Pennsylvania was not legally or functionally liable for any judgment against PHEAA. The court reasoned that the first factor weighed heavily against PHEAA being an “arm of the state” because the obligations of PHEAA do not bind Pennsylvania. State law also explicitly grants control over funds to PHEAA and funds are held in a separate account within the Treasury.
The facts assumed by the court in Oberg II were confirmed through the parties’ discovery, mainly that PHEAA has control over its significant and independent funds. Therefore, in the current case, the Fourth Circuit still held that Pennsylvania was not legally or functionally liable for a judgment against PHEAA, and so the first factor still weighed heavily against “arm of the state” status.
(2) Degree of Autonomy Exercised by the Organization
In Oberg II, the court found that the following factors weighed in favor of “arm of the state” status: PHEAA’s board is comprised of gubernatorial appointees and state legislators, the statutory requirement that the Governor approve PHEAA bond issues, and PHEAA activities are subject to audit by the Auditor General for Pennsylvania. However, other facts, the court found, were suggestive that PHEAA is not an “arm of the state.” These facts include that PHEAA exerts financial independence, has control over its revenues, and has corporate powers to “enter into contracts, sue and be sued, and purchase and sell property in its own name.” The Fourth Circuit in Oberg II held that this factor cut against holding PHEAA as an “arm of the state.”
The Fourth Circuit affirmed this holding in the current case by reasoning that PHEAA exercises control over its revenues, makes policy decisions, sets its own budget, and manages its own daily activities without much oversight from Pennsylvania. The ways in which the State does exercise some control are mainly ministerial matters and are not substantive. Therefore, this factor also weighs heavily against PHEAA being an “arm of the state.”
(3) Whether the Organization is Involved with State Concerns, as Opposed to Non-State or Local Concerns
The Fourth Circuit, in Oberg II, held that this factor weighed in favor of “arm of the state” status because PHEAA focused on improving access to higher education, which is a matter of “legitimate state concern.” However, PHEAA’s revenues were mostly generated through out-of-state activities, weakening the factor.
In the current case, the Fourth Circuit upheld its former ruling in determining that this factor only weighed slightly in favor of “arm of the state” status.
(4) How the Organization is Treated under State Law
The Fourth Circuit also held that the fourth factor weighed in favor of treating PHEAA as an “arm of the state” because state law treats PHEAA as a state agency and as an organization to benefit its own citizens.
The Fourth Circuit upheld this ruling in the current case.
Fourth Circuit Vacates and Remands
The court held that the PHEAA is an independent political division, not an arm of Pennsylvania, and therefore is a “person” under the FCA. The Fourth Circuit vacated the district court’s grant of summary judgment for PHEAA and remanded for further proceedings on the merits of the FCA claims Oberg asserted against PHEAA.