State and local governments receive millions in federal dollars each year. I was asked recently whether a state or local government committing fraud through a false claim or certification could be held liable under the False Claims Act. In other words, can you sue a state or local government under the False Claims Act?
In some ways, the answer to this question is easy, as the U.S. Supreme Court has provided basic guidance. The False Claims Act applies, by its own terms, to a “person.” In Vermont Agency of Natural Resources v. U.S. ex rel. Stevens, 529 U.S. 765 (2000), the Court concluded that a state government was not a “person,” and as a result, could not be held liable for submitting false claims. By contrast, in Cook County, Illinois v. U.S. ex rel. Chandler, 538 U.S. 119 (2003), the Court decided that a municipal government was, in fact, a “person” and could be held liable. While the results of these two cases may seem strange, it rests on an esoteric meaning of the word “person.” Without belaboring this point, at its most basic level, a “person” does not include a “sovereign” – like a state – but does include a “corporation,” and local governments are generally considered “municipal corporations.” (If this piques your interest for any reason, I encourage you to read the cases for an enlightening discussion of how “person” can be defined.)
That does not settle the issue completely, however. Courts have concluded that an entity that is an “arm of the state” is also shielded from liability under the False Claims Act. It is not always clear whether an entity is an arm of the state or an arm of the local government. Several federal courts have applied a test to determine whether an agency is subject to the FCA. The factors correspond to the test used for “sovereign immunity” purposes, i.e., immunity of a state from being sued in federal court. (This is another esoteric subject that derives from the Eleventh Amendment to the constitution and is not pertinent here.)
The test looks to the following four factors: (1) how state law defines the entity; (2) what degree of control the state maintains over the entity; (3) where the entity gets its money; and (4) who is responsible for judgments against the entity. The test must be applied based on the entity’s particular function at issue, not in an overall capacity.
Applying this test to “entities” here in Florida, courts have found that water management districts (e.g., the South Florida Water Management District) and community colleges (e.g., Miami-Dade College) are “arms of the state”; therefore, these entities cannot be liable under the False Claims Act. By contrast, courts have found that county sheriffs and local health districts are not “arms of the state,” and these entities can be held liable for committing fraud on the federal government.
One point of clarification: none of this discussion applies to Florida’s own False Claims Act. The Florida Legislature has made clear that counties and municipalities cannot be defendants in a state False Claims Act case.
All of these rules can be complicated, so even if you believe that the entity committing fraud may be an “arm of the state,” if you have knowledge of the fraud, you should still consult with an attorney to discuss whether a whistleblower suit would be viable.