Summary

A professor at the University of Texas Health Science Center has petitioned the U.S. Supreme Court to determine the standard for imposing liability on state universities (and their related entities, such as hospitals and research centers) under the False Claims Act, 31 U.S.C. §§ 3729, et seq.  In King v. University of Texas Health Science Center, the U.S. Court of Appeals for the Fifth Circuit held that the Health Science Center, a hospital within the University of Texas System, is an “arm of the state,” and therefore both exempt from liability under the False Claims Act and immune from suit in federal court under the Eleventh Amendment.

The federal courts of appeal which have addressed this issue — whether a state university or related entity — have reached conflicting conclusions.  Because there is a split among the federal circuits, this increases the likelihood that the Supreme Court grant certiorari on this issue. 

Background

In this case, a former associate professor at the University of Texas Health Science Center filed a qui tam (or whistleblower) claim under the False Claims Act (“FCA”), alleging that the University violated the Act by covering up the misconduct of a professor who received federal research grants. Under the FCA, liability will be imposed on “any person who . . .knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval” or “knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim.”  31 U.S.C. § 3729(a)(1)(A)-(B).

The whistleblower, Professor Terri King, worked in the Health Science Center’s Department of Internal Medicine from 2001 to 2005.  In 2001, she began working in a research lab under Dr. Dianna Milewicz’s supervision. According to King’s complaint, she began noticing discrepancies in Milewicz’s data in 2004.  King alleges that when she informed Milewicz about the discrepancies, she was retaliated against by receiving a “false and defamatory performance review” from Dr. Milewicz. King also alleges that she was retaliated against when she was reassigned to less favorable positions and eventually terminated.

In January 2011, King filed a qui tam lawsuit against the Health Science Center, alleging that Dr. Milewicz falsified research data and results.  King claims that the fraud was in connection with federally-funded research, and that Milewicz used falsified results in order to obtain federal funding.  King also alleged that the Center covered up Milewicz’s misconduct relating to federal research grants.  In addition, King asserted a retaliation and wrongful termination claim under the FCA’s anti-retaliation provision, 31 U.S.C. § 3730(h), alleging that she was retaliated against after notifying Dr. Milewicz of the alleged fraud. The United States, which has the right under the FCA to intervene in qui tam actions, declined to do so.

The U.S. District Court dismissed the whistleblower claim, concluding that the university hospital was an “arm of the state,” and therefore exempt from the FCA’s qui tam provisions.  The district court also held that the plaintiff’s retaliation claim was barred by the Eleventh Amendment’s “sovereign immunity” protection.  The district court’s reasoning was based on the Supreme Court’s decision in Vt. Agency of Natural Resources. v. United States (2000), which held that states (as well as state agencies) are not subject to liability under the False Claims Act because they are not a “person” within the meaning of that Act.

In November 2013, the Fifth Circuit affirmed the district court’s ruling that the Health Science Center is an “arm of the state,” and therefore not a “person” that can be held liable under the FCA.  The Fifth Circuit applied six factors to determine whether the center qualifies as an “arm of the state,” including: (1) whether state law characterizes the agency as an arm of the state; (2) the source of funds for the entity; (3) the degree of local autonomy by the entity; (4) whether the entity is concerned primarily with local, as opposed to statewide problems; (5) whether the entity has authority to sue, and be sued, in its own name; and (6) whether the entity has the right to hold and use property.  In applying these factors, the Fifth Circuit recognized:

            • The Health Science Center is part of the University of Texas, and the university is considered, under state statutory law, an “arm of the state.”  Texas law also recognizes that the Health Science Center is a “governmental unit.”

            • The Health Science Center receives significant funding from state sources.

            • The Health Science Center has limited autonomy.  A Board of Regents appointed by the Texas Governor is responsible for governing the University of Texas System, including the component institutions.  All Health Science Center contracts must be in accordance with board rules or specially approved by the Board of Regents. As a state agency, the Center is also required to follow specific accounting and financial reporting requirements.  In addition, the Board of Regents has the sole and exclusive management over the Center’s right to hold and use property.

            • The University of Texas System has locations throughout the state of Texas.  Although the Health Science Center’s facilities are confined to Houston, its research and education are created to benefit the citizens of the state, not just the local community.

For some of the above factors (particularly, the local/state factor), the Fifth Circuit framed the “entity” as the University of Texas, rather than the more narrow entity of the Health Science Center. In addition, despite the fact that the Health Science Center can sue, and be sued in its own name (a fact that King argues is important in demonstrating that the entity was not an “arm of the state”), the Court held this factor was outweighed by the others.

The Fifth Circuit also affirmed the dismissal of the FCA retaliation claim, holding that the Health Science Center is an “arm of the state” and therefore entitled to “sovereign immunity” under the Eleventh Amendment. Under the Eleventh Amendment, a state, or “arm of the state,” may generally not be sued for monetary relief.  Therefore, to the extent King was seeking monetary relief relating to her termination, that claim was barred by the Eleventh Amendment.

On January 31, 2014, King filed a petition with the U.S. Supreme Court for review.  While the Supreme Court has complete discretion in deciding whether to review cases, the fact that other federal courts of appeal have applied inconsistent standards in deciding this issue — whether state universities (or related entities) can be held liable under the FCA —increases the likelihood that the Supreme Court will decide this important issue.  For example, the Fourth and Fifth Circuits consider whether the entity is concerned primarily with local, as opposed to statewide concerns, while the Sixth Circuit considers whether the entity’s functions fall within the traditional purview of state or local government. While there is some overlap between these criteria, the broader approach by the Fourth and Fifth Circuit would lead to a greater range of entities considered as “arms of the state,” and therefore exempt under the FCA.

In her petition for review, King argues that the Fifth Circuit’s decision was wrong for the following reasons: (1) the Health Science Center has local autonomy; (2) the Center has $1 billion of its own assets (separate from the rest of the university); and (3) the Health Science Center is mostly concerned with local problems, rather than statewide.  King also argues that the courts incorrectly conflated the Health Science Center with the University of Texas, when the courts should have focused on the Health Science Center specifically, rather than the University as a whole.  King also asks the Supreme Court to either reverse its prior Stevens decision, or at least narrow the decision in order to “minimize the growing fraud in academic research.”

Conclusion

Qui Tam actions have long been pursued in the defense, pharmaceutical and healthcare industries.  More recently, counsel for plaintiffs have been looking to other industries to target including higher education.  With significant federal funds spent on research and financial aid, higher education may be susceptible to such claims.  If the Supreme Court grants certiorari in this case, the outcome will likely have a significant impact on state universities and their related entities.