The Intersection of the Eleventh Amendment and the False Claims Act–A Recurring and Difficult Issue

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One of the most common recurring issues in False Claims Act (FCA) cases is whether the Eleventh Amendment immunizes the defendant from suit. Given the amount of federal funds that flow to other levels of government–states, state agencies, counties, cities, and other quasi-governmental bodies, these entities are frequently the target of FCA cases. Since FCA liability depends first and foremost on the receipt of federal funds, the sectors that receive the most federal funds are those most likely to be the subject of such suits.

The Eleventh Amendment bars suits for monetary damages against states unless Congress has abrogated that immunity, and it is well established that Congress did not abrogate that immunity through the FCA. U.S. ex rel. Sikkenga v. Regence BlueCross, 472 F.3d 702, 718 (10th Cir. 2006). It is equally clear that the Eleventh Amendment does not immunize cities, counties, and other lower-levels of state government. Sturdevant v. Paulsen, 218 F.3d 1160, 1164 (10th Cir. 2000).

The tough question is the treatment of state agencies that fall somewhere in the middle. The Eleventh Amendment immunizes state agencies that “operate as alter egos or instrumentalities of the states”–so called “arms of the state.” Watson v. University of Utah Med. Ctr., 75 F.3d 569, 574 (10th Cir.1996). And this is where the analysis gets tricky and where categorical classifications breakdown. The question is one of federal law, but depends heavily on how the entity is treated under state law. Sturdevant, at 1164. What’s more, because “[t]he inquiry turns on an analysis of state law and financial arrangements…the answer may well differ from state to state and agency to agency and epoch to epoch.” Ute Indian Tribe of the Uintah and Ouray Reservation v. Utah, 790 F.3d 1000, 1012 (10th Cir. 2015). In other words, a certain type of entity may be an arm of the state in, say, Kansas, but not an arm of the state in Utah, even though the entities are functionally identical.

The United States Supreme Court has suggested a number of factors to decide whether a particular state entity is an arm of the state for Eleventh Amendment purposes. The Tenth Circuit has distilled these into four primary factors: (1) the character of the entity under state law, which requires a “survey of state law to ascertain whether the entity is identified as an agency of the state”; (2) the autonomy given to the entity under state law (i.e., how much control the state exercises over the entity); (3) the amount of state funding the entity receives, including whether the entity has the ability to issue bonds or levy taxes on its own behalf; and (4) whether the entity is primarily concerned with local or state affairs, examining the entity’s function, composition, and purpose. Steadfast Ins. Co. v. Agricultural Ins. Co., 507 F.3d 1250, 1253 (10th Cir. 2007).

A brief review of recent Tenth Circuit cases attempting to apply this analysis reveals a patchwork of coverage under the Eleventh Amendment. For example, state-run universities are generally covered under the Eleventh Amendment.  Watson v. University of Utah Med. Ctr., 75 F.3d 569, 574 (10th Cir.1996) (University of Utah); Brennan v. University of Kan., 451 F.2d 1287, 1290 (10th Cir. 1971) (University of Kansas); Seibert v. State of Okla., 867 F.2d 591, 594 (10th Cir.1989) (University of Oklahoma); Prebble v. Brodrick, 535 F.2d 605, 610 (10th Cir.1976) (University of Wyoming); Brennan v. University of Kan., 451 F.2d 1287, 1290 (10th Cir.1971) (University of Kansas and University of Kansas Press).

The Tenth Circuit has also found that hospitals and medical facilities operated by state-run universities are covered by the Eleventh Amendment by virtue of their close relationship to the universities. Watson (University of Utah Medical Center); Ellis v. University of Kansas Medical Center, 163 F.3d 1186, 1195 (10th Cir. 1998) (University of Kansas Medical Center). Because of the large amount of federal funds flowing to the health care field, medical centers are often targets of FCA cases.

But the Tenth Circuit has not extended Eleventh Amendment immunity to all entities related to universities and their medical centers. For example, in U.S. ex rel. Sikkenga v. Regence BlueCross, the Tenth Circuit reversed the district court’s conclusion that Associated Regional and University Pathologists (“ARUP”) was an arm of the state and immune from an FCA case, despite its close connection to the University of Utah Medical Center, which is an arm of the state.

Even though ARUP is a wholly-owned subsidiary of a company owned the University of Utah, the Tenth Circuit found that on balance, it was not itself an arm of the state. The court pointed out that the state of Utah is not liable for any judgments against ARUP, that ARUP is a separately constituted business entity, that ARUP’s business extends well beyond Utah, that ARUP is allowed to conduct business without substantial state interference, that ARUP can initiate lawsuits and enter into contracts, and that there is little overlap between ARUP’s business and the University Medical Center’s. The court also noted that while there is significant financial interdependence between the Medical Center and ARUP, ARUP is designed to be financially independent and a profit-center for the Medical Center.

While these factors pointed in different directions, the Tenth Circuit was ultimately persuaded that the purpose of the Eleventh Amendment was not advanced by extending protections to what was essentially a profit-seeking corporation that just so happened to be owned by an arm of the state. 

Recently, the District of Kansas applied the same Eleventh Amendment factors in an FCA case to determine whether the University of Kansas Center for Research was an arm of the state. Moore v. University of Kansas, No. 14-2420-SAC (D. Kan. Aug. 21, 2015)In that case, the court carefully analyzed state statutes characterizing the Center for Research and found that it was closely connected to the University of Kansas, which is an arm of the state.

The Court also analyzed the status of the Center as a non-profit corporation associated closely with the University, which carries out important research-related functions for the University. But the court found the Center receives no money from the state of Kansas through budget appropriations. Instead, the bulk of the Center’s funding comes from federal and state research grants given to other executive agencies, which the Center merely administers on their behalf. Additionally, the agreement between the Center and the University provides that the University is not liable for the Center’s debts. While the University remains liable for its own staff working for the Center, the Center also obtains insurance to cover its operations. Finally, the court found that the Center is concerned with state-wide issues, not local issues.

The court believed that these four factors generally weighed in favor of finding the Center to be an arm of the state. Nevertheless, the court concluded that the evidence on the factors was incomplete. It allowed the plaintiff additional discovery to flesh out the issues relevant to the Eleventh Amendment analysis and denied the defendant’s motion to dismiss. The decision highlights the fact-intensive nature of inquiry and complexity of the legal and factual issues that courts must undertake to arrive at the right conclusion. Despite undertaking a thorough analysis of what appeared to be lots of evidence, the court did not yet feel comfortable drawing firm legal conclusions.

In sum, the Eleventh Amendment immunizes some–but not all–state agencies from FCA liability. Whether any given agency will be protected depends on a complex set of factors and the careful development of evidence relating to these factors. Because of the fact-specific nature of the inquiry, agencies in different states that appear to be similar can be treated differently for Eleventh Amendment purposes. In the age of the whistleblower, courts will undoubtedly be asked to decide this difficult question in future cases.