If You Could Turn Back Time — The D.C. Circuit Holds You Can in Recent Materiality Ruling

In a recent decision, U.S. ex rel. Vermont National Telephone Co. v. Northstar Wireless, LLC, Case No. 20-7039,—F.4th—, 2022 WL 1548488 (DC Cir. May 17, 2022), the DC Circuit provided interesting insight on both the FCA’s elusive government-action bar and the FCA’s more prominent materiality standard.

In its Auction 97, the FCC offered 25% bidding credits for more than 1,600 Advanced Wireless Services licenses to “very small businesses” (VSBs), defined as businesses with less than $15 million in attributable revenue. Defendants Northstar Wireless, LLC (Northstar) and SNR Wireless LicenseCo, LLC (SNR) submitted short-form applications to participate in Auction 97 as VSBs, disclosing in their applications that they had acquired the capital to participate in the auction from DISH Network. The FCC preliminarily approved their short-form applications to participate as VSBs, and Northstar and SNR ultimately secured 43.5% of the licenses offered. Collectively, Northstar and SNR’s VSB status dropped the price of their winning bids from approximately $13.5 billion to $10 billion.

After the auction, many other bidders petitioned the FCC to deny defendants’ applications, asserting that both Northstar and SNR were ineligible for the bidding credits because DISH Network effectively controlled them. After holding a post-auction licensing proceeding, the FCC agreed. In response to the FCC’s determination, Northstar and SNR notified the FCC that they would pay the full bid amount for some of the licenses won and default on the rest. The FCC then ordered them to pay a default payment.

Meanwhile, a competitor—Vermont National Telephone Company (Vermont National)—filed a qui tam suit alleging that Northstar, SNR and DISH Network violated the FCA by making false certifications to fraudulently secure bidding credits. The district court subsequently dismissed the complaint, holding that the government-action bar precluded the claim and that Vermont National had failed to sufficiently plead the materiality of defendants’ false certifications on the FCC’s decision to award bidding credits.

On appeal, the DC Circuit found that the district court had erred on both conclusions and that neither the government-action bar nor the materiality requirement prevented Vermont National’s suit from moving forward. The FCA’s government-action bar prohibits qui tam actions based on allegations or transactions that are subject to an administrative civil money penalty proceeding to which the government is already a party. The DC Circuit applied this prohibition narrowly, holding that the default payments imposed by the FCC were not assessed during the actual licensing proceeding—which considered only whether Northstar and SNR were eligible for VSB bidding credits. The circuit court rejected defendants’ characterization that the default payments “flow[ed] directly” from the FCC’s determination in the licensing proceeding, finding that the companies’ decisions to selectively default were “an intervening event” before the assessment. The circuit court also rejected the argument that the FCC had authority to assess a “civil money penalty” during the actual licensing proceeding rather than in a separate forfeiture proceeding, which the court found the FCC never initiated.

Although its reading of the government-action bar may have been fairly narrow, the DC Circuit applied a generous interpretation of “materiality” to reverse the lower court’s dismissal. In asserting their materiality defense, defendants argued that the alleged undisclosed resale agreements would not have influenced the “ultimate” decision to deny bidding credits because the FCC determined defendants’ ineligibility on other grounds (i.e., both were de facto controlled by DISH Network), without considering the disclosure (or lack thereof) of any resale agreements.

Rejecting this argument, the DC Circuit echoed pre-Escobar opinions in holding that the FCA’s materiality inquiry “focuses on the potential effect of the false statement when it is made”—not on “the false statement’s actual effect after it is discovered.” Here, at the time Northstar and SNR submitted their initial, short-form applications, VSB eligibility required disclosure of all agreements, arrangements, or understandings relating to the licenses being auctioned. Opining that the government’s “actual behavior” is examined only to assess whether the government attaches importance to a particular requirement, the DC Circuit reasoned that the two defendants’ failure to disclose on their short-form applications attributable revenue in the form of their spectrum resale agreements with DISH Network was an omission “capable of influencing” the FCC’s bidding credit eligibility determination. Thus, the court explained, the amended complaint plausibly pleaded materiality by alleging the importance of the VSB certification and defendants’ purported misrepresentations.

The DC Circuit’s Vermont National decision is notable because it focuses its materiality analysis exclusively on whether an allegedly false statement—including one made in the preliminary stages—satisfies materiality because it is capable of influencing a government decision, even if that statement is ultimately irrelevant to the government’s final decision. This has significant implications for defendants seeking to disprove materiality by showing that a misrepresentation had no impact on the government’s ultimate decision. We at Qui Notes will monitor whether other jurisdictions adopt the DC Circuit’s logic in future false certification actions.

© Arnold & Porter Kaye Scholer LLP 2022 All Rights Reserved. This blog post is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.