In an opinion issued on January 27, 2016, the United States Court of Appeals for the First Circuit affirmed the dismissal of a qui tam lawsuit against the University of Massachusetts, holding that the University was “indistinguishable” from a state agency and, therefore, not a “person” subject to potential liability under the False Claims Act, 31 U.S.C. 3729(a)(1)(A).

Relator Michael Willette, an employee of the University’s Center for Health Care Financing (“CHCF”), had alleged that the University had submitted false claims as a result of a scheme by another employee who had siphoned off some $4 million in funds.  CHCF recovers funds from third parties to reimburse Medicaid expenditures made by the Federal government and the State of Massachusetts.

The district court granted the University’s motion to dismiss, concluding that the University was not a “person” under the FCA and, rather, a state agency.  The FCA authorizes suits against any “person” who submits a false claim.  31 U.S.C. 3729(a)(1)(A).  States, of course, cannot be sued in a private action under the FCA under the Supreme Court’s decision in Vermont Agency of Natural Resources v. United States ex rel. Stevens, 529 U.S. 765 (2000).

On appeal, the First Circuit affirmed.  Joining the Fourth, Fifth, Sixth, Ninth, Tenth, and Eleventh Circuits, the First Circuit adopted the “arm-of-the state” test for determining whether an entity is properly categorized as a state under the FCA.  The test requires a two-step inquiry, looking first to whether the state has “indicated an intention – either explicitly by statute or implicitly through the structure of the entity – that the entity share the state’s sovereign immunity.”  Only if that step is inconclusive does a court then look at the second step, which requires the court to assess “whether the state’s treasury would be at risk in the event of an adverse judgment.”

Applying the test to this case, the First Circuit concluded that the University was “an arm of the state and . . . not a person subject to suit under the FCA.”  The court observed that Massachusetts statutes give the state close supervision and control of the University, noted that the fact that the University was not separately incorporated, and underscored the close relationship between the state’s function and that of the University (i.e., to further the “critically important government objective of providing higher education to the people of Massachusetts”).  Because the first step was conclusive, the First Circuit did not consider whether Willette’s suit imperiled the Massachusetts treasury.

The case is U.S. ex rel. Willette v. University of Massachusetts, No. 15-1239 (1st Cir. Jan. 27, 2016).