AT&T subsidiary denies overcharging schools at Seventh Circuit

CHICAGO (CN) — A corporate malfeasance suit almost 15 years in the making came before the Seventh Circuit on Thursday, centered on a federal whistleblower's allegations that AT&T subsidiary Wisconsin Bell overcharged schools and libraries in the Badger State for over a decade.

The origins of this alleged fraud go back to 1997, with the implementation of the federal E-Rate Program under the purview of the Federal Communications Commission. The program uses government funds to subsidize internet and telecommunications services for schools and libraries, particularly those in impoverished areas.

In order to qualify for reimbursement under the E-Rate Program, telecom companies like Wisconsin Bell are required to charge the schools and libraries they contract with no more than the local "lowest corresponding price," or "at rates less than the amounts charged for similar services to other parties." In some places public schools can qualify for as much as a 90% discount off typical rates.

Wisconsin Bell and similar companies can skirt this requirement only if they demonstrate that providing services for local schools and libraries would be so expensive that charging them the lowest corresponding price, or LCP, would put the company at a financial loss.

In 2008 telecom auditor Todd Heath, a resident of Dodge County in eastern Wisconsin, filed a federal fraud lawsuit against numerous telecoms companies that operated in the state. He claimed that the companies, including Wisconsin Bell and its competitor Verizon North, had received federal reimbursement via the E-Rate Program for close to a decade, despite overcharging the state's schools and libraries for their services for just as long.

"Verizon North routinely has withheld information about these available rates from public school and library customers, and it has billed almost all of them at much higher rates, sometimes three times as high as the lowest corresponding price," Heath's initial complaint stated.

The accusation was a hard sell, especially since many of the companies seemed to begin abiding more strictly by the E-Rate Program's LCP rule from 2009 onward. Over the next three years, Heath voluntarily dismissed his claims against all the defendants, except Wisconsin Bell.

"Defendant Wisconsin Bell, Inc., as an E-Rate participating entity, unlawfully and secretly has refused to abide by the [E-Rate Program]’s pricing proscriptions and routinely has failed to bid, offer and as a result invoice its E-Rate eligible services to Wisconsin schools and libraries in accordance with regulatory mandates," Heath's 2011 amended complaint claimed. "In the process, Defendant has subverted the [E-Rate Program]’s goals, unlawfully obtained funding commitments that never should have issued, and mischarged and overcharged participating schools, libraries and the United States."

U.S. District Judge Lynn Adelman in Milwaukee federal court wanted nothing to do with the allegations. The Bill Clinton appointee dismissed Heath's claims in September 2012, opining that his court lacked subject matter jurisdiction. On appeal, the Seventh Circuit disagreed with Adelman and returned the case to district court. The case slowed to a crawl upon its return, barely moving over the next 10 years.

But in March 2022, Adelman again tossed the suit, this time ruling that Heath had not shown how Wisconsin Bell had violated the FCC's LCP rule for the E-Rate program. Even if the company had charged Wisconsin schools and libraries higher rates than other customers, Adelman wrote, the letter of the law only required it to charge the lowest possible rates for "similarly situated customers." In other words, the conditions at different schools and libraries which Wisconsin Bell contracted with may have been so disparate that Heath could not show they were "similarly situated."

"The LCP rule does not require a provider to offer E-rate customers the lowest rate available; it requires providers to offer the lowest rate charged to similarly situated customers. Heath does not show that any customers that were charged the lower rates were similarly situated to those who were charged a higher rate," Adelman wrote.

While the judge admitted that "similarly situated" is a vague qualifier, he opined that "customers are not 'similarly situated' when they are differentiated by factors 'clearly and significantly' affecting cost, including but not limited to traffic volume, mileage from a switching facility, and length of contract."

Heath again appealed Adelman's decision, arguing in his appellant brief to the Seventh Circuit that the district judge based his ruling on a disingenuous reading of the LCP rule.

"The district court effectively gave [Wisconsin Bell] the benefit of a presumption that its over-billing of E-rate customers was somehow, by random luck and without any affirmative showing, justified by hypothetical, unknown, and unquantified differences in the costs of services," the brief states.

In oral arguments on Thursday, Heath's attorney David Chizewer, of the Chicago law firm Goldberg Kohn, reiterated this point before a three-judge panel. He called the dispute over the phrase "similarly situated" nothing more than "semantic gamesmanship."

"What we have shown is that Wisconsin Bell never calculated a single lowest corresponding price for years and years... What they did was, they were instructing their salespeople to try and get the maximum price possible for any customer, whether it was an E-Rate customer or a regular customer," Chizewer said.

But U.S. Circuit Judge Frank Easterbrook, a Ronald Reagan appointee and one of the Seventh Circuit's most conservative judges, was not convinced. In fact, he expressed annoyance that Chizewer's arguments seemed based on a moral interpretation of the FCC's guidelines, rather than one grounded in legal standards.

"The FCC can say anything it wants but it doesn't change the burdens of proof and persuasion in court. You come to court, you have to meet the court's structure of burdens, no matter what the burdens were before the agency," Easterbrook snapped. "You don't want to be making this argument. You're wasting your time."

U.S. Circuit Judge David Hamilton, while not as irate as Easterbrook, also argued that Heath had the burden to show that the different facilities Wisconsin Bell contracted with were similarly situated as a matter of law. It was a burden he doubted Heath had met.

"Your brief spends a lot of time trying to shift the burden of proof to the defense. That's not persuasive," the Barack Obama appointee said.

The company's own attorney Helgi Walker, of the multinational law firm Gibson, Dunn & Crutcher, leaned into this perceived weakness in Heath's case.

"[Heath]'s idea of similarly situated... is completely wrong under the FCC's rules and the FCC's guidance," Walker said. "The FCC made clear... that costs are relevant to the provider's initial determination as to whether two customers are similarly situated."

However, Hamilton seemed to change course for Walker, challenging her to define "similarly situated" when even the district judge who initially tossed the suit admitted it was a vague term.

"We have a number of examples... identifying what, at least from 20,000 feet, look like similarly situated customers," Hamilton said. "Same products and services, same contract, entered at the same time, with pretty wildly disparate prices. What's wrong with those comparisons?"

Walker rebutted that while different customers may seem similar on their face, details such as whether a customer had a month-to-month or yearly contract, or differences in the call volume made by specific customers, all set them apart.

"What we know about these customers [based on Heath's evidence] is very little, and what we do know is that they are not similarly situated," Walker argued.

Her answer only seemed to frustrate the panel judges to varying degrees, who all surmised that Walker's definition of "similarly situated" was no more definitive than Chizewer's.

Hamilton and Easterbrook were joined on the panel by U.S. Circuit Judge John Z. Lee, an appointee of President Joe Biden. The judges did not say when they would issue a ruling.

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AT&T subsidiary denies overcharging schools at Seventh Circuit

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