A three-judge panel in St. Louis heard arguments from University and justice department lawyers last week, continuing the federal government’s two-year lawsuit against the University for alleged mismanagement of federal grants.
In a worst-case scenario, the University stands to lose $109 million.
University lawyers visited the Missouri appeals court Wednesday to defend a favorable ruling in St. Paul’s district court last summer. In July, United States District Court Judge Richard Kyle ruled that the federal government could not sue the University, considered an arm of the state government.
Kyle found that use of the False Claims Act against state governments violates the Constitution. States are exempt from prosecution by private citizens according to the 11th Amendment.
The act encourages private citizens — who stand to receive a percentage of any damages the government recovers — to sue for fraud on behalf of the United States.
A decision from the appeals court might take anywhere from 60 days to six months.
The government is suing the University for two decades of alleged and admitted fraud of several federal grants in the University’s surgery department.
The bulk of the government’s lawsuit surrounds the illegal sale of ALG, an experimental drug developed by members of the University’s surgery department. The department sold the drug without approval from the Food and Drug Administration.
Numerous decisions and motions have chipped away at the complex, two-year-old suit, slowly moving the two parties toward a conclusion. But the lion’s share of the case remains in the courts.
At issue in St. Louis is the government’s decision to sue the University under the False Claims Act.
The act carries fines of $5,000 to $10,000 for each instance of fraud. Those found guilty under the act are required to pay two to three times the amount of original damages. In the University’s case, fines could soar to an estimated $109 million.
University lawyers argue that the decision in St. Louis could alter the delicate relationship between state and federal governments.
Allowing private citizens to sue states tramples the principle of state sovereignty under the 11th Amendment, according to the University’s brief to the court.
Upholding the July ruling strips the government of its primary weapon against fraud, argue justice department lawyers.
The appeal stirred 36 attorneys general, the Association of American Medical Colleges and the California State University system to file arguments on the University’s behalf.
The large damages awarded under the False Claims Act could squeeze state treasuries, said Elizabeth Osenbaugh, Solicitor General for the Iowa attorney general’s office.
In addition, the amplified fines extracted from state treasuries would unfairly penalize innocent tax and tuition payers, said Mark Rotenberg, general councel for the University. Other tools exist for the federal government to prosecute fraud and mismanagement, Rotenberg said.
“The University is not claiming that we are exempt from strict accounting,” Rotenberg said. “The issue before the court of appeals … is not whether the University can get off scot-free, it’s whether the government can impose a threat of double and treble fines.”
But Rotenberg’s federal opponents contend state universities compete for federal dollars against private citizens and companies, and are therefore subject to the same penalties.
Rotenberg said the St. Louis court appearance will not affect ongoing efforts to settle the case out of court. The justice department declined to comment on open settlement talks.
The University and the justice department resumed out-of-court settlement negotiations in late February, following a lengthy stalemate after talks broke down in the winter of 1996 and the two parties exchanged lawsuits.
The Board of Regents is intent on settling the case out of court if possible, Rotenberg said.
“But the University cannot agree to the overstated demands of the government as they have detailed them so far,” Rotenberg said. “It may be possible for them to bridge the gap, but that hasn’t happened yet.”
Wednesday’s arguments came days after a St. Paul district court closed an offshoot of the case.
A June 3 decision in St. Paul’s U.S. District Court fined the University $2.5 million for misspent grant money.
The decision fined the University for inflated salaries, expense and travel accounts on 29 separate grants from the National Institutes of Health, the Environmental Protection Agency and the Department of Defense totaling more than $50 million.
Judge Richard Kyle ordered the University to pay $628,599 for 28 of the mishandled grants and reimburse the government an additional $1.9 million for a single surgery grant.