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Joseph M. Hill v. FCC & USA, No. 12-60070 (5th Cir.)

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Released: May 25, 2012


BRIEF FOR THE RESPONDENTS

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT

NO. 12-60070

JOSEPH M. HILL, TRUSTEE IN BANKRUPTCY FOR
LAKEHILLS CONSULTING, L.P.,
PETITIONER
v.
FEDERAL COMMUNICATIONS COMMISSION
AND THE UNITED STATES OF AMERICA,
RESPONDENTS

ON PETITION FOR REVIEW OF AN ORDER OF
THE FEDERAL COMMUNICATIONS COMMISSION

STUART F. DELERY
AUSTIN C. SCHLICK
ACTING ASSISTANT ATTORNEY
GENERAL COUNSEL
GENERAL
PETER KARANJIA
BETH S. BRINKMANN
DEPUTY GENERAL COUNSEL
DEPUTY ASSISTANT ATTORNEY
GENERAL
JACOB M. LEWIS

ASSOCIATE GENERAL COUNSEL
MARK B. STERN

ALISA B. KLEIN
HILLARY B. BURCHUK
ATTORNEYS
COUNSEL

FEDERAL COMMUNICATIONS COMMISSION
U.S. DEPARTMENT OF JUSTICE
WASHINGTON, D.C. 20554
CIVIL DIVISION
(202) 418-1740
WASHINGTON, DC 20530


STATEMENT REGARDING ORAL ARGUMENT

Respondents believe that issues presented in the case are straightforward and
that the government’s position is sufficiently set forth in the briefs and the order on
review. Nonetheless, respondents would welcome the opportunity to present oral
argument if the Court determines that it would be of assistance.
i

TABLE OF CONTENTS

Page


JURISDICTIONAL STATEMENT ...........................................................................1
STATEMENT OF THE ISSUES PRESENTED FOR REVIEW ..............................2
STATEMENT OF THE CASE...................................................................................2
COUNTERSTATEMENT OF THE FACTS..............................................................4
I.
Statutory and Regulatory Background ..................................................4
II. Prior
Proceedings. .................................................................................9
III. The
Administrative Decisions .............................................................12
A. USAC’s
Funding Rescission.....................................................12
B. The
Commission’s Affirmance. ................................................15
SUMMARY OF THE ARGUMENT .......................................................................18
STANDARD OF REVIEW .....................................................................................20
ARGUMENT ...........................................................................................................21
I.
THE COMMISSION PROPERLY UPHELD
USAC’S RESCISSION OF LAKEHILLS’S
FUNDING............................................................................................21
A.
The Commission Reasonably Determined
That Funding Commitments Resulting From
Contracts Awarded In Violation Of The
Agency’s Competitive Bidding Rules
Should Be Rescinded And The Disbursed
Funds Recovered.......................................................................22
B. The
Recovery
Rule Advances Universal
Service Principles......................................................................26
II.
THE COMMISSION REASONABLY DENIED
LAKEHILLS’S REQUEST FOR A WAIVER OF
THE RECOVERY RULE. ..................................................................30
i

Page

A.
Lakehills Failed To Demonstrate That A
Waiver Would Be In The Public Interest. .................................30
B.
Events In 2007 Do Not Weigh in Favor Of
Granting A Waiver To Lakehills. ..............................................34
CONCLUSION ........................................................................................................36

ii

TABLE OF AUTHORITIES

Page


Cases


Alenco Communications, Inc. v. FCC, 201 F.3d 608 (5th
Cir. 2000)........................................................................................ 5, 28
BDPCS, Inc. v. FCC, 351 F.3d 1177 (D.C. Cir. 2003) ..................................21
Brown v. United States, 227 F.3d 295 (5th Cir. 2000) ...................................23
Chrysler Corp. v. Brown, 441 U.S. 281 (1979) ...................................... 23, 26
Citizens for Fair Utility Regulation v. U.S. Nuclear
Regulatory Comm’n, 898 F.2d 51 (5th Cir. 1990)...............................21
Citizens to Preserve Overton Park, Inc. v. Volpe, 401
U.S. 402 (1971) ...................................................................................20
City of Arlington v. FCC, 668 F.3d 229 (5th Cir. 2012) ................................20
Comsat Corp. v. FCC, 250 F.3d 931 (5th Cir. 2001).....................................27
Doe v. United States, 372 F.3d 1347 (Fed. Cir. 2004) ...................................25
Federal Crop Insurance Corporation v. Merrill, 332
U.S. 380 (1947) ...................................................................................23
Heckler v. Community Health Services of Crawford, 467
U.S. 51 (1984) .....................................................................................26
Hicks v. Harris, 606 F.2d 65 (5th Cir. 1979) .................................................24
Jones v. Dept. of Health & Human Servs., 843 F.3d 851
(5th Cir. 1988) .....................................................................................24
Mountain Solutions, Ltd. v. FCC, 197 F.3d 512 (D.C. Cir.
1999)....................................................................................................21
Northeast Cellular Tel. Co. v. FCC, 897 F.2d 1164 (D.C.
Cir. 1990).............................................................................................30
OPM v. Richmond, 496 U.S. 414 (1990) .......................................... 24, 25, 26

iii

Page

People of the State of New York v. FCC, 267 F.3d 91 (2d
Cir. 2001).............................................................................................21
R&R Farm Enters. v. Federal Crop Ins. Corp., 788 F.2d
1148 (5th Cir. 1986) ............................................................................24
Rural Cellular Ass’n v. FCC, 588 F.3d 1095 (D.C. Cir.
2009)....................................................................................................28
Schweiker v. Hansen, 450 U.S. 785 (1981) ...................................................23
Texas Office of Public Util. Counsel v. FCC, 1183 F.3d
393 (5th Cir. 1999) ................................................................................6
United States v. Bohuchot, 2008 WL 4849324 (N.D. Tex.
2008)....................................................................................................10
United States v. Bohuchot, 625 F.3d 892 (5th Cir. 2010) ..............................10
United States v. Harvey, 659 F.2d 62 (5th Cir. 1981)....................................23
United States v. Rogan, 517 F.3d 449 (7th Cir. 2008) ...................................33
WAIT Radio v. FCC, 418 F.2d 1153 (D.C. Cir. 1969) ...................................30
Wright v. Allstate Ins. Co., 415 F.3d 384 (5th Cir. 2005) ..............................24

Administrative Decisions

Changes to the Board of Directors of the National
Exchange Carrier Association, Inc., Federal-State
Joint Board on Universal Service
, Order, 17
Comm. Reg. 1192 (1999) ......................................................................8
Federal-State Joint Board on Universal Service, Report
and Order, 12 FCC Rcd 8776 (1997), aff ’d in part,
Texas Office of Public Util. Counsel v. FCC, 1183
F.3d 393 (5th Cir. 1999) ........................................................................6
In the Matter of Schools and Libraries Universal Service
Support Mechanism, 19 FCC Rcd 15808 (2004)7, 8, 24, 25, 28, 29, 35

iv

Page

Request for Review of a Decision of the Universal
Service Administrator by Albert Lea Area Schools,
Order, 24 FCC Rcd 4533 (WCB 2009)...............................................31

Statutes and Regulations

5 U.S.C. § 706(2)(A) ...................................................................................20
28 U.S.C. § 2342(1).........................................................................................2
28 U.S.C. § 2344..............................................................................................2
47 U.S.C. § 151................................................................................................4
47 U.S.C. § 154(i)..........................................................................................26
47 U.S.C. § 254(b)(1) ....................................................................................27
47 U.S.C. § 254(b)(6) ....................................................................................28
47 U.S.C. § 254(b)(7) ....................................................................................28
47 U.S.C. § 254(d)...........................................................................................5
47 U.S.C. § 254(h).......................................................................................4, 6
47 U.S.C. § 254(h)(2)(A).......................................................................... 5, 26
47 U.S.C. § 402(a) ...........................................................................................2
47 U.S.C. § 405(a) .................................................................................. 19, 27
47 C.F.R. § 1.3 ...............................................................................................30
47 C.F.R. § 54.504(b)(4)..................................................................................7
47 C.F.R. § 54.504(a).......................................................................................6
47 C.F.R. § 54.504(b) ......................................................................................7
47 C.F.R. § 54.504(c)................................................................................ 8, 22
47 C.F.R. § 54.507 ...........................................................................................6
v

Page

47 C.F.R. § 54.511(a).......................................................................................7
47 C.F.R. § 54.706 ...........................................................................................5
47 C.F.R. §§ 54.500-54.523.............................................................................5

Others


H.R. Conf. Rep. 104-458 (1996) .....................................................................4

vi



IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT

NO. 12-60070

JOSEPH M. HILL, TRUSTEE IN BANKRUPTCY FOR
LAKEHILLS CONSULTING, L.P.,
PETITIONER
v.
FEDERAL COMMUNICATIONS COMMISSION
AND THE UNITED STATES OF AMERICA,
RESPONDENTS

ON PETITION FOR REVIEW OF AN ORDER OF
THE FEDERAL COMMUNICATIONS COMMISSION

BRIEF FOR THE RESPONDENTS

JURISDICTIONAL STATEMENT

The Federal Communications Commission (“FCC” or “Commission”)
released the Order under review on November 28, 2011. Request for Review of
Decisions of the Universal Service Administrator by Joseph M. Hill, Trustee in
Bankruptcy for Lakehills Consulting LP, 26 FCC Rcd 1656 (released November
28, 2011) (Petitioner’s Record Excerpts (“R.E.”) Tab 1). Joseph M. Hill, the
Trustee in Bankruptcy for Lakehills Consulting, L.P. (“Lakehills”), filed a timely
petition for review on January 27, 2012, within the 60-day deadline established by


2

28 U.S.C. § 2344. This Court has jurisdiction to review the Commission’s
decision under 47 U.S.C. § 402(a) and 28 U.S.C. § 2342(1).

STATEMENT OF THE ISSUES PRESENTED FOR REVIEW

1. Whether, after finding numerous, undisputed violations of the
Commission’s competitive bidding rules, the Commission lawfully approved the
rescission of federal funding of contracts awarded to Lakehills’s predecessor under
a government program that provides subsidized communications services to
schools and libraries.
2. Whether the Commission acted within its discretion in denying, as
inconsistent with the public interest, Lakehills’s request to waive the agency’s
rules requiring recovery of federal funds disbursed in violation of the
Commission’s competitive bidding rules.

STATEMENT OF THE CASE

This case involves Lakehills’s claims to federal funds under an FCC
program that provides discounted communications services to schools and
libraries. Under this program, know as the E-rate program, eligible schools and
libraries can apply for subsidies, or “discounts,” for eligible communications
services. If the applications are approved and after compliance with the relevant
regulations, the eligible school or library applicant can receive funding to cover a


3

large portion of the cost due under contracts with service providers for the eligible
services.
On March 29, 2011, the Universal Service Administrative Company
(“USAC”), which administers the E-rate program under the supervision of the
FCC, rescinded E-rate program funding committed to the Houston Independent
School District (“the Houston ISD”) for funding years 2002, 2003, and 2004.
USAC found that the Houston ISD, and a consortium of providers of
communications equipment and related services had failed to conduct a fair and
open competitive bidding process when awarding contracts for E-rate services.
One of the implicated providers was Analytical Computer Services (“ACS”), a
company whose assets and liabilities Lakehills subsequently acquired.
USAC explained that it was required by law to recover any E-rate funds
improperly disbursed pursuant to these contracts. Lakehills appealed USAC’s
decision to the FCC, arguing that USAC was not required to recoup the tainted E-
rate funds, notwithstanding the violations of the FCC’s competitive bidding rules,
which were undisputed. In the alternative, Lakehills sought a waiver of the rule
requiring that funds be withheld and recovered. On November 28, 2011, the
Commission denied Lakehills’s request for review, affirmed USAC’s decision to
rescind funding, and denied Lakehills’s waiver request. Lakehills has appealed the


4

Commission’s order denying its request for administrative review and/or waiver to
this Court.

COUNTERSTATEMENT OF THE FACTS

I.

Statutory and Regulatory Background


The availability of reasonably priced telecommunications services in all
parts of the nation, known as “universal service,” is a longstanding goal of federal
telecommunications law. See 47 U.S.C. § 151 (directing the Commission “to make
available, so far as possible, to all the people of the United States . . . a rapid,
efficient, Nation-wide and world-wide wire and radio communication service with
adequate facilities at reasonable charges.”).
In 1996, Congress amended the Communications Act to, among other
things, add a new Section 254 to the Act. See Pub. L. No. 104-104, § 254, 110
Stat. 56, 71 (1996) (codified at 47 U.S.C. § 254). As relevant here, that provision
expanded the scope of universal service by creating programs to provide
discounted telecommunications services and other communications services to
schools, libraries, and rural health care providers. See 47 U.S.C. § 254(h).
Congress thus sought to insure that elementary and secondary schools and libraries
would have affordable access to modern communications services. H.R. Conf.
Rep. No. 104-458, at 17 reprinted in 1996 USCCAN 124, 133 (1996).


5

The Commission’s Universal Service Schools and Libraries Support
Mechanism, or “E-rate” program, is financed by the Universal Service Fund – a
federal fund to which all providers of interstate telecommunications services are
required to contribute. See 47 U.S.C. § 254(d); 47 C.F.R. § 54.706. These
providers are permitted to, and almost always do, pass along to their end-user
customers the cost of their Universal Service Fund contributions. See Alenco
Communications, Inc. v. FCC, 201 F.3d 608, 620 (5th Cir. 2000). Thus, like other
subsidy programs under the Universal Service Fund, the E-rate program is
indirectly funded by almost every user of interstate telecommunications services in
the United States.
With respect to schools and libraries, Congress directed the Commission to
“establish competitively neutral rules . . . to enhance, to the extent technically
feasible and economically reasonable, access to advanced communications and
information services for all public and non-profit elementary and secondary school
classrooms, health care providers, and libraries.” 47 U.S.C. § 254(h)(2)(A). The
E-rate program, established pursuant to this directive, implements universal service
support for the nation’s schools and libraries by allowing eligible schools, libraries
and consortia to apply for discounts for eligible telecommunications services,
Internet access, and internal connections, such as communications links between
different schools in an eligible school district. 47 C.F.R. §§ 54.500-54.523. Since


6

the inception of the E-rate program, the Commission has required, as a matter of
“fiscal responsibility,” that “eligible schools and libraries seek competitive bids for
all services eligible for section 254(h) discounts.” Federal-State Joint Board on
Universal Service, Report and Order, 12 FCC Rcd 8776, 9029 ¶ 480 (1997), aff’d
in part, Texas Office of Public Util. Counsel v. FCC, 1183 F.3d 393 (5th Cir.
1999). As the Commission explained in 1997, “[c]ompetitive bidding is the most
efficient means for ensuring that eligible schools and libraries are informed about
all of the choices available to them.” Id. Moreover, “[a]bsent competitive bidding,
prices charged to schools and libraries may be needlessly high,” and “fewer
eligible schools and libraries would be able to participate in the program or the
demand on universal service support mechanisms would be needlessly great.” Id.
In particular, the amount available each year under the E-rate program is capped at
$2.25 billion, adjusted for inflation. 12 FCC Rcd at ¶ 529; 47 C.F.R. § 54.507.
To promote a competitive, fair and open bidding process, the Commission
adopted a number of “competitive bidding requirements,” in addition to those
imposed by state and local law. These requirements ensure that all prospective
bidders can identify the services sought and prepare timely bids. See 47 C.F.R.


7

§ 54.504(a)(2001).1 Emphasizing that “the competitive bidding process is a key
component of the schools and library program,” the FCC has explained that
requiring recovery of funds for violations of the competitive bidding rules ensures
that universal service funds “support services that satisfy the precise needs of an
applicant and that services are provided at the lowest possible rates.” Id.; In the
Matter of Schools and Libraries Universal Service Support Mechanism, 19 FCC
Rcd 15808, 15814 ¶ 21 (2004) (“Fifth Report and Order”).
First, applicants seeking eligible services under the E-rate program must
submit, for posting on USAC’s website, a FCC Form 470 requesting discounts for
the requested services under a new contract. 47 C.F.R. § 54.504(b). After
submitting the FCC Form 470, the applicant must wait 28 days before making
commitments with the selected service provider. 47 C.F.R. § 54.504(b)(4).
The Commission’s rules require the applicant to carefully consider all bids it
receives prior to entering into an agreement with the service provider. 47 C.F.R. §
54.511(a). “[U]pon signing a contract for eligible services,” an eligible school,
library or consortium must submit a completed FCC Form 471 to notify USAC that
services have been requested from a specified service provider. 47 C.F.R. §

1 Citations to the provisions of the Code of Federal Regulations addressing the E-
rate program requirements are to the version of the regulations in effect at the time
of the events at issue in this litigation. A copy of the versions of these regulations
that were in effect during the relevant time period are contained in the Statutory
and Regulatory Addendum to this brief.


8

54.504(c). The commitment of universal service support is “contingent upon” the
filing of the Form 471. Id.
To insure the integrity of the E-rate program, the Commission adopted a
number of requirements designed to recover E-rate funds committed in violation of
the rules governing the program. Since the early years of the program, the
Commission has made clear that any E-rate funds that are committed in violation
of the governing statute must be recovered. Changes to the Board of Directors of
the National Exchange Carrier Association, Inc., Federal-State Joint Board on
Universal Service, Order, 17 Comm. Reg. 1192 (FCC 99-291) (1999)
(“Commitment Adjustment Order”). In 2004, in the Fifth Report and Order, the
Commission further strengthened the integrity of the E-rate program to protect it
from waste, fraud, and abuse. There, the Commission recognized that, in addition
to its obligation to recover funds “disbursed in violation of the statute,” it has an
obligation to recover funds disbursed in violation of “a rule that implements the
statute or a substantive program goal.” Fifth Report and Order, 19 FCC Rcd at
15814 ¶ 18. The Commission explained that it “should recover the full amount
disbursed for any funding requests in which the beneficiary failed to comply with
the Commission’s competitive bidding requirements set forth in section 54.504 and
54.511 [and] related Commission orders.” Id. at ¶ 21. For example, the agency
specified that it is “appropriate to recover the full amount of [the] funds disbursed


9

for a funding request when the beneficiary signs a contract before the end of the
28-day posting period,” or “where the beneficiary failed to consider price as the
primary fact when evaluating among competing bids.” Id.

II.

Prior Proceedings.


This case arises out of the Houston ISD’s selection of Lakehills’s
predecessor ACS, a reseller of computer equipment and provider of installation
and maintenance services, to supply communications equipment and related
services pertaining to commitments made for E-rate funding between 2002 and
2004.
On January 12, 2007, Lakehills acquired ACS, including all of ACS’s
contracts, employees, and liabilities. R.E. Tab 1, ¶ 8. Four days earlier, an article
published in the Houston Chronicle raised serious concerns about the Houston
ISD’s choice of ACS.2 The article reported that ACS’s partner Micro Systems
Engineering (“MSE”), a co-signatory (with ACS) on bidding proposals for E-rate
services to the Houston ISD, was the subject of a federal investigation into possible
corruption and fraud arising out of its provision of services to the Dallas
Independent School District (“Dallas ISD”). Id. The article also reported ACS’s
allegations that computer manufacturer Hewlett Packard (“HP”) had severed its

2 See “School Board Weighs Ties to Vendor,” Houston Chronicle (Jan. 8, 2007)
available at htpp://www.chron.com/disp/story.mpl/metropolitan/4453657.html
(copy attached R.E. Tab 2).


10

reseller relationship with ACS because of concerns about violations of HP’s ethics
rules prohibiting bribery and kickbacks.
On March 19, 2007, USAC formally requested that ACS “address in detail
and in writing” the issues raised in the Houston Chronicle article to permit USAC
“to evaluate whether ACS has complied fully with program rules and whether
USAC should seek recovery of funds or take other appropriate action.” R.E. Tab
3, p. 2. In response, the president of ACS, Frank Trifilio, denied any wrongdoing,
and stated that HP did not offer a specific reason for severing its relationship with
ACS. R.E. Tab 1, ¶ 9. On May 22, 2007, MSE’s president, Frankie Wong, was
indicted on 11 federal criminal counts, including bribery concerning E-rate funding
for contracts with the Dallas ISD. See United States v. Bohuchot, 2008 WL
4849324 (N.D. Tex. 2008).3
In a September 27, 2007 letter, USAC informed Lakehills it was withholding
payments for E-rate services that Lakehills provided to the Houston ISD “to
protect the integrity of the Universal Service Fund . . . from possible waste, fraud
and abuse.” R.E. Tab 4, p. 1. USAC explained that it was taking this action based
on its understanding that MSE had co-signed bid proposals with ACS, and that
MSE’s president, Mr. Wong, had been indicted on charges relating to MSE’s

3 A guilty verdict was returned on all counts on July 10, 2008, and Mr. Wong’s
conviction was affirmed by this Court in November of 2010. United States v.
Bohuchot
, 625 F.3d 892 (5th Cir. 2010).


11

contracts with the Dallas ISD. Id. USAC further noted its understanding that
ACS’s president, Mr. Trifilio, is or was the president of a company that “is alleged
to have played a role in the money laundering charges in [the] indictment.” Id.
USAC asked ACS to explain its relationship with Mr. Wong and with that
company, Acclaim Professional Services (“Acclaim”). Id. at 5. On November 27,
2007, after considering Lakehills’s response, USAC informed Lakehills that, to
“protect the integrity of the Universal Service Fund from possible waste fraud and
abuse,” it would continue to withhold funding based on the “close and pervasive
ties” between Lakehills and ACS, MSE and Acclaim, and the indictment earlier
that year of MSE’s president. R.E. Tab 5, at 1-2.
In June 2009, Lakehills filed a petition for liquidation under Chapter 7 of the
Bankruptcy Code, claiming as assets the E-rate funds withheld by USAC. The
United States has filed a proof of claim for $225,182,370, representing the sum of
the ACS contracts, trebled pursuant to the False Claims Act. R.E. Tab 1, ¶ 11.
Lakehills filed an objection to this claim, and litigation over the objection has been
stayed pending the outcome of this appeal.
In March, 2010, the Houston ISD entered into a settlement agreement with
the United States Department of Justice to resolve an investigation into its non-
competitive bidding practices insofar as they may have resulted in the submission
of false claims for payment in violation of the False Claims Act. R.E. Tab 1, ¶ 12.


12

As part of the settlement, the Houston ISD paid $850,000 to the United States, and
relinquished its right to funding requests it made in funding years 2002-2004. Id.
at ¶ 12 & n. 73.

III. The Administrative Decisions


A.

USAC’s Funding Rescission


On March 29, 2011, USAC rescinded funding commitments it had made to
the Houston ISD for funding years 2002-2004, and sought to recover all funds
committed to ACS arising out of the Houston ISD contract awards. R.E. Tab 6. In
a 23-page decision, USAC explained that it had found multiple violations of the E-
rate competitive bidding rules during the relevant period.
For funding year 2002, USAC determined that the Houston ISD did not have
signed contracts in place at the time it submitted its Form 471, in plain violation of
the requirement that Form 471 be submitted “upon signing” such contracts. R.E.
Tab 6, p. 4 & n.19. Based on contemporaneous e-mails and other evidence,
USAC also found that the Houston ISD “had predetermined that HP, Lakehills,
ACS, and MSE would continue to be [its] vendors prior to the completion of the
Funding Year 2002 competitive bidding process.” Id. at p. 5. Finally, USAC
found that the Houston ISD employees “accepted meals, gifts, and other gratuities
from vendors” – including MSE and ASC – who were seeking contract awards
from the district. Id. at p. 6. See id. at pp. 6-8 (detailing the purchase of cigars and


13

numerous meals during 2002). USAC concluded that because the Houston ISD
“violated the FCC’s competitive bidding rules and local procurement laws,” and
because it did not appear that the Houston ISD “had contracts in place . . . at the
time it filed its Form 471 for Funding Year 2002,” it was “required to rescind the
funding commitments” and “recover any improperly disbursed funds.” Id. at p. 9.
For funding year 2003, USAC determined that the Houston ISD had violated
the requirement that Form 470 must be submitted for posting on USAC’s website
at least 28 days before the award of any E-rate contract: the district had declared
ACS and MSE the bid winners on December 20, 2002 even though it had
submitted its Form 470 only four days earlier. Id. at pp. 9-10. USAC also found
evidence (as with funding year 2002) that the Houston ISD had “pre-determined
that it would continue to use HP, ACS, and MSE as its vendors,” and these
companies provided Houston ISD employees with “many . . . meals, trips, and
other gratuities.” Id. at p. 11. See also id. at pp. 11-14 (describing provision of
numerous meals, including some in Las Vegas, Astros baseball tickets, and an
outing at a billiards parlor). USAC concluded that these violations of “the FCC’s
competitive bidding rules and its policies,” as well as the violation of “the
mandatory 28-day competitive bidding period,” required it to rescind the funding
commitments and recover the improperly disbursed funds for funding year 2003.
Id. at pp. 15-16.


14

For funding year 2004, USAC again determined that employees of the
Houston ISD had accepted numerous meals, trips and gratuities from HP, ACS and
MSE and Acclaim, including tickets to the Super Bowl and a $60,000 loan. See
R.E. Tab 6, pp. 17-20. USAC again emphasized that the acceptance of such
gratuities violated E-rate program rules “regarding fair and open competitive
bidding and the avoidance of improper relationships between E-Rate program
applicants and their service providers,” as well as the Houston ISD’s own policies.
Id. at p. 20. “Because [the Houston ISD] violated the FCC’s competitive bidding
rules and its policies,” USAC concluded that, for funding year 2004 as well, it was
“required to rescind the funding commitments . . . and recover any improperly
disbursed funds.” Id. at p. 21.
Finally, USAC concluded that because the competitive bidding violations
“tainted” the underlying contracts, it was prohibited by Commission rules from
disbursing the funds “irrespective of the assignment of the contracts to Lakehills.”
Id. at p. 22. “The fact that [the Houston ISD] and ACS assigned these contracts to
Lakehills or that Lakehills may have performed work pursuant to these contracts
does not cure the underlying competitive bidding violations that occurred at the
time [the Houston ISD] awarded these contracts” to the consortium including ACS.
Id. at p. 23.


15

B.

The Commission’s Affirmance.


Lakehills filed an administrative appeal from USAC’s decision, which the
Commission denied. R.E. Tab 1. The Commission first held that “USAC correctly
determined that Houston ISD, ACS/Lakehills, MSE and Acclaim violated the
Commission’s competitive bidding rules for funding years 2002, 2003, and 2004.”
R.E. Tab 1, ¶ 20. Among other things, the Commission found that the Houston
ISD filed its Form 471 for funding year 2002 before it had signed contracts for
services, and that it had “selected ACS within four days of posting its FCC Form
470 for FY 2003.” Id. The Commission also found the “record . . . replete with
examples demonstrating Houston ISD selected” ACS and other E-rate service
providers “prior to the conclusion of the competitive bidding process,” and that the
school district “tailored its process to reflect the services and products offered by,”
inter alia, ACS and MSE. Id. The agency also emphasized that, as the evidence
before USAC showed, Houston ISD personnel “met with and accepted extensive
gifts from ACS” and the other vendors, such as “meals, tickets to sporting events,”
– including access to “ACS’s suite for the Super Bowl,” – “monetary loans, . . .
and trips to Las Vegas, Nevada, and Seattle, Washington.” Id.
The Commission explained that the practices engaged in by the Houston ISD
and its vendors “suppress fair and open competitive bidding” and “ultimately
damage the integrity of the E-rate program.” Id. at ¶ 21. The Commission


16

underscored that “[t]he Universal Service Fund is a limited resource, and
applicants and service providers who acquire funds by violating our rules reduce
the amount available for compliant applicants.” Id. Because the Houston ISD
“conducted a bidding process that was not fair and open and selected ACS in
violation of the competitive bidding rules,” the Commission concluded that
“[u]niversal service funding should not have been distributed to ACS, nor to any
successor of ACS, including Lakehills.” Id.
The Commission rejected Lakehills’s contention that the Commission
cannot recover funds for violations of its rules, rather than violations of a statute,
noting that, like statutes, duly enacted agency regulations have the “‘force and
effect of law.’” Id. at ¶ 22 (citations omitted). The Commission also rejected the
assertion that the amount of the government’s recovery should be offset by the
“value” of the services provided by Lakehills to the Houston ISD. Id. at ¶ 25. The
Commission explained that “whether the work was performed is not relevant to
whether there was a violation of the competitive bidding rules,” id., and that in any
event, “Lakehills provided no services to the United States”; instead, “the value of
any goods or services provided by Lakehills benefited Houston ISD, not the United
States.” Id. at ¶ 26.
Finally, the Commission held that a waiver of its recoupment rules was
unwarranted. The Commission explained that it will waive its rules “only if


17

special circumstances warrant a deviation from the general rule, and such deviation
will serve the public interest.” Id. at ¶ 30. Under that standard, the Commission
observed, it had not found waivers appropriate where a “contract is signed more
than a few days prior to the expiration of the 28-day [waiting] period,” or where
“there has not been a fair and open competitive bidding process.” Id. (citing
cases). Moreover, the Commission explained, it could not find the public interest
to be served “when there is evidence of waste, fraud and abuse in the record.” Id.
In this case, the Commission found, “the activities engaged in by Houston ISD,
and ACS and its partners, substantially undermined Houston ISD’s competitive
bidding process,” and the public interest therefore “does not support Lakehills
retaining funding obtained in violation of Commission rules under ACS’s tainted
contracts.” Id.
The Commission also rejected Lakehills’s contention that a waiver of the
recoupment requirement was justified on the theory that USAC should have
informed Lakehills before September 2007 of the then-pending government
investigations of suspected bidding-process irregularities and other misconduct
regarding the provision of E-rate services to the Houston ISD. The Commission
explained that “[w]ell before Lakehills performed the work at issue – as early as
2005 – entities financing its work appear likely to have known of the potential
irregularities with some of the consortium vendors (such as MSE) and the


18

investigation into wrongdoing involving the Dallas ISD, providing reason to
suspect that USAC was likely to hold or deny funding for applications involving
MSE not just in Dallas but in Houston ISD as well.” Id.
This appeal followed.

SUMMARY OF THE ARGUMENT

The Commission properly concluded – and Lakehills does not dispute – that
for funding years 2002-2004, Lakehills’s E-rate contracts with the Houston ISD
were awarded without conducting a fair and open competitive bidding process and
in violation of the Commission’s competitive bidding rules. Among other things,
the evidence showed, the Houston ISD selected its vendors prior to the conclusion
of the competitive bidding process, and the Houston ISD employees accepted from
vendors (including Lakehills’s predecessor, ACS) numerous gifts, meals, trips and
event tickets. As a result of these violations, the Commission properly affirmed
USAC’s decision to rescind the contracts, and appropriately denied Lakehills’s
request to waive its rule requiring recovery of improperly committed funds.
1. The Commission correctly rejected Lakehills’s contention that the
Commission lacks power to recover funds committed and disbursed as a result of
contracts awarded in violation of a rule implementing a statute, rather than the
underlying statute itself. Congress vested the Commission with authority to
promulgate rules to implement the E-rate program, and such duly promulgated


19

rules, like statutes, have the force and effect of law. Limiting the agency to
enforcement of statutory requirements alone would disserve the goals of the E-rate
program because it would remove an important protection against the violation of
regulatory requirements (including competitive bidding requirements) that are
intended to preserve the integrity of the Universal Service Fund, simply because
the requirements are not embodied expressly in a statute.
2. Lakehills’s argument that, in rescinding funding, the Commission failed
to give consideration to the principles governing universal service in the
Communications Act is procedurally barred because Lakehills did not present it to
the Commission. See 47 U.S.C. § 405(a). In any event, the argument fails to
further Lakehills’s cause. Recovering funds committed or disbursed in violation of
the competitive bidding rules advances the purposes of the E-rate program by
promoting adherence to rules that protect the integrity of the program and ensure
that E-rate services are provided at reasonable rates and in the public interest.
3. Lastly, the Commission did not abuse its broad discretion in denying
Lakehills’s request for waiver of the recovery rule. As the Commission properly
determined, the public interest would not be served by waiving the rule under the
facts of this case, where there was substantial evidence that the E-rate contracts
were awarded without conducting the requisite competitive bidding process. The
fact that Lakehills’s provided services under its contract with the Houston ISD is


20

irrelevant to the Commission’s finding that the contracts were obtained in violation
of Commission rules. Nor was the Commission compelled to waive recovery for
funds relating to Lakehills’s work in 2007. USAC’s March 2007 grant of
Lakehills’s request for a consolidated identification number for financial
accounting purposes could not reasonably have given rise to any reliance interest
on Lakehills’s part. As for the interests of Lakehills’s creditors, the Commission
properly found that they had reason to be on notice as early as 2005 that problems
might arise with Lakehills’s USAC funding.
STANDARD OF REVIEW
Under the Administrative Procedure Act (“APA”), the Commission’s
decision must be upheld unless it is found to be “arbitrary, capricious, an abuse of
discretion, or otherwise not accordance with law.” 5 U.S.C. § 706(2)(A). “[T]he
ultimate standard of review is a narrow one,” and the “court is not empowered to
substitute its judgment for that of the agency.” Citizens to Preserve Overton Park,
Inc. v. Volpe, 401 U.S. 402, 416 (1971). Review is limited to whether the agency
articulated a rational connection between the facts found and the decision made;
the Court’s “mandate is not to weigh the evidence pro and con.” City of Arlington
v. FCC, 668 F.3d 229, 260 (5th Cir. 2012) (citations and quotation marks omitted).
This standard is “even more deferential” when a court is reviewing an agency’s


21

application and interpretation of its own regulations. Citizens for Fair Utility
Regulation v. U.S. Nuclear Regulatory Comm’n, 898 F.2d 51, 54 (5th Cir. 1990).
In addition, a party challenging an agency decision declining to grant an
exemption from a generally applicable rule bears a very heavy burden. People of
the State of New York v. FCC, 267 F.3d 91, 107 (2d Cir. 2001). “[R]eview of an
agency's denial of a waiver” may result in reversal “only when ‘the agency’s
reasons are so insubstantial as to render that denial an abuse of discretion.’ ”
BDPCS, Inc. v. FCC, 351 F.3d 1177, 1181-82 (D.C. Cir. 2003) (quoting Mountain
Solutions, Ltd. v. FCC, 197 F.3d 512, 517 (D.C. Cir. 1999)).
ARGUMENT

I.

THE COMMISSION PROPERLY UPHELD USAC’S
RESCISSION OF LAKEHILLS’S FUNDING.


Lakehills does not dispute that, in funding years 2002-2004, the E-rate
contracts to Lakehills’s predecessor, ACS, were awarded in violation of the
Commission’s competitive bidding rules.
First, in Funding Year 2002, the Houston ISD filed its Form 471 before it
had signed contracts for services, in direct violation of the Commission’s rule
requiring the submission of Form 471 only “upon signing a contract for eligible
services.” R.E. Tab 1, ¶ 20 & n. 120. See 47 C.F.R. § 54.504(c)(2001) .


22

Second, the Houston ISD selected ACS in Funding Year 2003 “within four
days of posting its FCC Form 470,” in plain violation of Commission rules
“requiring applicants to wait 28 days prior to making a selection.” Id., § 54.504(b).
Third, in all three funding years, the “Houston ISD met with and accepted
extensive gifts from ACS, HP, MSE, and Acclaim,” including meals, tickets to
sporting events, loans, and trips to Las Vegas and Seattle. Id. See R.E. Tab 6, pp.
6-8, 11-14, 17-20.
Thus, the Commission correctly held that the “Houston ISD conducted a
bidding process that was not fair and open and selected ACS in violation of the
competitive bidding rules.” R.E. Tab 1, ¶ 21.

A.

The Commission Reasonably Determined That
Funding Commitments Resulting From
Contracts Awarded In Violation Of The
Agency’s Competitive Bidding Rules Should Be
Rescinded And The Disbursed Funds
Recovered.


The Commission properly upheld USAC’s decision to rescind the funding
commitments to Lakehills and to initiate recovery of previously committed funding
for the 2002-2004 period. R.E. Tab 1, ¶¶ 22-24. As the Commission explained,
the Supreme Court has affirmed the government’s power to “recover funds which
have been wrongfully, erroneously, or illegally paid,” whether the illegality stems
from a violation of a statutory or regulatory requirement. Id. at ¶ 22. It is well
settled that duly promulgated regulations, like properly enacted statutes, have the


23

“force and effect of law.” Chrysler Corp. v. Brown, 441 U.S. 281, 295 (1979)
(citations omitted); Brown v. United States, 227 F.3d 295, 298 (5th Cir. 2000);
United States v. Harvey, 659 F.2d 62, 64 (5th Cir. 1981).
Thus, in Schweiker v. Hansen, 450 U.S. 785 (1981), the Supreme Court held
that failure to comply with an agency rule prohibited the expenditure of public
funds. In that case, the issue was whether Social Security benefits could be paid
when the claimant failed to comply with an agency regulation requiring a written
application before such benefits could be disbursed. After noting that the
“requisite manner of application” had been delegated to the agency, the Court held
that it was “no more authorized to overlook the valid regulation requiring that
applications be in writing than it is to overlook any other valid requirement for the
receipt of benefits.” 450 U.S. at 790.
Likewise, in Federal Crop Insurance Corporation v. Merrill, 332 U.S. 380
(1947), the claimant was refused recovery for its lost crop on a federally backed
insurance policy, because the claimant failed to comply with the policy’s terms and
conditions incorporating agency regulations. The Court explained that the scope of
the government’s authority “may be explicitly defined by Congress” or “be limited
by delegated legislation, properly exercised through the rule-making power.” 332
U.S. at 384.


24

This Court has applied the teachings of Schweiker and Merrill to preclude a
payment by the United States when regulations promulgated pursuant to a variety
of statutory benefit programs have been violated. See, e.g., Wright v. Allstate Ins.
Co., 415 F.3d 384, 387 (5th Cir. 2005) (National Flood Insurance Act regulation
requiring filing of proof of loss); Jones v. Dept. of Health & Human Servs., 843
F.3d 851, 854 (5th Cir. 1988) (Social Security regulation requiring a written
application for benefits); R&R Farm Enters. v. Federal Crop Ins. Corp., 788 F.2d
1148, 1154 (5th Cir. 1986) (Federal Crop Insurance regulation requiring loss to be
caused by peril insured against); Hicks v. Harris, 606 F.2d 65, 66-67 (5th Cir.
1979) (Higher Education Act regulation prohibiting insurance payout where loan
disbursements are made prior to the issuance of insurance). Consistent with that
precedent against federal expenditure where governing rules have been violated,
the Commission has long made clear that it will “recover the full amount disbursed
for any funding requests in which the beneficiary failed to comply with the
Commission’s competitive bidding requirements.” Fifth Report and Order, 19
FCC Rcd at 15815, ¶ 21.
Contrary to Lakehills’s suggestion (Pet. Br. 19), the Supreme Court’s
decision in OPM v. Richmond, 496 U.S. 414 (1990), does not limit the
Commission to recovering only those government funds paid out in violation of a
statutory requirement, but not an agency regulation. To be sure, the Richmond


25

Court rejected a claim to benefits in excess of a “statutory eligibility limit.” See
496 U.S. at 418. But the decision nowhere suggests that the government’s power
to recover unlawfully disbursed funds is limited to those paid out in violation of a
statutory requirement. Indeed, in reaching its holding, the Court in Richmond
expressly noted its prior decision in Schweiker v. Hansen, which (as discussed
above) involved the preclusive effect of agency rules. See Richmond, 496 U.S. at
429. Thus, as the Federal Circuit has explained, “[w]hile Richmond addressed a
statutory limitation,” the opinion’s citation of Hansen in support of its holding
demonstrates that “statutory and regulatory requirements concerning payment of
money from the Treasury [are] equally binding.” Doe v. United States, 372 F.3d
1347, 1356 (Fed. Cir. 2004).4

Lakehills’s proposed distinction between statutory and rule violations not
only misconstrues Supreme Court precedent, but also makes no sense as a practical
matter. As the Commission explained in the order under review, the FCC’s
competitive bidding rules “ensure that the [universal service] fund supports
services that satisfy the needs of an institution at the lowest possible price.” R.E.
Tab 1, ¶ 23. See also Fifth Report and Order, ¶ 21. It would undermine the

4 Lakehills’s contention that the Commission’s decision to seek recovery for
violation of the competitive bidding rules was “based solely” on a
“misinterpretation” of Richmond (Pet. Br. 18) is belied by the terms of the order
under review, which, among other authorities, expressly relies on Schweiker. See
R.E. Tab 1, ¶ 23.


26

integrity of the E-rate program if applicants and service providers could retain
funds received in violation of the Commission’s rules, simply because the funding
conditions – duly promulgated under delegated authority, see 47 U.S.C.
§ 254(h)(2)(A); see also id. § 154(i) – are contained in agency rules rather than
statutory provisions. Indeed, such an approach would permit service providers to
violate regulations governing eligibility for federal funds so long as those rules do
not merely parrot the authorizing statute. “Protection of the public fisc requires
that those who seek public funds act with scrupulous regard for the requirements of
law.” Richmond, 496 U.S. at 426 (quoting Heckler v. Community Health Services
of Crawford, 467 U.S. 51, 63 (1984)).
In sum, because agency rules, like statutes, have the “force and effect of
law,” Chrysler Corp., 441 U.S. at 295, the Commission was correct in concluding
that the multiple and undisputed violations of the agency’s competitive bidding
rules required full recovery of the improperly committed E-rate funds in this case.

B.

The Recovery Rule Advances Universal Service
Principles.


Lakehills also contends that the Commission “failed to give proper
consideration and weight to the Universal Service Principles” set forth in Section
254(b) of the Communications Act. Pet. Br. 20.
At the outset, Lakehills’s contention is barred by Section 405 of the
Communications Act, which requires that “a party must afford the Commission an


27

opportunity to pass on the arguments the party presents for judicial review.”
Comsat Corp. v. FCC, 250 F.3d 931, 937 (5th Cir. 2001). See 47 U.S.C. § 405(a)
(specifying that a petition for reconsideration is “a condition precedent to judicial
review” of an FCC order if “the party seeking review . . . relies on questions of fact
or law upon which the Commission . . . has been afforded no opportunity to
pass.”). In this case, Lakehills never argued to the Commission, as it now does on
appeal, that rescinding the funding commitments and seeking to recover
disbursements would fail to give proper consideration and weight to the statute’s
universal service principles. Compare Pet. Br. 20 with R.E. Tab 7 (Lakehills’s
Request for Review). The argument is therefore foreclosed in this Court.
In any event, the argument fails on the merits because the FCC’s recovery
rule is entirely consistent with Congress’s stated goals for universal service.
Among other things, ensuring that wrongfully disbursed funds are recovered
promotes the provision of quality universal services at reasonable rates, see 47
U.S.C. § 254(b)(1), and thereby serves to encourage access to advanced
telecommunications services, by elementary and secondary schools and libraries,


28

id. § 254(b)(6).5 As the Commission has explained, because “applicants and
service providers who acquire funds by violating [the competitive bidding] rules
reduce the amount available for compliant applicants,” R.E. Tab 1, ¶ 21; 47 C.F.R.
§ 54.507, recovery of funds is essential to preserving the integrity of the E-rate
program and protecting federal funds from waste, fraud, and abuse. Fifth Report
and Order, ¶ 21. Because the competitive bidding rules are designed to ensure that
services are provided to the government at competitive rates, violations of those
rules carry the risk of inflated prices. The recovery rule therefore also advances
the statutory principle that quality services should be available at reasonable rates.
See Alenco Communications v. FCC, 201 F.3d at 620-21 (“[t]he agency’s broad
discretion to provide sufficient universal service funding includes the decision to

5 Lakehills also contends (Pet. Br. 22) that the Commission’s decision to recover
funds disregards 47 U.S.C. § 254(b)(7), which provides that the Commission shall
base universal service policies on “[s]uch other principles” as it determines “are
necessary and appropriate for the protection of the public interest, convenience and
necessity and are consistent with this Act.” By its terms, however, section
254(b)(7) governs the Commission’s authority to adopt additional universal
service principles. See Rural Cellular Ass’n v. FCC, 588 F.3d 1095, 1099 (D.C.
Cir. 2009). It is not an independent constraint on the Commission’s power to
advance the principles that are already embodied in the Act.


29

impose cost controls to avoid excessive expenditures that will detract from
universal service”).6
Lakehills argues that a rule that “mandates automatic withdrawal of all
funding for the violation of any rule, without further assessment of factors such as
what party primarily was responsible for the violation and whether the intended
beneficiary received the intended benefit, does not serve the public interest.” Pet.
Br. 23. But the Commission does not mandate “automatic” withdrawal of funding
for a violation of “any rule.” Recovery is mandated only for amounts disbursed in
violation of a rule, such as the competitive bidding rules, that implements a
“substantive program goal.” See Fifth Report and Order, ¶¶ 20-21. And even
then, the Commission has made clear that it “retains the discretion to depart from
[the] general standards” governing recovery “when application would be contrary
to the public interest.” Id. at ¶ 18 & n.38. As explained below, the Commission
reasonably found that no such departure from the general rule was justified on the
facts of this case.

6 Thus, Lakehills is wrong in asserting that there was “no allegation or evidence to
suggest that Houston ISD or USAC overpaid or would become obligated to
overpay for the services provided.” Pet. Br. 22-23. The violation of the
competitive bidding rules removed an important protection intended to ensure that
the services are provided “at the lowest possible price.” R.E. Tab 1, at ¶ 23.


30

II.

THE COMMISSION REASONABLY DENIED
LAKEHILLS’S REQUEST FOR A WAIVER OF
THE RECOVERY RULE.


The Commission may waive any provision of its rules on a showing of good
cause. 47 C.F.R. § 1.3. A waiver is appropriate, however, “only if special
circumstances warrant a deviation from the general rule, and such deviation will
serve the public interest.” Northeast Cellular Tel. Co. v. FCC, 897 F.2d 1164,
1166 (D.C. Cir. 1990). Because an applicant for waiver “must plead with
particularity the facts and circumstances which warrant such action,” it “faces a
high hurdle even at the starting gate.” WAIT Radio v. FCC, 418 F.2d 1153, 1157
(D.C. Cir. 1969).

A.

Lakehills Failed To Demonstrate That A Waiver
Would Be In The Public Interest.


As the Commission explained, while it has waived its universal service rules
where, for example, “applicants have committed minor errors in filling out their
applications,” it “has not found waiver appropriate in instances where, for
example, [a] contract is signed more than a few days prior to the expiration of the


31

28-day [waiting] period, or where there has not been a fair and open competitive
bidding process.” R.E. Tab 1, ¶ 30 (emphasis added). 7
Here, Lakehills does not contend that the undisputed violations of the
competitive bidding rules in this case are attributable to any “errors,” much less
“minor errors.” For instance, ACS was selected as the Houston ISD’s funding year
2003 vendor within “four days” (not the 28 days required) of its submission of
Form 470, R.E. Tab 1, ¶ 20 – hardly a minimal departure from the rule. Nor does
Lakehills contest the Commission’s determination that the ACS contract awards
for all three funding years were tainted by improper contacts between the Houston
ISD and its vendors, as well as the provision of numerous prohibited meals and
gratuities, all of which led the Commission to conclude that the “bidding process”
that led to ACS’s selection “was not fair and open.” Id. The Commission properly
determined that the public interest would not be “served by waiving [its] rules
when there is evidence of waste, fraud and abuse in the record,” and “does not

7 The Commission distinguished Request for Review of a Decision of the Universal
Service Administrator by Albert Lea Area Schools,
Order, 24 FCC Rcd 4533
(WCB 2009), where the agency’s Wireline Competition Bureau waived the
Commission’s filing and waiting period rules where the applicants’ errors were
merely “clerical,” id. at 4537 ¶ 5, or where applicants missed the waiting period
deadline by a “minimal number of days (i.e. one to three days) and therefore their
requests for discounted services were subject to competitive bidding for a
meaningful period of time,” id. at 4539 ¶ 9. R.E. Tab 1, ¶ 30 n. 174.



32

support Lakehills retaining funding obtained in violation of Commission rules
under ACS’s tainted contracts.” Id. at ¶ 30.
Lakehills contends that the Commission, in evaluating its request for a
waiver, was obligated to consider the value of the services Lakehills and ACS
provided to the Houston ISD. Pet. Br. 26. But as the Commission explained, the
fact that “the work was performed is not relevant to whether there was a violation
of the competitive bidding rules.” R.E. Tab 1, ¶ 25. The public interest in
enforcing a free and open competitive bidding process to promote low-cost, high-
quality, E-rate services remains undiminished even if the services provided without
fair competition are performed.
Under Lakehills’s theory, recovery of federal funds due to violations of the
competitive bidding rules would be permitted only to the extent that the service
provider failed to perform on its contract. But if recovery is limited to non-
performance issues, recoupment could not be used to deter other conduct in
violation of the competitive bidding rules, such as bid-rigging. Nor would the rule
requiring recovery of improperly disbursed funds perform any meaningful purpose,
as recovery of federal funds is required in any event when a service provider fails
to perform as required by a government program.
Contrary to Lakehills’s suggestion that the Commission “disregarded” the
value of its services (Pet. Br. 26), the Commission explained that the “value of any


33

goods or services provided by Lakehills benefited Houston ISD,” and that any
“intangible benefits” to the United States, whose E-rate funds are at issue here,
“are speculative at best.” Id. at ¶ 26. See United States v. Rogan, 517 F.3d 449,
453 (7th Cir. 2008) (noting in context of Medicaid funding that, regardless of
whether or not medical services were provided to the patients, the defendant “did
not furnish any medical service to the United States.”) (emphasis added). In some
sense, of course, any federal subsidy program is intended broadly to promote the
federal goals underlying the subsidy. But under Lakehills’s argument (see Pet. Br.
26-29), performance under the subsidy invariably would offset the government’s
right to recover misspent funds. As explained above, neither law nor logic requires
that result and would render the competitive bidding rules meaningless.
Lakehills’s contention (Pet. Br. 23) that enforcement of the recovery rule
will diminish the incentive of investors to finance E-rate projects is unavailing, for
several reasons. As an initial matter, as the Commission noted, such enforcement
would have no effect on “access to E-rate funds for companies that comply with
the program requirements.” R.E. Tab 1, ¶ 30. Furthermore, that there may be
situations where the rule must be enforced is simply a risk (like many others) that
lenders are expected to take into account when deciding whether to extend


34

financing.8 Indeed, logic suggests that rules ensuring fair competition are likely to
promote investment; by contrast, a flawed bidding process is likely to lead to an
uncertain environment for lenders. Finally, as the Commission found, the entities
financing Lakehills’s work had reason to know “as early as 2005” of the widely
reported concerns about the conduct of the members of Lakehills’s consortium,
(particularly MSE), as well as the investigation into the wrongdoing involving the
Dallas ISD. See R.E. Tab 1, ¶ 30 & n.259 (citing several 2005 media reports of
the Dallas ISD investigation and USAC’s freeze of E-rate payments).

B.

Events In 2007 Do Not Weigh in Favor Of
Granting A Waiver To Lakehills.


Lakehills further contends that the Commission should have engaged in a
“separate balancing of the equities” for “service provided by Lakehills during
2007.” Pet. Br. 30. Specifically, Lakehills complains that on March 9, 2007
“USAC took the affirmative act” of approving Lakehills’s request to have ACS’s
“service provider identification numbers” (SPINs) consolidated into Lakehills’s
SPIN, and that “[h]aving received its consolidated SPIN, Lakehills took on new E-
rate work.” Pet. Br. 31. USAC’s grant of a consolidated SPIN – at Lakehills’s
own request – was an accounting procedure to facilitate the tracking and

8 Lakehills’s grounds for a waiver are not enhanced because the funds sought will
be paid by its Trustee in Bankruptcy to Lakehills’s creditors (Pet. Br. 32), because
any rights those lenders may have are derived from their relationship with
Lakehills.


35

disbursement of universal service funds under the contracts to which Lakehills
succeeded. No service provider reasonably could have interpreted that ministerial
action as an assurance or guaranty of payment for services ultimately determined
to have been provided or disbursed in violation of the Commission’s competitive
bidding rules – particularly where the Commission had made clear since 2004 its
“intent ‘to recover the full amount disbursed for any funding requests in which the
beneficiary failed to comply with the Commission’s competitive bidding
requirements.’” R.E. Tab 1, ¶ 4, quoting Fifth Report and Order, ¶ 21. Nor is
there merit in Lakehills’s complaint that “USAC did nothing to dissuade Lakehills
from taking new work” during this time period. Pet. Br. 31. Lakehills itself
acknowledges that the FCC was under no obligation to inform it of the details of an
ongoing (and nonpublic) law enforcement investigation, id. at 31 n.17. See R.E.
Tab 1, ¶ 29.
In any event, as the Commission explained, Lakehills can hardly claim
unfair surprise. Media coverage of the irregularities and their relationship to the
Houston ISD contracts broke as early as January of 2007, when the Houston
Chronicle reported that the president of Lakehills’s predecessor (ACS) had
testified in the criminal investigation of its co-bidder MSE (whose president was
indicted in May 2007), and its reseller relationship with HP was terminated under a
cloud of suspected ethics violations. R.E. Tab 1, ¶¶ 9-10; R.E. Tab 2. Under


36

these circumstances, Lakehills proceeded to provide further services in May 2007
at its own peril.
* * * * * *
In sum, Lakehills has failed to meet its heavy burden of showing that the
Commission abused its discretion in denying a waiver of its recovery rule in the
face of the Commission’s undisputed determination that Lakehills and its
predecessor, ACS, obtained E-rate contracts with the Houston ISD in violation of
the agency’s competitive bidding rules.

CONCLUSION

For the foregoing reasons, the petition for review should be denied.

Respectfully submitted,

STUART F. DELERY
AUSTIN C. SCHLICK
ACTING ASSISTANT ATTORNEY GENERAL GENERAL COUNSEL


BETH S. BRINKMANN
PETER KARANJIA
DEPUTY ASSISTANT ATTORNEY
DEPUTY GENERAL COUNSEL
GENERAL


JACOB M. LEWIS
MARK B. STERN
ASSOCIATE GENERAL COUNSEL


/S/ ALISA B. KLEIN
/S/ HILLARY B. BURCHUK
ALISA B. KLEIN
HILLARY B. BURCHUK
ATTORNEYS
COUNSEL


U.S.DEPARTMENT OF JUSTICE
FEDERAL COMMUNICATIONS COMMISSION
CIVIL DIVISION
WASHINGTON, D.C. 20554
WASHINGTON, DC 20530
(202) 418-1740 (TELEPHONE)
(202) 418-2819 (FAX)
MAY 21, 2012



IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
JOSEPH M. HILL, TRUSTEE IN BANKRUPTCY FOR
)
LAKEHILLS CONSULTING, L.P.
)
)
PETITIONER
)
)
V.
)
)
NO. 12-60070
FEDERAL COMMUNICATIONS COMMISSION
)
)
AND THE UNITED STATES OF AMERICA
)
R

ESPONDENTS


CERTIFICATE OF COMPLIANCE
Pursuant to the requirements of Fed. R. App. P. 32(a)(7), I hereby certify
that the accompanying “Brief for Respondents” in the captioned case contains
8071 words.

/S/ HILLARY B. BURCHUK





HILLARY B. BURCHUK

FEDERAL COMMUNICATIONS COMMISSION
WASHINGTON, D.C. 20554
(202) 418-1740 (TELEPHONE)
(202) 418-2819 (FAX)

MAY 21, 2012





































12-60070

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT


Joseph M. Hill, Trustee in Bankruptcy for Lakehills Consulting, L.P.,
Petitioner,

v.

Federal Communications Commission and United States of America,
Respondents.


CERTIFICATE OF SERVICE



I, Hillary B. Burchuk, hereby certify that on May 24, 2012, I electronically
filed the foregoing Brief for Respondents with the Clerk of the Court for the
United States Court of Appeals for the Fifth Circuit by using the CM/ECF
system. Participants in the case who are registered CM/ECF users will be
served by the CM/ECF system.


L. James D’Agostino
Shari L. Heyen
Greenberg Traurig, L.L.P.
Greenberg Traurig, L.L.P.
1750 Tysons Blvd, Suite 1200
1000 Louisiana Street, Suite 1700
McLean, VA 22102
Houston, TX 77002
Counsel for: Petitioner
Counsel for: Petitioner


E. Sanderson Hoe

Jason N. Workmaster
McKenna, Long & Aldridge, L.L.P.
1900 K Street, N.W.
Washington, D.C. 20006-1180
Counsel for: Petitioner



/s/ Hillary B. Burchuk

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