News of the Week

Funding Status

Wave 1 for FY 2011 will be released on Thursday, June 23rd, for just under $397 million.  As expected, this will be a large initial funding wave — albeit not quite the "record wave" noted in USAC’s funding notice.  As indicated in the table below, the first wave for FY 2011 comes later in the year than has been the case in recent years due in large part to: (a) the later Form 471 filing deadline; and (b) an extensive review of USAC’s PIA review procedures (most likely associated with 2010 changes to the FCC’s E-rate rules).  Nevertheless, USAC should be commended for a excellent start to FY 2011 funding.¹

First wave funding for the most recent five years is as follows:

Wave 54 for FY 2010 will be released on Wednesday, June 22nd.  Cumulative funding for FY 2010 is currently $2.55 billion.  Priority 2 funding is still being awarded at 81% and above, and denied at 79% and below.  The status of Priority 2 funding at 80% is pending an FCC decision.

Lakehills COMAD and Black Hole Appeal

The Trustee in Bankruptcy for Lakehills Consulting, LP, filed an FCC appeal that addresses a number of interesting points concerning post-funding commitment adjustments ("COMADs") and extensive delays in pending funding and/or invoice payments (often referred to as "black holes").

The Lakehills appeal is related to a broader set of E-rate problems experienced by Houston ISD 7-9 years ago.  A little over a year ago, Houston reached an agreement with the U.S. Department of Justice resolving contentions that Houston ISD had engaged in non-competitive bidding practices for E-rate contracts and that certain ex-school district officials had received gratuities from technology vendors (including trips, meals, and loans). As a part of the settlement, HISD agreed to pay $850,000 in civil claims and to withdraw pending E-rate funding requests for "millions of dollars" (undisclosed, but probably in excess of $100 million).  Houston’s E-rate funding, which had been pending for a number of years, resumed earlier this year.

Lakehills was not so lucky.  Their problem began in 2007 when, though a series of acquisitions, they acquired the assets of ACS, including ACS’ contracts with HISD covering FY 2002-2004 that were later called into question for competitive bidding violations.  Through a SPIN consolidation, the related FRNs became associated with Lakehills.  Shortly thereafter, USAC began to delay payments on past ACS work and on 2007 work done by Lakehills under the original ACS contracts.  In 2009, Lakehills filed for bankruptcy "largely due to USAC’s refusal to compensate Lakehills."  Lakehills’ appeal indicates that USAC is currently withholding payment of over $20 million for work done since Lakehills took over, and is seeking the return of approximately $62 million for funds previously disbursed.

In its appeal, Lakehills takes USAC to task for not alerting it to problems that USAC was actively investigating with the ACS contracts during the acquisition and SPIN consolidation process.  This was in spite of "numerous communications and attempted communications between Lakehills and USAC" on payment delays.  The appeal makes several important procedural arguments, not the least of which is fairness.

From a more legal viewpoint, Lakehills argues that "The FCC Rule requiring the withholding and recovery of all funds disbursed in connection with an E-rate contract allegedly tainted by the giving of gratuities is not required by law."  Specifically, it argues:

1. The FCC rule appears to be based on the FCC’s incorrect interpretation of the OPM v. Richmond Supreme Court decision that requires full recovery in cases of violations of federal statutes, not of federal rules.
2. The False Claims Act, which authorizes the Government to recover money where there has been fraudulent activity, requires consideration of mitigating factors including the "value the Government has received" and a determination of "whether the claimant acted with fraudulent intent at the time it submitted its claim" — both conditions applying to the work Lakehills successfully completed and invoiced after assuming ACS’ contracts in 2007.
3. Basic contract law holds that "When calculating breach damages, value received by the non-breaching party is factored in to prevent a windfall for the non-breaching party."
4. The Federal Assignment of Claims Act permits a government contractor to assign the proceeds of its contract to a financial institution under the condition that, if the contract is deemed to be tainted by fraud, the government is still obligated to pay the financial institution for value received.  In the Lakehills case, financing has been obtained to support the contract work (which led to the bankruptcy).
5. The repayment request is a form of forfeiture that must proceed under the FCC’s rules governing forfeiture which require specific procedures, "caps on the total monetary penalty, and a one-year statute of limitations."
6. Should the FCC decide not to reverse the USAC decision as a matter of law, there is ample basis for granting a waiver of the FCC’s rules in this instance.

One particularly interesting aspect of this situation is the differing impact on a service provider of COMADs versus the withholding of payment on invoices.  In the case of COMADs, repayment may be the responsibility of either the applicant or the service provider (or both), depending on which party is deemed at fault.  When invoice payments are being withheld, the entire burden falls on either the service provider (as in the Lakehills case involving SPIs) or the applicant (if BEARs are used).  In either case, the only way to shift the burden may involve legal action outside of the E-rate process.

It may be some time before we see an FCC decision on the Lakehills appeal, but the issues raised are important.  We have long been concerned with the all-or-nothing aspects of COMAD decisions and the due-process aspects of "black hole" situations.

E-Rate Updates and Reminders

Online Form 486 Ready for FY 2011:

The funding year pull-down list on the SLD’s online Form 486 filing system has been updated to include the 2011-2012 funding year.  As a general rule, a Form 486 should not be filed before services start (often July 1st), but there is a special check-off provision that permits a Form 486 to be filed early if service will start any time in July.  This exception was more useful in prior funding years when the first waves were released a month or two before June.

Remember that the deadline for filing a Form 486 is the later of 120 days from the FCDL date or the service start date.  This means that the Form 486 deadline for most applicants funded in Wave 1 (and probably Wave 2) will be October 31, 2011 (actually 122 days this year since the 120th day falls on a Saturday).

More information on the Form 486 is provided in last week’s SLD News Brief.

SLD Fall Training:

The schedule for the SLD’s annual applicant workshops is shown below.  Registration for these workshops has been open since May, and four are currently available only on a waiting list basis.   Many state-sponsored E-rate workshops are also typically available each fall.

Schools and Libraries News Brief dated June 17 – Form 486

The SLD’s News Brief for June 17, 2011, discusses the Form 486 filing process for applicants funded in the first and subsequent funding waves for FY 2011.  It covers:

• Filing Form 486 early (as discussed above)
• Technology planning requirements (beginning this year, for Priority 2 only)
• CIPA requirements (updated rules expected for FY 2012, but not for FY 2011)

¹  Interestingly, none of the special EDU 2011 wireless pilot project applications, which we thought might have been given priority attention, were funded in Wave 1 (although 3 of the 20 participants had other applications funded).