Theodore Marcus once was an in-house lawyer for AT&T, tasked with reviewing whether the telecom giant was overcharging schools and libraries for Internet and telephone service.
As a result, AT&T is now accusing Marcus of “shocking” legal misconduct and is trying to persuade a federal judge to dismiss a sweeping lawsuit because of it. The future of the case will depend, in part, on whether a federal court views Marcus as a whistleblower trying to right a wrong, or a corporate lawyer violating his duty to his former employer.
Marcus never locked in an agreement to benefit from the pending suits, which allege overcharging, and is not in line to share in any proceeds. But he is furious, saying AT&T abused a government program designed to help needy schools, and he is detailing his allegations publicly for the first time.
“There’s been no consequences for a bunch of folks … who failed to do what they were supposed to do for a program that’s supposed to take care of poor children,” he said in an interview with The Washington Post. “That’s what’s driving me. These are poor Black and Brown kids and they cannot fend for themselves and you have to do what’s right. There has to be an accounting.”
The program in question, called E-Rate, was authorized by Congress and set up by the Federal Communications Commission in 1996 to help connect schools and libraries to telecommunications services, including what was then a burgeoning Internet. Telecom customers pay a small fee on every phone bill into a fund, which provides subsidies, with more help for the poorest schools. In the past year, as the coronavirus pandemic forced remote learning on millions of children, policymakers have considered expanding the program to cover Internet connections in students’ homes.
E-Rate has delivered telecom companies billions of dollars in revenue, but it has come with a catch: They had to charge what the law calls the “lowest corresponding price,” or LCP, defined as no more than what similar customers pay. It’s a tricky calculation, because no two contracts are identical. The carriers are responsible for certifying that they are in compliance.
For nearly two decades, including the period when Marcus was at AT&T, the program had to turn away schools because it lacked funding to cover all their requests. Starting in 2015, the government doubled the fund to about $4 billion a year, more than enough to reimburse all eligible applicants. In 2020, E-Rate subsidies covered $2.9 billion in Internet costs for more than 21,000 schools and libraries.
If the pattern of overcharging that Marcus and others have alleged is true, the telecom giant deprived hundreds of school districts nationwide of millions of dollars they could have used for education expenses. Limited money in the E-Rate fund at that time could have funded service to more communities.
In a statement, Fletcher Cook, a spokesman for AT&T, said the company has always complied with the lowest-corresponding-price rule. He accused Marcus of raising concerns after a poor performance review and not receiving a position he sought. AT&T also noted that the U.S. government declined to intervene in the lawsuits alleging overcharging, and said internal reviews found that the company did nothing wrong.
The spokesman called Marcus’s claim that AT&T’s actions hurt children living in poverty “baseless and offensive.”
“We comply with the rules of the E-Rate program, and there is no evidence to support these absurd claims,” Cook said.
Marcus said the poor performance review came after he raised questions internally and that AT&T never denied him a position he sought.
Marcus’s claims also raise questions about the government’s role and response, since it knew about these allegations for more than a decade. For years, federal regulators were reluctant to address possible abuses by telecom companies, even as they investigated schools for possible fraud in the program, said Tom Wheeler, who served as FCC chairman from 2013 to 2017.
“In order to incentivize the phone companies to hook up, everybody conveniently ignored the lowest-price rule,” Wheeler said. The government, he added, “never enforced it, because that was considered to be discouraging the companies.”
In a statement, Jessica Rosenworcel, the FCC’s new acting chairwoman, said the agency should be doing more to ensure schools have access to affordable Internet service.
“It’s clear," she said, “that going forward we need to aggressively monitor compliance with our rules and, where necessary, double down on our controls to protect the integrity of this vital program.”
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Inside company, suspicions grow
Marcus, 57, was raised in Indiana and moved to the District when he was 10. The family, struggling financially, landed in a house that had belonged to Marcus’s uncle in the Columbia Heights neighborhood.
Marcus says that he received a good education at a Catholic school, that his father eventually joined them in D.C. and that he was accepted at the University of Virginia. In 1991, he earned a law degree from the University of Texas at Austin.
In 2000, he became an in-house lawyer for BellSouth, a forerunner to AT&T. He was part of a team that managed the company’s federal policy positions and represented AT&T to regulators at the FCC.
In 2008, a Wisconsin consultant named Todd Heath filed a lawsuit against AT&T, and Marcus was asked to look into it. AT&T described Marcus as its “legal point person” on its response to Heath’s lawsuit and other E-Rate issues.
Heath made a living helping school districts figure out whether they had overpaid for services and, if so, win refunds. He noticed that some of his clients were paying far more than others for essentially the same services, and he filed a federal lawsuit against Wisconsin Bell, a division of AT&T.
Heath became what’s called a qui tam plaintiff, meaning he is suing on behalf of the government under the federal False Claims Act, designed to root out attempts to defraud the government. If he wins, he stands to collect a share of the settlement.
Heath’s filings allege that AT&T did not create a method to determine the lowest price until 2009, 13 years after E-Rate began. He argues that every claim submitted to the government for reimbursement between 1997 and 2009 was false and that although the cost is hard to calculate, it’s “at least” in the hundreds of millions of dollars.
After reviewing Heath’s allegations, Marcus said he concluded that the company had not been complying with the lowest-price rule and that it had misled federal investigators about it. He later grew alarmed when, he said, AT&T executives dismissed his concerns.
He recounted the events that led him to these conclusions in interviews with The Post and through a 47-page chronology he wrote in 2011. The Post also reviewed copies of internal AT&T notes and emails in Marcus’s possession, as well as records including court filings and lawsuit exhibits.
In 2008, Marcus attended a meeting in Dallas about the E-Rate program, during which the pricing rule was not discussed, he said. At this meeting, AT&T officials distributed a 61-page training document for employees working on E-Rate that did not include any mention of the lowest-corresponding-price requirements. Marcus kept the document.
In its statement, AT&T confirmed a central allegation against the company — that for years, it did not train its employees on how to comply with the lowest-corresponding-price rule. Cook, the AT&T spokesman, said that’s because the government did not provide guidance for complying with it until 2012.
Cook said that in 2009, after Heath’s allegations were leveled, the company began training employees to offer the lowest corresponding price. Before then, he said, AT&T set pricing in compliance with Section 202(a) of the Telecommunications Act, which generally prohibits discrimination in pricing.
Some experts questioned this rationale, saying that the lowest-price rule is stricter and more specific than the nondiscrimination provisions, and that the rule covers Internet services, while the nondiscrimination provisions do not.
“Lowest corresponding price is a separate rule with its own enforcement consequences," said John Windhausen Jr., founder and executive director of the Schools, Health & Libraries Broadband Coalition.
Marcus also became concerned about a federal investigation of potential fraud in Indiana. In December 2008, the FCC sent AT&T the terms of a proposed settlement, which required the company to document that it was in compliance with the lowest-price rule in the state, Marcus said.
AT&T said the settlement led to annual audits that found that the company was in compliance with the pricing rule.
The proposed settlement caused confusion inside the company, Marcus said. It seemed to him that almost nobody was familiar with the pricing rule, and he worried that AT&T had not been following it.
Marcus was particularly concerned, because, in defending AT&T, he says company officials told investigators that it had been charging appropriate rates in line with the lowest-price requirement. Now, he feared AT&T had misrepresented itself to the U.S. attorney’s office.
In September 2009, Marcus led an internal investigation aimed at figuring out whether AT&T employees on the front lines of E-Rate contracts knew about the lowest-price rule.
The review found that several employees who had spent more than a decade working on E-Rate deals for schools and libraries had no knowledge of a lowest-price rule, according to notes Marcus said were taken by AT&T lawyers present for the interviews and viewed by The Post. Two longtime sales managers had never heard the term “lowest corresponding price,” but assumed it was something the pricing department would be responsible for, the notes indicate.
The Post independently located and interviewed three former AT&T employees who worked on E-Rate contracts at various times over the past two decades and found they did not have a common understanding of the lowest-price rule and how the company was supposed to implement it.
One of them, who began working at AT&T after 2009, said that she was trained on the lowest-price rule, but that she was not aware of any requirement to assess whether one school was being charged more than another.
By 2010, some school districts nationwide were waking up to the problem of overcharging. In August of that year, auditors for Detroit Public Schools reported that AT&T overcharged the district by at least $2.8 million over five years and charged hundreds of thousands of dollars in state taxes to a tax-exempt school system.
AT&T said an internal investigation determined that the company did not overcharge Detroit schools, but declined to provide a copy of the findings.
Marcus said that by 2011, he had grown frustrated and convinced that the company had not been truthful with the government about its compliance with the lowest-price rule during the Indiana investigation. He viewed this as a potential crime and took his concerns to Wayne Watts, AT&T’s general counsel at the time. Watts told Marcus in an email that he was having an outside law firm investigate the matter.
Watts could not be reached for comment.
Two months later, the company informed Marcus via email that the investigation concluded without finding “any illegal or unethical act” by AT&T.
AT&T confirmed that it hired an outside firm to investigate and said the firm “concluded no violation of law or attorney ethical obligations had occurred.”
“We are always truthful and accurate in our statements to the U.S. Attorney, or any other agency,” the company said, declining to share documentation of the investigation’s findings.
Marcus said that after receiving the email, he spoke to Bill Drexel, then a senior vice president at AT&T, about the investigation and whether AT&T was obligated to correct the record with federal prosecutors in the Indiana inquiry, because AT&T told them the company was in compliance at the time with pricing rules. He said Drexel told him the company did not have an “affirmative duty to disclose” anything to the prosecutors. Drexel declined to comment.
Outraged, Marcus considered taking his allegations outside the company.
Billions of dollars, with scant scrutiny
For years, federal regulators have done little to enforce the rules of the E-Rate program, even amid growing evidence of fraud and abuse. Government watchdogs have said E-Rate is vulnerable to fraud because it relies on telecom companies to self-certify that they are offering the low prices required.
In September, the Government Accountability Office recommended that the FCC undergo a formal review of fraud controls, something the agency has repeatedly pledged to do but has not.
A spokeswoman for the FCC said the commission takes it obligation to eliminate fraud and abuse seriously and has a “robust” program to manage those risks. She said the commission has begun implementing the GAO recommendations.
The federal government’s clearest effort to enforce the lowest-price rule came in 2016, when the FCC issued an enforcement action against AT&T. The agency alleged the company charged two Orlando-area public school districts up to six times the rate that it charged a statewide consortium of other public schools and libraries in Florida.
The agency recommended a fine of $106,425 for “willfully” violating the lowest-price rule. Emails provided by AT&T as part of the FCC’s case showed the company knew the schools had been eligible for a lower rate but overcharged them anyway.
AT&T appealed the decision, arguing that the government had missed, by one month, its one-year deadline for finding companies in violation of the law. The company also said the two Florida school districts freely chose not to join the statewide consortium when that would have given them a lower rate. “We are confident we would have prevailed had the FCC not dismissed the case,” AT&T said.
The FCC planned to use the case to hold AT&T accountable for its school pricing and set an example that telecom companies would have to follow nationwide, said Travis LeBlanc, a former head of the FCC’s enforcement bureau, who led the investigation. But a few months after the order was issued, Donald Trump was elected president, and a Republican considered friendly to the telecom industry took over the role of FCC chairman. Ajit Pai, a former Verizon executive, sat on the order for four years before canceling it last year. He agreed with AT&T that the statute of limitations had run out.
Pai referred questions to a representative, who declined to comment.
Geoffrey Starks, one of the FCC’s two Democratic commissioners, said at the time that the budget problems many schools have faced during the coronavirus pandemic underscore why the government should do more to ensure they are paying low prices for Internet service.
“I do not disagree with today’s outcome, but I want to emphasize how much more needs to be done to give the lowest corresponding price rule the teeth it needs," he wrote.
Seeing little hope to change AT&T from the inside, Marcus left his job in 2011. He vowed to hold the company accountable for what he viewed as its harmful treatment of hundreds of schools.
A month before leaving, he took AT&T’s internal training documents and other material to Scott Shepherd, the attorney then representing Todd Heath, who was suing AT&T for its pricing in Wisconsin. Marcus sought legal advice from Shepherd and talked to him about becoming a silent party to the suit, or filing a new one, and sharing in any proceeds should the case succeed, Marcus said.
Heath declined to comment, one of his attorneys said. Shepherd declined to comment, his lawyer said.
Soon after he met with Shepherd, Marcus tried to present the information to a Justice Department lawyer who worked on these issues. He said he was told that the department could not accept the information because of attorney-client privilege constraints. A Justice Department spokeswoman declined to comment.
Later that year, Heath filed a second, broader suit, this one alleging that AT&T had ignored the low-price rule in 17 states and three big cities. As evidence, he cited the training slides Marcus received at that Dallas meeting, which make no mention of the low-price rule.
Marcus is not a party in the suits now pending. But AT&T is using his actions to try to persuade a federal judge to dismiss the multistate suit. The company argues that Marcus was wrong to share internal documents, and that Heath was wrong to use them in his case.
In September, AT&T moved to dismiss the case, saying the plaintiff relied on information that was unethically obtained from Marcus. Discovery is ongoing, and Marcus was recently deposed. A federal judge has not yet ruled on the motion to dismiss.
“This is a shocking case of attorney misconduct,” AT&T said in its motion. Marcus said AT&T’s accusations against him upset him enough to take his complaints public.
The case now hinges on whether the judge dismisses the suit based on AT&T’s allegations about Marcus’s conduct.
Attorney-client privilege usually bars lawyers from disclosing anything they learn in their communication with a client. However, U.S. laws and attorney codes of ethics make an exception for any information they learn from a client who appears to be committing a crime, said Dennis Ventry, a law professor at the University of California at Davis School of Law.
Marcus is now a lawyer at the FCC, working in an area unrelated to E-Rate. At his home in Spotsylvania, Va., steps from the site of a Civil War battlefield, he keeps stacks of notes documenting his time at AT&T, recently pulling them out and spreading them across his dining room table for a journalist to review.
He said he hopes that by putting his story on the record, he will shine a light on AT&T and how it has gone unpunished.
“People don’t believe it if you don’t put your name to it and take the risk," Marcus said. “So I’m putting my name to it and I’m taking the risk.”
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