The United States of America's Statement of Interest — United States ex rel. James R. Berkley v. Ocean State, LLC (Dkt. 83, D.R.I.)
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The United States' Statement of Interest filed February 14, 2025 as Document 83 (12 pages) in United States of America ex rel. James R. Berkley v. Ocean State, LLC, et al., Civil Action No. 20-CV-00538-JJM-PAS, in the U.S. District Court for the District of Rhode Island, submitted pursuant to 28 U.S.C. § 517. It addresses the argument in Defendants' summary judgment filings (ECF No. 75 and ECF No. 79) that materiality under the False Claims Act depends exclusively on whether the government demanded repayment of the Paycheck Protection Program loans at issue. The United States argues that materiality under Escobar is a holistic analysis of multiple factors and that continued payment matters only when the government had actual knowledge of violations. It states that it is not a party because it has not intervened and takes no position on the disputed facts.
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“The United States of America's Statement of Interest — United States ex rel. James R. Berkley v. Ocean State, LLC (Dkt. 83, D.R.I.).”
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Case 1:20-cv-00538-JJM-PAS Document 83 Filed 02/14/25 Page 1 of 12 PageID #:
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UNITED STATES DISTRICT COURT
DISTRICT OF RHODE ISLAND
THE UNITED STATES OF AMERICA
ex rel. JAMES R. BERKLEY,
Plaintiff,
v. Civil Action No. 20-CV-00538-JJM-PAS
OCEAN STATE, LLC; NEW HARBOR
CAPITAL FUND, LP; NEW HARBOR CAP-
ITAL FUND II, LP; NEW HARBOR CAPI-
TAL MANAGEMENT LP; BLUEPRINT
TEST PREPARATION, LLC; and FYZICAL
ACQUISITION HOLDINGS, LLC,
Defendants.
THE UNITED STATES OF AMERICA’S STATEMENT OF INTEREST
Pursuant to 28 U.S.C. § 517, the United States of America respectfully submits
this Statement of Interest to address an issue raised by the parties’ summary judg-
ment briefing. Specifically, Defendants’ Motion for Summary Judgment (ECF No. 75)
and Defendants’ Opposition to Relator’s Motion for Summary Judgment (ECF No. 79)
assert that materiality under the False Claims Act (FCA) depends exclusively upon
the actual behavior of the government, in this case, whether the government has de-
manded repayment of the Paycheck Protection Program (“PPP”) loans at issue. As
discussed below, under Universal Health Services, Inc. v. United States ex rel. Esco-
bar, 579 U.S. 176 (2016) (“Escobar”), materiality under the FCA is determined by a
holistic analysis of numerous factors, none of which are automatically dispositive of
the materiality inquiry. One potentially relevant factor identified by the Escobar
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court is the government’s continued payment of claims. However, this factor is rele-
vant only if the government paid with actual knowledge that requirements were vio-
lated. Awareness of mere allegations of noncompliance has no bearing on the materi-
ality inquiry.
The United States is not a party to this action because it has not intervened in
this case. Nevertheless, the United States remains the real party in interest, entitled
to receive the majority of any recovery. See 31 U.S.C. § 3730(d); United States ex rel.
Eisenstein v. City of New York, 556 U.S. 928, 934–35 (2009). Additionally, because
the FCA is the United States’ primary civil tool for redressing fraud against the gov-
ernment, the United States has a substantial interest in the proper interpretation of
FCA law. See United States ex rel. Doe v. Staples, Inc., 773 F.3d 83, 84 (D.C. Cir. 2014)
(citing S. Rep. No. 99-345, at 2, 4 (1986)). The United States, therefore, submits this
Statement of Interest to clarify the applicable case law on the materiality issue.
The United States takes no position on the facts the parties contend are dis-
puted or undisputed; it submits this Statement of Interest solely to address relevant
points of law. Neither the Court nor the parties should construe the fact that the
United States is not providing its views on other arguments or issues as support or
opposition.
DISCUSSION
I. Materiality Is Determined by a Holistic Analysis of Multiple
Factors.
False claims must be “material” to the government’s decision to pay in order to
provide a basis for liability under the FCA. The FCA defines the term “material” as
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“having a natural tendency to influence, or be capable of influencing, the payment or
receipt of money or property.” 31 U.S.C. § 3729(b)(4). In Escobar, the Supreme Court
stressed that this definition was the same as that employed in “other federal fraud
statutes,” which “descends from ‘common-law antecedents.’” 579 U.S. at 192–93. The
court explained that the same basic concept of materiality applies in all of these con-
texts and focuses upon “‘the effect on the likely or actual behavior of the recipient of
the alleged misrepresentation.’” Id. at 193 (emphasis added) (quoting 26 R. LORD,
WILLISTON ON CONTRACTS § 69:12, at 549 (4th ed. 2003)). The court stated that
“a matter is material” if: (1) a reasonable person would attach importance to it in
determining a “choice of action,” or (2) “the defendant knew or had reason to know
that the recipient of the representation attaches importance to the specific matter in
‘determining his choice of action,’” regardless of whether a reasonable person would
do so. Id. While drawing on numerous fraud statutes, Escobar framed the test of ma-
teriality under the FCA in terms of the likely effect on the government’s decision to
pay in whole or in part when the government has actual knowledge of non-compliance
with a particular requirement. See id. at 195 (stating that proof of materiality can
include whether government consistently “refuses to pay claims” or “pays a particular
claim in full”).
The Supreme Court clarified that a variety of factors are relevant to the mate-
riality inquiry and stressed that no one factor is automatically dispositive. Id. at 191
(citing Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27, 39 (2011)); see also United
States ex rel. Escobar v. Universal Health Servs., Inc., 842 F.3d 103, 109 (1st Cir.
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2016) (“Escobar II”). Thus, the materiality inquiry may consider whether the govern-
ment took action when it had actual knowledge of similar violations, Escobar, 579
U.S. at 195; whether the violation goes to the “essence of the bargain,” id. at 193 n.5
(quoting Junius Constr. Co. v. Cohen, 178 N.E. 672, 674 (N.Y. 1931)); and whether
the violation is significant or “minor or insubstantial,” id. at 194. The court also ex-
plained that designation of a particular statutory, regulatory, or contractual require-
ment as a condition of payment is relevant to the materiality inquiry, but it rejected
the notion that the designation could be “automatically dispositive” as a matter of
law. Id. The Supreme Court’s fact-based approach to materiality thus requires courts
to view materiality holistically and practically, rather than as being dictated by for-
mal designations.
II. The Government’s Action in Continuing to Pay Claims Is
Only Relevant to Materiality When the Government Has
Actual Knowledge of the Misconduct, Not Mere Awareness
of Allegations
Defendants argue that Relator cannot establish materiality because “the gov-
ernment knew of Relator’s accusations about the PPP loan applications, but chose to
do nothing.” See ECF No. 79 at 42. This, according to Defendants, demonstrates that
Relator’s “accusations [are] immaterial as a matter of law.” ECF No. 75-1, at 38.; see
also ECF No. 79, at 42. Defendants’ argument is inconsistent with Escobar.
Government action may bear on materiality only when the paying agency has
“actual knowledge that certain requirements were violated.” Escobar, 579 U.S. at 195
(emphasis added). Following Escobar, the federal Courts of Appeal, including the
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First Circuit, have consistently held that governmental awareness of a relator’s alle-
gations is not the same as actual knowledge of violations for purposes of establishing
materiality. See, e.g., Escobar II, 842 F.3d at 112 (holding that “mere awareness of
allegations concerning noncompliance” does not show “knowledge of actual noncom-
pliance”); accord United States ex rel. Heath v. Wisconsin Bell, Inc., 92 F.4th 654, 665
(7th Cir. 2023) (“The government’s knowledge of a pending lawsuit making allega-
tions simply does not indicate actual knowledge of actual violations.”); United States
ex rel. Druding v. Care Alts., 81 F.4th 361, 375 (3d Cir. 2023) (“Like our sister circuits,
we will not equate the government’s awareness of allegations of fraud with ‘actual
knowledge’ that fraud occurred.”); United States ex rel. Campie v. Gilead Scis., Inc.,
862 F.3d 890, 906–07 (9th Cir. 2017) (holding that continued payment of claims by
the government cannot be dispositive where the “parties dispute exactly what the
government knew and when, calling into question its ‘actual knowledge’”). Indeed, in
assessing materiality, “it makes sense not to place much weight on the government’s
response in the wake of such [qui tam] litigation because, prior to discovery and a
formal court ruling, the relator’s allegations are just that—allegations, and the gov-
ernment may not necessarily have knowledge of all the material facts.” United States
ex rel. Foreman v. AECOM, 19 F.4th 85, 115 (2d Cir. 2021).
Courts have also recognized that a federal agency may decide not to suspend
payment to a potentially liable FCA defendant for a variety of reasons unrelated to
the materiality of the defendant’s false claims, and that drawing inferences about
materiality from those agency decisions would be improper. See, e.g., United States
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ex rel. USN4U, LLC v. Wolf Creek Fed. Servs. Inc., 34 F.4th 507, 517 (6th Cir. 2022)
(“There are a variety of factors unrelated to the materiality of the allegations that
could cause the Government to continue contracting with a party after the Govern-
ment becomes aware of alleged fraud”—e.g., “there could be a lack of other suppliers”
or “other feasible procurement options,” or “there could be high ‘costs associated with
implementing another bidding process[.]’”); United States ex rel. Prose v. Molina
Healthcare of Ill., Inc., 17 F.4th 732, 744 (7th Cir. 2021) (holding that complaint ade-
quately alleged materiality despite government’s continued contracting with defend-
ant because “[m]any things could explain the government’s continued contracting,”
such as “need[ing] time to work out a way not to prejudice Medicaid recipients”);
United States ex rel. Cimino v. Int’l Bus. Machs. Corp., 3 F.4th 412, 423 (D.C. Cir.
2021) (holding that, at motion to dismiss stage, lack of materiality could not be in-
ferred from the government’s decision to extend a license agreement with the defend-
ant after learning of the relator’s allegations, because it was plausible that the gov-
ernment “continued to pay for the licenses for any number of reasons that do not
render IBM’s fraud immaterial”); see also United States ex rel. Harrison v. Westing-
house Savannah River Co., 352 F.3d 908, 917 (4th Cir. 2003) (noting that the govern-
ment “might choose to continue funding the contract despite earlier wrongdoing by
the contractor” because the contract is “advantageous to the government” or is too far
along to terminate). Thus, “[w]hile Escobar articulated that continued payment de-
spite knowledge of fraud often indicates lack of materiality, ‘often’ does not mean
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‘always.’” United States ex rel. Aldridge v. Corp. Mgmt., Inc., 78 F.4th 727, 738 (5th
Cir. 2023).
The cases cited by Defendants do not support their argument that the govern-
ment’s inaction after receiving a relator’s allegations warrants summary judgment to
Defendants on materiality grounds. See ECF No. 79, at 3–4, 41; ECF No. 75-1, at 36–
39. Two of the cases cited by Defendants hinged on the sufficiency of allegations at
the motion to dismiss stage, not on the sufficiency of relator’s evidence at summary
judgment. In D’Agostino v. EV3, Inc., 845 F.3d 1, 7–10 (1st Cir. 2016), the court af-
firmed dismissal of the relator’s fraudulent inducement claims because the relator
failed to plausibly allege a causal link between the alleged fraudulent representations
and the government’s payment of claims. The court’s only observation about the ma-
teriality of the alleged fraudulent representation was made in passing. In Zotos v.
Town of Hingham, 98 F.4th 339, 345 (1st Cir. 2024), the court affirmed dismissal of
the relator’s claims for lack of materiality because the relator failed to plausibly allege
that compliance with the federal requirements at issue relating to “ultra vires” speed
limit signs “was necessary for federal funding” under the Federal-Aid Highway Pro-
gram or went to the “essence of the bargain.” Id. In coming to this conclusion, the
court assumed that the government was not aware of the falsity of the defendants
claims, and commented in dicta that the relator’s qui tam complaint was one of “mul-
tiple prior occasions” over a decade where relator had sued the town concerning speed
limit signs. Id. at 342, 345.
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In four other cases cited by Defendants, decided at summary judgment, the
courts pointed to evidence that the government had actual knowledge of misconduct.
See United States ex rel. Kelly v. Serco, Inc., 846 F.3d 325, 334 (9th Cir. 2017) (relator
“failed to establish a genuine issue of material fact regarding . . . materiality” where
undisputed facts demonstrated that the agency was aware of defendant’s noncompli-
ance with contractual requirement, continued paying under the contract, and even-
tually eliminated the requirement altogether because “it provided minimal benefit”);
United States ex rel. Janssen v. Lawrence Mem’l Hosp., 949 F.3d 533, 539, 542 (10th
Cir. 2020) (evidence was insufficient to raise a dispute of fact as to materiality, where
the evidence showed that a Medicare contractor had investigated the relator’s fraud
allegations and the contractor’s documentation confirmed that Medicare had been
made “aware of quality issue” following completion of the investigation, but continued
paying claims); 1 United States ex rel. McBride v. Halliburton Co., 848 F.3d 1027, 1034
(D.C. Cir. 2017) (affirming summary judgment to contractor because following receipt
of a qui tam complaint, the government “investigated [the Relator’s] allegations and
did not disallow any charged costs”); United States ex rel. Miller v. ManPow, LLC, No.
2:21-cv-05418, 2024 WL 305699, at *15–16 (C.D. Cal. Jan 3, 2024) (granting summary
judgment to PPP loan recipient defendants after finding no dispute of fact that “the
1 In Janssen, the Tenth Circuit also observed that its holding was not inconsistent
with Escobar II, because Escobar II “assessed the sufficiency of a complaint at the
motion to dismiss stage, finding that potential knowledge of allegations was insuffi-
cient to warrant dismissal,” while Janssen affirmed a grant of summary judgment.
See Janssen, 949 F.3d at 542 n.13. The court noted that “[i]t is not inconsistent to
state that knowledge of allegations is insufficient, alone, to warrant dismissal under
Rule 12(b)(6) and yet constitutes some evidence of immateriality under Rule 56(a).”
Id.
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[Small Business Administration (SBA)] separately reviewed each of Defendant’s for-
giveness applications and sought payroll provider records” and engaged in an “thor-
ough and interactive SBA review process” and that “the SBA has reviewed all of Re-
lators’ allegations” and refrained from taking action).
Further, in support of their argument concerning the government’s inaction,
the Defendants omit certain facts that may be relevant to materiality. Specifically,
the declaration submitted by an SBA representative states that “SBA did not conduct
a manual review” of Defendants’ PPP loan forgiveness application packages, ECF No.
75-70, Ex. 79, Frulla Decl. ¶¶ 12, 20, 26, contrary to Defendants’ contentions. See
ECF No. 75-1, at 38 (“SBA also conducted contemporaneous ‘Loan Review(s)’ ‘related
to’ both Ocean State and Fyzical’s ‘PPP loan forgiveness application’ in 2020 and early
2021 . . . .); ECF No. 79, at 44 (“[T]the government has fully considered Relator’s al-
legations . . . .”). Further, the declarations submitted by SBA do not state that the
agency “has been fully aware” of relator’s allegations, contrary to Defendants’ argu-
ment. Compare ECF No. 75-69, Ex. 78, Zelaya Decl.; ECF No. 75-70, Ex. 79, Frulla
Decl., with ECF No. 79, at 3–4 (“The SBA has provided affidavits confirming it has
been fully aware of Relator’s allegations for years but has declined to require repay-
ment of the loans . . . .”).
Moreover, the United States’ decision to decline intervention in this case does
not support Defendants’ assertion that materiality is lacking. See United States ex
rel. Prather v. Brookdale Senior Living Cmtys., Inc., 892 F.3d 822, 836 (6th Cir. 2018)
(finding “government’s decision not to intervene” to be “unpersuasive” in materiality
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inquiry). Indeed, even in the Escobar case, the government had declined to intervene,
“and the Supreme Court did not mention this as a relevant factor in its materiality
analysis.” Id. (citing Escobar, 579 U.S. at 185). “[I]ntervention decisions are, at best,
of minimal relevance” because there are many non-merits-based reasons for the gov-
ernment’s litigation choices, ranging from the conservation of scarce prosecutorial
resources to the prioritization of other cases. United States ex rel. Int’l Bhd. of Elec.
Workers Loc. Union No. 98 v. Farfield Co., 5 F.4th 315, 346 (3d Cir. 2021). And even
merits-based reasons for declination might have nothing to do with the materiality of
a defendant’s alleged course of conduct. There is accordingly no basis for drawing any
inferences with respect to materiality when the government has decided not to inter-
vene in a qui tam action and permit a relator to proceed with the litigation as permit-
ted by 31 U.S.C. § 3730(d)(2).
The United States urges the Court to refrain from adopting Defendants’ nar-
row interpretation of materiality. As noted above, there are many possible explana-
tions for the government’s payment decisions, and it would be inappropriate to draw
inferences from those decisions, or lack thereof, absent evidence that the government
had actual knowledge of misconduct. Again, the United States takes no position as to
whether the facts related to materiality as put forward in Defendants’ and Relator’s
briefs are in dispute.
CONCLUSION
For these reasons, the Court should follow the Escobar materiality standard,
which requires a holistic assessment of materiality, with no one factor necessarily
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dispositive, and considers government action relevant only when the paying agency
acts with actual knowledge that a requirement was violated.
Dated: February 14, 2025 Respectfully submitted,
UNITED STATES OF AMERICA
By its Attorneys,
BRETT A. SHUMATE
Acting Assistant Attorney General
ZACHARY A. CUNHA
United States Attorney
/s/ Kevin Love Hubbard
Kevin Love Hubbard
Assistant United States Attorney
United States Attorney’s Office
50 Kennedy Plaza, 8th Floor
Providence, RI 02903
Tel: (401) 709-5000
Fax: (401) 709-5001
Kevin.Hubbard@usdoj.gov
Jamie Ann Yavelberg
Allison Cendali
Sarah E. Loucks
Attorneys, Civil Division
U.S. Department of Justice
P.O. Box 261, Ben Franklin Station
Washington, DC 20044
Phone: (202) 616-2921
Fax: (202) 307-6364
Sarah.E.Loucks@usdoj.gov
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CERTIFICATE OF SERVICE
I hereby certify that on February 14, 2025, I electronically filed the within
Statement of Interest with the Clerk of the United States District Court for the Dis-
trict of Rhode Island using the CM/ECF System, thereby serving it on all registered
users in accordance with Federal Rule of Civil Procedure 5(b)(2)(E) and Local Rule
Gen 305.
Dated: February 14, 2025
/s/ Kevin Love Hubbard
Kevin Love Hubbard
Assistant United States Attorney
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