The opinion
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10 UNITED STATES DISTRICT COURT
11 SOUTHERN DISTRICT OF CALIFORNIA
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13 UNITED STATES OF Case No.: 20-cv-1625-WQH-AHG
AMERICA ex rel. ROGER S.
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CRAIG, ORDER
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Plaintiff,
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v.
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HAWTHORNE MACHINERY
18 CO., BRIAN VERHOEVEN, TEE
NESS, and DAVID NESS,
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Defendants.
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21 HAYES, Judge:
22 The matter before the Court is the Motion for Summary Judgment (ECF No. 98)
23 filed by Defendants Hawthorne Machinery Co., Brian Verhoeven, Tee Ness, and David
24 Ness.
25 I. PROCEDURAL BACKGROUND
26 On August 21, 2020, Plaintiff-Relator Roger S. Craig (“Relator”) initiated this action
27 on behalf of the United States of America by filing a Complaint under seal against
28 Defendants Hawthorne Machinery Co. (“Hawthorne”) and Comerica Bank (“Comerica”)
1 asserting violations of the False Claims Act (“FCA”), 31 U.S.C. §§ 3279 et seq. (ECF No.
2 1.)
3 On March 11, 2021, Relator filed a First Amended Complaint (“FAC”). (ECF No.
4 4.)
5 On November 16, 2022, the Court issued an Order stating that the United States
6 declined to intervene in this action and ordering that the pleadings be unsealed and served
7 on Defendants. (ECF No. 13 at 1–2; see ECF No. 15 (Government’s Notice of Election to
8 Decline to Intervene).)
9 On August 21, 2023, Relator filed the Second Amended Complaint (“SAC”) against
10 Defendants Hawthorne, Brian Verhoeven (“Verhoeven”), Tee Ness, and David Ness
11 (collectively, “Defendants”). (ECF No. 51.)
12 On October 20, 2023, Defendants filed a Motion to Dismiss. (ECF No. 58.) On
13 September 25, 2024, the Court issued an Order denying Defendants’ Motion to Dismiss.
14 (ECF No. 68.)
15 On October 9, 2024, Defendants filed an Answer. (ECF No. 69.)
16 On January 29, 2026, Defendants filed the pending Motion for Summary Judgment.
17 (ECF No. 98.) On February 23, 2026, Relator filed an Opposition. (ECF No. 99.) On March
18 2, 2026, Defendants filed a Reply. (ECF No. 100.) On March 9, 2026, Relator filed an
19 additional Response in Opposition. (ECF No. 101.) On May 15, 2026, the Court held a
20 motion hearing. (ECF No. 107.)
21 II. FACTS
22 A. Background
23 Hawthorne is a seller and lessor of heavy machinery, including Caterpillar brand
24 equipment. (SAC ¶ 26.) Hawthorne owns two related entities: Hawthorne Pacific Corp.
25 and Hawthorne of Samoa, Inc. (See ECF No. 98-2, Defendants’ Statement of Undisputed
26 Material Facts (“DUF”) ¶ 24.)
27 Verhoeven is the Chief Financial Officer, Treasurer, and Executive Vice President
28 of Hawthorne. (SAC ¶ 27.) Tee Ness is the President, Chief Executive Officer, and
1 Chairman of the Board of Directors of Hawthorne. Id. ¶ 28. David Ness is the Chief
2 Operating Officer and Senior Vice President of Hawthorne. Id. ¶ 29.
3 Relator began working as a Finance Manager for Hawthorne on October 14, 2019.
4 (SAC ¶ 24.) Relator’s employment was terminated effective April 3, 2020, as part of a
5 reduction in force related to the COVID-19 pandemic. (DUF ¶ 3; ECF No. 98-8 (Notice to
6 Employee as to Change in Relationship).)
7 B. Paycheck Protection Program
8 On March 27, 2020, Congress enacted the Coronavirus Aid, Relief, and Economic
9 Security Act (“CARES Act”), Pub L. No. 116-136, 134 Stat. 281 (2020). The CARES Act
10 created the Paycheck Protection Program (“PPP”), a program administered by the Small
11 Business Association (“SBA”) offering loans to specified entities for qualifying purposes,
12 such as payroll expenses. (SAC ¶ 3.)
13 The CARES Act provides:
14 During the covered period [from February 15, 2020 through June 30, 2021],
in addition to small business concerns, any business concern, nonprofit
15
organization, housing cooperative, veterans organization, or Tribal business
16 concern described in section 657a(b)(2)(C) of this title shall be eligible to
receive a covered loan if the business concern, nonprofit organization,
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housing cooperative, veterans organization, or Tribal business concern
18 employs not more than the greater of [] 500 employees; or [] if applicable,
the size standard in number of employees established by the Administration
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for the industry in which the business concern, nonprofit organization,
20 housing cooperative, veterans organization, or Tribal business concern
operates.
21
22 15 U.S.C. § 636(a)(36)(D)(i) (emphasis added); id. § 636(a)(36)(A)(iii). The CARES Act
23 provides that “the term ‘employee’ includes individuals employed on a full-time, part-time,
24 or other basis.” Id. § 636(a)(36)(D)(v).
25 In a document titled “SBA Pre-PPP Guidance,” the SBA instructed applicants that
26 the “method for determining” an applicant’s size should be “based upon numbers of
27 employees for each of the pay periods in the preceding completed 12 calendar months.”
28 (ECF No. 99-17.)
1 C. Hawthorne’s PPP Loan Application
2 On April 2, 2020, a non-party emailed David Ness regarding the CARES Act and
3 the possibility of Hawthorne applying for a PPP loan. (ECF No. 99-41 at 3.) David Ness
4 responded via email:
5 We have actively been working with outside [counsel] to analyze the bill. We
are about 540-550 [employees]. But we have separate businesses, however the
6
small business bureau is very tough, compared to dept. of labor. We won’t be
7 able to benefit from this. Thanks though!
8 Id. at 2. In response to that email, another non-party suggested that David Ness consider
9 “apply[ing] to be added to the ‘Franchise Directory’ that [the] SBA maintains” because
10 “[t]he legislation allows any business concern operating as a franchise that is assigned a
11 franchise identified code to participate in the Payroll Protection Program.” Id.
12 On April 5, 2020, Hawthorne prepared and submitted a PPP loan application through
13 Coamerica in the amount of $8,083,800. (DUF ¶ 6.)
14 In the morning of April 5, 2020, a representative from Coamerica sent Verhoeven
15 an email with a list of necessary documentation to support Hawthorne’s PPP application,
16 including an “SBA Form 2483 Paycheck Protection Program Borrower Application Form”
17 (the “Form 2483”), “Exhibit and Addendum A for SBA Form 2483,” and documents that
18 would “establish eligibility such as payroll processor records, payroll tax filings (941
19 Quarterly forms).” (ECF No. 98-10 at 9–10.)
20 Hours later, Verhoeven returned the Form 2483 and supporting documentation,
21 including an “Excel file consolidating the Form 941s and reconciling back to payroll detail
22 by person,” to Coamerica. Id. at 9. Verhoeven provided Coamerica with a payroll report
23 indicating that it had 484 employees during the period from February 12, 2020, through
24 February 14, 2020. (DUF ¶ 7.)
25 The representative from Coamerica sent the PPP application to its Underwriting
26 center. Id. ¶ 8. Another employee responded with a “list of items that we need to process
27 the application.” (ECF No. 98-10 at 5.) One of the employee’s questions stated: “Employee
28 count on application states 455, but the employee count used to calculate Salaries/Wages
1 on the table ($34,952,515.78) is 592 employees. Do we know why it’s different?” Id. ¶¶ 8,
2 10; ECF No. 98-10 at 5.
3 Coamerica forwarded this inquiry and others to Verhoeven, who responded in
4 relevant part: “We currently have 455 employees and had 484 on 2/15/2020. The 592
5 employees listed in the 2019 report include all employees who received a pay check during
6 2019. They were not all employed at the same time. We did not exceed 500 employees at
7 any individual point during 2019.” (DUF ¶ 11; ECF No. 98-10 at 3.)
8 Coamerica advised Hawthorne to “fix the employee number on the application to
9 reflect the average employee headcount in the last 12 months.” (ECF No. 98-10 at 2.)
10 Coamerica expressed that it was “afraid SBA won’t accept the 455 number as that is the
11 current employee headcount of Hawthorne.” Id.
12 Verhoeven sent Coamerica a revised Form 2483, which reported a total of 489
13 Hawthorne employees: 298 employees for Hawthorne Machinery Co., in addition to 184
14 employees for Hawthorne Pacific Corp. and 7 employees for Hawthorne of Samoa, Inc.
15 (DUF ¶¶ 13–14; ECF No. 98-12.) Hawthorne described these two entities as “qualified
16 affiliates” and “subsidiaries” in its application. (DUF ¶ 25; ECF No. 98-12 at 6.)
17 Verhoeven testified that he calculated the total employee count of 489 by reviewing
18 Hawthorne’s “active employee” reports for the end of each month in 2019. (DUF ¶ 18; see
19 ECF No. 98-26 at 14–15.) Verhoeven added the number of active employees at the end of
20 each month in 2019 and divided the sum by 12 to reach the final calculation of 489. (ECF
21 No. 98-26 at 15, 29–31.)
22 On April 6, 2020, the SBA approved Hawthorne’s PPP loan in the amount of
23 $8,083,800. (ECF No. 98-18.)
24 D. CQ Pacific’s PPP Loan Application
25 Two days earlier—on April 3, 2020—CQ Pacific LLC (“CQ Pacific”), a company
26 that operates retail locations in Hawaii under the “Carquest” trade name, also applied for a
27 PPP loan. (SAC ¶ 33; DUF ¶ 27.) The parties dispute the relationship between Hawthorne
28 and CQ Pacific; namely, whether CQ Pacific operated as a franchise of Hawthorne. (DUF
1 ¶ 26; ECF No. 99-1 at 26–27.) CQ Pacific sought a loan in the amount of $563,870 and
2 reported that it had 61 employees. (ECF No. 98-4 at 3.)
3 The CARES Act includes a “Waiver of affiliation rules” for PPP eligibility, which
4 provides that “the provisions applicable to affiliations under section 121.103 of title 13,
5 Code of Federal Regulations, or any successor regulation, are waived with respect to
6 eligibility for a covered loan for [] any business concern with not more than 500 employees
7 that, as of the date on which the covered loan is disbursed, is assigned a North American
8 Industry Classification System code beginning with 72; [] any business concern operating
9 as a franchise that is assigned a franchise identifier code by the Administration; [and] any
10 business concern that receives financial assistance from a company licensed under section
11 681 of this title.” 15 U.S.C. § 636(a)(36)(D)(iv).
12 The SBA Franchise Directory lists an “SBA Franchise Identifier Code” for Carquest
13 and, separately, for Carquest Auto Parts. (ECF No. 98-14 at 3.)
14 E. Subsequent History
15 On August 26, 2021, representatives from the Department of Justice (“DOJ”) and
16 the SBA met virtually with Verhoeven to discuss an investigation into Hawthorne’s PPP
17 loan. (ECF No. 98-4 at 3.)
18 On October 4, 2021, the SBA forgave Hawthorne’s PPP loan in the principal amount
19 of $8,083,800 and $120,583.35 in interest. (ECF No. 98-21 (Notice of Paycheck Protection
20 Program Forgiveness Payment issued by the SBA).)
21 On January 18, 2022, the DOJ issued a Civil Investigative Demand on Hawthorne
22 “to determine whether there has been a violation of” the FCA. (ECF No. 98-22 at 2.) On
23 May 12, 2022, Hawthorne responded to written interrogatories issued as part of the Civil
24 Investigative Demand. (ECF No. 98-17 at 1–25.)
25 On November 16, 2022, the United States declined to intervene in this action. (ECF
26 No. 13.)
27 / / /
28 / / /
1 III. LEGAL STANDARDS
2 A. Summary Judgment
3 “A party may move for summary judgment, identifying each claim or defense—or
4 the part of each claim or defense—on which summary judgment is sought. The court shall
5 grant summary judgment if the movant shows that there is no genuine dispute as to any
6 material fact and the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P.
7 56(a). “A material fact is one that is relevant to an element of a claim or defense, and whose
8 existence might affect the outcome of the case.” See United States v. Grayson, 879 F.2d
9 620, 622 (9th Cir. 1989) (citation omitted). The materiality of a fact is determined by the
10 substantive law governing the claim or defense. See Anderson v. Liberty Lobby, Inc., 477
11 U.S. 242, 248 (1986); Celotex Corp. v. Catrett, 477 U.S. 317, 322–24 (1986).
12 The moving party has the initial burden of demonstrating that summary judgment is
13 proper. Adickes v. S.H. Kress & Co., 398 U.S. 144, 153 (1970). Where the party moving
14 for summary judgment bears the burden of proof at trial, the moving party “must come
15 forward with evidence which would entitle it to a directed verdict if the evidence went
16 uncontroverted at trial.” Houghton v. South, 965 F.2d 1532, 1536 (9th Cir. 1992). Where
17 the party moving for summary judgment does not bear the burden of proof at trial, “the
18 burden on the moving party may be discharged by ‘showing’—that is, pointing out to the
19 district court—that there is an absence of evidence to support the nonmoving party’s case.”
20 Celotex Corp., 477 U.S. at 325.
21 If the moving party meets the initial burden, the burden shifts to the opposing party
22 to show that summary judgment is not appropriate. Anderson, 477 U.S. at 256; Celotex
23 Corp., 477 U.S. at 322, 324. The nonmoving party cannot defeat summary judgment
24 merely by demonstrating “that there is some metaphysical doubt as to the material facts.”
25 Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986); see also
26 Anderson, 477 U.S. at 252 (“The mere existence of a scintilla of evidence in support of the
27 [nonmoving party’s] position will be insufficient[.]”). The nonmoving party must “go
28 beyond the pleadings and by [his] own affidavits, or by the depositions, answers to
1 interrogatories, and admissions on file, designate specific facts showing that there is a
2 genuine issue for trial.” Celotex Corp., 477 U.S. at 324 (quotations omitted). The
3 nonmoving party’s evidence “is to be believed, and all justifiable inferences are to be drawn
4 in his favor.” Anderson, 477 U.S. at 255. However, “‘[w]here the record taken as a whole
5 could not lead a rational trier of fact to find for the nonmoving party, there is no genuine
6 issue for trial,’ and summary judgment is appropriate.” Zetwick v. County of Yolo, 850 F.3d
7 436, 441 (9th Cir. 2017) (quoting Ricci v. DeStefano, 557 U.S. 557, 586 (2009)).
8 B. False Claims Act
9 The FCA imposes liability on a person who “knowingly presents, or causes to be
10 presented, a false or fraudulent claim for payment or approval.” 31 U.S.C. § 3729(a)(1)(A).
11 To establish a claim under § 3729(a)(1)(A), a relator must prove each of the following
12 elements: “(1) a false or fraudulent claim (2) that was material to the decision-making
13 process (3) which defendant presented, or caused to be presented, to the United States for
14 payment or approval (4) with knowledge that the claim was false or fraudulent.” Hooper
15 v. Lockheed Martin Corp., 688 F.3d 1037, 1047 (9th Cir. 2012) (citations omitted).
16 “Likewise, to establish a cause of action under § 3729(a)(1)(B), the United States or a
17 relator must show that defendants knowingly made, used, or caused to be made or used, a
18 false record or statement material to a false or fraudulent claim.” Id. The FCA defines a
19 “claim” as “any request or demand, whether under a contract or otherwise, for money or
20 property . . . that [] is presented to an officer, employee, or agent of the United States.” 31
21 U.S.C. § 3729(b)(2).
22 Under a false certification theory, FCA liability attaches where a party “falsely
23 certifies compliance with a statute or regulation as a condition to payment.” United States
24 ex rel. Hendow v. Univ. of Phoenix, 461 F.3d 1166, 1171 (9th Cir. 2006) (citations omitted).
25 There are two types of false certifications: express and implied. “Express certification
26 simply means that the entity seeking payment certifies compliance with a law, rule or
27 regulation as part of the process through which the claim for payment is submitted.” Ebeid
28 ex rel. U.S. v. Lungwitz, 616 F.3d 993, 998 (9th Cir. 2010). “Implied false certification
1 occurs when an entity has previously undertaken to expressly comply with a law, rule, or
2 regulation, and that obligation is implicated by submitting a claim for payment even though
3 a certification of compliance is not required in the process of submitting the claim.” Id.
4 “Violations of laws, rules, or regulations alone do not create a cause of action under the
5 FCA. It is the false certification of compliance which creates liability when certification is
6 a prerequisite to obtaining a government benefit.” United States ex rel. Hopper v. Anton,
7 91 F.3d 1261, 1266 (9th Cir. 1996) (emphasis in original). “Defendants can be liable for
8 violating requirements even if they were not expressly designated as conditions of
9 payment. Conversely, even when a requirement is expressly designated a condition of
10 payment, not every violation of such a requirement gives rise to liability. What matters is
11 not the label the Government attaches to a requirement, but whether the defendant
12 knowingly violated a requirement that the defendant knows is material to the Government’s
13 payment decision.” Universal Health Services, Inc. v. United States ex rel. Escobar
14 (Escobar), 579 U.S. 176, 181 (2016).
15 “To survive summary judgment” on claims brought under the FCA, a “relator must
16 establish evidence on which a reasonable jury could find for the plaintiff.” United States
17 ex rel. Kelly v. Serco, Inc., 846 F.3d 325, 330 (9th Cir. 2017) (emphasis in original)
18 (quoting United States ex rel. Aflatooni v. Kitsap Physicians Serv., 314 F.3d 995, 1001 (9th
19 Cir. 2002)). “If the facts make a claim ‘implausible,’ the non-movant must present ‘more
20 persuasive evidence than would otherwise be necessary’ in order to defeat a summary
21 judgment motion.” Id. (citation and quotation omitted).
22 IV. DISCUSSION
23 Relator brings two causes of action under the FCA based on allegations that
24 Defendants knowingly submitted false information about the number of Hawthorne
25 employees in their PPP loan application. (See SAC at ¶¶ 150–55 (asserting claims under
26 31 U.S.C. § 3729(a)(1)(A) and (B)).) Relator raises two theories in support of his position
27 that the actual number of Hawthorne employees exceeded 500 during the relevant period:
28 (1) Hawthorne knew that it averaged, “at minimum, 503 employees during calendar year
1 2019,” but knowingly devised a counting methodology that excluded some of those
2 employees; and (2) Hawthorne knew that it should have included the 61 employees
3 working at its “affiliate/subsidiary CQ Pacific” because CQ Pacific did not qualify as an
4 “franchise” within the meaning of the CARES Act. (ECF No. 99 at 16–17; ECF No. 51 at
5 4, 23, 26; see 31 U.S.C. §§ 3729(a)(1)(A), (B).)
6 As to the former theory, Relator contends that Defendants “counted only those
7 [Hawthorne] employees that were ‘active employees’ on the final day of each month in
8 calendar year 2019.” (ECF No. 99 at 8.) Relator contends that this methodology fails to
9 fully account for the 103 Hawthorne employees terminated throughout the year because, if
10 their employment concluded before the final day of the month, these employees would not
11 have been included in the “active employees” count for the month in which they were
12 terminated. Id.
13 As to the latter theory, Relator contends that all CQ Pacific employees should have
14 been included in Hawthorne’s total number of employees because CQ Pacific was not
15 operating as a “franchise” in a manner that would permit Hawthorne to exclude its
16 employees. Id. at 12; see ECF No. 99-15 at 8 (Relator’s expert concluding that “CQ Pacific
17 should not be treated as a franchise. . .”).
18 Defendants contend that each of Relator’s theories of liability represents only “a
19 hindsight disagreement about how employees should have been counted during the earliest
20 days of the” PPP program. (ECF No. 98-1 at 6.) Defendants contend that they submitted
21 the Form 2483 and supporting documentation based on good-faith calculations, including
22 adherence to Coamerica’s instruction that that their count should reflect “the average
23 employee headcount in the last 12 months.” Id. at 12.
24 In their Motion for Summary Judgment, Defendants contend that the undisputed
25 facts in the record do not plausibly establish materiality, scienter, or falsity as to either of
26 Relator’s claims under the FCA, and that summary judgment on each claim is appropriate.
27 Id. at 29.
28 / / /
1 A. Request for Judicial Notice and Evidentiary Objections
2 As a preliminary matter, the Court considers Defendants’ Request for Judicial Notice
3 filed in support of their Motion for Summary Judgment. (ECF No. 98-3.) Defendants
4 request that the Court notice the “SBA Franchise Directory,” which is accessible from the
5 SBA’s website at the following URL: https://www.sba.gov/document/support-sba-
6 franchise-directory. Id. at 3.
7 “Judicial notice under [Federal Rule of Evidence] 201 permits a court to notice an
8 adjudicative fact if it is ‘not subject to reasonable dispute.’” Khoja v. Orexigen
9 Therapeutics, Inc., 899 F.3d 988, 999 (9th Cir. 2018) (quoting Fed. R. Evid. 201). “A fact
10 is ‘not subject to reasonable dispute’ if it is ‘generally known,’ or ‘can be accurately and
11 readily determined from sources whose accuracy cannot reasonably be questioned.’” Id.
12 (quoting Fed. R. Evid. 201(b)(1)–(2)); see also Lee v. City of Los Angeles, 250 F.3d 668,
13 689 (9th Cir. 2001). “Under Rule 201, the court can take judicial notice of public records
14 and government documents available from reliable sources on the Internet, such as
15 websites run by governmental agencies.” Gerritsen v. Warner Bros. Ent. Inc., 112 F. Supp.
16 3d 1011, 1033 (C.D. Cal. 2015) (quotation omitted); see also Daniels-Hall v. Nat’l Educ.
17 Ass’n, 629 F.3d 992, 998 (9th Cir. 2010) (taking notice of a list of vendors displayed
18 publicly on school districts’ websites). The SBA Franchise Directory is displayed publicly
19 on a federal government website whose reliability cannot reasonably be questioned.
20 Accordingly, Defendants’ Request for Judicial Notice (ECF No. 98-3) is granted.
21 In their Reply in Support of the Motion for Summary Judgment, Defendants object
22 to certain documents filed by Relator in support of his Opposition to the Motion for
23 Summary Judgment. (ECF No. 100 at 6.) Defendants “object under Rule 56(c)(2) and Rule
24 56(c)(4) to Relator’s counsel’s declaration and ‘spreadsheet’ exhibits,” which are
25 “described as edited, with data inserted, ‘filled-in,’ or otherwise manipulated.” Id.
26 Defendants contend that these materials “lack foundation, are hearsay, [and] are not
27 business records.” Id. Relator responds that the spreadsheets are business records created
28 during Hawthorne’s normal course of business and were submitted in support of its PPP
1 loan application. (ECF No. 101 at 2.) Relator contends that the challenged exhibits are
2 merely versions of documents produced by Defendants during discovery that have been
3 sorted or edited to “show the relevant information to the Court.” Id. at 4.
4 Upon review, the challenged exhibits reflect various alterations to two payroll-
5 related spreadsheets: (1) the Hawthorne Machinery Co. & Subsidiaries Employee Analysis
6 – Paid Hours (Including Reg., Sick, Vacation & Overtime), (ECF No. 99-9), and (2) the
7 Hawthorne Machinery Payroll Calendar Year 2019, (ECF No. 99-21). Relator submits
8 edited versions of these spreadsheets, including filters and highlights, to further explain his
9 contentions regarding the accurate number of Hawthorne employees. The Court does not
10 rely upon the altered versions of these documents filed by Relator because the original,
11 unedited copies are adequate to inform its analysis of the Motion for Summary Judgment.
12 Accordingly, Defendants’ objections to the altered spreadsheets are denied as moot.
13 B. Materiality
14 Defendants contend that summary judgment is appropriate on the basis that Relator
15 fails to identify adequate evidence to establish materiality because the record does not
16 indicate that the SBA “would have denied guarantee or disbursement in April 2020, or
17 denied forgiveness in October 2021, based on the particular headcount dispute he now
18 advances.” (ECF No. 98-1 at 20.) Defendants also contend that the SBA knew of Relator’s
19 allegations at the time that it chose to forgive Defendants’ loan in full. Id. at 22.
20 Relator responds that materiality is a “fact-specific question that is typically an
21 appropriate question for the jury.” (ECF No. 99 at 26.) Relator contends that PPP loans
22 were meant “to assist small businesses,” and that the limitation on employees for applicant
23 businesses was an integral aspect of the program. Id. at 26–27. Relator contends that the
24 United States’s decision not to intervene in this case and the SBA’s forgiveness of its loan
25 to Defendants are not decisive as to materiality at the summary judgment stage. Id. at 28.
26 Under the False Claims Act, a falsehood is material if it has “a natural tendency to
27 influence, or be capable of influencing, the payment or receipt of money or property.” 31
28 U.S.C. § 3729(b)(4). In Escobar, the Supreme Court stated that “[t]he materiality standard
1 is demanding.” 579 U.S. at 194. “A misrepresentation cannot be deemed material merely
2 because the Government designates compliance with a particular statutory, regulatory, or
3 contractual requirement as a condition of payment.” Id. “[P]roof of materiality can include,
4 but is not necessarily limited to, evidence that the defendant knows that the Government
5 consistently refuses to pay claims in the mine run of cases based on noncompliance with
6 the particular statutory, regulatory, or contractual requirement. Conversely, if the
7 Government pays a particular claim in full despite its actual knowledge that certain
8 requirements were violated, that is very strong evidence that those requirements are not
9 material.” Id. at 194–95.
10 In United States ex rel. Kelly v. Serco, Inc., the Ninth Circuit affirmed a grant of
11 summary judgment on the issue of materiality for a defendant corporation that performed
12 project management services for the United States. 846 F.3d 325, 328 (9th Cir. 2017).
13 Under the terms of the contract, the defendant company was required to “implement a cost
14 and progress tracking system” to record its work. Id. The relator in that action, who had
15 been hired by the defendant company to monitor its performance on the project, determined
16 that the defendant company’s cost reports were unreliable because they “tracked costs
17 manually and with a single charge code in violation of” third-party, standardized guidelines
18 that had not been expressly identified in the contract. Id. at 329. The Ninth Circuit affirmed
19 summary judgment for the defendant on the issue of materiality, stating: “Given the
20 demanding standard required for materiality under the FCA, the government’s acceptance
21 of [the defendant company’s] reports despite their non-compliance with [the standardized
22 guidelines],” and the government’s payment in fulfillment of the contract to the defendant
23 company, “no reasonable jury could return a verdict for [the relator] on his implied false
24 certification claim.” Id. at 335.
25 In Stephens Institute, conversely, the Ninth Circuit affirmed a district court’s denial
26 of summary judgment for claims against a defendant school alleged to have offered
27 financial incentives to admissions officers in violation of eligibility requirements for
28 federal funding. United States ex rel. Rose v. Stephens Inst., 909 F.3d 1012, 1016 (9th Cir.
1 2018). The Ninth Circuit wrote that, in light of the Supreme Court’s holding in Escobar,
2 “it is clear that noncompliance with the incentive compensation ban is not material per se.”
3 Id. at 1020. The appellate court discussed the circumstances to assess whether the alleged
4 violations were material: the federal government had conditioned payment of educational
5 funding on the “incentive compensation ban through statute, regulation, and contract” (in
6 other words, “triple-conditioning” the disbursement of funds) and the Department of
7 Education’s conduct in similar situations demonstrated a pattern of enforcement of the
8 incentive policy, which suggested that it “did care about violations of the incentive
9 compensation ban and did not allow schools simply to continue violating the ban while
10 receiving Title IV funds.” Id. at 1020–22. The appellate court also emphasized the
11 magnitude of the violation: admissions officers saw their salaries adjusted by “as much as
12 $23,000” and could win “a trip to Hawaii.” Id. at 1022 (“[T]hose awards are precisely the
13 kind of substantial incentive that Congress sought to prevent in enacting the ban on
14 incentive compensation.”). The Ninth Circuit concluded that, viewing the evidence in the
15 light most favorable to the relators, a reasonable factfinder could determine that the
16 violations of the prohibition on incentive programs were material. Id.
17 Here, there is no dispute that the PPP loan program to which Defendants applied had
18 a statutory eligibility threshold of 500 employees. Materiality, however, is not satisfied
19 merely by a violation of that threshold. Escobar, 579 U.S. at 194 (“In sum, when evaluating
20 materiality under the False Claims Act, the Government’s decision to expressly identify a
21 provision as a condition of payment is relevant, but not automatically dispositive.”); see
22 also Stephens Institute, 909 F.3d at 1020. The issue of materiality is not resolved merely
23 by determining whether Hawthorne employed more than 500 employees in the relevant
24 time period under either of Relator’s theories of liability.
25 The parties do not identify, as contemplated by the Supreme Court in Escobar, a
26 pattern of conduct in which the SBA declined or chose to issue loans to companies that
27 marginally exceeded the employee headcount threshold. Escobar, 579 U.S. at 195. The
28 record does provide support, however, for a finding similar to the third form of proof
1 contemplated in Escobar that provides insight into materiality: circumstances in which “the
2 Government pays a particular claim in full despite its actual knowledge that certain
3 requirements were violated.” Id.
4 Defendants provide adequate evidence to establish that the SBA forgave
5 Hawthorne’s PPP loan in full on October 4, 2021. (ECF No. 98-21.) Defendants also
6 provide adequate evidence to establish that the SBA’s forgiveness of the loan occurred
7 after the initiation of this action on August 21, 2020, and after a meeting between the DOJ,
8 SBA, and Verhoeven to discuss an investigation into Hawthorne’s PPP loan. (ECF No. 1;
9 ECF No. 98-4 at 3.) This sequence of events supports an inference that the SBA knew of
10 Relator’s allegations regarding the accurate number of Hawthorne employees, and that
11 knowledge of those allegations was insufficient for the SBA to decline forgiveness of the
12 PPP loan. The SBA’s decision to forgive Hawthorne’s PPP loan—although it does not
13 indicate that the agency determined that the eligibility requirements had, in fact, been
14 violated—weighs heavily towards a finding that the alleged violation was immaterial to
15 the SBA’s original decision to issue the loan. Accordingly, Defendants satisfy their burden
16 of demonstrating that the evidence supports summary judgment in their favor on
17 materiality. The burden shifts to Relator to show that summary judgment is not appropriate.
18 Relator cites Gilead Sciences, in which the Ninth Circuit held that the relators
19 sufficiently pled materiality despite “continued FDA approval” of pharmaceutical products
20 after the government learned that the drugs had been produced at unregistered facilities in
21 violation of federal requirements. United States ex rel. Campie v. Gilead Scis., Inc., 862
22 F.3d 890, 896, 906 (9th Cir. 2017). In that case, the Ninth Circuit reasoned that continued
23 approval did not indicate that the violation was immaterial because “there are many reasons
24 the FDA may choose not to withdraw a drug approval” and, moreover, the defendant
25 company ceased using materials from the noncompliant facility during its continuing
26 relationship with the government. Id. at 906. The SBA’s forgiveness of Defendants’ loan
27 is more persuasive on the question of materiality than the continued approval in Gilead
28 Sciences because the alleged violation and the government’s later conduct are related to a
1 single event: the issuance of the PPP loan to Hawthorne, rather than the broader
2 relationship between a pharmaceutical developer and the federal government. The SBA’s
3 forgiveness of Hawthorne’s PPP loan constitutes an affirmative act—rather than the
4 maintenance of an existing relationship—that strongly suggests the alleged violation did
5 not materially affect the government’s determination of whether Hawthorne was eligible
6 for the PPP program.
7 Relator raises a range of purportedly accurate calculations of Hawthorne employees.
8 (See ECF No. 99 at 16 (arguing that Hawthorne “had, at minimum, an average of 503
9 employees” in 2019); id. at 21 (identifying the 561 participants, per Form 5500, on
10 Hawthorne’s employee benefit plan at the beginning of 2019); id. at 22 (contending that
11 Hawthorne should have included the “61 employees that worked at CQ Pacific” in the total
12 headcount).) Even drawing all reasonable inferences in Relator’s favor, the alleged
13 magnitude of Defendants’ false representation does not constitute a substantial deviation
14 from the 500-employee threshold in the CARES Act. Assuming that Relator can establish
15 falsity on any or all of his theories, the alleged deviation from the statutory threshold for
16 PPP eligibility remains “minor or insubstantial.” Escobar, 579 U.S. at 194.
17 Relator has not satisfied his burden to show that summary judgment on the issue of
18 materiality is inappropriate. Based on the record, no reasonable juror could conclude that
19 Defendants’ alleged violation of the statutory threshold for PPP eligibility was material to
20 the SBA. Accordingly, summary judgment for Defendants on the issue of materiality is
21 appropriate as to all claims. See United States ex rel. Hartpence v. Kinetic Concepts, Inc.,
22 44 F.4th 838, 850 n.7 (9th Cir. 2022) (explaining that the materiality analyses under 31
23 U.S.C. § 3729(a)(1)(A) and (B) are equivalent at the summary judgment stage).
24 C. Scienter
25 Defendants also contend that Relator fails to establish scienter because they “sought
26 and followed lender direction on how to complete the headcount field, supported the
27 submission with ordinary-course payroll and headcount materials, and documented
28 distinctions among different payroll-related metrics,” which is “inconsistent with a
1 subjective belief in falsity.” (ECF No. 98-1 at 17.) Defendants contend that, even if
2 Relator’s calculations of Hawthorne’s employee headcount are more accurate than their
3 own, there is inadequate evidence in the record to support a finding that Defendants knew
4 that they exceeded the employee count threshold for PPP eligibility. Id. at 16–17.
5 Relator responds that Verhoeven “purposely ignored [Hawthorne’s] actual payroll
6 numbers” when submitting the PPP application to Coamerica. (ECF No. 99 at 25.) Relator
7 contends that Hawthorne’s internal payroll and health insurance documents indicated a
8 higher number of employees than reported and that Defendants deliberately ignored this
9 information when preparing their loan application. (See ECF No. 99-54 at 3 (Form 5500
10 for the “Hawthorne CAT 401(k) Retirement Plan” from 2019 reporting 561 “active
11 participants at the beginning of the year” and 548 “active participants at the end of the
12 year”).) Relator also identifies the email from David Ness on April 2, 2020, indicating that
13 he believed Hawthorne “won’t be able to benefit from” the PPP loan program because the
14 company employed “about 540–550” employees. (ECF No. 99 at 19; ECF No. 99-41 at 2.)
15 Scienter requires that the defendant acted “knowingly” in providing false
16 information to the government. 31 U.S.C. §§ 3729(a)(1)(A)–(B). The FCA defines
17 “knowingly” as having “actual knowledge of the information,” “act[ing] in deliberate
18 ignorance of the truth or falsity of the information,” or “act[ing] in reckless disregard of
19 the truth or falsity of the information.” Id. § 3729(b)(1). “Congress specifically amended
20 the [FCA] to include this definition of scienter, to make ‘firm . . . its intention that the act
21 not punish honest mistakes or incorrect claims submitted through mere negligence.’”
22 United States ex rel. Hochman v. Nackman, 145 F.3d 1069, 1073 (9th Cir. 1998) (quoting
23 S. Rep. No. 99-345, at 7 (1986)). The Supreme Court has stated that “[t]he FCA’s scienter
24 element refers to [a defendant’s] knowledge and subjective beliefs” at the time that the
25 allegedly false claim is submitted. United States ex rel. Schutte v. SuperValu Inc., 598 U.S.
26 739, 749, 752 (2023).
27 Innocent mistakes and negligent conduct do not establish scienter. In a case
28 concerning a mechanical engineer’s qui tam suit against a former employer, the Ninth
1 Circuit affirmed a district court’s grant of summary judgment in favor of the defendant
2 corporation on the issue of scienter. Wang v. FMC Corp., 975 F.2d 1412, 1421 (9th Cir.
3 1992), overruled on other grounds by United States ex rel. Hartpence v. Kinetic Concepts,
4 Inc., 792 F.3d 1121 (9th Cir. 2015). The Ninth Circuit stated that the relator failed to
5 establish that the defendant corporation had “committed anything more than ‘innocent
6 mistakes’ or ‘negligence’” and that “[v]irtually all of [his] evidence consists of his own
7 affidavit, which assesses and condemns [the defendant corporation’s] performance on
8 various defense projects.” Id. at 1420. With respect to one project, the relator’s “entire
9 claim [was] based on allegedly faulty calculation by another” employee of the defendant
10 corporation. Id. The Ninth Circuit held that the relator’s criticism, “even if accurate, proves
11 no more than an ‘innocent mistake.’” Id.
12 Here, the record indicates that Verhoeven and Coamerica communicated repeatedly
13 about Defendants’ PPP loan application on April 5, 2020. (ECF No. 98-10.) During that
14 day, Verhoeven shared a series of documents, including a “Signed 2483 Application” and
15 payroll documentation. Id. at 8–9. In response to an inquiry from Coamerica about a
16 discrepancy between a payroll figure indicating more than 500 employees and the
17 calculation of total employees in Hawthorne’s application, Verhoeven stated that the “592
18 employees listed in the 2019 report include[s] all employees who received a pay check
19 during 2019. They were not all employed at the same time. We did not exceed 500
20 employees at any individual point during 2019.” Id. at 3.
21 In response, Coamerica advised Verhoeven to “fix the employee number on the
22 application to reflect the average employee headcount in the last 12 months.” (ECF No.
23 98-10 at 2.) Coamerica’s response did not appear to suggest that Hawthorne should conceal
24 information about the number of its employees; instead, the advisal was based on concern
25 that the “SBA won’t accept the . . . current employee headcount of Hawthorne” and that
26 historical information from 2019 was more appropriate. Id. (emphasis added). The Active
27 Employee Report subsequently generated by Defendants indicated a “2019 Average Active
28 Headcount” of 486 employees and listed, at bottom, the number of reported Hawthorne
1 employees as 489. (ECF No. 98-24 at 2.) In the finalized Form 2483 conveyed to
2 Coamerica for submission in its PPP loan application, Hawthorne listed 489 as the total “#
3 of Jobs” in connection with its application. (ECF No. 98-12 at 6.)
4 During his deposition, Verhoeven testified about the methodology used to determine
5 the number of Hawthorne employees in 2019:
6 Well, when the law was originally passed, the information provided about
how to go about counting employees was not laid out. So we were left with
7
trying to come up with a reasonable approach to counting employees. And so
8 in the instructions to the form, which are not on this one, but different—on
the other application, it made reference to most applicants will use the 2019
9
payroll.
10
So seeing that, and not having any other guidance at the time, I went about
11
preparing the application. Most of the time was spent in getting the dollars,
12 the analysis done for the dollars. . . .
13
I followed the same approach using the 2019 calendar year, and I used our
14 month-end active employee report in our financial system to determine how
many employees we had that were active at the end of each calendar month.
15
16 (ECF No. 98-26 at 14–15.)
17 The record indicates that Verhoeven adopted a methodology for determining the
18 total number of Hawthorne employees in 2019 by averaging the number of employees at
19 the end of each month in that year. The guidance available to Defendants at the time of
20 submitting their PPP loan did not indicate that this methodology was impermissible. The
21 statutory definition of “employees,” which included full-time and part-time employees, did
22 not explain how those employees should be counted for the purpose of the PPP application,
23 including in the case of termination during a pay period. 15 U.S.C. § 636(a)(36)(D)(v).
24 Likewise, the provision that “part-time” employees must be included did not explain how
25 the termination of an employee during the year should affect their mathematical
26 contribution towards the company’s total headcount. Defendants satisfy their burden to
27 show that summary judgment is appropriate on the issue of scienter, and the burden shifts
28
1 to Relator to present “persuasive evidence” that summary judgment is not appropriate.
2 Kelly, 846 F.3d at 330.
3 Even drawing all reasonable inferences in favor of Relator, the email sent by David
4 Ness three days prior to Hawthorne’s PPP loan application is inadequate to create a triable
5 issue of fact regarding scienter. The email states that David Ness has been “working with
6 outside council [sic] to analyze the [CARES Act]” and estimates that Hawthorne is
7 ineligible for a PPP loan because it maintains “about 540–550 employees.” During his
8 deposition, however, David Ness testified that he was not involved in Hawthorne’s loan
9 application process and did not know how the total number of employees was calculated
10 for the purpose of the application. (ECF No. 99-42 at 14, 16.) The record reflects, instead,
11 that Verhoeven prepared the loan application based on his communications with
12 Coamerica. (ECF No. 98-26 at 14–16.) David Ness’s estimate of Hawthorne’s employee
13 headcount, which exceeded the statutory threshold for PPP eligibility, does not indicate
14 that Verhoeven later acted knowingly or with deliberate indifference in contributing false
15 information to Hawthorne’s loan application.
16 With respect to Relator’s theory of falsity related to the affiliate/franchise status of
17 CQ Pacific, the statutory guidance contained a “[w]aiver of affiliation rules.” Id.
18 § 636(a)(36(D)(iv). Defendants contend that, at the time of the loan application, they
19 understood CQ Pacific to qualify as a franchise whose employees were excluded from its
20 total count. (DUF ¶ 28.) Verhoeven testified, in relevant part:
21 Well, when the law came out, it didn’t define franchise, as I recall. It – it used
fairly plain language about the term “franchise,” in the context of whether or
22
not a company is listed on the SBA’s franchise agreement. You know, the law
23 was put together very quickly, and they used a lot of general terms. It was
intended to be broad, from our understanding.
24
25 And so, in reviewing it, we concluded that the term “franchise” relates to the
franchise list that the SBA issued.
26
27 (ECF No. 98-26 at 11.)
28
l Even if Defendants should have employed an alternative methodology that would
2 ||have yielded a number of Hawthorne employees greater than the statutory limit for PPP
3 || eligibility or included CQ Pacific employees, the record does not indicate that Defendants
4 || acted knowingly or in reckless disregard of the truth when preparing the Form 2483 and
5 |}other supporting materials for the PPP loan application. Communications between
6 || Verhoeven and Coamerica indicate a mutual effort to provide the required documentation
7 || to the SBA. Relator’s contentions are related mostly to the question of whether Defendants’
8 ||methodology was correct; however, the fact that Hawthorne should have counted its
9 ||}employees in a manner that resulted in a higher total does not establish that Defendants
10 ||knowingly submitted a false headcount in their PPP application. At this stage in the
11 || proceedings, Defendants adequately point to an absence of evidence that could support a
12 || finding of scienter. Relator does not identify adequate evidence in response to support the
13 conclusion that a reasonable factfinder could find in his favor on scienter.
14 Accordingly, summary judgment in favor of Defendants is warranted on the
15 |/elements of materiality and scienter as to both of Relator’s claims under the FCA. The
16 || Court does not reach the question of whether summary judgment is appropriate on the issue
17 || of falsity with respect to either of Relator’s theories of liability because, even if a rational
18 factfinder could find for Relator of the issue of falsity, each of the foregoing grounds
19 || provides an independent basis to issue judgment on all claims for Defendants.
20 V. CONCLUSION
21 IT IS HEREBY ORDERED that the Motion for Summary Judgment (ECF No. 98)
22 granted. The Clerk of Court shall enter judgment in favor of Defendants and against
23 || Relator as to all claims.
24
25
26 ||Dated: June 8, 2026 itt Z. Maa
27 Hon. William Q. Hayes
28 United States District Court
44