relator’s opposition defendants’ motion has alleged a material misrepresentation regarding...

United States ex rel. Ben Ferris v. Afognak

Native Corp, et al.; 3:15-cv-00150-HRH

William H. Narwold (pro hac vice)

[email protected]

Mathew P. Jasinski (pro hac vice)

[email protected]

Michael J. Pendell (pro hac vice)

[email protected]

Laura W. Ray (pro hac vice)

[email protected]

MOTLEY RICE LLC

20 Church St., 17th Floor

Hartford, CT 06103

Tel.: (860) 882-1681

Fax: (860) 882-1682

John P. Cashion (Alaska Bar No. 9806025)

[email protected]

CASHION GILMORE LLC

1007 W. 3rd Ave., Suite 301

Anchorage, AK 99501

Tel.: (907) 222-7936

Fax: (907) 222-7038

[email protected]

Sarah M. Frazier (pro hac vice)

[email protected]

BERG & ANDROPHY

3704 Travis St.

Houston, TX 77002

Tel: (713) 529-5622

Fax: (713) 529-3785

Charles H. Rabon, Jr. (pro hac vice)

[email protected]

RABON LAW FIRM, PLLC

225 E. Worthington Ave., Ste. 100

Charlotte, NC 28203

Tel.: (704) 247-3247

Fax: (704) 208-4645

Attorneys for Relator Ben Ferris

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF ALASKA

UNITED STATES OF AMERICA,

ex. rel. BEN FERRIS,

Plaintiff,

v.

AFOGNAK NATIVE CORPORATION and

ALUTIIQ, LLC,

Defendants.

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Case No. 3:15-cv-00150-HRH

RELATOR’S OPPOSITION

TO DEFENDANTS’ MOTION

TO DISMISS THE SECOND

AMENDED COMPLAINT

PURSUANT TO RULES 12(b)(6)

AND 9(b) [212]

Case 3:15-cv-00150-HRH Document 218 Filed 01/03/17 of 37


Native Corp, et al.; 3:15-cv-00150-HRH - i -

TABLE OF CONTENTS

I. INTRODUCTION .............................................................................................................. 1

II. BACKGROUND ................................................................................................................ 2

A. The Small Business Act’s 8(a) program is reserved exclusively for small business

concerns, irrespective of their ownership. .............................................................. 2

B. Relator alleges that Afognak has misrepresented its subsidiaries’ small business

status. ...................................................................................................................... 6

C. The only issue before the Court is whether Relator sufficiently has alleged that the

misrepresentations were material. ........................................................................... 8

III. LEGAL STANDARD ....................................................................................................... 10

IV. ARGUMENT .................................................................................................................... 11

A. Afognak’s misrepresentations are material because they have “a natural tendency

to influence” the payment or receipt of money or property. ................................. 12

1. A reasonable person would attach importance to Afognak’s

misrepresentations..................................................................................... 15

2. Even if a reasonable person would not attach importance to Afognak’s

misrepresentations, Afognak knew or had reason to know that the

government did. ........................................................................................ 17

B. Relator sufficiently has alleged Afognak’s material misrepresentations. ............. 19

1. Relator has alleged a material misrepresentation regarding whether

Afognak’s 8(a) subsidiaries are separate and distinct small business

concerns. ................................................................................................... 20


Afognak’s 8(a) subsidiaries do their own work as separate and distinct

small business concerns. ........................................................................... 22


Afognak’s 8(a) subsidiaries are managed as separate and distinct small

business concerns. ..................................................................................... 23


Afognak’s 8(a) subsidiaries pursue growth and development as separate

and distinct small business concerns......................................................... 24

C. There is no evidence that the government has actual knowledge of

Afognak’s violations. ............................................................................................ 25

V. CONCLUSION ................................................................................................................. 28



Native Corp, et al.; 3:15-cv-00150-HRH - ii -

TABLE OF AUTHORITIES

Cases

Ab-Tech Constr. v. United States,

31 Fed. Cl. 429 (Fed. Cl. 1994) ................................................................................................ 18

Am. Elec. Co. v. United States,

270 F. Supp. 689 (D. Haw. 1967) ............................................................................................... 4

Ashcroft v. Iqbal,

556 U.S. 662 (2009) .................................................................................................................. 10

Autodesk, Inc. v. Dassault Systemes Solidworks Corp., No. C 08-04397 WHA,

2008 U.S. Dist. LEXIS 109800 (N.D. Cal. Dec. 18, 2008) ...................................................... 10

Bell Atl. Corp. v. Twombly,

550 U.S. 544 (2007) .................................................................................................................. 10

Berg v. Honeywell Int’l, Inc.,

580 Fed. App’x 559 (9th Cir. 2014) ......................................................................................... 27

Bly-Magee v. California,

236 F.3d 1014 (9th Cir. 2001) .................................................................................................. 11

Ebeid ex rel. United States v. Lungwitz,

616 F.3d 993 (9th Cir. 2010) .............................................................................................. 10, 11

Hooper v. Lockheed Martin Corp.,

688 F.3d 1037 (9th Cir. 2012) .................................................................................................. 27

In re Reality Technologies, Inc., SBA No. BDPT-488,

2013 WL 215002 (May 3, 2013) .............................................................................................. 23

In re Sparccom & Assocs., SBA No. BDPT-501,

2013 WL 4502314 (Aug. 19, 2013) .......................................................................................... 25

Livid Holdings Ltd. v. Salomon Smith Barney, Inc.,

416 F.3d 940 (9th Cir. 2005) .................................................................................................... 10

Rose v. Stephens Inst., No. 09-cv-05966-PJH,

2016 U.S. Dist. LEXIS 128269 (N.D. Cal. Sept. 20, 2016) ..................................................... 25

Silvas v. E*Trade Mortg. Corp.,

514 F.3d 1001 (9th Cir. 2008) .................................................................................................. 10



Native Corp, et al.; 3:15-cv-00150-HRH - iii -

United States ex rel. Am. Sys. Consulting v. ManTech Advanced Sys. Int’l,

600 Fed. Appx. 969 (6th Cir. 2015) .......................................................................................... 27

United States ex rel. Handal v. Cent. Empl. Training, No. 2:13-cv-01697-KJM-KJN,

2016 U.S. Dist. LEXIS 105158 (E.D. Cal. Aug. 8, 2016) .................................................. 11, 16

United States ex rel. Harrison v. Westinghouse Savannah River Co.,

352 F.3d 908 (4th Cir. 2003) .................................................................................................... 27

United States ex rel. Hendow v. Univ. of Phoenix,

461 F.3d 1166 (9th Cir. 2006) ............................................................................................ 11, 16

United States ex rel. Jordan v. Northrop Grumman Corp., No. CV 95-2985 ABC,

2002 U.S. Dist. LEXIS 26674 (C.D. Cal. Aug. 5, 2002) .......................................................... 28

United States v. Palin, No. 1:14-cr-00023,

2016 U.S. Dist. LEXIS 111225 (W.D. Va. Aug. 22, 2016) ..................................................... 12

United States v. United Healthcare Ins. Co.,

832 F.3d 1084 (9th Cir. 2016) ............................................................................................ 10, 11

United States, ex rel. Escobar v. Universal Health Servs.,

842 F.3d 103, 2016 U.S. App. LEXIS 21072 (1st Cir. Nov. 22, 2016)............................ passim

United States, ex rel. Longhi v. Lithium Power Techs., Inc.,

575 F.3d 458 (5th Cir. 2009) .................................................................................................... 12

United States, ex rel. Miller,

840 F.3d 494, 2016 U.S. App. LEXIS 18758 (8th Cir. Oct. 19, 2016) .............................. 14, 16

Universal Health Services, Inc. v. United States, ex rel. Escobar,

136 S. Ct. 1989 (Jun. 16, 2016) ......................................................................................... passim

Statutes

15 U.S.C. § 631 ............................................................................................................................... 3

15 U.S.C. § 631(f)(1)(E) ............................................................................................................... 17

15 U.S.C. § 631(f)(2)(C) ............................................................................................................... 17

15 U.S.C. § 632(a)(1) ............................................................................................................ 3, 4, 21

15 U.S.C. § 632(a)(2)(A) ................................................................................................................ 4

15 U.S.C. § 632(a)(2)(B) ................................................................................................................ 4

15 U.S.C. § 632(w)(1)............................................................................................................... 8, 17



Native Corp, et al.; 3:15-cv-00150-HRH - iv -

15 U.S.C. § 632(w)(2)..................................................................................................................... 1

15 U.S.C. § 636(j)(10) .................................................................................................................... 3

15 U.S.C. § 636(j)(10)(J)(ii)(II) ...................................................................................................... 5

15 U.S.C. § 636(j)(11)(B)(iii) ......................................................................................................... 5

15 U.S.C. § 637(a) .......................................................................................................................... 3

15 U.S.C. § 637(a)(1) ...................................................................................................................... 3

15 U.S.C. § 637(a)(1)(B) ................................................................................................................ 3

15 U.S.C. § 637(a)(13) .................................................................................................................... 4

15 U.S.C. § 637(a)(4) ...................................................................................................................... 4

15 U.S.C. § 637(a)(4)(A)(i)(II) ....................................................................................................... 5

15 U.S.C. § 637(a)(4)(B)(ii) ........................................................................................................... 5

31 U.S.C. § 3729(a)(1)(A) ............................................................................................................ 11

31 U.S.C. § 3729(a)(1)(B) ............................................................................................................ 11

31 U.S.C. § 3729(b)(4) ................................................................................................................. 12

31 U.S.C. §§ 3729-3733 ................................................................................................................. 1

43 U.S.C. § 1626(e)(1) .................................................................................................................... 4

Public Laws

Pub. L. 101-574, § 204, 104 Stat. 2819 (Nov. 15, 1990) ................................................................ 5

Pub. L. No. 102-415, § 10, 106 Stat. 2115 (Oct. 14, 1992) ............................................................ 4

Pub. L. No. 111-21 at § 4, 123 Stat. 1623 (2009) ......................................................................... 12

Pub. L. No. 83-163, § 207, 67 Stat. 236 (Jul. 30, 1953) ................................................................. 3

Pub. L. No. 83-163, §§ 202, 203, 67 Stat. 232-33 (Jul. 30, 1953) .................................................. 3

Pub. L. No. 83-163, §§ 207(c)-(d), 67 Stat. 236 (Jul. 30, 1953) ..................................................... 3

Pub. L. No. 85-536, § 8(a), 72 Stat. 384 (Jul. 18, 1958) ................................................................. 3



Native Corp, et al.; 3:15-cv-00150-HRH - v -

Pub. L. No. 95-507, § 201, 92 Stat. 1760-61 (Oct. 24, 1978) ....................................................... 17

Pub. L. No. 95-507, § 204, 92 Stat. 1765-66 (Oct. 24, 1978) ......................................................... 3

Pub. L. No. 99-272, § 18015, 100 Stat. 370-71 (Apr. 7, 1986) ...................................................... 4

Pub. L. No. 99-562, 100. Stat. 3153 (Oct. 27, 1987) .................................................................... 27

Rules

Fed. R. Civ. P. 12(b)(6)............................................................................................................. 1, 10

Fed. R. Civ. P. 9(b) ............................................................................................................. 1, 10, 11

Regulations

13 C.F.R. § 121.101 ........................................................................................................................ 6

13 C.F.R. § 121.103(a)(1) ............................................................................................................... 5

13 C.F.R. § 121.103(e).................................................................................................................... 5

13 C.F.R. § 121.108(b)(1) ............................................................................................................. 17

13 C.F.R. § 122.104(d)(1) ............................................................................................................... 4

13 C.F.R. § 122.106(b)(4)(i) ........................................................................................................... 4

13 C.F.R. § 124.1 ............................................................................................................................ 4

13 C.F.R. § 124.102 ...................................................................................................................... 16

13 C.F.R. § 124.109(c)(1) ............................................................................................................. 21

13 C.F.R. § 124.109(c)(2) ............................................................................................................. 16

13 C.F.R. § 124.109(c)(2)(iii) ......................................................................................................... 5

13 C.F.R. § 124.109(c)(3)(ii) ........................................................................................................ 26

13 C.F.R. § 124.109(c)(4) ............................................................................................................. 23

13 C.F.R. § 124.109(c)(4)(i) ......................................................................................................... 23

13 C.F.R. § 124.109(c)(4)(ii) ........................................................................................................ 24

13 C.F.R. § 124.2 ............................................................................................................................ 4



Native Corp, et al.; 3:15-cv-00150-HRH - vi -

13 C.F.R. § 124.402(c).................................................................................................................. 24

13 C.F.R. § 124.403(c)(2) ............................................................................................................. 24

13 C.F.R. § 124.501(g) ................................................................................................................. 16

Federal Register

34 Fed. Reg. 4937-38 (Mar. 7, 1969) ............................................................................................. 3

35 Fed. Reg. 4939-40, § 4 (Mar. 21, 1970) .................................................................................... 3

76 Fed. Reg. 8222, 8256 (Feb. 11, 2011) ..................................................................................... 26

81 Fed. Reg. 34243, 34244 (May 31, 2016) ................................................................................. 22

Legislative History

136 Cong. Rec. S17645-02, 17647 (Oct. 27, 1990) ........................................................................ 5

Other Authorities

Matthew C. Stephenson, Public Regulation of Private Enforcement: The Case for

Expanding the Role of Administrative Agencies, 91 Va. L. Rev. 93 (2005) ............................. 28

Restatement (Second) of Torts § 538 (1977) ................................................................................ 14

SBA, About the 8(a) Business Development Program,

https://www.sba.gov/contracting/government-contracting-programs/8a-business-

development-program/about-8a-business-development-program

(last visited Jan. 2, 2017) ............................................................................................................ 4

Suppl. Br. for Amicus Curiae Taxpayers Against Fraud Educ. Fund, United States, ex rel.

Escobar v. Universal Health Servs., No. 14-1423, at 7 (1st Cir. Aug. 22, 2016) ..................... 14

U.S. Gov’t Accountability Office, GAO-06-399, Contract Management: Increased Use

of Alaska Native Corporations’ Special 8(a) Provisions Calls for Tailored Oversight

(2006) .................................................................................................................................. 26, 28

U.S. Gov’t Accountability Office, GAO-12-84, Federal Contracting: Monitoring and

Oversight of Tribal 8(a) Firms Need Attention (2012) ................................................. 26, 27, 28



Native Corp, et al.; 3:15-cv-00150-HRH - 1 -

I. INTRODUCTION

Relator Ben Ferris (“Relator”) opposes the November 28, 2016 motion to dismiss filed by

Defendants Afognak Native Corporation and Alutiiq, LLC (together, “Afognak”).1

In order to qualify for set-aside and no-bid government contract work under the Small

Business Administration’s (“SBA”) 8(a) Small Business Development Program, Afognak

certifies that its subsidiaries qualify as small businesses. 15 U.S.C. § 632(w)(2). As alleged in the

Second Amended Complaint (“SAC”),2 however, the truth is that Afognak’s subsidiaries exist

only on paper, have no real employees except those of their parent company, and have only

“placeholder” managers who have no knowledge of which small businesses they “manage” and

instead work solely to advance the interests of Afognak itself. (See generally, e.g., SAC, ¶ 39,

¶¶ 49-83.) As a result, Afognak has caused damages to the United States “based on the total

amount expended” on these contracts. 15 U.S.C. § 632(w)(2). Relator brought this action under

the False Claims Act (“FCA”), 31 U.S.C. §§ 3729-3733, to recover such damages, and civil

penalties, on behalf of the United States of America.

Afognak previously moved to dismiss Relator’s First Amended Complaint on the ground

that Relator had not sufficiently stated a claim “because nothing about the operational structure

pled in the Amended Complaint would disqualify [Afognak]’s businesses from participating” in

1 Dkt. #212, Defs.’ Mot. to Dismiss Second Am. Compl. Pursuant to Rules 12(b)(6) and

9(b) (cited herein as “Mot.”). 2 Pursuant to the Confidentiality and Protective Order in this case (Dkt. #71), Relator

initially filed a redacted version of the SAC on the public docket (Dkt. #202) and moved to seal

the unredacted version of the SAC, and exhibits 12 and 13 thereto, for a temporary period of

fourteen days (Dkt. #203), which motion the Court granted on November 21, 2016 (Dkt. #209).

As Afognak notes, the temporary seal has expired. (See Mot. at 9 n.6.) Accordingly, Relator

herewith has filed the unredacted version of the SAC on the public docket. (Dkt. #217.)




the 8(a) Program.3 Afognak lost that argument. (Dkt #48.) Now, relying upon the Supreme

Court’s recent decision in Universal Health Services, Inc. v. United States, ex rel. Escobar,

136 S. Ct. 1989 (Jun. 16, 2016), Afognak insists that whether its subsidiaries qualified for the

8(a) program is immaterial. Specifically, Afognak’s second motion to dismiss contends that

Relator has failed “to plead any facts showing the government actually does not pay claim

involving the statutory violations in question.” (Mot. at 1 (emphasis omitted).)

This is one way to prove materiality, to be sure. But Escobar itself makes clear that it is

not the only way. See Escobar, 136 S. Ct. at 2003 (“proof of materiality can include, but is not

necessarily limited to, evidence that the defendant knows that the Government consistently

refuses to pay claims” (emphasis added)); see also id. at 2001 (“materiality cannot rest on a

single fact or occurrence as always determinative” (internal quotation marks omitted)). Instead, a

representation is material if either (1) a reasonable person would attach importance to it in

determining his or her choice of action in the transaction or (2) the defendant knew or had reason

to know that the recipient of the representation attaches importance to it, even though a

reasonable person would not. Id. at 2002-2003. As set forth below, Relator meets both standards.

Accordingly, Afognak’s second motion to dismiss should be denied.

II. BACKGROUND

A. The Small Business Act’s 8(a) program is reserved exclusively for

small business concerns, irrespective of their ownership.

The purpose of the Small Business Act (the “Act”) is to “aid, counsel, assist, and protect”

“small-business concerns” and “to insure that a fair proportion of the total purchases and

contracts or subcontracts for property and services for the Government” be placed with such

3 Dkt. #32, Mem. of Law in Supp. of Defs.’ Mot. to Dismiss (“Defs.’ 1st MTD”), at 13.




concerns. See 15 U.S.C. § 631. The Act defines a “small-business concern” as “one which is

independently owned and operated and which is not dominant in its field of operation . . . .”

15 U.S.C. § 632(a)(1). Both the purpose of the Act and definition of a “small-business concern”

have remained virtually unchanged since the Act’s enactment in 1953. Compare 15 U.S.C.

§§ 631, 632(a)(1), with Pub. L. No. 83-163, §§ 202, 203, 67 Stat. 232-33 (Jul. 30, 1953).

Under § 207 of the 1953 Act—which became § 8(a) in 19584—Congress authorized the

SBA to enter into contracts with the government “to furnish articles, equipment, supplies or

materials,” and to subcontract the performance of those contracts to “small-business concerns or

others.” Pub. L. No. 83-163, §§ 207(c)-(d), 67 Stat. 236 (Jul. 30, 1953) (codified at 15 U.S.C.

§ 637(a)(1)). By 1970, the SBA had begun using § 8(a) as a vehicle for strengthening minority-

owned small businesses in conjunction with President Nixon’s creation of a minority business

enterprise program.5 Congress formally established the 8(a) program in 1978, see Pub. L.

No. 95-507, § 204, 92 Stat. 1765-66 (Oct. 24, 1978),6 which it reserved exclusively for small

business concerns owned and controlled by socially and economically disadvantaged individuals,

id., § 202, 92 Stat. 1761 (codified at 15 U.S.C. § 637(a)(1)(B)). In 1986, Congress opened up the

8(a) program to small business concerns owned by “economically disadvantaged Indian

4 Pub. L. No. 85-536, § 8(a), 72 Stat. 384 (Jul. 18, 1958). 5 See Exec. Order No. 11458, 34 Fed. Reg. 4937-38 (Mar. 7, 1969); see also Exec. Order

No. 11518, 35 Fed. Reg. 4939-40, § 4 (Mar. 21, 1970) (“the [SBA] shall particularly consider the

needs and interests of minority-owned small business concerns”). 6 “There is established within the Administration a small business and capital ownership

development program (hereinafter referred to as the “Program”) which shall provide assistance

exclusively for small business concerns eligible to receive contracts pursuant to section 637(a) of

this title.” 15 U.S.C. § 636(j)(10).




Tribe[s],” including Alaska Native Corporations (“ANCs”).7 See Pub. L. No. 99-272, § 18015,

100 Stat. 370-71 (Apr. 7, 1986) (codified at 15 U.S.C. §§ 637(a)(4), 637(a)(13)).

As expressed by the SBA, the purpose of the 8(a) program is “to assist eligible small

disadvantaged business concerns compete in the American economy through business

development.” 13 C.F.R. § 124.1. “A firm that completes its nine year term of participation in

the 8(a) BD program is deemed to graduate from the program.” 13 C.F.R. § 124.2. The goal “is

to graduate 8(a) firms that will go on to thrive in a competitive business environment.” SBA,

About the 8(a) Business Development Program.8

In addition to the statutory definition of a “small business concern”—i.e., “one which is

independently owned and operated and which is not dominant in its field of operation,”

15 U.S.C. § 632(a)(1)—the Act empowers the SBA to “specify detailed definitions or standards

by which a business concern may be determined to be a small business concern . . . .” 15 U.S.C.

§ 632(a)(2)(A). In fashioning such size standards, the SBA may utilize, among other criteria, the

number of employees and dollar volume of business. See 15 U.S.C. § 632(a)(2)(B). As a general

rule, the SBA includes both the small business concern and its “affiliates” in applying these

standards. See, e.g., 13 C.F.R. § 122.104(d)(1); 13 C.F.R. § 122.106(b)(4)(i). Otherwise,

“corporate giants with small affiliates . . . could reap the benefits of small business

contracts . . . .” See Am. Elec. Co. v. United States, 270 F. Supp. 689, 692 (D. Haw. 1967).

7 In 1992, Congress amended the Alaska Native Claims Settlement Act (“ANCSA”) to

clarify that ANCs are “economically disadvantaged” for all purposes of federal law. Pub. L. No.

102-415, § 10, 106 Stat. 2115 (Oct. 14, 1992) (codified at 43 U.S.C. § 1626(e)(1)). 8 https://www.sba.gov/contracting/government-contracting-programs/8a-business-

development-program/about-8a-business-development-program (last visited Jan. 2, 2017).




Broadly speaking, “[c]oncerns and entities are affiliates of each other when one controls

or has the power to control the other, or a third party or parties controls or has the power to

control both.” 13 C.F.R. § 121.103(a)(1). Likewise, “[a]ffiliation arises where one or more

officers, directors, managing members, or partners who control the board of directors and/or

management of one concern also control the board of directors or management of one or more

other concerns.” 13 C.F.R. § 121.103(e). Yet, to participate in the 8(a) program, a tribally-owned

concern must be owned by the tribe (or a wholly-owned business entity of such tribe), the firm’s

“management and daily business operations” must be controlled by one or more tribal members,

and they—or managers that they hire—may oversee two 8(a) participants at time. See 15 U.S.C.

§§ 636(j)(11)(B)(iii), 637(a)(4)(A)(i)(II), 637(a)(4)(B)(ii). Thus, it is no surprise that, in 1990,

Congress amended the Act to clarify that the affiliates of a tribally-owned small business concern

are not included in assessing its size for purposes of the 8(a) program:

In determining the size of a small business concern owned by a socially and

economically disadvantaged Indian tribe (or a wholly owned business entity of

such tribe), each firm’s size shall be independently determined without regard to

its affiliation with the tribe, any entity of the tribal government, or any other

business enterprise owned by the tribe, unless the Administrator determines that

one or more such tribally owned business concerns have obtained, or are likely to

obtain, a substantial unfair competitive advantage within an industry category.

Pub. L. 101-574, § 204, 104 Stat. 2819 (Nov. 15, 1990) (codified at 15 U.S.C.

§ 636(j)(10)(J)(ii)(II)); accord 13 C.F.R. § 124.109(c)(2)(iii).9 Unlike other large companies,

ANCs—and, more importantly, their shareholders—may reap the benefits of their subsidiaries’

participation in the 8(a) program.

9 As stated in the legislative history, the impetus for this amendment was the fact that

“concurrent tribal ownership of several [8(a)] Program Participants ha[d] sometimes created

other eligibility problems in light of SBA’s generally applicable rules regarding ‘affiliation.’”

136 Cong. Rec. S17645-02, 17647 (Oct. 27, 1990).




Nevertheless, Afognak does not dispute that each such subsidiary must itself be a “small

business concern.” (Mot. at 5-6.) That is, irrespective of the size of its affiliates and

notwithstanding its ownership by the ANC, a tribally-owned 8(a) firm must be both “small”

within the SBA’s size standards and an independently operated “business concern” within the

meaning of the Act. For an ANC to reap the benefits of its subsidiaries’ participation in the 8(a)

program, the subsidiaries themselves must bid on the contracts and do the work.

B. Relator alleges that Afognak has misrepresented its subsidiaries’

small business status.

In the present case, Relator contends that Afognak’s 8(a) subsidiaries do not actually bid

on the contracts or do the work because they are not operated as legitimate, independent small

business concerns. (See generally SAC ¶¶ 4-6.) Instead, they exist in name only, as an elaborate

front for their parent’s direct—and illicit—participation in the 8(a) program.

As alleged the Second Amended Complaint, Afognak has over a dozen subsidiaries, each

of which purports to be competent in a particular industry, as reflected in that subsidiary’s

primary NAICS code.10 (See SAC, ¶¶ 19, 32, 49.) Externally, these subsidiaries are the “small

business concerns” that ostensibly bid on, contract for, and perform 8(a) work with their own

employees. (See id., ¶¶ 4, 25-29.) Internally, however, the subsidiaries are pure fiction—names

on a page. In reality, Afognak has eight industry-based operating divisions that are responsible

for performing contracts within their respective areas of expertise. (See id., ¶¶ 40-46.) It is

through these divisions that Afognak—an $800 million enterprise (id., ¶ 40)—itself

surreptitiously bids on and performs the work with its employees, regardless of which

10 The SBA utilizes the North American Industry Classification System (“NAICS”). This

system includes definitions for each business industry and assigns codes to all economic activity

within twenty broad sections. See 13 C.F.R. § 121.101.




subsidiary’s name appears on the contract (id., ¶¶ 5, 52-54, 67, 75). Afognak tracks and

maintains the performance of each contract awarded to its own divisions, not the separate 8(a)

business entities to which the government contracts nominally were awarded. (See id., ¶¶ 76-79.)

Externally, each subsidiary has a general manager, who is responsible for that entity’s

management and daily operations, and who devotes all the time necessary to the subsidiary as his

first priority. (SAC, ¶¶ 50, 64.) Internally, these general managers have no real operational

responsibilities for Afognak’s subsidiaries, because the subsidiaries do not actually operate as

business concerns. (See id., ¶¶ 51, 57-60.) Instead, the general managers are assigned

responsibilities within their respective Afognak divisions, on a contract-by-contract basis,

without regard to the 8(a) entity to which the contract was awarded. (See, e.g., id., ¶¶ 61, 65.)

Externally, each Afognak subsidiary has a business plan to grow, develop, and succeed

after graduation from the 8(a) program. (See SAC, ¶¶ 33, 70, 130.) Internally, it is Afognak alone

that has a plan for growth—its elaborate scheme of organizing sham entities in order to obtain

lucrative government contracts for itself, not for its subsidiaries. (See id., ¶¶ 77, 82-83.) From

their inception, Afognak’s 8(a) subsidiaries have no prospects for growth beyond the usefulness

of their NAICS codes to Afognak and the amount of contract dollars remaining under their

NAICS code caps. (See id., ¶¶ 19, 53.)

Afognak is required to certify in, inter alia, each subsidiary’s application and annual

reviews, that the subsidiary qualifies for participation in the 8(a) program. (See generally

SAC, ¶¶ 32-33, 49-50, 63-67.) Based upon the foregoing allegations, Relator contends that

Afognak is liable under the FCA for falsely and/or fraudulently certifying, or causing its

subsidiaries to certify, that:




Afognak’s 8(a) subsidiaries are separate and distinct small business concerns

(see SAC, ¶¶ 38, 91, 140, 145);

Afognak’s 8(a) subsidiaries would fully perform each contract awarded,

consistent with all applicable percentages of work and costs required thereunder

(see id., ¶¶ 94, 95, 140, 148);

the general manager assigned to each subsidiary actually manages the daily

operations of that subsidiary, his expertise and background aligns with that

particular 8(a) entity’s industry focus, and he devotes all the time necessary to

the concern in order for it to achieve its business objectives (see id., ¶¶ 50, 93,

140, 147); and

Afognak’s 8(a) subsidiaries will pursue contracts that will allow the business to

grow, develop, and eventually graduate from the program (see id., ¶¶ 92, 104,

140, 146).

As a result, Afognak “willfully sought and received” each 8(a) contract by

misrepresentation. See 15 U.S.C. § 632(w)(1). Indeed, it is the Supreme Court’s Escobar

decision—so heavily relied upon by Afognak—that best affirms the viability of Relator’s theory

of liability. Specifically, where a party has allegedly perpetrated a scheme to defraud the

government in order to obtain funds—here, government contracts—to which it is not entitled, the

FCA is implicated, whether the party has uttered specific misrepresentations or misled through

half-truths, and whether the misrepresentations relate to statutory or contractual compliance.

Escobar, 136 S. Ct. at 2000 n.3 and accompanying text. Here, Relator has alleged both false

certifications and half-truths implicating both statutory and contractual violations.

C. The only issue before the Court is whether Relator sufficiently has alleged

that the misrepresentations were material.

Relator commenced this action under seal, in the United States District Court for the

Northern District of Alabama, on May 30, 2013. (Dkt. #1.) He filed the First Amended

Complaint on June 24, 2013. (Dkt. #6.) Following the government’s notice of declination

(Dkt. #14), Afognak filed its first motion to dismiss on September 30, 2014 (Dkt. #31). In




support of dismissal, Afognak relied principally upon the argument that Afognak had not

misrepresented its subsidiaries’ eligibility for the 8(a) program “because nothing about the

operational structure pled in the Amended Complaint would disqualify [Afognak’s] businesses

from participating” in the 8(a) program. (Dkt. #32, Mem. of Law, at 13.) On January 8, 2015, the

Alabama court denied Afognak’s motion in all parts relevant here11 (Dkt. #48), and Afognak

subsequently answered the First Amended Complaint on January 30, 2015 (Dkt. #53).

Afognak moved to transfer venue to the United States District Court for the District of

Alaska, which motion the Alabama court granted on August 6, 2015 (Dkt. #101). Thereafter, on

June 16, 2016, the United States Supreme Court issued Escobar. On the purported ground that

Relator’s allegations failed to meet the materiality standard articulated by the Supreme Court,12

Afognak moved on August 17, 2016 for leave to file a motion for judgment on the pleadings.

(Dkt. #189.) In actuality, Afognak’s motion for leave rested upon the same (unsuccessful)

argument advanced in its earlier motion to dismiss, namely, that Afognak has not made any

misrepresentations because its subsidiaries are, in fact, eligible to participate in the 8(a) program.

Accordingly, on September 28, 2016, this Court denied Afognak’s motion. (See Dkt. #201 at 9.)

Because of “the possibility that Relator has not adequately pleaded the materiality

requirement of his FCA claims,” however, the Court ordered Relator to amend his complaint.

(Id.) The Court further ordered that Afognak could move for judgment on the pleadings if, after

reviewing the amended complaint, it found Relator’s materiality allegations wanting. (Id.)

11 Although the court concluded that Relator had not sufficiently pled his conspiracy

claim (Dkt. #48), Relator subsequently dismissed this claim voluntarily (Dkt. #52). 12 In order to be actionable under the FCA, “a misrepresentation must be material to the

Government’s payment decision.” Escobar, 136 S. Ct. at 2002.




Relator filed his Second Amended Complaint on October 28, 2016.13 (Dkt. #202.) In lieu of

moving for judgment on the pleadings (see Mot. at 1 n.1), Afognak filed its second motion to

dismiss on November 28, 2016.14 (Dkt. #212.) The sole basis for Afognak’s second motion to

dismiss is its argument that its misrepresentations are immaterial. (See Mot. at 13 n.7.)

III. LEGAL STANDARD

In reviewing a motion to dismiss pursuant to Rule 12(b)(6), the court must accept as true

all factual allegations in the complaint and draw all reasonable inferences in favor of the

nonmoving party. Silvas v. E*Trade Mortg. Corp., 514 F.3d 1001, 1003 (9th Cir. 2008). A

complaint should not be dismissed if, when construed in the most favorable light, it contains

“sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its

face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S.

544, 555 (2007)). “A Rule 12(b)(6) analysis addresses the legal sufficiency of a claim, but does

not reach its merits or decide the truth of plaintiffs’ factual allegations.” Autodesk, Inc. v.

Dassault Systemes Solidworks Corp., No. C 08-04397 WHA, 2008 U.S. Dist. LEXIS 109800, at

*6-*7 (N.D. Cal. Dec. 18, 2008); accord Livid Holdings Ltd. v. Salomon Smith Barney, Inc., 416

F.3d 940, 950 (9th Cir. 2005).

In alleging fraud under Rule 9(b), “the plaintiff must allege ‘the who, what, when, where,

and how of the misconduct charged.’ Knowledge, however, may be pled generally.” United

States v. United Healthcare Ins. Co., 832 F.3d 1084, 1101 (9th Cir. 2016) (quoting Ebeid ex rel.

13 As Afognak observes—albeit somewhat derisively—the SAC alleges the same

underlying facts as the First Amended Complaint. (Mot. at 9 (“the operative allegations of the

[SAC] are virtually identical to the allegations of the prior complaints”).) 14 As an additional related document in support of the instant motion, Afognak filed a

request for judicial notice (Dkt. #213), to which Relator contemporaneously is filing a

separate response.




United States v. Lungwitz, 616 F.3d 993, 998 (9th Cir. 2010)). The purpose of Rule 9(b) is to

afford the defendant notice of the specific conduct it must defend. See Bly-Magee v. California,

236 F.3d 1014, 1018 (9th Cir. 2001).

IV. ARGUMENT

The FCA imposes liability in part on “any person who . . . knowingly presents, or causes

to be presented, a false or fraudulent claim for payment or approval,” 31 U.S.C. § 3729(a)(1)(A),

or “knowingly makes, uses, or causes to be made or used, a false record or statement material to

a false or fraudulent claim,” 31 U.S.C. § 3729(a)(1)(B). “[A] claim under the [FCA] can be false

where a party merely falsely certifies compliance with a statute or regulation as a condition to

government payment.”15 United States v. United Healthcare Ins. Co., 832 F.3d 1084, 1094 (9th

Cir. 2016) (internal quotation marks omitted); see also Escobar, 136 S. Ct. at 1999 (omissions of

“violations of statutory, regulatory, or contractual requirements . . . can be a basis for liability if

they render the defendant’s representations misleading”). Under this theory, the false

certification of compliance creates liability when certification is a prerequisite to obtaining a

government benefit. United Healthcare, 832 F.3d at 1094. “Implied false certification occurs

when an entity has previously undertaken to expressly comply with a law, rule, or regulation, and

that obligation is implicated by submitting a claim for payment even though a certification of

compliance is not required in the process of submitting the claim.” Ebeid, 616 F.3d at 998.

“The essential elements of a false certification claim are: (1) a false statement or

fraudulent course of conduct, (2) made with scienter, (3) that was material, causing (4) the

15 There is no distinction between a condition of participation and a condition of

payment. United States ex rel. Handal v. Cent. Empl. Training, No. 2:13-cv-01697-KJM-KJN,

2016 U.S. Dist. LEXIS 105158, at *19 (E.D. Cal. Aug. 8, 2016) (citing United States ex rel.

Hendow v. Univ. of Phoenix, 461 F.3d 1166, 1176 (9th Cir. 2006)).




government to pay out money or forfeit moneys due.” Id. (internal quotation marks omitted).

Although Afognak remains unwilling to concede that Relator sufficiently has alleged that

Afognak misrepresents its subsidiaries’ eligibility to participate in the 8(a) program, the sole

basis for Afognak’s second motion to dismiss is its argument that its misrepresentations are

immaterial. (See Mot. at 13 n.7.) As shown below, however, Relator plausibly has alleged that

Afognak’s misrepresentations had a natural tendency to influence the SBA’s decision to award

its subsidiaries lucrative 8(a) work.

A. Afognak’s misrepresentations are material because they have “a natural

tendency to influence” the payment or receipt of money or property.

The test for determining materiality in FCA cases is whether the conduct at issue has “a

natural tendency to influence, or [is] capable of influencing, the payment or receipt of money or

property.”16 Escobar, 136 S. Ct. at 2002 (citing 31 U.S.C. § 3729(b)(4)).

The relators in Escobar filed an FCA action against the parent company of a mental

health clinic after their daughter died from an adverse reaction to medication prescribed by a

nurse who lacked authority to prescribe medications without supervision. 136 S. Ct. at 1997. The

relators alleged that the defendant violated the FCA because its clinic submitted Medicaid

reimbursement claims that “made representations about the specific services provided by specific

types of professionals, but that failed to disclose serious violations of regulations pertaining to

16 Congress amended the FCA in 2009 expressly to incorporate this “natural tendency”

test, Pub. L. No. 111-21 at § 4, 123 Stat. 1623 (2009), thereby rejecting a more onerous

“outcome materiality” standard that some courts had adopted, see United States, ex rel. Longhi

v. Lithium Power Techs., Inc., 575 F.3d 458, 470 (5th Cir. 2009). The Supreme Court did not

change this definition in Escobar, but rather it “clarified what the word ‘material’ encompasses

and does not encompass in cases where the government proceeds on a theory of implied false

certification.” United States v. Palin, No. 1:14-cr-00023, 2016 U.S. Dist. LEXIS 111225, at *5

(W.D. Va. Aug. 22, 2016).




staff qualifications and licensing requirements for these services.” Id. at 1997-98. The district

court dismissed the relators’ complaint on the ground that the regulations at issue imposed only

conditions of participation in the Medicaid program, not preconditions to payment. Id. at 1998.

The First Circuit reversed, finding that the regulations at issue were conditions of payment. Id.

Holding that FCA liability for failing to disclose regulatory violations does not turn upon

their designation as conditions of payment, the Supreme Court vacated the First Circuit’s

decision. Escobar, 136 S. Ct. at 1996. In doing so, the Supreme Court rejected the defendant’s

argument that a statutory, regulatory, or contractual requirement is not material unless expressly

designated as a condition of payment. See id. at 2001. By the same token, however, a

misrepresentation is not material merely because the government designates compliance with a

particular requirement as a condition of payment or because the government would have the

option to decline to pay if it knew of the defendant’s noncompliance. See id. at 2003.

Instead, noting that the materiality requirement derives from the common law, the

Supreme Court explained that there are two, alternate methods by which materiality can be

established—one objective (a reasonable person test), the other subjective (i.e., from the

perspective of the defendant). Specifically, a matter is material in either of the following two

circumstances:

(1) “[if] a reasonable [person] would attach importance to [it] in determining his

choice of action in the transaction”; or

(2) if 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,” even though a reasonable person would not.




Escobar, 136 S. Ct. at 2002-2003 (emphasis added) (quoting Restatement (Second) of Torts

§ 538, at 80 (1977)); accord United States, ex rel. Miller, 840 F.3d 494, 2016 U.S. App. LEXIS

18758, at *16 (8th Cir. Oct. 19, 2016).

In either case, “materiality cannot rest on a single fact or occurrence as always

determinative.” Escobar, 136 S. Ct. at 2001 (internal quotation marks omitted). Instead, as the

First Circuit recently explained on remand in Escobar, “courts are to conduct a holistic approach

to determining materiality in connection with a payment decision, with no one factor being

necessarily dispositive.”17 United States, ex rel. Escobar v. Universal Health Servs. (“Escobar

(remand)”), 842 F.3d 103, 2016 U.S. App. LEXIS 21072, at *14-*15 (1st Cir. Nov. 22, 2016).

The Supreme Court identified several factors that may bear upon materiality. As summarized by

one amicus curiae, these include:

whether the violation is “garden-variety” or “minor or insubstantial,” Escobar[],

136 S. Ct. at 2003; whether the violation is significant, id. at 2004; whether it

involves “core” or “basic” requirements, or “critical facts,” id. at 2000-2001;

whether the violation goes to the “essence of the bargain,” id. at 2003 n.5 (citation

omitted); or whether and what actions the Government took where it had actual

knowledge of the same or similar violations, id. at 2003-2004.18

Applying this holistic approach, the First Circuit concluded that the relators in Escobar

ultimately had alleged the materiality of the regulations at issue in that case for three reasons.

First, compliance with the regulations “was a condition of payment—itself a ‘relevant’ though

‘not dispositive’ factor in determining materiality.” Escobar (remand), 2016 U.S. App. LEXIS

17 In this regard, Afognak is wrong that “Relator must show . . . that the government

denies eligibility or refuses to pay for violations of the particular regulation in question.” (Mot.

at 20 (emphasis omitted).) This approach would effectively convert Escobar’s natural tendency

test into the outcome materiality test rejected by Congress. (See supra note 16.) 18 See Suppl. Br. for Amicus Curiae Taxpayers Against Fraud Educ. Fund, United States,

ex rel. Escobar v. Universal Health Servs., No. 14-1423, at 7 (1st Cir. Aug. 22, 2016).




21072, at *17 (quoting Escobar, 136 S. Ct. at 2001). Second, the regulations went to the “‘very

essence of the bargain’” of the government’s contractual relationship with the clinic under the

Medicaid program. Id. (quoting Escobar, 136 S. Ct. at 2003 n.5). “And third, while the Supreme

Court observed that ‘if the Government pays a particular claim in full despite its actual

knowledge that certain requirements were violated, that is very strong evidence that those

requirements are not material,’. . . the Court did not state that such knowledge is dispositive.” Id.

(quoting and citing Escobar, 136 S. Ct. at 2003-04). Moreover, there was no evidence in “the

factual allegations in the [complaint]” that the government paid such claims “despite actual

knowledge of the violations.” Id. at *21.

The crux of Relator’s claim in this action is that Afognak has misrepresented the small

business status of its subsidiaries. Contrary to Afognak’s express certifications, its subsidiaries

are not 8(a)-eligible small businesses because they are not independently operated “separate

business entities” (see SAC, ¶¶ 38, 91, 140, 145), do not do their own work (see id., ¶¶ 94, 95,

140, 148), do not have their own managers (see id., ¶¶ 50, 93, 140, 147), and do not pursue

contracts for purposes of achieving their own viability (see id., ¶¶ 92, 104, 140, 146). For the

reasons that follow, these misrepresentations are material under both the objective and subjective

tests set forth in Escobar.19

1. A reasonable person would attach importance to Afognak’s

misrepresentations.

Construing Relator’s allegations in the light most favorable to him, a reasonable person

would attach importance to Afognak’s representations regarding its subsidiaries’ small business

19 Tellingly, Afognak altogether ignores Escobar’s objective standard. Its attack on the

subjective test is refuted infra, in Parts IV.A.2 and IV.B.




status in deciding whether to allow Afognak’s subsidiaries to participate in the 8(a) program for

at least three reasons.

First, Afognak does not dispute that a business owned by an ANC is required to qualify

as a small business for purposes of participating in the 8(a) program. (Mot. at 5-6; see also

SAC, ¶ 110 (citing 13 C.F.R. §§ 124.102, 124.109(c)(2)). Being an 8(a) participant, in turn, is a

prerequisite to receiving an 8(a) contract.20 (SAC, ¶ 109 (citing 13 C.F.R. § 124.501(g)).

Moreover, the SBA terminates 8(a) participants for submitting false information and failing to

maintain their eligibility. (SAC, ¶¶ 127, 129.) “While conditioning is not ‘automatically

dispositive’ of materiality, it is ‘relevant’ to materiality.” Miller, 2016 U.S. App. LEXIS 18758,

at *18-*19 (quoting Escobar, 136 S. Ct. at 2003); see, e.g., Escobar (remand), 2016 U.S. App.

LEXIS 21072, at *17 (including allegation that regulatory compliance was a condition of

payment among three reasons for concluding that alleged misrepresentations were material).

Second, being a “small business concern” is a “core” or “basic” requirement that goes to

the “very essence” of the 8(a) program. See Escobar, 136 S. Ct. at 2003 n.5. Since its inception,

the purpose of the 8(a) program has been to provide “the maximum practicable opportunity for

the development of small business concerns owned by members of socially and economically

disadvantaged groups” by “clarify[ing] and expand[ing] the program for the procurement by the

United States of articles, equipment, supplies, services, materials, and construction work from

small business concerns owned by socially and economically disadvantaged individuals.” See

20 “In assessing the materiality element, the court looks at whether ‘the statutory

requirements are causally related to [the government's] decision to pay out moneys due.’”

Handal, 2016 U.S. Dist. LEXIS 105158, at *19-*20 (quoting Hendow, 461 F.3d at 1175).




Pub. L. No. 95-507, § 201, 92 Stat. 1760-61 (Oct. 24, 1978) (emphases added) (codified at 15

U.S.C. §§ 631(f)(1)(E), 631(f)(2)(C)).

Third, far from constituting “garden-variety” breaches of contract or “minor or

insubstantial” regulatory violations, see Escobar, 136 S. Ct. at 2003, Afognak’s violations are

widespread and significant. The very reason Afognak organized multiple limited liability

companies is to “cheat” the 8(a) system. (See SAC, ¶ 55.) Beyond the record-keeping required to

perpetuate its scheme, however, the fact that its subsidiaries exist on paper changes virtually

nothing about how Afognak does business—as a single, large company.

2. Even if a reasonable person would not attach importance to

Afognak’s misrepresentations, Afognak knew or had reason to know

that the government did.

Irrespective of whether a reasonable person would attach importance to Afognak’s

representations regarding its subsidiaries’ small business status, Afognak knew or should have

known that they mattered to the government. At least three additional points compel

this conclusion.

First, in 2010, Congress adopted the presumed loss rule, which provides in relevant part

that “presumption of loss to the United States based on the total amount expended . . . whenever

it is established that a business concern other than a small business concern willfully sought and

received the award by misrepresentation.” See 15 U.S.C. § 632(w)(1); see also 13 C.F.R.

§ 121.108(b)(1) (deeming submission of bid for small business set-aside contract an “affirmative,

willful and intentional certification[] of small business size and status”). Although the Act

always has provided sanctions for misrepresentation of small business status, the Court of

Federal Claims had limited the damages recoverable under the FCA for misrepresentation of

small business status when the misrepresenting contractor fully performed the contract to the




government’s satisfaction. See Ab-Tech Constr. v. United States, 31 Fed. Cl. 429 (Fed. Cl. 1994),

aff’d, 57 F.3d 1084 (Fed. Cir. 1995). Thus, the evident purpose of the presumed loss rule was to

reinvigorate enforcement of small business status, which is a clear indication of importance.21

Second, in addition to Relator’s admonitions (see supra note 21), Afognak received

direct notice from the government both that failing to maintain program eligibility—including

small business status—could result in termination from the 8(a) program (SAC, ¶ 134) and that

8(a) participants may not share managers and employees (id., ¶ 121). Indeed, the SBA rejected at

least one Afognak application precisely because it included an intercompany agreement that

provided for sharing more than merely “administrative” services. (Id., ¶ 114.) Although Afognak

is quick to aver that the same business concern is now an 8(a) participant—a fact not in the

record—that’s because Afognak revised the agreement. (See id., ¶ 115).

Third, “[p]roof of materiality can include, but is not necessarily limited to, evidence that

the defendant knows that the Government consistently refuses to pay claims in the mine run of

cases based on noncompliance with the particular statutory, regulatory, or contractual

requirement.” Escobar, 136 S. Ct. at 2003. Here, Relator alleges that the government denies 8(a)

applications for business concerns that are “other than small” (SAC, ¶ 117), concerns that are

controlled by individuals without relevant managerial experience or who commit insufficient

time to the entity (id., ¶¶ 120, 122), and concerns that fail to show reasonable prospects for

success in competing in the private sector (id., ¶ 125). Moreover, the government terminates 8(a)

participants for submitting false information (id., ¶ 127), failing to maintain program eligibility

21 There is no question that Afognak knew about the presumed loss rule, given that

Relator immediately expressed his concerns about Afognak’s operating model to Afognak’s

senior management upon learning about it. (SAC, ¶¶ 37-39.)




(id., ¶ 129), failing to make substantial and sustained efforts to obtain business (id., ¶ 131), and

failing to comply with applicable percentage of work requirements (id., ¶ 132).

B. Relator sufficiently has alleged Afognak’s material misrepresentations.

Afognak’s response is that “Relator’s allegations are mismatched: Relator alleges the

materiality of regulatory violations that he has not claimed . . . without pleading any facts

demonstrating materiality for the regulatory violations that he does purport to claim.” (Mot. at 1

(emphases omitted).)

In part for the same reason that it lost its first motion to dismiss, this argument is

specious. Thumbing its nose at the implied false certification theory, for example, Afognak

continues to insist that its statements were technically true. (See, e.g., Mot. at 15 (“[Afognak’s]

8(a) Participants are for-profit limited liability companies, which is all that is required.”).)

Escobar, however, makes clear that “half-truths—representations that state the truth only so far

as it goes, while omitting qualifying information—can be actionable misrepresentations.”

Escobar, 136 S. Ct. at 2000. Yes, Afognak’s subsidiaries are small businesses on paper.

But Afognak knew or should have known that the SBA would also find it important that they do

not operate as separate and distinct concerns; otherwise, this requirement would be meaningless.

As discussed above, see supra Part IV.A., Escobar makes clear that the materiality

inquiry requires a holistic assessment of the tendency or capacity of the undisclosed violation to

affect the government’s decision. Just as this case does not involve an isolated violation of any

one rule, the question is not whether the violation of any one rule would be material. See

Escobar, 136 S. Ct. at 2001 (“materiality cannot rest on a single fact or occurrence as always

determinative” (internal quotation marks omitted)). Instead, the question is whether, taken

together, Afognak’s misrepresentations have “a natural tendency to influence” the SBA’s




decision to accept its subsidiaries into the 8(a) program and award them lucrative 8(a) contracts.

A side-by-side comparison of Afognak’s core misrepresentations and the corresponding SBA

decisions cited by Relator show that a reasonable jury could conclude that they do:

Misrepresentation Government Action

Afognak’s 8(a) subsidiaries are not operated

as separate and distinct small business

concerns. (See SAC, ¶¶ 38, 91, 140, 145.)

The government denies 8(a) applications for

business concerns that are “other than small.”

(Id., ¶ 117.)

Afognak’s 8(a) subsidiaries do not have

individuals—expert or otherwise—who

actually devote time to day-to-day

management. (See id., ¶¶ 50, 93, 140, 147.)


concerns that are controlled by individuals

without relevant managerial experience or

who commit insufficient time to the entity.

(Id., ¶¶ 120, 122.)

Afognak’s 8(a) subsidiaries do not pursue

contracts for purposes of the subsidiaries’

own growth and development. (See id.,

¶¶ 92, 104, 140, 14.)


concerns that fail to show reasonable

prospects for success and terminates

participants that fail to make substantial and

sustained efforts to obtain business. (Id.,

¶¶ 125, 131.)

Afognak’s 8(a) subsidiaries do not comply

with applicable percentages of work and costs

requirements. (See id., ¶¶ 94, 95, 140, 148.)

The government terminates 8(a) participants

for failing to comply with applicable

percentage of work requirements. (Id., ¶ 132.)

Each misrepresentation is addressed in turn.


Afognak’s 8(a) subsidiaries are separate and distinct small business

concerns.

As noted above, Afognak recycles its argument that Relator’s claim is not plausible

because its 8(a) subsidiaries “are for-profit limited liability companies, which is all that is

required.” (Mot. at 15; compare id., with Defs.’ 1st MTD at 14-15 (“[E]ach subsidiary was ‘a

separate and distinct legal entity’; indeed, [Relator] admits that each business existed ‘on

paper.’. . . That is all the program rules require.” (emphasis in original) (citation omitted)).) Put




another way, Afognak’s position is that it may operate as a single, unified entity, so long as it

files the necessary paperwork to organize a gaggle of LLCs, whose names appear on 8(a)

applications and 8(a) bids and 8(a) participation agreements and 8(a) contracts and government

checks but do not actually do anything themselves. If Afognak is correct, then it is the 8(a)

program that’s a sham.

This cannot be the law. Congress opened up the 8(a) program to small business concerns

owned by ANCs—not ANCs themselves. As such, the rules require that a tribally-owned 8(a)

“applicant or participating concern must be a separate and distinct legal entity organized or

chartered by the tribe, or Federal or state authorities.” 13 C.F.R. § 124.109(c)(1); accord

15 U.S.C. § 632(a)(1). Interpreting the “separate and distinct” requirement in the manner

Afognak suggests—that is, merely that each entity must exist on paper—would eviscerate the

rule. There would be no reason to require ANCs to organize separate and distinct subsidiaries if

the subsidiaries were not actually required to operate as separate and distinct subsidiaries.

Even assuming that Relator is correct, Afognak argues that he has not sufficiently alleged

the materiality of its “separate subsidiary” misrepresentation because he has not shown that “the

government denies admission or declines payment to ANCs organized as [Afognak] [is]

organized.” (Mot. at 21-22.) Again, however, materiality requires a holistic assessment of the

tendency or capacity of the undisclosed violation to affect the government’s decision. Escobar

(remand), 2016 U.S. App. LEXIS 21072, at *14-*15. The fact that no other ANC has been

caught doing precisely the same thing does not make Afognak’s scheme immaterial. See id.

at *21 (rejecting similar argument, given absence of evidence that government “continued to pay

claims despite actual knowledge of the violations”).




On the ground that each ANC subsidiary’s size must be determined independently,

Afognak also maintains that “it is irrelevant whether the SBA terminates or denies admission to

businesses that are ‘other than small.’” (Mot. at 16-17.) But if Relator is correct that Afognak’s

subsidiaries are not separate and distinct small business concerns to begin with, then the relevant

entity for size purposes is Afognak itself.


Afognak’s 8(a) subsidiaries do their own work as separate and

distinct small business concerns.

Afognak does not dispute that the government terminates 8(a) participants that fail to

comply with the requirement that a participant firm must perform 50 percent of an 8(a) contract

if the contract is for services, supplies or products. (SAC, ¶ 132.) Instead, Afognak continues to

maintain that—in purported contrast to the example alleged by Relator (see id.)—it did not

violate this rule because Relator’s allegation that Afognak’s employees, rather than its

subsidiaries’ employees, performed the work is tantamount to saying “that Defendants passed on

8(a) work to themselves.” (See Mot. at 22-23; compare id., with Defs.’ 1st MTD at 17 (“ANC-

owned 8(a) subsidiaries may lease employees to satisfy any percentage of work requirements.”).)

Specifically, Afognak cites a May 31, 2016 final rule for the proposition that “subcontracts to

‘similarly situated’ entities do not count towards subcontracting limits (formerly percentage of

work limits).” (Mot. at 23 (emphasis added).)

This rule does not help Afognak. It defines a “similarly situated entity” as “a

subcontractor that has the same small business program status as the prime contractor. 13 C.F.R.

§ 125.1 (emphasis added). Thus, “[f]or an 8(a) requirement,” the subcontractor must be “an 8(a)

certified Program Participant.” Id.; see also 81 Fed. Reg. 34243, 34244 (May 31, 2016) (“The

Government’s policy of promoting contracting opportunities for small businesses . . . is seriously




undermined when firms pass on work in excess of applicable limitations to firms that are other

than small . . . .”). The very point of Relator’s claim is that Afognak—the company actually

doing the work—is other than small. It is not, nor could it be, an 8(a) participant.22


Afognak’s 8(a) subsidiaries are managed as separate and distinct

small business concerns.

Afognak does not dispute that “the SBA denies 8(a) applications for business concerns

that ‘fail to show that they are controlled through individuals with managerial experience of the

extent and complexity needed to run the concern.’” (See Mot. at 17 (quoting SAC, ¶ 120).)

Instead, Afognak contends that “Relator does not plead that [it] violated any requirement that

management have sufficient knowledge and expertise,” on the ground that the pertinent

regulation, 13 C.F.R. § 124.109(c)(4), “requires only that the ANC control and manage the

business, either directly or indirectly.” (Mot. at 18 n.8 and accompanying text.)

To the contrary, § 124.109(c)(4) expressly provides that a “Tribally-owned concern may

be controlled by the Tribe through one or more individuals who possess sufficient management

experience of an extent and complexity needed to run the concern . . . .” 13 C.F.R.

§ 124.109(c)(4)(i). That is how Afognak purported to run its subsidiaries. But it turns out that

there was nothing to run.

Section 124.109(c)(4) further provides that 8(a) managers “are precluded from engaging

in any outside employment or other business interests which conflict with the management of the

22 In this regard, Afognak’s attempt to distinguish In re Reality Technologies, Inc., SBA

No. BDPT-488, 2013 WL 215002 (May 3, 2013)—Relator’s example of a case in which the

SBA terminated an 8(a) firm for failing to comply with the percentage of work requirement

(SAC, ¶ 132)—is without merit. (See Mot. at 22.) Afognak is no more “similarly situated” than

the non-disadvantaged firm involved in that case.




concern . . . .” 13 C.F.R. § 124.109(c)(4)(ii). According to Afognak, Relator does not allege that

its general managers “were engaged in such outside employment.” (Mot. at 18.) But the SBA

itself made it clear that outside activities “include involvement in the ANC” and “holding

companies.” (SAC, ¶ 121.) That is exactly what Relator alleges in this case—that Afognak’s

general managers do not actually manage their subsidiaries, but rather work exclusively for their

respective Afognak operating divisions. (See id., ¶¶ 51, 57-60, 61, 65.) The SBA has denied 8(a)

program admission for misrepresentations involving similar rules applicable to non-ANCs. (See

SAC, ¶ 122.) Afognak offers no reason to think that ANCs should be treated differently.


Afognak’s 8(a) subsidiaries pursue growth and development as

separate and distinct small business concerns.

Afognak argues that Relator pleads no facts showing that its 8(a) participants represent

that they will pursue business in accordance with their business plans and that he does not allege

that Afognak misrepresented their prospects for success. (See Mot. at 19, 21.) To the contrary,

each entity’s business plan is an integral part of its application and annual reviews. (See SAC,

¶¶ 33, 63, 70.) The business plan must contain, among other things, the subsidiary’s “[s]pecific

targets, objectives, and goals for the business development.” 13 C.F.R. § 124.402(c). During the

transitional stage of the 8(a) program—beginning in the fifth year—the business plan must also

describe “[t]he specific steps the Participant intends to take to continue its business growth and

promote profitable business operations after the expiration of its program term.” 13 C.F.R.

§ 124.403(c)(2). Afognak’s business plans are false because its subsidiaries do not intend to

grow and develop in their own right. They have no prospects for success beyond their usefulness

to their parent. (See SAC, ¶ 125.)




Afognak also argues that “Relator pleads no evidence that the SBA in fact denies

eligibility or the government refuses to pay 8(a) participants that fail to pursue business in

accordance with their business plans.” (Mot. at 19.) To the contrary, in In re Sparccom &

Assocs., SBA No. BDPT-501, 2013 WL 4502314, at *1 (Aug. 19, 2013), the SBA terminated an

8(a) participant “for failure to pursue competitive and commercial business or failure in other

ways to make reasonable efforts to develop and achieve competitive viability.” (See SAC,

¶ 131.) Afognak insists that, “at most, Sparccom supports an argument that the SBA may

terminate an 8(a) participant for a complete failure to pursue business.” (Mot. at 19.) But nothing

in the SBA’s decision suggests that it intended to limit Sparccom in this manner. In any event,

Afognak is incorrect that “Relator makes no such allegation” regarding its own 8(a) subsidiaries.

(Id. at 19-20.) As discussed above, Afognak’s subsidiaries do not pursue any business in their

own right; they are mere conduits for Afognak.

C. There is no evidence that the government has actual knowledge of

Afognak’s violations.

Finally, Afognak contends that Relator does not claim that the government has

terminated or denied admission to any of its 8(a) participants, despite the fact that Relator

notified the government of his claims more than three years ago. (Mot. at 13.) But there is no

evidence that the government continued to pay claims despite actual knowledge of Afognak’s

violations. See Escobar (remand), 2016 U.S. App. LEXIS 21072, at *21 (“mere awareness of

allegations concerning noncompliance with regulations is different from knowledge of actual

noncompliance”); see also Rose v. Stephens Inst., No. 09-cv-05966-PJH, 2016 U.S. Dist. LEXIS

128269, at *17 (N.D. Cal. Sept. 20, 2016) (finding government’s decision not to take action

against defendant despite awareness of allegations “not terribly relevant to materiality”). To the




contrary, Relator’s allegations—accepted as true, as they must be “for purposes of evaluating a

12(b)(6) motion,” see Escobar (remand), 2016 U.S. App. LEXIS 21072, at *21—are firmly

grounded in the government’s lack of knowledge, which is why Afognak’s lies had a tendency to

influence government decisions. (See, e.g., SAC, ¶¶ 100-102.)

On this point, Afognak misplaces its reliance upon GAO reports from 2006 and 2012.23

(Mot. at 14, 25.) Far from blessing Afognak’s operating model, the GAO expressed concern

about ANC subsidiaries coordinating with one another and sharing administrative services.

(See, e.g., 2006 GAO Report at 32.) Afognak’s conduct transcends these practices. Its

subsidiaries do not merely work in concert or have overlapping capabilities (see id. at 28); they

operate as a single, unified business. Indeed, Relator alleges that Afognak was an outlier if not

the only ANC operating in this manner. (See SAC, ¶ 56.) The fact that one unidentified ANC

firm reportedly leveraged the expertise and management of other subsidiaries (Mot. at 25 (citing

2006 GAO Report at 28)), does not suggest—let alone, endorse—Afognak’s approach.24 To the

contrary, “SBA expects that, when it accepts multiple firms under the same tribal entity into the

8(a) program, each firm will operate and grow independently, in line with the business

23 U.S. Gov’t Accountability Office, GAO-06-399, Contract Management: Increased Use

of Alaska Native Corporations’ Special 8(a) Provisions Calls for Tailored Oversight (2006)

(“2006 GAO Report”) and U.S. Gov’t Accountability Office, GAO-12-84, Federal Contracting:

Monitoring and Oversight of Tribal 8(a) Firms Need Attention (2012) (“2012 GAO Report”),

attached as Exhibits A and B to Dkt. #214, Decl. of Angela R. Jones in Supp. of Defs.’ Mot. to

Dismiss.) 24 It bears noting, moreover, that the SBA promulgated regulations in 2011 that were

intended to rein in the abuses identified in the GAO’s 2006 report. For example, the 2011 rules

restrict the ability of newly certified ANC-owned 8(a) firms to receive set-aside contracts that are

“follow-on” contracts to an 8(a) contract that was performed by a sister subsidiary. See 76 Fed.

Reg. 8222, 8256 (Feb. 11, 2011) (codified at 13 C.F.R. § 124.109(c)(3)(ii)).




development purposes of the program.” (2012 GAO Report at 36 (emphasis added).) At most,

the GAO’s reports reveal a disputed issue of fact, but that is no basis for dismissal.

Even if there were evidence that the government had some knowledge of Afognak’s

violations, the fact that the government may continue to pay even after discovering wrongdoing

does not, in and of itself, establish lack of materiality. See, e.g., United States ex rel. Am. Sys.

Consulting v. ManTech Advanced Sys. Int’l, 600 Fed. Appx. 969, 977 (6th Cir. 2015) (“[w]hen

the government discovers misrepresentations . . . a subsequent decision not to terminate may

weigh against a finding of materiality, but it is not always dispositive”); United States ex rel.

Harrison v. Westinghouse Savannah River Co., 352 F.3d 908, 917 (4th Cir. 2003) (“we can

foresee instances in which a government entity might choose to continue funding the contract

despite earlier wrongdoing by the contractor”). Holding otherwise would effectively reinstate the

government knowledge defense, which Congress abolished in 1986. Pub. L. No. 99-562, 100.

Stat. 3153 (Oct. 27, 1987).

Although it is possible that, “at the summary judgment stage or after trial, the extent and

the nature of government knowledge may show that the defendant did not ‘knowingly’ submit a

false claim,”25 it is well settled that, after 1986, “the government’s knowledge of the underlying

facts is not automatically a complete defense when that knowledge appears only as an allegation

on the face of a complaint . . . .” Hooper v. Lockheed Martin Corp., 688 F.3d 1037, 1051 (9th

Cir. 2012) (internal quotation marks omitted); see, e.g., United States ex rel. Jordan v. Northrop

Grumman Corp., No. CV 95-2985 ABC, 2002 U.S. Dist. LEXIS 26674, at *62 (C.D. Cal. Aug.

25 Whether the government’s knowledge demonstrates that the contractor did not submit

its claim in deliberate ignorance or reckless disregard of the truth “is a fact-specific inquiry that

requires the court to draw inferences from evidence in the record.” Berg v. Honeywell Int’l, Inc.,

580 Fed. App’x 559, 560 (9th Cir. 2014).




5, 2002) (distinguishing cases that involved “situations where the Government had received full

disclosure of the specific facts underlying the particular claim prior to submission of that claim”

(emphasis added)).

Moreover, part of the impetus for the 1986 amendment was a GAO report critical of

government oversight. The GAO had found that “most fraud goes undetected due to the failure

of Governmental agencies to effectively ensure accountability on the part of program recipients

and Government contractors.” S. Rep. No. 99-345, at 3 (1986), reprinted in 1986 U.S.C.C.A.N.

5266, 5268 (emphasis added). Here, the GAO reports upon which Afognak relies focused on the

SBA’s lax oversight. (See, e.g., 2006 GAO Report at 7 (listing examples of “where SBA’s

oversight has fallen short”) id. at 33-34 (reporting that Alaska district office officials “were

having difficulty managing their large volume and the unique type of work in their 8(a)

portfolio”); 2012 GAO Report at 46 (“SBA officials look at individual firms during annual

reviews, but do not consider the consequences of their interconnectedness with sister subsidiaries

and the parent company”).) Thus, the SBA’s apparent ineffectiveness only serves to underscore

the importance of Relator’s claim. See Matthew C. Stephenson, Public Regulation of Private

Enforcement: The Case for Expanding the Role of Administrative Agencies, 91 Va. L. Rev. 93,

110 (2005) (“Another potential benefit of private enforcement suits is that they can correct for

agency slack—that is, the tendency of government regulators to underenforce certain statutory

requirements because of political pressure, lobbying by regulated entities, or the laziness or self-

interest of the regulators themselves.”).

V. CONCLUSION

In sum, Relator sufficiently has alleged that Afognak knew or had reason to know that the

government would find it important that Afognak’s 8(a) subsidiaries are not operated as separate




and distinct small business concerns (see SAC, ¶¶ 38, 91, 140, 145); do not comply with

applicable percentages of work and costs requirements (see id., ¶¶ 94, 95, 140, 148); do not have

individuals—expert or otherwise—who actually devote time to day-to-day management (see id.,

¶¶ 50, 93, 140, 147); and do not pursue contracts for purposes of the subsidiaries’ own growth

and development (see id., ¶¶ 92, 104, 140, 146). Accordingly, the Court should deny Afognak’s

motion to dismiss.

Dated: January 3, 2017 Respectfully submitted,

John P. Cashion

(Alaska Bar No. 9806025)

[email protected]

CASHION GILMORE LLC

1007 W. 3rd Ave., Suite 301

Anchorage, AK 99501

Tel.: (907) 222-7936

Fax: (907) 222-7938

[email protected]

By: /s/ William H. Narwold

William H. Narwold

Mathew P. Jasinski

Michael J. Pendell

Laura W. Ray

MOTLEY RICE LLC


Hartford, CT 06103

Tel.: (860) 882-1681

Fax: (860) 882-1682

[email protected]

[email protected]

[email protected]

[email protected]

Sarah M. Frazier

BERG & ANDROPHY

3704 Travis St.

Houston, TX 77002

Tel: (713) 529-5622

Fax: (713) 529-3785

[email protected]

Charles H. Rabon, Jr.

RABON LAW FIRM, PLLC

225 E. Worthington Ave., Ste. 100

Charlotte, NC 28203

Tel.: (704) 247-3247

Fax: (704) 208-4645

[email protected]

Counsel for Relator Ben Ferris




CERTIFICATE OF SERVICE

I certify that on January 3, 2017, the foregoing was filed with the Court’s electronic filing

system which served a copy on all counsel of record.

By: /s/ William H. Narwold

William H. Narwold

MOTLEY RICE LLC


Hartford, CT 06103

Tel.: (860) 882-1676

Fax: (860) 882-1682

[email protected]


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