Virginia ex rel. Hunter Laboratories, L.L.C. v. Virginia

Decision Date07 July 2016
Docket NumberNo. 15-1484,15-1484
Citation828 F.3d 281
PartiesCommonwealth of Virginia ex rel. Hunter Laboratories, L.L.C. ; Commonwealth of Virginia ex rel. Chris Riedel, an individual, Plaintiffs–Appellants, v. Commonwealth of Virginia, Plaintiff–Appellee, and Laboratory Corporation of America, a Delaware corporation; Laboratory Corporation of America Holdings, a Delaware corporation; Does 10 Through 100, Inclusive; Quest Diagnostics Nichols Institute, f/k/a Quest Diagnostics, Incorporated, a California corporation; Quest Diagnostics Clinical Laboratories, Inc.; Specialty Laboratories, Inc., a California corporation; Quest Diagnostics, Incorporated, a Delaware corporation; United States of America, Defendants.
CourtU.S. Court of Appeals — Fourth Circuit

828 F.3d 281

Commonwealth of Virginia ex rel. Hunter Laboratories, L.L.C. ; Commonwealth of Virginia ex rel. Chris Riedel, an individual, Plaintiffs–Appellants
v.
Commonwealth of Virginia, Plaintiff–Appellee
and
Laboratory Corporation of America, a Delaware corporation; Laboratory Corporation of America Holdings, a Delaware corporation; Does 10 Through 100, Inclusive; Quest Diagnostics Nichols Institute, f/k/a Quest Diagnostics, Incorporated, a California corporation; Quest Diagnostics Clinical Laboratories, Inc.; Specialty Laboratories, Inc., a California corporation; Quest Diagnostics, Incorporated, a Delaware corporation; United States of America, Defendants.

No. 15-1484

United States Court of Appeals, Fourth Circuit.

Argued: May 10, 2016
Decided: July 7, 2016


ARGUED: Eric James Buescher, Cotchett, Pitre & McCarthy, LLP, Burlingame, California, for Appellants. Candice Mae Deisher, Office of the Attorney General of Virginia, Richmond, Virginia, for Appellee. ON BRIEF: Justin T. Berger, Cotchett, Pitre & McCarthy, LLP, Burlingame,

828 F.3d 283

California, for Appellants. Mark R. Herring, Attorney General of Virginia, Adele M. Neiburg, Assistant Attorney General, Office of the Attorney General of Virginia, Richmond, Virginia, for Appellee.

Before MOTZ, KING, and HARRIS, Circuit Judges.

Vacated and remanded by published opinion. Judge King wrote the opinion, in which Judge Motz and Judge Harris joined.

KING, Circuit Judge:

In December 2007, qui tam relators Hunter Laboratories, L.L.C., and Chris Riedel (the “relators”) filed this civil action in the Circuit Court of Fairfax County against multiple medical laboratory businesses. The complaint alleged that the medical laboratories had submitted false claims to the Commonwealth of Virginia for Medicaid reimbursement, in contravention of the Virginia Fraud Against Taxpayers Act (the “VFATA”). The defendants removed the action to the Eastern District of Virginia, and the relators (the appellants here) and the Commonwealth (the appellee here) thereafter entered into a settlement agreement with certain of the defendants. In April 2015, the district court awarded the relators a share of the settlement proceeds. On appeal, the relators contend that the court's award was insufficient under the VFATA. We are unable to reach that issue, however, because the district court lacked subject matter jurisdiction over the qui tam action. As explained below, we vacate and remand for a remand to the state court.

I.

Before turning to the facts of this case, we explain some pertinent aspects of the Medicaid program. Established in 1965, the Medicaid program “provides joint federal and state funding of medical care for individuals who cannot afford to pay their own medical costs.” See Ark. Dep't of Health & Human Servs. v. Ahlborn , 547 U.S. 268, 275, 126 S.Ct. 1752, 164 L.Ed.2d 459 (2006). Although state participation in Medicaid is voluntary, a state seeking federal funds for Medicaid must first submit a “plan[ ] for medical assistance” to the Secretary of Health and Human Services (the “Secretary”). See 42 U.S.C. § 1396-1.

The Commonwealth of Virginia participates in the Medicaid program, and Virginia law authorizes the Commonwealth's aptly named Department of Medical Assistance Services (the “DMAS”) to “submit to the [Secretary] a state plan for medical assistance services.” See Va. Code Ann. § 32.1-325(A). Pursuant thereto, DMAS is obliged to “[m]ake, adopt, promulgate and enforce such regulations as may be necessary” to carry out the Commonwealth's plan for Medicaid services. Id. § 32.1-325(B)(3). DMAS also receives and processes Medicaid reimbursement claims submitted by healthcare service providers. See, e.g. , Dep't of Med. Assistance Servs. v. Beverly Healthcare of Fredericksburg , 268 Va. 278, 601 S.E.2d 604, 606 (2004) (explaining that DMAS determines “reimbursement rates for providers of nursing home services to Medicaid recipients”).

A.

Under Virginia law a relator may institute —“for the person and for the Commonwealth”—a qui tam civil action alleging violations of the VFATA. See Va. Code Ann. § 8.01-216.5(A).1 On December 19,

828 F.3d 284

2007, the relators filed the qui tam complaint in this case under seal in the Circuit Court of Fairfax County. See Virginia ex rel. Hunter Labs., L.L.C. v. Quest Diagnostics, Inc. , No. 1:13-cv-01129 (E.D. Va. Sept. 9, 2013), ECF No. 1-2 (the “Complaint”). The Complaint alleged that the defendant medical laboratories violated the VFATA in two ways: by presenting false claims, in contravention of Va. Code Ann. § 8.01-216.3(A)(1) ; and by making or using false records or statements to obtain payment or approval of false claims, in violation of Va. Code Ann. § 8.01-216.3(A)(2). As relief, the Complaint sought damages, civil penalties, costs, and other appropriate relief as provided by Virginia law.

In support of the VFATA claims, the Complaint alleged that the defendants “made false claims for payment of Medicaid-covered laboratory tests by falsely representing that the fees being charged were no greater than the maximum fees payable pursuant to Virginia regulations.” See Complaint ¶ 6 (relying on 12 Va. Admin. Code 30-80-30 ). More specifically, the relators alleged that, “[d]espite Commonwealth regulations,” the various defendants offered deep discounts for certain services to “induce” physicians, hospitals, and other healthcare providers to rely on one of the defendants' facilities for most or all of their testing needs. See id. ¶ 24. The relationships thereby established would generate “pull through” referrals of testing for patients covered by Medicaid, see id. for which the defendants would substantially overbill DMAS when submitting their reimbursement claims, see id. ¶¶ 30-31. In so doing, the Complaint maintained, the defendants falsely “represented that their fees complied with Commonwealth Medicaid regulations.” Id. ¶ 31.

In addition to alleging that the defendants' “pull through” practices violated the Commonwealth's Medicaid regulations, the Complaint maintained that those practices were “independently unlawful as kickback schemes, strictly prohibited by Federal health care programs pursuant to 42 U.S.C. § 1320a-7b(b)(2)(A).” See Complaint ¶ 28. The relators emphasized that the “discounts and overcharges described [in the Complaint] are all the more egregious,” because the defendant medical laboratories knew that federal law prohibits such kickbacks. Id. The Complaint failed to allege, however, that any violations of the federal anti-kickback statute rendered the reimbursement claims false under the VFATA. Indeed, the relators did not seek relief predicated on violations of federal law.

B.

About five years after the qui tam Complaint was filed, the Commonwealth declined to intervene in the matter.2 In August 2013, the Fairfax County court unsealed the Complaint, and the relators proceeded to litigate their claims. In September 2013, the defendants removed the action from the state court in Fairfax County to the federal court in the Eastern District of Virginia, asserting that the VFATA claims arose under federal law, pursuant to 28 U.S.C. § 1331.

828 F.3d 285

In support of removal to the district court, the defendants insisted that the Complaint alleged “a federal ‘pull through’ theory of liability that hinges entirely on the interpretation and application of federal law.” See J.A. 21 ¶ 7.3 More specifically, the defendants suggested that the relators had alleged practices that, if proven, constituted “ ‘independently unlawful’ violations of the federal Anti-Kickback Statute, which rendered subsequent claims for payment submitted to Virginia ‘false,’ and thus actionable under the VFATA.” Id. (citation omitted). In other words, the defendants maintained that, because the relators were obliged to show violations of federal law under the “ ‘pull through’ theory to prove all required elements of the corresponding VFATA claims,” those claims arose under federal law. Id. at 23 ¶ 11 (footnote omitted). The relators did not challenge the removal to federal court or seek to remand the proceeding to state court, and the issue of subject matter jurisdiction was never litigated in the district court.4

In May 2014, the district court dismissed with prejudice all claims against defendants Laboratory Corporation of America and Laboratory Corporation of America Holdings. On September 25, 2014, the relators, the Commonwealth, and the remaining four defendants—(1) Quest Diagnostics Incorporated; (2) Quest Diagnostics Nichols Institute, f/k/a Quest Diagnostics, Inc.; (3) Quest Diagnostics Clinical Laboratories, Inc.; and (4) Specialty Laboratories, Inc. (the...

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