USA. v. Smithkline Beecham Corp., 98-1497

• Citation: 205 F.3d 97
• Decision Date: 05 March 1999
• Docket Number: No. 98-1499,N,No. 98-1497,98-1497,98-1499
• Parties: (3rd Cir. 2000) UNITED STATES OF AMERICA EX REL. ROBERT J. MERENA v. SMITHKLINE BEECHAM CORPORATION United States of America, Appellant UNITED STATES OF AMERICA EX REL. KEVIN J. SPEAR; THE BERKELEY COMMUNITY LAW CENTER; JACK DOWDEN v. SMITHKLINE BEECHAM CLINICAL LABORATORIES, INC. United States of America, Appellant UNITED STATES OF AMERICA EX REL. GLENN GROSSENBACHER; CHARLES W. ROBINSON, JR. v. SMITHKLINE BEECHAM CLINICAL LABORATORIES, INC. United States of America, Appellant o. 98-1498, Argued:
• Court: United States Courts of Appeals. United States Court of Appeals (3rd Circuit)

Page 97

205 F.3d 97 (3rd Cir. 2000)

UNITED STATES OF AMERICA EX REL. ROBERT J. MERENA v. SMITHKLINE BEECHAM CORPORATION United States of America, Appellant UNITED STATES OF AMERICA EX REL. KEVIN J. SPEAR; THE BERKELEY COMMUNITY LAW CENTER; JACK DOWDEN v. SMITHKLINE BEECHAM CLINICAL LABORATORIES, INC.

United States of America, Appellant UNITED STATES OF AMERICA EX REL. GLENN GROSSENBACHER; CHARLES W. ROBINSON, JR. v. SMITHKLINE BEECHAM CLINICAL LABORATORIES, INC.

United States of America, Appellant

No. 98-1497, No. 98-1498, No. 98-1499

UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT

Argued: March 5, 1999

Filed February 29, 2000

Amended April 21, 2000

ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA (Dist. Ct. Nos. 93--cv--5974 and 95-cv-6551) District Judge: The Honorable Donald W. VanArtsdalen

Douglas N. Letter Freddi Lipstein (argued) United States Department of Justice Civil Division, Appellate Staff 601 D. Street, N.W. Washington, D.C. 20530-0001 Attorneys for Appellant United States of America

Marc S. Raspanti (argued) Miller, Alfano & Raspanti 1818 Market Street Suite 3402 Philadelphia, PA 19103 Attorney for Appellee Robert J. Merena

Thomas H. Lee, II Dechert, Price & Rhoads 1717 Arch Street 4000 Bell Atlantic Tower Philadelphia, PA 19103 Attorney for Appellee Smithkline Beecham

Normand F. Pizza Nyda S. Brook Christopher J. Shenfield Brook, Pizza, & Van Loon 400 Poydras Street Suite 2500 New Orleans, LA 70130 Attorneys for Appellee William, St. John & LaCorte

John E. Clark Goode, Casseb & Jones 700 North St. Mary's Street Suite 1700 San Antonio TX 78205 Attorney for Appellees Charles W. Robinson, Jr., and Glenn Grossenbacher

Peter W. Chatfield Phillips & Cohen 2000 Massachusetts Avenue, N.W. Washington, DC 20036 Attorney for Appellees Kevin J. Spear, Berkeley Community Law Center, and Jack Dowden

Carol S. Dew Dew & Smith 100 Court Street P.O. Box 30 Monroe, GA 30655-0030 Attorney for Appellee Jeffrey Clausen

Lisa R. Hovelson Taxpayers Against Fraud Suite 501, 1220 Nineteenth Street, N.W. Washington D.C. 20036 Attorney for Amicus Curiae Taxpayers Against Fraud, The False Claims Act Legal Center

Daniel Popeo Paul D. Kamenar Washington Legal Foundation 2009 Massachusetts Avenue, N.W. Washington, D.C. 20036 Attorneys for Amicus Curiae Washington Legal Foundation

Before: ALITO, McKEE, AND GARWOOD,^* Circuit Judges

OPINION OF THE COURT

ALITO, Circuit Judge:

In this appeal, the United States challenges the District Court's decision to award a group of qui tam relators approximately $52 million of the government's settlement with defendant SmithKline Beecham Clinical Laboratories of a variety of claims under the False Claims Act, 31 U.S.C. S 3729 et seq. For the reasons explained below, we reverse and remand for further proceedings.

I.

A. In 1992, the United States began to suspect that SmithKline Beecham Clinical Laboratories ("SKB") and several other medical laboratories had adopted the following scheme that allowed them to bill the federal government for unauthorized and unnecessary laboratory tests. The laboratories had "bundled" a standard grouping of blood tests with some additional tests and had then marketed this grouping to doctors by leading them to believe that the additional tests would not increase costs to Medicare and other government-sponsored health programs.

After the tests were ordered, the laboratories "unbundled" the additional tests from the standard grouping for purposes of billing. In many instances, treating physicians had made no determination that the additional tests were medically necessary for the diagnosis or treatment of patients instead, the physicians had ordered the tests solely because they were sold as a package with other tests that they had deemed necessary. As a result, the laboratories submitted bills--and received payment-for tests that were medically unnecessary.

This scheme, which later became known as the "automated chemistry" scheme, attracted national attention in December 1992 when one of the contractors that had engaged in the practice, National Health Laboratories, settled a lawsuit brought under the False Claims Act for $111 million. See Joint App. at 1432-1441. Public interest grew as the news media reported that the government had issued comprehensive subpoenas to SKB and other laboratories. See Joint App. at 1442-1450, 1451-1457, 1470-1473.

B. In November 1993, relator Robert Merena, an SKB employee, filed a qui tam action against SKB in the United States District Court for the Eastern District of Pennsylvania. His complaint contained eight separate claims under the False Claims Act. Merena's complaint alleged that SKB had defrauded the government by, inter alia, billing for tests that were not performed, double billing, paying illegal kickbacks to health care professionals, and adding tests to "automated chemistry" profiles and then separately billing for those tests. App. at 75-103.

One month later, relator Glenn Grossenbacher, an attorney, filed a second qui tam action against SKB in the United States District Court for the Western District of Texas.¹ Relators Kevin Spear, Jack Dowden, and the Berkeley Community Law Center (collectively, "the Spear relators") followed in February of 1995 with a suit in the Northern District of California. The courts in Texas and California transferred these actions to the Eastern District of Pennsylvania for consolidation with the Merena case.

After Merena's action was filed, the government commenced an investigation into a series of new claims that were not part of its original investigation. At the same time, the government continued to pursue the original "automated chemistry" investigation that it had begun after the 1992 settlement with National Health Laboratories.

C. In August 1995, the government began formal settlement negotiations with SKB. The government presented SKB with a written settlement framework that allocated a specific dollar amount for each alleged false claim. Joint App. at 1476-1491.

By early 1996, SKB and the government had reached a tentative agreement to settle, for $295 million, certain federal and state claims for losses occurring through December 31, 1994. This agreement was intended to settle claims related to the government's original "automated chemistry" investigation, along with additional claims in the qui tam actions filed by relators Merena, Grossenbacher, and Spear. At a meeting on March 22, 1996, counsel for the United States explained to the relators the components of the proposed settlement. See Joint App. at 1537, 15381549. During the summer of 1996, the United States negotiated an additional payment from SKB of $30 million to resolve additional claims that arose during 1995 and 1996. Joint App. at 859, 1223.

The government formally intervened in the Merena, Grossenbacher, and Spear actions pursuant to 31 U.S.C. S 3730(b)(2). Soon thereafter, the District Court formally approved a settlement agreement between the United States and SKB for $325 million plus interest. See Joint App. at 201-221. Although the False Claims Act provides a specific mechanism for relators to challenge the adequacy of a settlement agreement into which the government enters 31 U.S.C. S 3730(c)(2)(B), Merena, Grossenbacher, and the Spear relators did not challenge the overall statement. See Joint App. at 213.

After approving the settlement agreement, the District Court dismissed the three qui tam actions with prejudice. However, the Court expressly retained jurisdiction over, among other things, the "determination of the relators' qui tam shares." Dist. Ct. Op. At 7. See Joint App. at 198, 274277.

The District Court subsequently disposed of complaints that three other relators filed after the Merena, Grossenbacher, and Spear complaints. The Court analyzed these complaints on a claim-by-claim basis in order to determine whether each claim was barred under the "first to-file" rule imposed by 31 U.S.C. S 3730(b)(5). The Court was able to identify only one claim that had not been raised in one of the previously filed complaints. Accordingly, the Court allowed that claim to survive but barred all the others. The later-filing relators appealed, but we affirmed the District Court's decision. See United States ex rel. LaCorte v. SmithKline Beecham Clinical Lab., 149 F.3d 227, 325-36 (3d Cir. 1998).

The government failed to reach an agreement with relators Merena and Grossenbacher on the amount that they would receive from the settlement agreement. The government maintained that Merena was entitled to approximately $10 million of the $65 million attributable to the non-"automated chemistry" claims and has paid Merena this amount. The government and the Spear relators have a proposed agreement that, if approved, will award the Spear relators 15% of the $13 million that the government attributed to a claim called the "CBC Indices" claim.

D. The core of the current dispute between the United States and relators Merena, Grossenbacher, and Robinson (hereinafter "the relators") concerns the relators' right to a share of the settlement proceeds attributable to the "automated chemistry" claims. The relators argue that they are entitled under 31 U.S.C. S 3170(d) to a percentage of the total proceeds that the government obtained in the settlement. The government, on the other hand, maintains that the relators may not receive any portion of the proceeds attributable to the "automated chemistry" claims because the relators' "automated chemistry" claims were jurisdictionally barred under the public-disclosure provision of the qui tam statute, 31 U.S.C. S 3730(e)(4) ("section (e)(4)"), which provides that "[n]o court shall have jurisdiction" over any False Claims Act action that is "based upon" certain specified public disclosures unless the action is brought by the Attorney General or an "original source" of the information. The government contends...