Commonwealth of Virginia ex rel. Hunter Labs. v. Commonwealth of Virginia, No. 15-1484 (4th Cir. 2016)

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Justia Opinion Summary

Relators filed suit against medical laboratory businesses in 2007 in state court, alleging that the labs had submitted false claims to the Commonwealth for Medicaid reimbursement. Defendants removed to federal court. After the Commonwealth entered into a settlement agreement with defendants, the district court awarded relators a share of the settlement proceeds. Relators appealed, contending that the district court's award was insufficient under state law. The court vacated and remanded to the state court, concluding that the district court lacked subject matter jurisdiction over the qui tam action. In this case, by the plain terms of the complaint, relators could have prevailed on their state law claims by proving that defendants contravened the Commonwealth’s Medicaid regulations, without showing any violation of federal law.

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PUBLISHED UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT No. 15-1484 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. Appeal from the United States District Court for the Eastern District of Virginia, at Alexandria. Gerald Bruce Lee, District Judge; Anthony J. Trenga, District Judge. (1:13-cv-01129-GBLTCB) Argued: May 10, 2016 Decided: Before MOTZ, KING, and HARRIS, Circuit Judges. July 7, 2016 Vacated and remanded by published opinion. Judge King wrote the opinion, in which Judge Motz and Judge Harris joined. 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, 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. 2 KING, Circuit Judge: In L.L.C., December and 2007, Chris qui Riedel tam (the relators Hunter “relators”) Laboratories, filed this civil action in the Circuit Court of Fairfax County against multiple medical laboratory businesses. medical laboratories Commonwealth of had The complaint alleged that the submitted Virginia for false Medicaid claims to reimbursement, the 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 3 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 (2006). in Medicaid is voluntary, a state Although state participation 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, 601 S.E.2d 604, 606 (Va. 2004) (explaining that DMAS determines “reimbursement rates for providers of nursing home services to Medicaid recipients”). 4 A. Under person and Virginia for law the a relator Commonwealth” may — alleging violations of the VFATA. 216.5(A). 1 complaint institute a qui tam — “for civil the action See Va. Code Ann. § 8.01- On December 19, 2007, the relators filed the qui tam in this Fairfax County. case under seal in the Circuit Court of 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 § 8.01-216.3(A)(1); Ann. 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 1 the maximum fees payable The term “qui tam” is “short for the Latin phrase qui tam pro domino rege quam pro se ipso in hac parte sequitur, which means ‘who pursues this action on our Lord the King’s behalf as well as his own.’” See Vt. Agency of Nat. Res. v. United States ex rel. Stevens, 529 U.S. 765, 768 n.1 (2000). 5 pursuant to Virginia regulations.” on 12 Va. Admin. Code See Complaint ¶ 6 (relying 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 their reimbursement claims, see id. ¶¶ 30-31. when submitting 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 unlawful maintained as kickback that those schemes, practices strictly were “independently 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 anti6 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. the defendants removed the action from In September 2013, 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. 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 specifically, of the federal defendants law.” See suggested J.A. that 21 the ¶ 7. 3 relators More had alleged practices that, if proven, constituted “‘independently 2 The VFATA requires that a qui tam complaint first be filed under seal, without service on the defendants, to allow the Commonwealth to investigate the allegations and determine whether to intervene, i.e., litigate the lawsuit on its own behalf. See Va. Code Ann. § 8.01-216.5. 3 Citations herein to “J.A. __” refer to the contents of the Joint Appendix filed by the parties in this appeal. 7 unlawful’ violations of the federal Anti-Kickback Statute, which rendered subsequent claims for payment submitted ‘false,’ and thus actionable under the VFATA.” omitted). In other words, the defendants to Virginia Id. (citation 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 — Diagnostics Nichols (3) Quest Diagnostics (1) Quest Diagnostics Institute, f/k/a Clinical 4 Incorporated; Quest (2) Quest Diagnostics, Laboratories, Inc.; Inc.; and After removal, the district court dismissed the initial qui tam Complaint under Rule 12(b)(6) and the relators filed their First Amended Complaint. At oral argument in this appeal, both the relators and the Commonwealth conceded that the initial Complaint — operative at the time of removal — must show subject matter jurisdiction in order for the lawsuit to be properly litigated in federal court. 8 (4) Specialty Laboratories, Inc. (the “settling defendants”) — finalized a settlement agreement in this case (the “Agreement”). 5 Pursuant thereto, the parties agreed that — in exchange for, inter alia, dismissal with prejudice of the claims against the settling defendants — those defendants would pay $1,250,000 to the Commonwealth, and that the Commonwealth would then pay the relators “a percentage of the applicable proceeds in an amount to be negotiated.” See J.A. 139. 6 The Agreement provides that it is governed by Virginia law and that “venue for addressing and resolving any and all disputes relating to th[e] Agreement shall be the [Virginia].” Shortly state courts of appropriate jurisdiction of Agreement, the Id. at 146. after the parties finalized the Attorney General of Virginia requested the district court to approve the sum of $138,925.34 as the relators’ share of the settlement proceeds. 7 5 The relators opposed the Commonwealth’s None of the named defendants is a party to this appeal. 6 Under Virginia law, if the Commonwealth declines to intervene in a qui tam action and the matter is later settled, the qui tam relator is entitled to a share that is “not less than twenty-five percent and not more than thirty percent of the proceeds of the . . . settlement.” See Va. Code Ann. § 8.01216.7(B). 7 Although the Commonwealth declined to intervene when this litigation was pending in state court, the Attorney General appeared on behalf of the Commonwealth on September 26, 2014, when he moved the district court for disbursement of the (Continued) 9 motion concerning their share of the settlement proceeds, insisting that the share proposed by the Attorney General was not sufficient and that they were entitled to $350,000. In April 2015, the district court entered an order approving the Commonwealth’s proposal, awarding the relators their share of the settlement proceeds. $138,925.34 as See Virginia ex rel. Hunter Labs., L.L.C. v. Quest Diagnostics, Inc., No. 1:13-cv01129 (E.D. Va. Apr. 22, 2015), ECF No. 121. The relators have timely noted this appeal, and we possess jurisdiction pursuant to 28 U.S.C. § 1291. 8 On April 21, 2016, prior to oral argument of the appeal, we sought supplemental briefing on whether the district court had possessed subject matter jurisdiction. By their supplemental briefs, the relators relators’ share of the settlement proceeds. The propriety of the Commonwealth as a party-litigant in these proceedings is not contested. 8 We observe that it is questionable whether the district court’s April 2015 order was a “final decision[],” see 28 U.S.C. § 1291, when the relators noted their appeal on April 29, 2015. We are satisfied, however, that any defect in that regard was cured when the court dismissed the claims against the settling defendants on May 29, 2015, as there were no other pending claims in the action at that time. See, e.g., Harbert v. Healthcare Servs. Grp., Inc., 391 F.3d 1140, 1146 (10th Cir. 2004) (recognizing that “an otherwise nonfinal decision becomes final and appealable if the district court adjudicates all remaining claims against all remaining parties before the appellate court acts to dismiss the appeal”). 10 and the Commonwealth assert that subject matter jurisdiction was proper in the district court. II. The recognized limits on jurisdiction in the federal courts “define the very foundation of judicial authority.” See United States v. Wilson, 699 F.3d 789, 793 (4th Cir. 2012). As such, “[e]very federal appellate court has a special obligation to satisfy itself not only of its own jurisdiction, but also that of the lower courts in a cause under review.” See Rice v. Rivera, 617 F.3d 802, 807 (4th Cir. 2010) (per curiam) (internal quotation marks omitted); Wilson, 699 F.3d at 793 (explaining that “a lack of subject matter jurisdiction cannot be waived or forfeited”). novo. Our review of subject matter jurisdiction is de See Dixon v. Coburg Dairy, Inc., 369 F.3d 811, 815-16 (4th Cir. 2004) (en banc). III. A. Section 1331 of Title 28 confers on the federal district courts “original jurisdiction of all civil actions arising under the . . . laws . . . of the United States.” With exceptions not relevant here, an action initiated in a state court — over which a federal district court would possess original jurisdiction — 11 may be removed to the appropriate district court. § 1441(a). As initially a filed general in proposition, state court may See 28 U.S.C. therefore, be removed an action to federal district court if one or more of the claims asserted arises under federal law. The determination of whether a claim arises under federal law for purposes of 28 U.S.C. § 1331 requires the application of “the well-pleaded complaint rule.” 402 F.3d 430, 442 (4th Cir. See Pinney v. Nokia, Inc., 2005). Pursuant thereto, the federal court may examine only that which “necessarily appears in the plaintiff’s statement of his own claim” whether there is jurisdiction over the action. in assessing See Franchise Tax Bd. v. Constr. Laborers Vacation Tr. for S. Cal., 463 U.S. 1, 10 (1983) (internal quotation marks omitted). Under the well-pleaded complaint rule, as the Supreme Court has explained, “a case can ‘aris[e] under’ federal law in two ways.” See Gunn v. Minton, 133 S. Ct. 1059, 1064 (2013). First, “a case arises under federal law when federal law creates the cause of action asserted.” Id. Second, as relevant here, § 1331 confers jurisdiction over a “special and small category” of claims that originate in “state rather than federal law.” Id. at 1064-65 situations, jurisdiction as (internal the will quotation Court only has exist omitted). recognized, over 12 marks a In “arising state-law claim such under” if a “federal issue” disputed, (3) substantial, federal court is “(1) necessarily without approved by Congress.” and raised, (4) capable disrupting the of (2) actually resolution federal-state in balance Id. at 1065 (relying on Grable & Sons Metal Prods., Inc. v. Darue Eng’g & Mfg., 545 U.S. 308, 314 (2005)). We recent adhered to the Court’s decision in Flying four-part Pigs, L.L.C. L.L.C., 757 F.3d 177 (4th Cir. 2014). Grable v. RRAJ test in our Franchising, There, the plaintiff sought to enforce — under state law and in state court — an equitable ownership. lien against The certain defendant trademarks removed the case with to disputed the federal district court, insisting that applying federal law was required in order to resolve the trademark ownership dispute. As we observed, however, “a plaintiff’s right to relief for a given claim necessarily depends on a question of federal law only when every legal theory supporting the claim requires the resolution of a federal issue.” Id. at 182 (quoting Dixon v. Coburg Dairy, Inc., 369 F.3d 811, 816 (4th Cir. 2004) (en banc)). Trademark ownership, we explained, “is not acquired by federal or state registration,” but instead derives “only from prior use.” (internal quotation marks omitted). Thus, although Id. federal registration of a trademark is “prima facie evidence that the registrant is the owner of the 13 mark,” such registration is neither necessary nor sufficient to establish ownership. (internal quotation marks omitted). not “necessarily decision, we raised,” rejected as the Id. Because a federal issue was required by proposition state-law claim arose under federal law. the that Court’s the Grable plaintiff’s Id. at 182-83. B. With parties’ Both the foregoing contentions the relators, principles regarding as in mind, subject appellants, we matter and the turn to the jurisdiction. Commonwealth, as appellee, maintain that the VFATA claims fall into the “special and small under category” federal because of law. resolving state-law That whether is so, the claims that according defendant actually to the medical arise relators, laboratories contravened the federal anti-kickback statute is “determinative of the cause of action under VFATA, as claims kickbacks that are submitted to Medicaid are false.” Br. of Appellants 5-6. tainted by See Supp. The Commonwealth, for its part, broadly asserts that “[f]ederal issues are always raised with respect to claims involving Medicaid, including claims under the VFATA,” because Medicaid is “a joint federal-state program.” See Supp. Br. of Appellee 4-5. Applying the well-pleaded complaint rule in this situation demonstrates that, without question, federal law does not create any cause of action that is 14 asserted in the Complaint. Furthermore, the relators’ VFATA claims fail at Grable’s first prong, because those claims do not “necessarily raise” any Indeed, to prove the “pull through” theory — the federal issue. defendants’ basis for removal to federal court — the relators need only show, as pleaded in the Complaint, that the defendants contravened the Commonwealth’s Medicaid regulations; namely, by undercharging for certain services in order to induce Medicaid referrals, and then overcharging the Commonwealth when providing those same services to referred Medicaid recipients. Complaint ¶¶ 7, 23-25. claims that the See, e.g., The corresponding Medicaid reimbursement defendants submitted to DMAS were false, according to the Complaint, because charging Medicaid recipients higher fees than other clients “violated DMAS regulations.” See id. ¶¶ 29-37. As the Supreme Court recently explained in a similar context, a plaintiff pursuing a “state-law action for breach of contract” could allege, “for atmospheric reasons,” defendant’s conduct also contravened federal law. that the See Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Manning, 136 S. Ct. 1562, 1568 (2016); id. at 1574-75 (extending Grable test for § 1331 “arising under” jurisdiction to alleged violations of Section 27 of the Securities Exchange Act of 1934). Such a “hypothetical suit” would not arise under federal law, however, “because the plaintiff can get all the relief he seeks just by showing the 15 breach of an agreement,” violated federal law. at 182 (recognizing without proving that the defendant Id. at 1569; accord Flying Pigs, 757 F.3d that every theory of relief must federal issue for claim to arise under federal law). raise In other words, the hypothetical breach-of-contract suit “can achieve all it is supposed to,” even if issues of federal law “never come up.” See Merrill Lynch, 136 S. Ct. at 1569. The Court’s hypothetical suit in Merrill Lynch further undermines the contention of the parties to this appeal that subject matter jurisdiction was present in the district court proceedings. By the plain terms of the Complaint, the relators could have prevailed on their VFATA claims by proving that the defendants contravened the Commonwealth’s Medicaid regulations, without showing any violation of federal law. The mere fact that the funded Virginia Medicaid program is jointly by the federal government and the Commonwealth is not sufficient to satisfy Grable’s first prong, and that fact does not make a federal case out of every Medicaid dispute. Put succinctly, the Complaint’s VFATA claims do not necessarily raise any federal issue, and thus do not arise under federal law. 9 9 Because the first prong of Grable is not satisfied, we need not address the other parts of that test. See Flying Pigs, 757 F.3d at 183 n.8. 16 IV. Pursuant to the foregoing, we vacate the judgment and remand for the district court to remand to the Circuit Court of Fairfax County. VACATED AND REMANDED 17