Hunter Laboratories, ex rel v. Commonwealth of Virginia

Filing

PUBLISHED AUTHORED OPINION filed. Originating case number: 1:13-cv-01129-GBL-TCB. [999880946]. [15-1484]

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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

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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.

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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
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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”).

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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).

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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

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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.

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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.

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(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)
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concerning

their

share

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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”).

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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 —
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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

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“federal

issue”

disputed,

(3) substantial,

federal

court

is

Pg: 13 of 17

“(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

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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.

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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
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breach

of

an

Filed: 07/07/2016

agreement,”

violated federal law.
at

182

(recognizing

Pg: 16 of 17

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.

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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