United States of America et al v. Laboratory Corporation of America Holdings

Filing 72

ORDER AND OPINION The Court GRANTS IN PART and DENIES IN PART Defendant LabCorp's partial Motion to Dismiss. (Dkt. No. 60 .) The Motion is GRANTED as to claims regarding medically unnecessary tests, the cause of action f or reversefalse claims liability (Count II), and the causes of action under California law (Count III) and Illinois law (Count IV), and those claims are DISMISSED. The Motion is DENIED as to Relators conspiracy claim. AND IT IS SO ORDERED. Signed by Honorable Richard M Gergel on 1/15/2019.(sshe, )

IN THE UNITED STATES DISTRICT COURT
DISTRICT OF SOUTH CAROLINA
BEAUFORT DIVISION

United States of America and The States
of California and Illinois, ex rel. Scarlett
Lutz and Kayla Webster,
Plaintiffs/Relaters,
V.

Laboratory Corporation of America
Holdings,
Defendant.

Civil Action No. 9:14-cv-3699-RMG

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ORDER AND OPINION

This matter is before the Court on Defendant Laboratory Corporation of America
Holdings' ("LabCorp") partial motion to dismiss the fourth amended complaint ("F AC") under
Federal Rules of Civil Procedure 9(b) and 12(b)(6). (Dkt. No. 60.) For the reasons below,
LabCorp' s motion to dismiss is granted in part and denied in part.
I.

Background

Relaters Scarlett Lutz and Kayla Webster ("Relaters") filed a qui tam complaint in 2013
alleging violations of the False Claims Act ("FCA"), 31 U.S.C. § 3729 and multiple state statutes
against LabCorp and other defendants. The claims against Defendant LabCorp were eventually
severed from the claims against the other defendants. On June 26, 2018, the Relaters filed their
Fourth Amended Complaint, alleging that LabCorp violated the FCA through several fraudulent
schemes impacting government health care programs, such as billing for medically unnecessary
tests and paying kickbacks to physicians for ordering tests from LabCorp, and that it did so as part
of a conspiracy with two other laboratories: Health Diagnostic Laboratory, Inc. ("HDL'') and
Singulex, Inc. ("Singulex"). In addition to claims under the FCA, Relaters brought claims under
the California Insurance Frauds Prevention Act ("CIFP A"), Cal. Ins. Code § 1871. 7, and the
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Illinois Insurance Claims Fraud Prevention Act ("ICFPA"), 740 Ill. Comp. Stat. Ann. 92/15, both
of which allow interested persons to bring a qui tam suit for fraudulent claims submitted to private
insurers. Neither the federal government nor any state government has decided to intervene in this

qui tam action as of the date of this order. 1
Defendant LabCorp now seeks the dismissal of most claims brought by the Relators. First,
LabCorp argues that the FAC fails to state a cause of action against LabCorp for submitting claims
for medically unnecessary tests. Second, LabCorp argues that Relators' claim for reverse false
claims liability, Count II, is duplicative and fails to allege the claim with particularity, as required
by Rule 9(b). Third, LabCorp argues that the Relators lack standing to bring claims under the
CIFP A or ICFP A since they are not "interested persons" and, regardless, the claims fail under 9(b).
Finally, LabCorp argues that the conspiracy claims fail under 9(b). LabCorp's motion does not
seek dismissal of the claims based on alleged kickbacks paid to ensure that doctors referred and
ordered lab tests. (Dkt. No. 60 at 3.) Relators oppose the motion. (Dkt. No. 63.)

II.

Legal Standard
A. Motion to Dismiss
Rule 12(b)( 6) of the Federal Rules of Civil Procedure permits the dismissal of an action if

the complaint fails "to state a claim upon which relief can be granted." Such a motion tests the
legal sufficiency of the complaint and "does not resolve contests surrounding the facts, the merits
of the claim, or the applicability of defenses .... Our inquiry then is limited to whether the
allegations constitute 'a short and plain statement of the claim showing that the pleader is entitled
to relief."' Republican Party ofNC. v. Martin, 980 F.2d 943,952 (4th Cir. 1992)(quotation marks

1

The United States expressly declined to intervene in the case. (Dkt. No. 30.) The Court draws
no inference about the merits of the Relators' allegations based on the Government's decision not
to intervene. See US. ex rel. Berge v. Bd of Trustees of the Univ. of Alabama, 104 F.3d 1453,
1458 (4th Cir. 1997).
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and citation omitted). In a Rule 12(b)(6) motion, the Court is obligated to "assume the truth of all
facts alleged in the complaint and the existence of any fact that can be proved, consistent with the
complaint's allegations." E. Shore Mkts., Inc. v. J.D. Assocs. Ltd. P'ship, 213 F.3d 175, 180 (4th
Cir. 2000). However, while the Court must accept the facts in a light most favorable to the nonmoving party, it "need not accept as true unwarranted inferences, unreasonable conclusions, or
arguments." Id.
To survive a motion to dismiss, the complaint must state "enough facts to state a claim to
relief that is plausible on its face." Bell At/. Corp. v. Twombly, 550 U.S. 544,570 (2007). Although
the requirement of plausibility does not impose a probability requirement at this stage, the
complaint must show more than a "sheer possibility that a defendant has acted unlawfully."
Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). A complaint has "facial plausibility" where the

pleading "allows the court to draw the reasonable inference that the defendant is liable for the
misconduct alleged." Id.

B. Pleading Fraud with Particularity - Rule 9(b)
A complaint alleging fraud "must state with particularity the circumstances constituting
fraud." Fed. R. Civ. P. 9(b). However, "[m]alice, intent, knowledge, and other conditions of a
person's mind may be alleged generally." Id. To meet this standard, the complaint must describe
"the time, place, and contents of the false representations, as well as the identity of the person
making the misrepresentation and what he obtained thereby." US. ex rel. Wilson v. Kellogg Brown
& Root, Inc., 525 F.3d 370, 379 (4th Cir. 2008) (citations omitted). In other words, the complaint

must describe the "who, what, when, where, and how of the alleged fraud." Id. (citations omitted).
Finally, "[a] court should hesitate to dismiss a complaint under Rule 9(b) if the court is
satisfied (1) that the defendant has been made aware of the particular circumstances for which she

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will have to prepare a defense at trial, and (2) that plaintiff has substantial pre-discovery evidence
of those facts." Harrison v. Westinghouse Savannah River Co., 176 F.3d 776, 784 (4th Cir. 1999).
Rule 9(b) also requires a complaint to include "some indicia of reliability" to "support the
allegation that an actual false claim was presented to the government." Nathan, 707 F.3d at 457
(citation omitted).

A complaint provides the requisite indicia of reliability where "specific

allegations of the defendant's fraudulent conduct necessarily [lead] to the plausible inference that
false claims were presented to the government." Id.

III.

Discussion
A. Claims Based on Medically Unnecessary Testing
Relators have not alleged that LabCorp encouraged any medically unnecessary testing, and

therefore the Court grants the motion to dismiss all claims based upon this theory. Under 42 U.S.C.
§ 1395y(a)(l )(A), the federal government will not reimburse a Medicare claim unless the services
at issue were "reasonable and necessary." It follows that "claims for medically unnecessary
treatment are actionable under the FCA." US. ex rel. Riley v. St. Luke's Episcopal Hosp., 355
F.3d 370,376 (5th Cir. 2004). Relators allege that LabCorp improperly encouraged physicians to
order medically unnecessary testing by informing at least one physician, Dr. Lloyd Miller, that
LabCorp would only draw blood for free if the doctor also ordered testing from LabCorp and
providing doctors with a space marked "other" on the LabCorp requisition form, causing doctors
to order unnecessary and sometimes duplicative testing. (Dkt. Nos. 50 at ,i,i 361 - 369; 63 at 13 14.)

Relators also allege that LabCorp caused medically unnecessary testing by providing

physicians with in-office phlebotomists who provided blood draws for blood samples referred to
HDL and Singulex after LabCorp already knew they were engaged in fraud. (Dkt. Nos. 50 at ,r,r
499 - 513; 63 at 12 -13.) LabCorp, however, argues that these claims are legally insufficient as

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the Complaint alleges it was doctors, rather than LabCorp, that ordered the tests and LabCorp
never certified the necessity of the tests. (Dkt. No. 60-1 at 9- 13.)
In submitting a claim for reimbursement, "a laboratory generally may rely on that doctor's
order in submitting a claim for reimbursement as medically necessary." United States v. Bertram,
900 F.3d 743, 750 (6th Cir. 2018). However, this rule is not universal, and there can still be a FCA
violation where a laboratory "engage[s] in a scheme to encourage ... physicians to order medically
unnecessary tests .... " See United States ex rel. Groat v. Boston Heart Diagnostics Corp., 296 F.
Supp. 3d 155, 165 (D.D.C. 2017). Here, Relators have not alleged that LabCorp encouraged any
medically unnecessary testing. Instead, they have alleged that LabCorp incentivized doctors, such
as Dr. Miller, to use its services by waiving a $5.00 fee for blood draws if a test is referred to them
and making it easy to do so by including an "other field" to be used for tests to other laboratories.
This claim alleges that LabCorp financially induced doctors to refer tests to LabCorp but does not
allege that LabCorp encouraged specific tests for patients which were medically unnecessary.
Similarly, while Relators allege that LabCorp knew that HDL offered above-market draw fees
dating back to 2010, they do not allege that LabCorp knew that blood draws provided for HDL
and Singulex were inherently medically unnecessary. (See FAC at~~ 262 - 265.)
These allegations stand in contrast to cases in which laboratories were leading doctors to
order a specific, and unnecessary, testing regime. See, e.g. United States ex rel. Groat v. Boston
Heart Diagnostics Corp., 255 F. Supp. 3d 13, 29 (D.D.C. 2017), amended on reconsideration in
part, 296 F. Supp. 3d 155 (D.D.C. 2017) (collecting cases) (denying request to dismiss where

Defendant allegedly provided physicians with "pre-printed test requisition forms" that would
"group together only a few medically justified tests with many medically unnecessary tests" and
made "marketing statements as to the benefits of and scientific validation of its tests .... "); United

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States v. Berkeley Heart/ab, Inc., 225 F. Supp. 3d 487, 500 (D.S.C. 2016) (Gergel, J.) (denying
motion to dismiss where panels Defendants offered to physicians identified "particular genetic
testing that is medically unnecessary for the vast majority of the population"); US. ex rel. Downy

v. Corning, Inc., 118 F. Supp. 2d 1160, 1166 (D.N.M. 2000) (denying motion to dismiss where
laboratory combined unnecessary PAP test onto line for PSA test).
Here, by contrast, while LabCorp allegedly encouraged physicians to order LabCorp tests
in general, and the Complaint still leaves the decision of which test to request to the ordering
physician. Instead, the issue of whether LabCorp financially induced physicians to refer tests to
LabCorp is covered under Relators' kickback claims, which is not at issue in this Order. Relators'
claims alleging medically unnecessary tests are therefore dismissed.

B. Reverse False Claims
As this Court explained in a related case, "[t]he retention of proceeds provision of the FCA
(often referred to as the 'reverse false claims' provision) imposes liability on anyone who
'knowingly makes, uses, or causes to be made or used, a false record or statement material to an
obligation to pay or transmit money or property to the Government, or knowingly conceals or
knowingly and improperly avoids or decreases an obligation to pay or transmit money or property
to the Government."' United States v. Berkeley Heart/ab, Inc., 247 F. Supp. 3d 724, 732 (D.S.C.
2017) citing 31 U.S.C. § 3729(a)(l )(G). In this context, an "obligation" includes "the retention of
any overpayment." Id. citing 31 U.S.C. § 3729(b)(3).
Relators here allege that LabCorp received improper payments for claims it submitted that
were tainted by violations of the anti-kickback statute. (F AC at 1572.) Relators allege that, since
these payments were made subject to an illegal kickback, LabCorp was required to return these
payments. (Id. at 11167 -68, 590; Dkt. No. 63 at 14-16.) Relators argue that while these claims

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are generally based on the same conduct that support their kickback claims, the reverse false claims
causes of action are pled "in the alternative." (Dkt. No. 63 at 14.) However, it is well settled that
"reverse false claims may not be based on the same conduct as a plaintiffs claims under 31 U .S.C.
§§ 3729(a)(l)(A) and (a)(l)(B)." United States ex rel. Branscome v. Blue Ridge Home Health

Servs., Inc., No. 7:16CV00087, 2018 WL 1309734, at *5 (W.D. Va. Mar. 13, 2018) citing
Pencheng Si v. Laogai Research Found., 71 F. Supp. 3d 73, 97 (D.D.C. 2014). Therefore, as the
Court previously explained, "[u]nder Plaintiffs interpretation 'just about any traditional false
statement or presentment action would give rise to a reverse false claim action .... '" Berkeley

Heart/ab, Inc., 247 F. Supp. 3d at 733. Therefore, LabCorp's motion to dismiss Count II (the
reverse false claims cause of action) is granted.

C. State Law Claims
Relators additionally bring claims under the CIFPA and ICFP A, California and Illinois
laws that allow interested persons to bring a qui tam suit for fraud against private insurers.
LabCorp argues that Relators lack standing to bring a qui tam suit for these claims as they are not
"interested persons," as required by the statutes, since the Relators have no connection to LabCorp,
California, Illinois, or any private insurers from those two states. 2 The FAC does not include any
allegations that the Relators, both South Carolina residents, have any personal involvement with
LabCorp, or any actions that took place in California or Illinois. (See FAC at ,i,r14, 47 - 57.)
However, Relators propose that the Relators qualify as "interested persons" because "a potential
relator qualifies as an interested person ... as long as he or she is the original source of the

2

The two statutes have largely identical language. The California statute, CIFP A, provides that
"Any interested persons, including an insurer, may bring a civil action for a violation of this section
for the person and for the State of California." Cal. Ins. Code § 1871. 7. The Illinois statute,
ICFPA, states that "An interested person, including an insurer, may bring a civil action for a
violation of this Act for the person and for the State of Illinois." 740 Ill. Comp. Stat. Ann. 92/15.
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information, and the lawsuit is not based on allegations previously disclosed in another proceeding
or by the media." (Dkt. No. 63 at 21.) Because of its interest in the litigation, the California
Department of Insurance ("CDI") submitted a Statement of Interest with Relaters' Response,
which argues that an '"interested person' who becomes a relater under the CIFPA does not need
to have a direct interest in the litigation[,]" and instead anyone can qualify as a relater so long the
facts underlying the claim are not already the subject of another case or the person is the original
source of the information. (Dkt. No. 63-1 at 6- 7.)
Relaters and CDI's arguments would define the phrase "interested person" out of the
statutes. Contrary to the Relaters and CDI's arguments the phrase "interested person" in the
statutes defines who may be a qui tam relater under the statute, making clear that only "interested

person[s] ... may bring a civil action for a violation of this section .... " Cal. Ins. Code§ 1871.7;
740 Ill. Comp. Stat. Ann. 92/15 (emphasis added). The fact, therefore, that a qui tam relater has
"no personal right to recover the damages s[o]ught" and instead it is the "government entities" that
are the real parties in interest does not affect who can serve as that qui tam relater in the first
instance. (Dkt. No. 63 at 20.) Instead, that is determined by the text of the statute.
While the federal FCA states that a "[a] person may bring a civil action for a violation of
section 3729," California and Illinois' statutes instead define who may serve as a qui tam relater
by stating that the relater must be an "interested person[.]" Id.; 31 U.S.C. § 3730. There is little
case law from either California or Illinois regarding who qualifies as an "interested person" under
the statutes. However, an order from a trial court in Illinois, the Circuit Court of Cook County,
addressed the issue. The court, looking to Merriam Webster's dictionary, stated that "'interested'
is commonly defined as 'being affected or involved."' State ex rel. Zolna-Pitts v. AT/ Holdings,

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Inc., No. 12CH27483, 2013 WL 3779568, at *3 (Ill. Cir. Ct. June 18, 2013) (citation omitted). 3

Applying this definition, the court held that the relator was not an interested person based on her
being a part;icipant in health insurance provided by Blue Cross Blue Shield of Illinois and Aetna
because there was no allegation that "[the defendant] made any false claim to either insurer." Id.
The court, however, held that the relator ultimately qualified as an "interested person" since she
was a former employee of the defendant. Id.
Neither the Parties nor the CDI have identified any California decisions interpreting the
meaning of "interested persons" under the CIFP A, and the Court similarly has been unable to
locate any California decisions defining the phrase. However, California courts have interpreted
the term "interested person" in other statutes to mean "a person having a direct, and not a merely
consequential, interest in the litigation." Associated Boat Indus. of N. Cal. v. Marshall, 230 P.2d
379,380 (1951), disapproved of on other grounds by Envtl. Prat. Info. Ctr. v. Dep't of Forestry &
Fire Prat., 50 Cal. Rptr. 2d 892 (Cal. Ct. App. 1996) (a party is an "interested person" if either "it

or its members is or may well be impacted by a challenged regulation."). See also Torres v. City
of Yorba Linda, 17 Cal. Rptr. 2d 400, 403-04 (Cal. Ct. App. 1993) ("'interested person' ... is a

person having a direct, and not a merely consequential, interest in the litigation."). These cases,
both from Illinois and California, hold that an individual needs some greater connection to the
litigation than merely being an original source or having a potential to gain a recovery from
pursuing claims under the ICFPA or CIFPA. The court in AT! Holdings, Inc., 2013 WL 3779568,
made this clear when it rejected the argument that the relator was an "interested person" because

3

The Court in AT! Holdings also noted that the ICFPA "was modeled after the California statute
and the language of the two statutes is substantively identical." Id.
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of her participation in health care plans in Illinois, a more concrete relationship to the submittal of
false claims in Illinois than the Relators allege here.
Relators and CDI's proposed expansive definition of "interested person" is unpersuasive.
First, the proposed definition is taken from language contained in§ 1871.7(h), which states that a
person may not bring an action if the "allegations or transactions" are already the subject of a
lawsuit or enforcement action in which the state is a party or where the information was already
publicly disclosed unless the person was "an original source of the information." Cal. Ins. Code§
l 871.7(h). While this section provides an important limit on who can serve as a qui tam relator, it
does nothing to define the phrase "interested person" included in § 1871. 7(e).
Relators and CDI also point to two cases to argue for their more expansive definition of
"interested person." The first, People ex rel. Strathmann v. Acacia Research Corp., 148 Cal. Rptr.
3d 361, 370 (2012), stated that "Strathmann is an 'interested person' bringing this action as a qui
tam relator. 'A qui tam relator is essentially a self-appointed private attorney general, and his
recovery is analogous to a lawyer's contingent fee.'" Id. (citations omitted). Relators argue this
language indicates that Strathmann was an "interested person by virtue of his status as a qui tam
relator." (Dkt. No. 63 at 26.) This, however, puts the cart before the horse, as the phrase
"interested person" defines who may be a qui tam relator. Furthermore, in Strathmann, the relator
was a former employee. Id. at 366. People ex rel. Alzayat v. Hebb, 226 Cal. Rptr. 3d 867 (Ct.
App. 2017), a case relied on extensively by CDI, is similarly unhelpful. The court in Alzayat, a
case determining whether certain claims under CIFPA are barred by the California workers'
compensation statute, clearly holds that CIFPA "does not mandate that the relator has suffered his
or her own injury." Id. at 889. However, a direct injury to Relators is not at issue here and

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otherwise, Alzayat, involving a relater who was an employee of the defendant, provides no
guidance on the definition of "interested person."
This opinion does not seek to define for California or Illinois precisely the contours of who
qualifies as an "interested person" under their state laws. However, based on case law in Illinois
and California, something more than merely being a source of the information or standing to gain
from any ultimately recovery is required to qualify as an "interested person" under the statutes.
The FAC does not allege that Relaters have any contacts, were employed or were in any other way
affected by or involved in the submission of allegedly false claims and/or kickback tainted claims
in California or Illinois. Therefore, it is clear that the Relaters here are not "interested persons"
under those statutes. The Relaters therefore do not have standing to bring claims under the CIFPA
and ICFPA, and the Court grants LabCorp's motion to dismiss Count III (CIFPA) and Count IV
(ICFPA). 4

D. Conspiracy Claims
To state a cause of action for conspiracy under the FCA, "[t]he complaint must allege the
existence of an agreement to violate the FCA and at least one act performed in furtherance of that
agreement." Berkeley Heart/ab, Inc., 225 F. Supp. 3d at 501 citing§ 3726(a)(l)(C). LabCorp
argues that Relaters fail to state a claim for conspiracy since Relaters fail to allege "any agreement
with HDL or Singulex regarding phlebotomy services, much less any agreement concerning the
submission of false claims." (Dkt. No. 60 at 23). LabCorp is incorrect, and Relaters properly pled
a conspiracy claim under the FCA with the particularity requirements of 9(b).

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The Court also refuses to withhold ruling on the motion to dismiss the CIFP A claim since the
CDI is still investigation the Relaters' allegations. (Dkt. No. 63 at 21.) The CDI clearly has
standing to bring a claim under the CIFP A, § 1871. 7(d), but that is unrelated to whether the
Relaters here have standing as "interested persons" under the statute.
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LabCorp identified the details of the alleged agreement with HDL, notably a discussion on
March 1, 2013, where LabCorp and HDL executives discussed the "mutually beneficial" issue of
the use of LabCorp's phlebotomists, and a July 21, 2014, "Memorandum of Understanding
between HDL, Inc. and LabCorp" circulated between the companies' executives which discussed
"LabCorp's assistance in providing phlebotomy services .... "

(FAC at

,r,r

397 - 398, 421.)

Similarly, the FAC alleges that LabCorp had extensive knowledge of HD L's violations of the
FCA, including a kickback scheme with physicians, both before and after the alleged agreement,
and that LabCorp acted in furtherance of the agreement by continuing to provide blood draw
services for HDL referred tests. (Id. at ,r,r 287 - 324, 388, 423.) Regarding Singulex, the FAC
alleges that "[b]y 2012, LabCorp entered into a contract with Singulex to perform some of the tests
in the Singulex panel," which allegedly was related to the blood draws since it "provided LabCorp
with a direct benefit from drawing Singulex samples for referring physicians." (Id. at ,r 436.) The
FAC alleges that by 2013 LabCorp and Singulex "were collaborating to provide testing for
employee health plans .... " (Id. at

,r 441.)

LabCorp also allegedly knew of Singulex's alleged

kickback scheme with physicians both before and after entering its contract and collaboration with
Singulex. (Id. at ,r,r 262-265, 277, 288.) Finally, the FAC alleges that both before and after these
alleged agreements, LabCorp continuously drew blood for tests that were referred to Singulex.
(Id. at ,r,r 433, 445 - 446.) The FAC therefore alleges that LabCorp entered into an agreement and

continued to draw blood even after knowing about the allegedly illegal kickback scheme.
Here, the FAC includes allegations of specific agreements entered into between LabCorp
and both Singulex and HDL regarding blood draw services which caused false claims to be
submitted. Regardless, the FAC also unmistakably alleges that LabCorp knew of the Singulex and
HD L's kickback scheme with physicians and continued to draw blood for tests referred to Singulex

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and HDL. By doing so, the FAC also alleges that LabCorp shared the two laboratories' specific
intent to submit false claims and/or kickback tainted claims to government programs. See US. ex

rel. DeCesare v. Americare in Home Nursing, No. 1:05CV696, 2011 WL 607390 (E.D. Va. Feb.
10, 2011) (holding conspiracy was properly pled where complaint alleged defendant "kn[ew], as
of the first letter, that it may be participating in an illegal referral network, such that its continuing
to do so afterwards constituted its assent to the other parties' allegedly illegal agreement.").
Therefore, at this stage, Relators sufficiently pled their conspiracy claim under the FCA.

E. Amended Complaint
In their Response, Relators requested leave to amend their complaint. If Relators wish to
amend their complaint, they should file a separate motion under Rule 15(a)(2), attaching the
proposed amended complaint, and identify why "justice so requires."

IV.

Conclusion
For the foregoing reasons, the Court GRANTS IN PART and DENIES IN

PART Defendant LabCorp's partial Motion to Dismiss.

(Dkt. No. 60.)

The Motion is

GRANTED as to claims regarding medically unnecessary tests, the cause of action for reverse
false claims liability (Count II), and the causes of action under California law (Count III) and
Illinois law (Count IV), and those claims are DISMISSED. The Motion is DENIED as to Relators
conspiracy claim. 5

AND IT IS SO ORDERED.

January Jr_, 2019
Charleston, South Carolina
5

This order does not affect Relators' kickback related claims, which were not a subject of
LabCorp' s Motion to Dismiss.
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