Court Opinion

ID: 4013861
Source: CourtListenerOpinion
Date Created: 2016-07-07 19:00:55.300098+00
Date Added: 2024-06-11T14:49:58.274061
License: Public Domain

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-GBL-
TCB)

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

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.

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   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

                                          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).              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, 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      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, 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

       1The 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.”                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-

                                          6
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.

      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

      2The 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     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

       4After 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   state   courts   of    appropriate      jurisdiction   of

[Virginia].”    Id. at 146.

     Shortly    after   the    parties    finalized   the    Agreement,    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        The relators opposed the Commonwealth’s

     5   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. § 8.01-
216.7(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   $138,925.34   as

their share of the settlement proceeds.              See Virginia ex rel.

Hunter Labs., L.L.C. v. Quest Diagnostics, Inc., No. 1:13-cv-

01129 (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”).     Our review of subject matter jurisdiction is de

novo.     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.                               See 28 U.S.C.

§ 1441(a).          As    a    general       proposition,             therefore,      an    action

initially      filed      in        state    court     may       be    removed     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.”                         See Pinney v. Nokia, Inc.,

402 F.3d 430,      442    (4th     Cir.    2005).            Pursuant      thereto,        the

federal court may examine only that which “necessarily appears

in    the   plaintiff’s         statement       of    his       own    claim”    in     assessing

whether there is jurisdiction over the action.                                  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      (internal          quotation       marks      omitted).           In    such

situations,         as    the       Court     has     recognized,          “arising         under”

jurisdiction        will       only     exist    over        a    state-law      claim          if   a

                                                12
“federal     issue”        is     “(1) necessarily            raised,          (2) actually

disputed,    (3) substantial,            and        (4) capable      of    resolution       in

federal     court    without       disrupting          the    federal-state            balance

approved by Congress.”             Id. at 1065 (relying on Grable & Sons

Metal Prods., Inc. v. Darue Eng’g & Mfg., 545 U.S. 308, 314

(2005)).

     We    adhered    to    the    Court’s          four-part     Grable       test    in   our

recent    decision    in    Flying       Pigs,       L.L.C.     v.   RRAJ      Franchising,

L.L.C., 757 F.3d 177 (4th Cir. 2014).                           There, the plaintiff

sought to enforce — under state law and in state court — an

equitable     lien    against           certain        trademarks          with       disputed

ownership.      The       defendant          removed    the    case       to   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.”                                   Id.

(internal    quotation          marks    omitted).           Thus,     although        federal

registration of a trademark is “prima facie evidence that the

registrant    is    the    owner        of    the    mark,”     such      registration      is

                                              13
neither necessary nor sufficient to establish ownership.                                        Id.

(internal quotation marks omitted).                     Because a federal issue was

not    “necessarily        raised,”       as    required       by    the       Court’s     Grable

decision,       we    rejected      the    proposition          that       the        plaintiff’s

state-law claim arose under federal law.                       Id. at 182-83.

                                                B.

       With     the   foregoing       principles        in     mind,       we    turn     to    the

parties’       contentions       regarding           subject        matter       jurisdiction.

Both    the     relators,      as   appellants,          and    the       Commonwealth,          as

appellee, maintain that the VFATA claims fall into the “special

and    small    category”      of     state-law        claims       that       actually    arise

under    federal      law.      That      is    so,    according          to    the     relators,

because     resolving        whether      the       defendant       medical          laboratories

contravened the federal anti-kickback statute is “determinative

of    the   cause     of     action    under         VFATA,    as     claims          tainted    by

kickbacks that are submitted to Medicaid are false.”                                   See Supp.

Br. of Appellants 5-6.              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     asserted       in        the    Complaint.

                                                14
Furthermore, the relators’ VFATA claims fail at Grable’s first

prong,    because   those   claims      do   not   “necessarily        raise”      any

federal issue.      Indeed, to prove the “pull through” theory — the

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.                    See, e.g.,

Complaint ¶¶ 7, 23-25.       The corresponding Medicaid reimbursement

claims    that   the    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,”         that   the

defendant’s conduct also contravened federal law.                      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,”      without    proving    that   the   defendant

violated federal law.           Id. at 1569; accord Flying Pigs, 757 F.3d

at   182     (recognizing      that     every   theory   of   relief    must     raise

federal issue for claim to arise under federal law).                          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         Virginia    Medicaid    program    is   jointly     funded    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

       9Because 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