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United States v. Millenium Laboratories, Inc.

United States Court of Appeals, First Circuit

May 6, 2019

UNITED STATES OF AMERICA; STATE OF CALIFORNIA; STATE OF COLORADO; STATE OF CONNECTICUT; STATE OF DELAWARE; DISTRICT OF COLUMBIA; STATE OF FLORIDA; STATE OF GEORGIA; STATE OF HAWAII; STATE OF ILLINOIS; STATE OF INDIANA; STATE OF IOWA; STATE OF LOUISIANA; STATE OF MARYLAND; COMMONWEALTH OF MASSACHUSETTS; STATE OF MICHIGAN; STATE OF MONTANA; STATE OF NEVADA; STATE OF NEW JERSEY; STATE OF NEW MEXICO; STATE OF NEW YORK; STATE OF NORTH CAROLINA; STATE OF OKLAHOMA; STATE OF RHODE ISLAND; STATE OF TENNESSEE; STATE OF TEXAS; COMMONWEALTH OF VIRGINA; and STATE OF WISCONSIN, ex rel. MARK MCGUIRE, WENDY JOHNSON, and RYAN UEHLING, Plaintiffs,
v.
MILLENIUM LABORATORIES, INC., MILLENIUM LABORATORIES OF CALIFORNIA, INC.; JAMES SLATTERY; HOWARD APPEL, Defendants. MARK MCGUIRE, Cross-Claimant, Appellant,

          APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MASSACHUSETTS [Hon. Nathaniel M. Gorton, U.S. District Judge]

          Michael Tabb, with whom Thomas M. Greene, Ryan P. Morrison, and Greene LLP were on brief, for appellant.

          Michael B. Bogdanow, with whom Robert Foster and Meehan, Boyle, Black & Bogdanow, P.C. were on brief, for appellees.

          Before Torruella, Lynch, and Thompson, Circuit Judges.

          LYNCH, CIRCUIT JUDGE

         The False Claims Act (FCA), 31 U.S.C. § 3729 et seq., authorizes private persons, known as relators, to "bring a civil action . . . in the name of the Government" against those who make fraudulent claims against the United States, id. § 3730(b)(1). When a relator brings such a qui tam suit, the government may intervene and proceed with the action, or it may decline to intervene and allow the relator to proceed. See id. § 3730(b)(1)-(4), (c).

         The FCA encourages relators to bring qui tam suits by allowing them to share in any recovery obtained for the government. To avoid diluting this potential payout, the FCA's first-to-file rule prohibits relators other than the first to file from "bring[ing] a related action based on the facts underlying the pending action." Id. § 3730(b)(5).

         This case arises out of the government's successful intervention in several qui tam suits against Millennium Health (formerly Millennium Laboratories). Millennium settled with the government for $227 million, setting aside fifteen percent of that money as a relator's share. The question on appeal is who is the first-to-file relator and how that is determined.

         Mark McGuire brought a crossclaim for declaratory judgment that he is the first to file and is entitled, under 31 U.S.C. § 3730(d)(1), to the fifteen-percent share. Robert Cunningham, who had brought an earlier qui tam suit against Millennium, moved to dismiss the crossclaim, arguing that he, not McGuire, was the first to file. Finding that the first-to-file rule was jurisdictional, and based on its review of extrinsic materials outside of the complaints, the district court agreed with Cunningham. United States ex rel. Cunningham v. Millennium Labs., Inc., 202 F.Supp.3d 198, 209 (D. Mass. 2016). The district court dismissed McGuire's crossclaim for lack of subject-matter jurisdiction. Id.

         We hold, for the first time in this circuit, that the first-to-file rule is not jurisdictional, reversing earlier circuit precedent, and we hold that we have jurisdiction over McGuire's crossclaim. We then describe the appropriate method for the first-to-file analysis and hold that McGuire was the first-to-file relator and that he has stated a claim that he is entitled to the relator's share of the settlement. We reverse and remand for further proceedings consistent with this opinion.

         I.

         A. The False Claims Act

         President Abraham Lincoln signed the FCA into law in 1863. It was originally intended "to combat rampant fraud in Civil War defense contracts." S. Rep. No. 99-345, at 8 (1986). Today, the FCA is the federal government's "primary litigative tool for combatting fraud." Id. at 2.

         The FCA imposes liability on any person who "knowingly presents . . . a false or fraudulent claim for payment or approval," 31 U.S.C. § 3729(a)(1)(A), "to an officer, employee, or agent of the United States," id. § 3729(b)(2)(A)(i). A relator may enforce the FCA by bringing a civil qui tam action "in the name of the Government." Id. § 3730(b).

         To bring such an action, the relator must file a complaint under seal and must serve the United States with a copy of the complaint and a disclosure of all material evidence. Id. § 3730(b)(2). After reviewing those materials, the United States may "proceed with the action, in which case the action shall be conducted by the Government." Id. § 3730(b)(4). Or, "[i]f the government does not exercise its right to intervene in the suit, the relator may serve the complaint upon the defendant and proceed with the action." United States ex rel. Karvelas v. Melrose-Wakefield Hosp., 360 F.3d 220, 225 (1st Cir. 2004), abrogated on other grounds by Allison Engine Co. v. United States ex rel. Sanders, 553 U.S. 662 (2008).

         The FCA entitles the relator to a portion of any resulting judgment or settlement. Before the 1986 amendments to the FCA, the relator's share in a case in which the government had intervened was capped at "10 percent of the proceeds of the action or settlement of the claim." S. Rep. No. 99-345, at 41. The FCA now mandates a relator award in such a case of "at least 15 percent but not more than 25 percent of the proceeds of the action or settlement of the claim, depending upon the extent to which the person substantially contributed to the prosecution of the action."[1] 31 U.S.C. § 3730(d)(1).

         The 1986 amendments also added a significant restriction on recoveries in qui tam suits that is relevant here: the "first-to-file" rule in paragraph 3730(b)(5). That paragraph provides, "When a person brings an action under [31 U.S.C. § 3730(b)], no person other than the Government may intervene or bring a related action based on the facts underlying the pending action." Id. § 3730(b)(5). Legislative history shows that this rule was meant to "clarify in the statute that private enforcement under the civil False Claims Act is not meant to produce class actions or multiple separate suits based on identical facts and circumstances." S. Rep. No. 99-345, at 25.

         B. The Complaints

         Because we hold that the first-to-file issue is to be addressed under Federal Rule of Civil Procedure 12(b)(6), not Rule 12(b)(1), we confine our review to the pleadings and to facts subject to judicial notice. Haley v. City of Bos., 657 F.3d 39, 46 (1st Cir. 2011). We limit our background discussion to facts alleged in Cunningham's amended complaint, McGuire's original complaint, and in the government's complaint in intervention and settlement agreement.[2]

         1. Cunningham's Amended Complaint

         In late 2009 and early 2010, relator Robert Cunningham[3]filed qui tam actions against five competitors of Calloway Laboratories, his employer. One competitor he sued was Millennium.

         Cunningham filed his first amended complaint[4] against Millennium on February 24, 2011. It detailed a mechanism of fraud arising from Millennium's "Physician Billing Model," the key component of which was Millennium's "multi-class qualitative drug screen," which Cunningham's complaint labels a "test kit." The test kit was a urine specimen collection cup with chemical test strips embedded in it. This kit, which "c[ould] be purchased for less than" ten dollars, "use[d] a single specimen" collected at the point of care to detect "multiple drug classes."

         We described the three aspects of Cunningham's allegations in United States ex rel. Estate of Cunningham v. Millennium Labs. of Calif., Inc., 713 F.3d 662, 665-66 (1st Cir. 2013). Cunningham's complaint alleged that Millennium used its inexpensive point-of-care test kits to induce physicians into excessive billing (Aspect One), excessive testing (Aspect Two), and excessive confirmatory testing (Aspect Three).[5] In Cunningham, we held that Aspects One and Three were jurisdictionally barred by the FCA's public disclosure provision, 31 U.S.C. § 3730(e)(4)(A), because they had been "publicly disclosed" in a California state defamation suit brought by Millennium against Calloway. 713 F.3d at 671. We then vacated the district court's order dismissing Aspect Two of Cunningham's claim and remanded that claim for further proceedings. Id. at 676. On remand, the district court dismissed Aspect Two of Cunningham's claim for lack of particularity under Federal Rule of Civil Procedure 9(b) and for failure to state a claim under Rule 12(b)(6). United States ex rel. Estate of Cunningham v. Millennium Labs. of Cal., No. 09-12209-RWZ, 2014 WL 309374, at *2 (D. Mass. Jan. 27, 2014). That decision is currently on appeal.

         Only Aspect Three is potentially relevant to the first-to-file issue here.[6] Cunningham alleged that if the initial qualitative test uncovered any of the tested drugs, that test "w[ould] need to be followed up by a quantitative screen" and then "confirmed by another method." The complaint alleges that Millennium's point-of-care model led to "significantly more testing," including "confirmatory tests."

         Cunningham alleged generally that this scheme "increas[ed] the revenues of the [physician] defendants at the expense of the government and private health insurance programs" and "significantly increase[d] Millennium's revenues and market share." Cunningham's amended complaint never mentions the terms "custom profiles" or "standing orders" or describes any fraudulent schemes by Millennium associated with either.

         Cunningham filed three disclosures of material evidence to the government in December 2009, September 2010, and February 2012, respectively.

         2. McGuire's Original Complaint

         Mark McGuire, appellant here, filed his original qui tam complaint on January 26, 2012. It focused not on point-of-care testing, the first stage of urinary drug testing, as Cunningham's complaint had done, but on confirmatory (or quantitative) testing, a later stage. McGuire alleged that after a point-of-care test discloses an unexpected drug (or shows the lack of an expected drug), a physician can order confirmatory tests. These tests, which require sophisticated equipment and so can be expensive, determine how much of the substance is present (or not).

         McGuire alleged that Millennium engaged in a scheme that resulted in unnecessary confirmatory tests being performed and billed to the government after the point-of-care tests. Millennium persuaded physicians to execute "custom profiles," which are standing orders for a battery of confirmatory tests on every urine sample, regardless of whether the point-of-care testing showed a need. McGuire alleged that "even if [a point-of-care test] comes back completely negative, . . . based on the customized profile Millennium has gotten the physician's office to sign, Millennium runs 10 confirmatory tests." Millennium profited because "[t]hese 10 unnecessary tests are then billed to Medicare, Medicaid or other ...


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