COMMONWEALTH OF VIRGINIA ex rel. HUNTER LABORATORIES, L.L.C. v. Commonwealth of Virginia

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.

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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 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

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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). 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”).

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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
1 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.” 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-

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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. 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
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 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
4 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 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)

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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”).

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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”). 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 —

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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

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“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

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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.

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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

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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
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

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