by Ben Vernia | April 2nd, 2010
In a March 24 opinion, District Judge William Martini adopted Magistrate Judge Mark Falk’s report and recommendation in a derivative suit brought by a shareholder against officers and directors of Quest Diagnostics, over the company’s 2008 settlement of a qui tam suit over its marketing of faulty medical test kits. In resolving the qui tam, which had been filed in 2004, the company’s subsidiary, Nichols Institute Diagnostics, Inc., pleaded guilty to a single felony misbranding count under the Food, Drug & Cosmetic Act, and paid a $40 million fine; Quest and the Nichols also paid $262 million more in settlement of the civil case, $6.2 million to state Medicaid agencies, and accepted a five-year Corporate Integrity Agreement.
In the derivative suit, a Quest shareholder alleged that the officers and directors breached their fiduciary duties and wasted corporate assets. The defendants removed the case to federal court, and the plaintiff moved to remand. The defendants argued in the motion that because the plaintiff must prove a violation of the False Claims Act in order to succeed on his claims, the case was one “arising under” federal law, and so federal jurisdiction was appropriate.
The Court disagreed, applying the Supreme Court’s jurisdictional interpretation in Grable & Sons Metal Prod., Inc. v. Darue Eng’g & Mfg., 545 U.S. 308 (2005), and Empire Healthcare Assurance, Inc. v. McVeigh, 547 U.S. 677 (2006). Judge Martini agreed with Magistrate Falk, writing:
Plaintiff‟s well-pleaded complaint asserts purely state law claims, centering on whether Defendants‟ actions and inactions violated their fiduciary duties and wasted corporate assets. While Defendants attempt to collapse these shareholder derivative claims into an FCA determination to create federal jurisdiction, this assertion mischaracterizes the nature of Plaintiff‟s allegations.
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The issue of an FCA violation represents no “dispositive and contested federal issue … at the heart of” Plaintiff‟s claims. Grable, 545 U.S. at 320. Moreover, the centrality of the claims hinges on “Defendants‟ conduct in allowing problems to occur and in not responding to them.” (Report and Recommendation at 8.) Proving an FCA violation is incidental, if at all necessary.
Judge Martini nevertheless denied the plaintiff’s motion for costs and fees, concluding that the defendants’ position was not unreasonable in light of the relative recency of the Supreme Court’s decisions in Grable and Empire.
