United States District Court, N.D. California
ORDER GRANTING MOTION TO DISMISS RE: ECF NO.
TIGAR UNITED STATES DISTRICT JUDGE
the Court is Defendants' motion to dismiss. ECF No. 54.
The Court will grant the motion.
Parties and Claims
forth in the operative complaint, Defendant Carolina Liquid
Chemistries Corp. (“Carolina Liquid”) is a
“manufacturer, distributor, reseller, and service
provider of in-office [urine drug test (“UDT”)]
analyzers and reagents.” First Amended Complaint
(“FAC”), ECF No. 25 ¶ 3. Defendant Patricia
Shugart is the Chief Operating Officer and Vice President of
Carolina Liquid. Id. ¶ 18. Defendant Phil
Shugart is the Chief Executive Officer and President.
Id. ¶ 19. Both Shugarts serve on Carolina
Liquid's board of directors. Id. ¶¶
Randy Reagan owns a chemistry supply business; Relator James
Longfield is an independent consultant in the chemistry and
laboratory industry. Id. ¶¶ 15-16.
allege that Defendants violated the False Claims Act
(“FCA”) and various state analogues by
perpetrating a widespread fraudulent scheme based on Medicare
and Medicaid billing for UDT tests. Since at least March
2009, Carolina Liquid “systematically marketed”
UDT machines by falsely representing that the machines could
perform “high complexity ‘quantitative' drug
testing.” Id. ¶ 2. Relators contend,
however, that Carolina Liquid's machines were in fact
“only capable of performing basic
‘qualitative' drug testing.” Id.
Critically, Medicare and Medicaid reimburse providers for
high complexity and quantitative drug testing at
substantially higher amounts than they do for qualitative
testingf. Id. Physicians and pain management clinics
followed Carolina Liquid's instructions to code tests
performed on those machines as high complexity, and therefore
submitted numerous false claims overcharging Medicare and
Medicaid for the services actually performed. Id.
described in Relators' complaint, qualitative drug
testing is most commonly performed by in-office immunoassays
and enzyme immunoassays that detect whether a drug class or
panel of drug classes is present in a urine sample.
Id. ¶¶ 42-43. These tests produce “a
‘yes/no' result, but are unable to identify
specific drugs within many drug classes or the amount of the
drug in the urine.” Id. ¶ 45. Because
these tests are imprecise and prone to false positives,
“physicians corroborate a positive result” from
one of those tests by sending samples to a laboratory that
performs a more complex “quantitative chromatography or
mass spectrometry test for specific drugs and their
quantities.” Id. ¶ 46. Relators also
allege that, “[s]eparate from whether a test is
‘qualitative' or ‘quantitative,' Medicare
also distinguishes in reimbursement based on the complexity
of a laboratory or office.” Id. ¶ 50.
Tests may be classified as either moderate or high
complexity; even high complexity tests, however, are
qualitative tests when performed on the UDT machines sold by
Carolina Liquid or using its reagents. Id. ¶
explain that the reimbursement scheme for UDTs, as
implemented by the Centers for Medicare & Medicaid
Services (“CMS”), has evolved during the period
of the alleged wrongdoing. As relevant here, prior to January
2011, CMS required providers to bill qualitative tests at a
rate of $20 per test. Id. ¶¶ 59, 64-65.
CMS then changed its practices to require providers to use
one of two codes: (1) G0434, for “Drug screen, other
than chromatographic; any number of drug classes, by
[Clinical Laboratory Improvement Amendments
(“CLIA”)] waived test or moderate complexity
test, per patient encounter”; or (2) G0431, for
“Drug screen, qualitative; multiple drug classes by
high complexity test method (e.g., immunoassay, enzyme
assay), per patient encounter.” Id. ¶ 68
(emphasis omitted). While G0434 tests were still reimbursed
at a rate of $20, G0431 tests would be reimbursed at $100 per
test. Id. Based on these definitions, Relators
assert that “submitting any code other than a single
G0434 per patient encounter for an in-office UDT is
fraudulent upcoding.” Id. ¶ 71 (emphasis
allege that Carolina Liquid nonetheless marketed its UDT
machines to customers by representing that the machines could
perform tests that qualified for “test code G0431 and
other high-complexity [Current Procedural Terminology
(“CPT”)] codes” and using reimbursement
projections based on those misrepresentations. Id.
¶ 74. These codes included CPT codes for quantitative
testing that Carolina Liquid machines were not equipped to
perform. Id. ¶¶ 86-87. As part of this
marketing, Carolina Liquid pitched its products as capable of
generating reimbursement rates as high as $476.27 per test.
Id. ¶¶ 74, 86-87. Relators contend that
Carolina Liquid sales representatives distributed written
brochures containing these projections, as well as a letter
from Patricia Shugart. Id. ¶¶ 74, 82-83,
85-87. Patricia Shugart also held internal meetings in which
she instructed employees to use these sales tactics.
Id. ¶ 81.
further claim that, when they became aware of these marketing
practices, they “repeatedly communicated to Carolina
Liquid personnel, including Carolina Liquid's Western
Regional Sales Director, ” that the coding being
promoted was improper. Id. ¶ 88. No corrective
action was taken. Relators also point to a response from
another manufacturer, Lin-Zhi International, Inc.
(“LZI”), whose reagents were used in some
Carolina Liquid tests. Id. ¶ 89. In 2012,
Lin-Zhi sent a letter to its customers clarifying that its
reagents could be used in qualitative and semi-quantitative
assays only. Id. ¶ 90.
point, Carolina Liquid also began offering billing and coding
consultant services to its customers. Id. ¶ 91.
Relators allege that these services were specifically
directed at promoting fraudulent upcoding. Id.
to Relators, Carolina Liquid has more than 300 customers
across 23 states. Id. ¶ 92. Relators posit that
these customers, using a variety of the UDT analyzers sold by
Carolina Liquid, submitted Medicare and Medicaid claims
pursuant to Carolina Liquid's instructions. Id.
April 3, 2013, Relators filed this FCA qui tam
action under seal, as directed by 31 U.S.C. § 3730(b).
ECF No. 1. In addition to their federal FCA claims, Relators
asserted claims under state false claim act analogues on
behalf of the states of California, Texas, New York,
Michigan, and North Carolina. Id.
September 13, 2013, a different relator, Delbert Salyer,
filed another qui tam action in the Central District
of California, asserting similar FCA claims on behalf of the
United States and a larger collection of states. United
States ex rel. Salyer v. Carolina Liquid Chemistries
Corp., No. 13-cv-05976-JST, ECF No. 1. That case was
subsequently transferred to this district and related to the
current action. Id., ECF Nos. 13, 15.
cases remained under seal pursuant to a series of extensions
while the United States determined whether to intervene.
Ultimately, the United States elected not to intervene, and
the cases were unsealed on October 23, 2018. ECF No. 27.
October 18, 2018, shortly before the cases were unsealed,
Reagan and Longfield filed the operative FAC in this action.
The affected States likewise elected not to intervene, and on
November 27, 2018, the Court issued an order reflecting those
decisions and dismissing without prejudice all claims
asserted on behalf of the State of Maryland in the Salyer
action. ECF No. 33.
March 19, 2019, Defendants filed this motion to dismiss. ECF
Court has jurisdiction over Relators' FCA claims pursuant
to 28 U.S.C. § 1331 and 31 U.S.C. § 3732(a). The
Court exercises supplemental jurisdiction over the state-law
claims under 28 U.S.C. § 1367 and 31 U.S.C. §