Quest Diagnostics 2007 Annual Report Download - page 41

Item 3. Legal Proceedings
In addition to the matters described below, in the normal course of business, we have been named, from
time to time, as a defendant in various legal actions, including arbitrations, class actions and other litigation,
arising in connection with our activities as a provider of diagnostic testing, information and services. These legal
actions may include lawsuits alleging negligence or other similar legal claims. Certain of the actual or threatened
legal actions include claims for substantial compensatory and/or punitive damages or claims for indeterminate
amounts of damages, and could have an adverse impact on our client base and reputation.
The Company is also involved, from time to time, in other reviews, investigations and proceedings by
governmental agencies regarding our business, including, among other matters, operational matters, certain of
which may result in adverse judgments, settlements, fines, penalties, injunctions or other relief. The number of
these reviews, investigations and proceedings has increased in recent years with regard to many firms in the
healthcare services industry, including our Company.
We maintain various liability insurance coverages for claims that could result from providing or failing to
provide clinical testing services, including inaccurate testing results and other exposures. Our insurance coverage
limits our maximum exposure on individual claims; however, we are essentially self-insured for a significant
portion of these claims.
The Company contests liability or the amount of damages as appropriate in each pending matter. In view of
the inherent difficulty of predicting the outcome of such matters, particularly in cases where claimants seek
substantial or indeterminate damages or where investigations or proceedings are in the early stages, we cannot
predict with certainty the loss or range of loss, if any, related to such matters, how or if such matters will be
resolved, when they ultimately will be resolved, or what the eventual settlement, fine, penalty or other relief, if
any, might be. Subject to the foregoing, and except for the NID Matter (see also Note 15 in “Notes to
Consolidated Financial Statements” in Part II, Item 8), we believe, based on current knowledge, that the outcome
of all other pending matters will not have a material adverse effect on our consolidated financial condition,
although the outcome of such matters could be material to our results of operations and cash flows in the period
that such matters are determined or paid, depending on, among other things, the levels of our revenues or income
for such period.
NID Matter.
As previously disclosed, NID, a test kit manufacturing subsidiary, and the Company each received a
subpoena from the United States Attorney’s Office for the Eastern District of New York during the fourth quarter
of 2004. The subpoenas requested a wide range of business records, including documents regarding parathyroid
hormone (“PTH”) test kits manufactured by NID and PTH testing performed by the Company. The Company has
voluntarily and actively cooperated with the investigation, providing information, witnesses and business records
of NID and the Company, including documents related to PTH tests and test kits, as well as other tests and test
kits. In the second and third quarters of 2005, the FDA conducted an inspection of NID and issued a Form 483
listing the observations made by the FDA during the course of the inspection. NID responded to the Form 483.
During the fourth quarter of 2005, NID instituted its second voluntary product hold within a six-month
period, due to quality issues, which adversely impacted the operating performance of NID. As a result, the
Company evaluated a number of strategic options for NID, and on April 19, 2006, decided to cease operations at
NID. Upon completion of the wind down of operations in the third quarter of 2006, the operations of NID were
classified as discontinued operations. During the third quarter of 2006, the government issued two additional
subpoenas, one to NID and one to the Company. The subpoenas covered various records, including records
related to tests and test kits in addition to PTH.
During the third quarter of 2007, the government and the Company began settlement discussions. In the
course of those discussions, the government has disclosed to the Company certain of the government’s legal
theories regarding the amount of damages allegedly incurred by the government, which include alleged violations
of civil and criminal statutes including the False Claims Act and the Food, Drug and Cosmetics Act. Violations
of these statutes and related regulations could lead to a warning letter, injunction, fines or penalties, exclusion
from federal health care programs and/or criminal prosecution, as well as claims by third parties. The Company
has analyzed the government’s position and presented its own analysis which argued against many of the
government’s claims. In light of that analysis and based on the status of settlement discussions, the Company has
established a reserve, in accordance with generally accepted accounting principles, reflected in discontinued
operations, of $241 million in connection with these claims. Of the total reserve, $51 million and $190 million
was recorded in the third and fourth quarters, respectively, of 2007. The Company estimates that the amount
reserved represents the minimum expected probable loss with respect to this matter. The Company does not
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