Quest Diagnostics 2009 Annual Report Download - page 104

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Operating lease rental expense for 2009, 2008 and 2007 aggregated $189 million, $190 million and $171
million, respectively. Rent expense associated with operating leases that include scheduled rent increases and
tenant incentives, such as rent holidays, is recorded on a straight-line basis over the term of the lease.
The Company has certain noncancelable commitments to purchase products or services from various
suppliers, mainly for telecommunications and standing orders to purchase reagents and other laboratory supplies.
At December 31, 2009, the approximate total future purchase commitments are $130 million, of which $51
million are expected to be incurred in 2010, $62 million are expected to be incurred in 2011 through 2012 and
the balance thereafter.
Contingent Lease Obligations
The Company remains subject to contingent obligations under certain real estate leases that were entered into
by certain predecessor companies of a subsidiary prior to the Company’s acquisition of the subsidiary. While the
title to the properties and interest to the subject leases have been transferred to third parties on several occasions
over the course of many years, the lessors have not released the subsidiary predecessor companies from their
original obligations under the leases and therefore remain contingently liable in the event of default. The
remaining terms of the lease obligations and the Company’s corresponding indemnifications range from 15 to 39
years. The lease payments under certain leases are subject to market value adjustments and therefore, the total
contingent obligations under the leases cannot be precisely determined but are likely to total several hundred
million dollars. A claim against the Company would be made only upon the current lessee’s default and after a
series of claims and corresponding defaults by third parties that precede the Company in the order of
indemnification. The Company also has certain indemnification rights from other parties to recover losses in the
event of default on the lease obligations. The Company believes that the likelihood of its performance under
these contingent obligations is remote and no liability has been recorded for any potential payments under the
contingent lease obligations.
Legal Matters
The Company is involved in various legal proceedings. Some of the proceedings against the Company
involve claims that are substantial in amount.
In 2005, the Company received a subpoena from the U. S. Attorney’s Office for the District of New Jersey.
The subpoena seeks the production of business and financial records regarding capitation and risk sharing
arrangements with government and private payers for the years 1993 through 1999. The Company cooperated
with the U. S. Attorney’s Office.
In 2005, the Company received a subpoena from the U. S. Department of Health and Human Services,
Office of the Inspector General, seeking business records including records regarding the Company’s relationship
with health maintenance organizations, independent physician associations, group purchasing organizations, and
preferred provider organizations relating back to 1995. The Company has cooperated with the investigation.
Subsequently, in November 2009, the U.S. District Court for the Southern District of New York partially
unsealed a civil complaint, U. S. ex rel. Fair Laboratory Practices Associates v. Quest Diagnostics Incorporated,
filed against the Company under the whistleblower provisions of the federal False Claims Act. The complaint
alleges, among other things, violations of the federal Anti-Kickback Statute and the federal False Claims Act in
connection with the Company’s pricing of laboratory services. The complaint seeks damages for alleged false
claims associated with laboratory tests reimbursed by government payors, treble damages and civil penalties.
In 2006 and 2008, the Company and several of its subsidiaries received subpoenas from the California
Attorney General’s Office seeking documents relating to the Company’s billings to MediCal, the California
Medicaid program. The Company has cooperated with the government’s requests. Subsequently, the State of
California intervened as plaintiff in a civil lawsuit, California ex rel. Hunter Laboratories, LLC v. Quest
Diagnostics Incorporated., et al., filed in California Superior Court against a number of clinical laboratories,
including the Company and several of its subsidiaries. The complaint alleges overcharging of MediCal for testing
services. The complaint was originally filed by a competitor laboratory in California under the whistleblower
provisions of the California False Claims Act. The complaint was unsealed on March 20, 2009.
F-34
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(dollars in thousands unless otherwise indicated)