Quest Diagnostics 2009 Annual Report Download - page 105

In June 2009, a shareholder plaintiff filed a purported derivative action in the Superior Court of New Jersey,
Morris County, on behalf of the Company against certain present and former directors and officers of the
Company based on, among other things, their alleged breaches of fiduciary duties in connection with the
manufacture, marketing, sale and billing related to certain test kits manufactured by NID. The complaint includes
claims for, among other things, breach of fiduciary duty and waste of corporate assets and seeks, among other
things, damages and remission of compensation received by the individual defendants.
In 2009, the Company and certain of its subsidiaries also received subpoenas from state agencies in three
states which seek documents relating to the Company’s Medicaid billing practices in those states. The Company
is cooperating with the requests.
The federal or state governments may bring claims based on new theories as to the Company’s practices
which management believes to be in compliance with law. In addition, certain federal and state statutes, including
the qui tam provisions of the federal False Claims Act, allow private individuals to bring lawsuits against
healthcare companies on behalf of government or private payers. The Company is aware of certain pending
individual or class action lawsuits, and has received several subpoenas, related to billing practices filed under the
qui tam provisions of the Civil False Claims Act and/or other federal and state statutes, regulations or other laws.
The Company understands that there may be other pending qui tam claims brought by former employees or other
“whistle blowers” as to which the Company cannot determine the extent of any potential liability.
Several of these matters are in their early stages of development and involve responding to and cooperating
with various government investigations and related subpoenas. While the Company believes that at least a
reasonable possibility exists that losses may have been incurred, based on the nature and status of the
investigations, the losses are either currently not probable or cannot be reasonably estimated.
Management has established reserves in accordance with generally accepted accounting principles for the
matters discussed above. Such reserves totaled approximately $10 million as of December 31, 2009. Although
management cannot predict the outcome of such matters, management does not anticipate that the ultimate
outcome of such matters will have a material adverse effect on the Company’s financial condition but may be
material to the Company’s results of operations or cash flows in the period in which the impact of such matters
is determined or paid.
As a general matter, providers of clinical testing services may be subject to lawsuits alleging negligence or
other similar legal claims. These suits could involve claims for substantial damages. Any professional liability
litigation could also have an adverse impact on the Company’s client base and reputation. The Company
maintains various liability insurance coverages for, among other things, claims that could result from providing,
or failing to provide, clinical testing services, including inaccurate testing results, and other exposures. The
Company’s insurance coverage limits its maximum exposure on individual claims; however, the Company is
essentially self-insured for a significant portion of these claims. Reserves for such matters are established by
considering actuarially determined losses based upon the Company’s historical and projected loss experience.
Management believes that present insurance coverage and reserves are sufficient to cover currently estimated
exposures. Although management cannot predict the outcome of any claims made against the Company,
management does not anticipate that the ultimate outcome of any such proceedings or claims will have a material
adverse effect on the Company’s financial condition but may be material to the Company’s results of operations
or cash flows in the period in which the impact of such claims is determined or paid.
16. DISCONTINUED OPERATIONS
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. On April 19, 2006, the Company decided to
discontinue NID’s operations. During the third quarter of 2006, the Company completed its wind down of NID
and classified the operations of NID as discontinued operations. Results of operations for NID have been reported
as discontinued operations in the accompanying consolidated statements of operations and related disclosures for
all periods presented.
During the third quarter of 2007, the government and the Company began settlement discussions with
respect to the government’s investigation involving NID and the Company. Based on the status of settlement
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QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(dollars in thousands unless otherwise indicated)