Quest Diagnostics 2012 Annual Report Download - page 111

F- 38
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 over the course
of many years, the title to the properties and interest in the subject leases have been transferred to third parties and the
subject leases have been amended several times by such third parties, the lessors have not formally 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 11
to 35 years. The lease payments under certain leases are subject to market value adjustments and contingent rental
payments 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 liability.
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.
Settlement of California Lawsuit
On May 9, 2011, the Company announced an agreement in principle to settle, and on May 19, 2011, the Company
finalized a settlement of, a qui tam case filed by a competitor under the California False Claims Act in California state court
(the "California Lawsuit") related to the Company's billing practices to Medi-Cal, the California Medicaid program. While
denying liability, in order to avoid the uncertainty, expense and risks of litigation, the Company agreed to resolve these matters
for $241 million. As a result of the agreement in principle, the Company recorded a pre-tax charge to earnings in the first
quarter of 2011 of $236 million (the "Medi-Cal charge"), which represented the cost to resolve the matters noted above and
related claims, less amounts previously reserved for related matters. The Company funded the $241 million payment in the
second quarter of 2011 with cash on hand and borrowings under its existing credit facilities.
Other Legal Matters
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. These actions could involve 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.
We are also involved, from time to time, in other reviews, investigations and proceedings by governmental agencies
regarding our business, including, among other matters, operational matters, 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.
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 alleged, 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 payers, treble
damages and civil penalties. In March 2011, the district court granted the Company's motion to dismiss the relators' complaint
and disqualified the relators and their counsel from pursuing an action based on the facts alleged in the complaint; the relators
filed a notice of appeal. In July 2011, the government filed a notice declining to intervene in the action and the Court entered a
final judgment in the Company's favor. The relators' appeal is pending.
In November 2010, a putative class action entitled Seibert v. Quest Diagnostics Incorporated, et al. was filed against
the Company and certain former officers of the Company in New Jersey state court, on behalf of the Company's sales people
nationwide who were over forty years old and who either resigned or were terminated after being placed on a performance
improvement plan. The complaint alleges that the defendants' conduct violates the New Jersey Law Against Discrimination
("NJLAD"), and seeks, among other things, unspecified damages. The defendants removed the complaint to the United States
District Court for the District of New Jersey. The plaintiffs filed an amended complaint that adds claims under ERISA. The
QUEST DIAGNOSTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
(dollars in thousands unless otherwise indicated)