Last month, the U.S. District Court for the District of New Jersey held that a private company, Allstate Insurance Company, could proceed with its whistleblower action against a clinical laboratory, Phoenix Toxicology and Lab Services, LLC, which allegedly submitted false claims to the federal government for medically unnecessary urine drug tests (“UDT”). See generally United States ex rel. Allstate Ins. Co. v. Phoenix Toxicology & Lab Servs., LLC, No. CV 22-6303, 2024 WL 2785396 (D.N.J. May 30, 2024). This lawsuit is part of a growing trend of non-traditional, whistleblower-like insurance companies, activists, investors, special purpose entities created just to file litigation (sometimes created by attorneys or litigation-funding groups) and others to file False Claims Act (“FCA”) actions, which have traditionally been brought by former or current employees of the target entities.


Allstate and Phoenix Toxicology have been counterparties in legal proceedings for over a decade. In 2013, Allstate sued Summit Pharmacy, Inc.—Phoenix Toxicology’s predecessor—over claims related to alleged racketeering, insurance fraud, and other alleged healthcare regulation violations. Phoenix Toxicology, 2024 WL 2785396, at *2. During discovery in that lawsuit, Allstate allegedly learned through nonpublic information that Phoenix Toxicology submitted claims for payment to Allstate for unnecessary UDT services rendered to its covered parties. Id.

In 2022, Allstate filed a qui tam complaint under seal alleging that Phoenix Toxicology had violated the FCA by submitting claims for unnecessary UDT to the federal government. Allstate reasoned that Phoenix Toxicology likely submitted similar duplicative, excessive, and medically unnecessary claims to Medicare, Medicaid, and the Federal Employee Health Benefits Program between 2016 and 2022 because it submitted such claims to Allstate. Id. at *8. Allstate specifically alleged three different schemes. First, Allstate alleged a “duplicative presumptive UDT scheme,” in which Phoenix Toxicology performed two screening tests on the same urine sample even when only there was no reason to perform a second test. Id. at *2. Second, Allstate alleged a “definitive UDT standing order scheme,” in which Phoenix Toxicology performed an expensive definitive test to confirm the absence of drugs when there was no clinical need to perform that second test. Id. at *3. Third, Allstate alleged a “drug classes standing order scheme,” in which Phoenix Toxicology allegedly performed tests on multiple drug classes as a matter of course even when there was no individualized circumstance making the testing necessary. Id.

On June 1, 2023, the United States declined to intervene in the lawsuit, and in October 2023, Phoenix Toxicology moved to dismiss the action, claiming that Allstate failed to state a claim under the FCA. Id. at *4.

The District of New Jersey’s Ruling

Phoenix Toxicology argued that Allstate failed to state a claim because it failed to plead that: (1) any claim to the federal government was false; (2) Phoenix Toxicology acted with scienter; and (3) any misrepresentation to the federal government was material. The court rejected all three arguments and found Allstate stated a claim for all three alleged schemes.

  • Falsity: The court held first that Allstate stated a claim for a fraudulent scheme. Specifically, the court held that Allstate alleged that Phoenix Toxicology was conducting medically unnecessary tests with specificity, which was bolstered by examples of nonpublic documents. The court rejected Phoenix Toxicology’s suggestion that it could rely solely on providers’ recommendations of whether the tests were medically necessary and stated that Phoenix Toxicology’s alleged definitive testing without even receiving presumptive testing results further demonstrated falsity. The court also held that Allstate appropriately relied on the evidence submitted to it to bolster its allegations that false claims were submitted to the federal government. In the court’s words, “As Allstate argues, there is no credible reason to believe, at this juncture, that Phoenix Toxicology would submit false claims to Allstate and other private insurers, but not to the federal government. It follows that Allstate’s theory raises a strong inference of fraud on the United States because Phoenix Toxicology is engaged exclusively in UDT, depends almost entirely on three New Jersey providers for referrals, and has reimbursed a substantially larger sum from the federal government than Allstate for similar UDT claims.” Phoenix Toxicology, 2024 WL 2785396, at *12.
  • Scienter: The court further held that Allstate adequately pleaded scienter because Allstate alleged Phoenix Toxicology was aware that referring providers already performed point-of-care testing and its requisition form contained a section requesting the result of such testing when a provider referred a patient for UDT. Allstate also alleged that Phoenix Toxicology performed definitive drug testing without regard to the results of presumptive testing or to confirm negative screening tests while knowing it was required to perform individualized assessments for each test. Allstate also adequately alleged that Phoenix Toxicology knew that performing such tests for every patient was “patently unreasonable.” Id. at *14.
  • Materiality: The court further held that Allstate sufficiently pleaded materiality because Allstate pointed to a Medicare Local Coverage Determination explaining that standing orders for all patients are not reasonable or necessary nor is automatic presumptive testing reasonable or necessary. Id. at *15.


United States ex rel. Allstate Ins. Co. v. Phoenix Toxicology & Lab Servs., LLC demonstrates (1) the Department of Justice’s continued crackdown on UDT laboratories, part of its effort to combat the opioid epidemic and the associated abuse of federal healthcare programs, and (2) non-traditional relators (what FCA whistleblowers are referred to) are playing an increasingly important role in bringing FCA cases. These non-traditional relators may bring FCA claims for reasons different than former or current employees, such as to deter bad actors that interact with the relator, to advance a policy interest or to create a new and regular source of business revenue (as opposed to a one-off pay day). This case serves as yet another reminder to healthcare providers that fraud can be uncovered by both insiders and outsiders it interacts with and that the universe of potential whistleblowers is growing (a trend that is being accelerated by litigation-funding entities bankrolling qui tam suits). Clients should be particularly careful in litigation with private parties that could touch upon claims to federal healthcare programs about the risks of aggressively litigating private disputes to conclusion. Interrogatories answered or discovery provided in a manageable private dispute could ultimately lead to future FCA claims entailing a much larger universe of potential claims and the specter of triple damages and FCA penalties.

The authors thank McGuireWoods summer associate Zachary Abbas for his assistance in preparing this legal alert. He is not licensed to practice law.