Why Walgreens is suing Theranos for breach of contract

Walgreens is suing its blood-testing startup Theranos Inc. for a breach of contract after the latter came under investigation for marketing technology that may jeopardize patient safety.

Walgreens Boots Alliance Inc. is seeking $140 million in damages, first reported by The Wall Street Journal. Attorneys filed the civil suit under seal, and few details were disclosed in court records, but according to sources from the Journal, Walgreens claims it was "misled" by Theranos about the “state of its technology” when the agreement was forged in 2013.

It is the latest development in the downfall of the embattled company – now called the most-hyped health-care startup – that drew support from big-name investors and politicians when it first started. Walgreens, in its drive to expand services offered in its drugstores, partnered with the startup that alleges it can offer accurate blood test results with just a prick of the finger. Subsequent investigations revealed that the technology didn’t really work, resulting in some patients receiving inaccurate health evaluations that may serve as the basis for critical medical decisions.

For Theranos, losing the relationship with Walgreens is significant. As Stat News reports, the three-year partnership had pushed the company to a sky-high valuation and was a major source of revenue. Walgreens ended ties with the company in June and closed 40 Theranos Wellness Centers set up across Arizona.

Following investigations by the Journal and regulators in the past year, the company has come under scrutiny from regulators and scientists. Reports found that Theranos failed to meet its own accuracy requirements for a range of tests, and many of them were actually not conducted using its touted prick-of-a-finger Edison blood-testing devices, as reported by the Journal. Corrected test reports were sent to doctors after it voided two years of results using Edison.

With health-care startups, however, a failed technology can have potentially fatal outcomes.

A lawsuit was filed in July by a customer who alleged the faulty blood tests failed to detect a serious medical condition, as reported by TechCrunch. The lawsuit stated that the original blood test performed by Theranos was inaccurate.

Accordingly, federal regulators have imposed sanctions on the company. Elizabeth Holmes, the turtleneck-clad chief executive officer of the startup once lauded as the world’s youngest billionaire, was banned in July from owning or operating a medical laboratory for at least two years. The Centers for Medicare and Medicaid Services in March pulled the operating license of the company’s Newark laboratory and levied a fine, as reported by Stat News. A criminal probe by federal prosecutors and investigation by the Securities and Exchange Commission followed to determine if she misled investors with promises of the technology.

Theranos is still trying to claw its way back to legitimacy. In August, it introduced a new device for blood testing, although critics have highlighted a lack of peer-reviewed data backing up the technology.

The company also denies Walgreens’ assertions in the lawsuit.

In a statement to the Journal, Theranos said it is disappointed with the lawsuit and claimed that Walgreens "consistently failed to meet its commitments to Theranos." The startup said it "will respond vigorously to Walgreens’ unfounded allegations, and will seek to hold Walgreens responsible for the damage it has caused to Theranos and its investors."