DR. BEHZAD NAZARI, D.D.S., ET AL., PETITIONERS, v. THE STATE OF TEXAS; XEROX CORPORATION; AND XEROX STATE HEALTHCARE, LLC F/K/A ACS STATE HEALTHCARE, LLC, RESPONDENTS
No. 16-0549
OPINION DELIVERED: June 22, 2018
ON PETITION FOR REVIEW FROM
JUSTICE LEHRMANN, joined by JUSTICE JOHNSON, concurring in part and dissenting in part.
When a state appears as a party to a suit, she voluntarily casts off the robes of her sovereignty, and stands before the bar
of a court of her own creation in the same attitude as an individual litigant; and her rights are determined and fixed by the same principles of law and equity, and a judgment for or against her must be given the same effect as would have been given it had it been rendered in a case between private individuals.1
Over a decade ago, we considered “whether sovereign immunity continues to exist when an affirmative claim for relief is filed by a governmental entity.” Reata Constr. Corp. v. City of Dallas, 197 S.W.3d 371, 376 (Tex. 2006). We determined that “under such circumstances immunity from suit no longer completely exists for the governmental entity.” Id. (citing State v. Humble Oil & Ref. Co., 169 S.W.2d 707, 708 (Tex. 1943)). This is because our modern jurisprudеnce rejects the “antiquated “feudal fiction“” that the government can do no wrong. Brown & Gay Eng‘g, Inc. v. Olivares, 461 S.W.3d 117, 121 (Tex. 2015) (quoting Wichita Falls State Hosp. v. Taylor, 106 S.W.3d 692, 695 (Tex. 2003)). Rather, “modern-day justifications” for immunity “revolve around protecting the public treasury.” Id. Consistent with these policies, we have narrowed the doctrine‘s scope in circumstances where “the governmental entity has joined into the litigation process by asserting its own affirmative claims for monetary relief,” Reata, 197 S.W.3d at 376, because it would be “fundamentally unfair to allow [a governmental entity] to assert affirmative claims against [a] party while claiming immunity” as to the party‘s claims against it, City of Dallas v. Albert, 354 S.W.3d 368, 379 (Tex. 2011).
In this case, the State filed suit under the
I. Background
In 1993, the mothers of children in low-income families sued the Texas Department of Health and the Texas Health and Human Services Commission under
However well-intended, these efforts attracted the scrutiny of Texas news media, and a Dallas news station reported a series of stories highlighting the State‘s high expenditures for dental and orthodontic services.7 The Health and Human Services Commission, through its Office of Inspector General, subsequently attributed the high expenditures to dental fraud. The Commission imposed payment holds against various dental providers, including some of the Providers in this case.8 Following administrative hearings,9 the SOAH administrative law judges found that the State had failed to present prima facie evidence to suppоrt its fraud allegations and ruled that the payment holds should be reversed.10 But the Commission refused to release the funds, in one case “alter[ing] the ALJs’ findings of fact and conclusions of law and issu[ing] a final order sustaining the HHSC-OIG‘s payment hold.”11
The Providers filed suit, challenging the Commissioner‘s authority to continue holding the funds.12 The trial courts agreed with the Providers, in one case reversing the final order sustaining the payment hold and, in another, issuing a writ of mandamus commanding the State to pay the improperly held funds.13 The courts of appeals affirmed the trial courts’ judgments in the payment-hold proceedings, ordering the State to release the held funds.14 The State nonsuited the administrative
The State filed the instant suit under the Medicaid Fraud Act, pursuing the same allegations at issue in thе nonsuited administrative cases.15 The Providers responded with counterclaims for “proportional recovery of actual and exemplary damages, interest, court costs, and attorney fees against the State” for conspiracy and breach of contract, in addition to a demand that the State release the monies held as ordered by the administrative law judges, trial courts, and courts of appeals in the nonsuited administrative proceedings. The State invoked sovereign immunity in a plea to the jurisdiction.
The trial court granted the State‘s plea without stating its reasons. The court of appeals affirmed, holding that the Reata rule did not apply because (1) “the civil penalties that the State is seeking against the Dental Groups do not qualify as damages or monetary relief as those terms were used in Reata,” and (2) “when the State pursues an enforcement action under the [Medicaid Fraud Act], it is not acting as an ordinary or private litigant as described in Reata but is instead acting in its sovereign capacity and exercising its police powers.” 497 S.W.3d 169, 181 (Tex. App.-Austin 2016) (emphasis removed).
II. Analysis
The Providers contend that this case fits perfectly within our Reata holding: because the State asserted affirmative claims for monetary relief against the Providers, it does not have immunity against the Providers’ offsetting counterclaims, which are connected, germane, and properly defensive to the State‘s claims. The State disagrees, arguing that in this Medicaid fraud (or any other) enforcement action, (1) the State does not seek the type of “monetary reliеf” we addressed in Reata, (2) the State does not appear as an “ordinary litigant,” and (3) the defendants’ counterclaims are not and cannot be connected, germane, and properly defensive to the State‘s claims. The Court sides with the State, holding that “the Reata rule . . . never applies when the state initiates litigation to enforce a substantive prohibition against unlawful conduct by imposing a monetary penalty.” Ante at ___. And, relying on our decision today in In re Xerox, ___ S.W.3d ___ (Tex. 2018), the Court holds that because the Medicaid Fraud Act “employs a penalty scheme,” the Act‘s civil remedies provision constitutes a monetary penalty and thus may not be offset. Ante at ___. I find the Court‘s analysis unpersuasive.
A. Judicial Abrogation of Immunity
In analyzing the reach of sovereign immunity, we must engage in a careful weighing analysis and consider the policy issues at hand. See, e.g., Olivares, 461 S.W.3d at 123 (“Guiding our analysis of whether to extend sovereign immunity . . . is whether doing so comports with and furthers the legitimate purposes that justify this otherwise harsh doctrine.“). These policy considerations led us to permit offsetting counterclaims against the government because: “(1) “when the State sues a private party, the general public stands to
B. Reata‘s Scope
In Reata, the City of Dallas intervened in a pending tort action and asserted claims that the city‘s contractor and its subcontractor negligently caused the city damages when the subcontractor accidentally drilled through a water main. 197 S.W.3d at 373. The State distinguishes Reata, noting that, in this case, the State is not seeking compensatory damages under a conventional tort theory. Instead, the State contends, although this is a civil case, it is a “law-enforcement action” seeking statutory “sanctions” or “penalties,” or perhaps “liquidated damages” (as opposed to compensatory damages), which are not based or calculated on the amount of damages or losses the State suffered as a result of the Providers’ fraud.
The court of appeals agreed, concluding that the State sued for a “civil penalty” to “punish” the Providers for violating a public-welfare statute and to deter others from doing the same. 497 S.W.3d at 179. The court of appeals primarily relied on State v. Emeritus Corp., 466 S.W.3d 233 (Tex. App.—Corpus Christi 2015, pet. denied), in which the court held that the
The Providers argue that the court of appeals erred in that conclusion because, other than its claim for an injunction, all of the State‘s claims in this suit are for “monetary relief.” Specifically, the Medicaid Fraud Act authorizes, and the State requests in its pleadings, a monetary award including (1) the “amount of any payment” the State made “as a result of” each “unlawful act“; (2) prejudgment interest on that amount; (3) a “civil penalty” for each unlawful act; and (4) two times “the amount of any payment” made as a result of an unlawful act. See
I agree with the Providers. The Court superficially states that ”Reata uses the word “damages’ more than a dozen times,” concluding that “[t]his usage indicates that we decided the case based on the narrow theory of damages rather than the broad theory of a transfer of funds.” Ante at ___. Admittedly, a word search for the term
decision “to file suit for damages encompassed a decision to leave its sphere of immunity from suit for claims against it which are germane to, connected with and properly defensive to claims the City asserts“; that sovereign immunity did not apply to the subcontractor‘s counterclaims “made against the City which were connected to, germane to, and properly defensive to the matters on which the City based its claim for damages“; and that “the City‘s assertion of claims for damages against Reata means that the City does not have immunity from Reata‘s claims to the limited extent we have explained.” 197 S.W.3d at 377. We referred once to “monetary damages,” reasoning that, “if the governmental entity interjects itself into or chooses to engage in litigation to assert affirmative claims for monetary damages, the entity will presumably have made a decision to expend resources to pay litigation costs.” Id. at 375.
But our discussion and our holding in Reata utilized much broader terms. Addressing not just the City‘s claims but the principles underlying our holding, we referred twice to claims for “monetary relief.” First, we reasoned that “where the governmental entity has joined into the litigation process by asserting its own affirmative claims for monetary relief, we see no ill befalling the governmental entity or hampering of its governmental functions by allowing adverse parties to assert, as an offset, claims germane to, connected with, and properly defensive to those asserted by the governmental entity.” Id. at 376–77. Second, we held that because “the City asserted affirmative claims for monetary relief against Reata, the City does not have immunity from Reata‘s claims germane to, connected to, and properly defensive to claims asserted by the City, to the extent any recovery on those claims will offset any recovery by the City from Reata.” Id. at 378. We referred once to “monetary recovery,” explaining that, once the government “asserts affirmative claims for monetary recovery, the City must participate in the litigation process as an ordinary litigant.” Id. at 377. And, most broadly, we referred three times simply to the government‘s “recovery.” We reasoned that our holding would not disrupt the government‘s fiscal planning if “the opposing party‘s claims can operate only as an offset to reduce the government‘s recovery.” Id. at 375. We further held that
We have since characterized Reata‘s holding by using the broader tеrms, explaining that governmental entities “do not have immunity from offsetting claims germane to, connected to, and properly defensive to monetary claims by the entities.” Albert, 354 S.W.3d at 376 (emphasis added).17 And more recently, we described Reata as holding that “when a governmental entity asserts claims for monetary relief, immunity does not protect the entity against the defendant‘s counterclaims for monetary relief that are “germane to, connected with, and properly defensive to’ the government‘s claims.” Borunda, 540 S.W.3d at 549–50 (emphasis added) (quoting Reata, 197 S.W.3d at 376–77). In both of these cases, we described Reata‘s holding as broadly addressing the State‘s claims for monetary “recovery.”
Accordingly, I agree with the Providers that the language we used in Reata did not limit our analysis or our holding to government claims for “compensatory damages,” but instead rested more broadly on the government‘s claims seeking a “monetary recovery.” However, as the Court observes, Reata involved only claims for compensatory damages, and neither Reata nor any of our subsequent cases specifically address the distinction between the broader and narrower terms. In other words, this is an issue of first impression, and it may just be, as the State and the Court suggest, that we used the broader terms merely as convenient references to the compensatory-damage relief the government was seeking in those cases, rather than to limit the State‘s immunity when it seeks any form of monetary recovery. I would reject that suggestion, however, primarily for two reasons.
First, although Reata involved only claims for compensatory damages, the cases on which we relied to support our holding in Reata did not. Anderson, Clayton & Co. v. State, the case that provided the foundation for our Reata holding, was an enforcement action in which the State sought “recovery of penalties” against a trucking company operating without a license. 62 S.W.2d 107, 107 (Tex. 1933). We held that the dеfendant could maintain a counterclaim against the State in that case, reasoning that the State,
having invoked the jurisdiction of the district court . . . for a judicial determination of the question as to whether the defendants were subject to the provisions of the foregoing act and liable for the penalties described therein, it became subject to the same rules as other litigants, except in so far as such rules may be modified in favor of the state by statute or may be inapplicable or unenforceable because of exemptions inherent in sovereignty. . . . That court at the instance of the state acquired jurisdiction of the parties and subject-matter in controversy, and, the defendants having
sought affirmative relief in a cross-bill, the jurisdiction of the court cannot afterwards be defeated by the state upon a plea that the cross-petitioners were seeking an injunction against the enforcement of a penal statute.
Id. at 110 (emphasis added). The Court attempts to limit Anderson, Clayton, reasoning that although the State sought “recovery of penalties,” the defendants sought only an injunction, not money damages, in their counterclaim. Ante at ___. But the Court gives short shrift to our language in that case. In determining that sovereign immunity did not bar the defendants’ counterclaims, we identified two guiding rules:
The authorities sustain the exception to the foregoing rule that the state‘s immunity from suit does not extend to a suit against state officers to enjoin the enforcement of an invalid law to the injury of the legal rights of a citizen.
But the authorities sustain the further rule that, where a state voluntarily files a suit and submits its rights for judicial determination, it will be bound thereby, and the defense will be entitled to plead and prove all matters properly defensive. This includes the right to make any defense by answer or cross-complaint germane to the matter in controversy.
Anderson, Clayton & Co., 62 S.W.2d at 110 (citations omitted) (emphases added). Dismissing the “rule” that a defendant is entitled to plead and prove all matters properly defensive, the Court concludes that the decision “establishes little” in resolving this case. Ante at ___. In addition to sidestepping that language, the Court ignores the fact that in Anderson, Clayton we expressly rejected the argument that the State‘s immunity could hinge on the “penal” nature of the statute being enforced, 62 S.W.2d at 108, a justification the Court relies on today. Further, the Court‘s reliance on the nature of the relief requested in the counterclaims is novel and misplaced. So long as the counterclaims arе germane, connected, and properly defensive to the government‘s claims and do not seek more than is required to offset those claims, they are permitted under Reata. 197 S.W.3d at 377.
In Reata, we also relied on our decision in Humble Oil, which involved the State‘s action to recover unpaid production taxes “plus interest and penalties.” 169 S.W.2d at 708 (emphasis added). We held in Humble Oil that the defendant could not assert offsetting counterclaims based on alleged overpayments in other tax periods. Id. at 710. However, contrary to the Court‘s description, we did not base that holding on the nature of the State‘s affirmative claims. Rather, Humble Oil‘s result rested on the fact that the defendant‘s counterclaims involved taxes due for different months and years than the taxes on which the State had sued, and thus the counterclaims were not “dependent upon” or “connected with” the State‘s affirmative claims. Id. Moreover, we affirmed that we had “no fault to find with the rule of law announced in the Anderson, Clayton & Co. opinion, when applied in a proper case.” Id. at 709. Because we based our decision in Reata on these seminal cases, it is no surprise that we referred broadly to government claims for “monetary relief” and “monetary recovery” in Reata, even though Reata itself involved only claims for compensatory damages.
Consistent with my reading of Reata‘s scope, several courts of appeals have applied Reata in cases involving government claims for monetary relief other than compensatory damages, including penalties, yet the Court neither cites, discusses, nor overrules those cases. For example, in Bandera County v. Hollingsworth, 419 S.W.3d 639, 642–44 (Tex. App.—San Antonio 2013, no pet.), the San Antonio Court of Appeals held the County was not immune from a counterclaim for
In addition to the absence of language in Reata and its predecessors indicating that the type of monetary recovery sought informs the offset analysis, the policies underlying the sovereign-immunity doctrine do not support the limitation the Court adopts. Consistent with our holdings in Anderson, Clayton and other earlier cases, we explained in Reata that our “determination that a governmental entity‘s immunity from suit does not extend to a situation where the entity has filed suit is consistent with the policy issues involved with immunity.” 197 S.W.3d at 375. And “the primary concern in Reata was ensuring that any outcome in favor of a counterclaiming defendant would not be paid with taxpayer dollars.” Borunda, 540 S.W.3d at 552. That is because the purpose of sovereign immunity is to “shield the public from the costs and consequences of improvident actions of their governments.” Hall v. McRaven, 508 S.W.3d 232, 238 (Tex. 2017) (quoting Tooke v. City of Mexia, 197 S.W.3d 325, 332 (Tex. 2006)); see also Olivares, 461 S.W.3d at 123 (considering “the general purpose of protecting the public fisc“). We thus limited the scope of immunity when the government files claims for monetary relief because, “if the governmental entity interjects itself into or chooses to engage in litigation to assert affirmative claims for monetary damages, the entity will presumably have made a decision to expend resources to pay litigation costs.” Reata, 197 S.W.3d at 375. And if “the opposing party‘s claims can operatе only as an offset to reduce the government‘s recovery, no tax resources will be called upon to pay a judgment, and the fiscal planning of the governmental entity should not be disrupted.” Id.
Accordingly, the policy reasons behind our decision in Reata support the broad language we used in that case, as well as the conclusion that Reata‘s holding applies when the government chooses to file a
Moreover, it is fundamentally unfair to allow the State to assert affirmative claims against the Providers—claims that could result in millions of dollars of recovery—but deny the Providers an opportunity to merely offset that recovery with counterclaims seeking, at a minimum, the release of money that every court to adjudicate the merits of the case has held to be unlawfully retained by the government. See Borunda, 540 S.W.3d at 553 (citing Reata, 197 S.W.3d at 375–76 (“[I]t would be fundamentally unfair to allow a governmental entity to assert affirmative claims against a party while claiming it had immunity as to the party‘s claims against it.“)), and Albert, 354 S.W.3d at 380 (noting that “here we do not see any fundamental unfairness or inequity occurring“)). The State has undoubtedly taken advantage of its sovereignty, unsuccessfully pursuing its fraud claims through several tribunals, modifying findings and orders in support of its position, and then, faced with court orders to release the withheld funds, abandoning its claims only to reappear here and assert immunity. I would hold that the State‘s pursuit of monetary relief under the Medicaid Fraud Act subjected it to the jurisdiction of the Court for offsetting, related counterclaims. “To hold otherwise would permit [the State] to use the court in the attainment of [its] object by piecemeal, by first adopting its judgment as right, and then repudiating it as wrong, and to avail [it]self of the advantages of its being both right and wrong.” See Sec. Trust. Co. of Austin v. Lipscomb County, 180 S.W.2d 151, 158 (Tex. 1944) (citation and internal quotation marks omitted).
C. The Court‘s “Law-Enforcement” Exception
The Court ignores the policy and jurisprudential concerns discussed herein, concluding instead that “sovereignty itself remains an important justification for sovereign immunity.” Ante at ___. But as we have already explained, protecting the public fisc and public reliance on government services, not fealty to an all-powerful sovereign, underlie our modern justifications for maintaining the doctrine. Olivares, 461 S.W.3d at 121. Regardless, the Court adopts the State‘s view that Reata does not apply here because the State is acting in its sovereign “law-enforcement” capacity. According to the Court, Reata ”never applies when the state initiates litigation to enforce a substantive prohibition against unlawful conduct by imposing a monetary penalty.” Ante at ___. Because “[p]enalties serve a law-enforcement function,” the Court asserts, allowing “spurious counterclaims” would “severely undermine their effectiveness” and “would interfere with the state‘s ability to enforce its laws.” Id. at ___.18
Second, a law-enforcement exception would swallow the Reata rule. The Court gives little guidance on hоw to determine whether the State is acting in a “law-enforcement” capacity as opposed to an “ordinary litigant,” other than to state that the exception applies “when the state seeks to impose a monetary penalty to enforce a substantive prohibition against unlawful conduct” and that “action is punitive rather than compensatory.” Ante at ___. But the Court‘s new rule obfuscates over a century of our sovereign immunity jurisprudence. As previously noted, our precedent before and after Reata unequivocally involved “substantive” claims, both statutory and under the common law, and many involved the imposition of “penalties.” See, e.g., Anderson, Clayton & Co., 62 S.W.2d at 110 (“[T]he jurisdiction of the court cannot afterwards be defeated by the state upon a pleа that the cross-petitioners were seeking an injunction against the enforcement of a penal statute.“).
When any governmental body brings suit, it necessarily acts under its sovereign authority to police and enforce the laws of the State. See Reata, 197 S.W.3d at 384 (Brister, J., concurring) (“[W]hen governments bring suit, they must do so through agents who ultimately derive their authority from the Legislature. . . . But when they file suit on an affirmative claim, they must be doing so with legislative authorization. If the rule were otherwise, it is not clear how a government could ever assert its own claims.“). The Court‘s decision today throws what has been a well- settled doctrine into limbo because almost any action brought by a governmental body arguably constitutes a “law-enforcement” action.19
was certainly entitled to pursue this civil action in lieu of its nonsuited administrative claims, see Albert, 354 S.W.3d at 375 (“Under litigation rules applicable to ordinary litigants . . . the City was entitled to nonsuit its [claims].“), but “preventing all offsetting claims” by creating a law-enforcement exception here “looks less like sovereign immunity than sovereign inequity,” Reata, 197 S.W.3d at 383 (Brister, J., concurring).
D. Connected, Germane, and Defensive Nature of Counterclaims
Finally, the Court concludes that Reata does not apply to the Providers’ counterclaims because they are not cоnnected, germane, and properly defensive to the State‘s Medicaid fraud claims. Considering the underlying allegations, the appropriate legal standard, and the State‘s burden on the merits, I cannot agree with this conclusion.
Where, as here, a plea to the jurisdiction challenges the pleadings, we determine if the pleader has alleged facts that affirmatively demonstrate the court‘s jurisdiction to hear the cause. City of El Paso v. Heinrich, 284 S.W.3d 366, 378 (Tex. 2009). Whether a pleader has alleged facts that affirmatively demonstrate a trial court‘s
We explained in Albert that counterclaims are “germane“—that is, “relevant“—to the government‘s claims when they are based on the same question as the government‘s claim, and are “properly defensive” when they “would at least inferentially rebut” the government‘s allegations. 354 S.W.3d at 375. Here, the State claims that the Providers committed unlawful acts by submitting prior-authorization and post-treatment-payment requests and then accepting payments even though the services they provided did not qualify for reimbursement under the Medicaid program. The Providers’ breach of contract and conspiracy counterclaims are based on their allegations that the State had an independent duty to determine whether the patient qualified for the services, that the State (through and in conspiracy with its contractor, Xerox) failed to fulfill that duty, and that thе Providers reasonably relied on the State‘s decisions when providing the services. And the Providers’ conversion counterclaim is based on the State‘s continued retention of Medicaid funds under a payment hold initiated on the same allegations, same facts, and same defendants as the State‘s failed administrative cases.
Unlike the Court, I conclude that the counterclaims are relevant and defensive to the State‘s claims. On the merits, the State must show that the Providers acted “knowingly” in undertaking the unlawful acts defined in the statute. See
III. Conclusion
When we explained the limited scope of the government‘s immunity against counterclaims in Reata, we relied on the policies that justify the doctrine in the first instance. Because the Reata rule permits only germane and properly defensive counterclaims and permits relief only in the form of an offset against the government‘s monetary recovery, we concluded that it “would be fundamentally unfair to allow a govеrnmental entity to assert affirmative claims against a party while claiming it had immunity as to the party‘s claims against it.” 197 S.W.3d at 375–76. For the reasons explained, I reach the same conclusion
Debra H. Lehrmann
Justice
OPINION DELIVERED: June 22, 2018