Dr. Behzad Nazari, D.D.S. v. State , 561 S.W.3d 495 ( 2018 )

IN THE SUPREME COURT OF TEXAS
══════════
No. 16-0549
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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
══════════════════════════════════════════
ON PETITION FOR REVIEW FROM THE
COURT OF APPEALS FOR THE THIRD DISTRICT OF TEXAS
══════════════════════════════════════════
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
jurisprudence rejects the “antiquated ‘feudal fiction’” that the government can do no wrong.
1
State v. Cloudt, 84 S.W. 415, 416 (Tex. Civ. App. 1904, writ ref’d).
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 Texas Medicaid Fraud Prevention Act (Medicaid
Fraud Act or Act), alleging that the defendants, several dental providers offering services through
the Texas Medicaid program, fraudulently obtained Medicaid reimbursements. In filing suit, the
State sought to recover any payments unlawfully provided under the Medicaid
program; prejudgment interest; two times the amount of any payment provided under the Medicaid
program; civil penalties; and expenses, costs, and attorney’s fees, as provided by the Act’s “civil
remedies” provision. See TEX. HUM. RES. CODE § 36.052(a). The Providers counterclaimed for
breach of contract, conversion, and fraud. The issue before the Court is whether sovereign
immunity bars the Providers’ counterclaims. Because the State seeks “monetary relief” under
Reata, I would hold that the State’s decision to file this action “encompassed a decision to leave
its sphere of immunity from suit.” Reata, 197 S.W.3d at 377. Because the Court holds otherwise,
I must respectfully express my dissent.2
2
For the reasons the Court explains, I agree that we lack interlocutory jurisdiction to address the dismissal
of the Providers’ third-party claims.
2
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 42 U.S.C. § 1983, alleging
that the Texas Medicaid program did not comply with federal law.3 The plaintiffs, a class of more
than 1.5 million indigent children in Texas, claimed that “the Texas program did not ensure eligible
children would receive health, dental, vision, and hearing screens,” “failed to meet annual
participation goals,” and “lacked proper case management and corrective procedures.”4 The State
ultimately agreed to settle the dispute by entering into a consent decree, which required the State,
among other things, “to conduct outreach efforts aimed at increasing participation and the receipt
of needed services” for Medicaid-eligible children.5 After years of litigation, in 2007 the State
began allocating millions of dollars in state and federal funding to provide these increased services,
including Medicaid dental services.6
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
3
Frew ex rel. Frew v. Hawkins, 540 U.S. 431, 434 (2004).
4
Frew v. Gilbert, 109 F. Supp. 2d 579, 587 (E.D. Tex. 2000), vacated sub nom. Frazar v. Gilbert, 300 F.3d
530 (5th Cir. 2002), rev’d sub nom. Frew ex rel. Frew v. Hawkins, 540 U.S. 431 (2004).
5
Id. at 588–89.
6
See Act of May 25, 2007, 80th Leg., R.S., ch. 1429, § 19, 2007 Tex. Gen. Laws 5834, 5838–39.
7
See, e.g., Byron Harris, Crooked Teeth: Medicaid Millions, WFAA (Jan. 9, 2012 1:10 PM CST),
http://www.wfaa.com/news/local/investigates/crooked-teeth-medicaid-millions_20161017055833341/336726628.
3
case.8 Following administrative hearings,9 the SOAH administrative law judges found that the
State had failed to present prima facie evidence to support 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 cases and did not release the withheld funds to the Providers.
8
See Tex. Health & Human Servs. Comm’n v. Antoine Dental Ctr., 487 S.W.3d 776, 777–78 (Tex. App.—
Texarkana 2016, no pet.); Janek v. Harlingen Family Dentistry, P.C., 451 S.W.3d 97, 99 (Tex. App.—Austin 2014,
pet. denied).
9
A provider subject to a payment hold, which the Commission may impose without prior notice on a
provider’s Medicaid reimbursements upon a credible allegation of provider fraud, may request an expedited
administrative hearing before the State Office of Administrative Hearings. Shamrock Psychiatric Clinic, P.A. v. Tex.
Dep’t of Health & Human Servs., 540 S.W.3d 553, 555 (Tex. 2018) (citing TEX. GOV’T CODE § 531.102(g)(2), (3)).
10
Antoine Dental Ctr., 487 S.W.3d at 778, 789; Harlingen Family Dentistry, 451 S.W.3d at 102.
11
Antoine Dental Ctr., 487 S.W.3d at 778, 791 (“Subsequently, [the HHSC Executive Commissioner] entered
a final order on May 2, 2014, which also rejected the ALJs’ decision. The order was presumably made under authority
of Section 357.483 of the Texas Administrative Code, which states, ‘The judge is a designee of the HHSC Executive
Commissioner for purposes of: (1) issuing default, final, and other orders, and (2) ruling on any motions for
rehearing.’”).
12
Id. at 778; Harlingen Family Dentistry, 451 S.W.3d at 99.
13
Harlingen Family Dentistry, 451 S.W.3d at 104; Antoine Dental Ctr., 487 S.W.3d at 802.
14
Harlingen Family Dentistry, 451 S.W.3d at 104 (“There is no evidence that is credible, reliable, or
verifying, or that has indicia of reliability, that [the providers] committed fraud or misrepresentation.”); Antoine Dental
Ctr., 487 S.W.3d at 804.
4
The State filed the instant suit under the Medicaid Fraud Act, pursuing the same allegations
at issue in the 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
15
The State also filed a separate suit against Xerox Corporation, the private contractor charged with
administering the Texas Medicaid program and assessing the medical necessity of providers’ reimbursement claims,
for violations of the Medicaid Fraud Act. See State v. Xerox Corp., No. D-1-GV-14-000581 (53rd Dist. Ct., Travis
County, Tex. May 9, 2014).
5
(or any other) enforcement action, (1) the State does not seek the type of “monetary relief” 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 lose nothing’; (2) doing so
avoids ‘jurisdictional problems in asking courts to enforce a judgment against a government
entity’; and (3) allowing such [claims] promotes ‘fundamental fairness.’” C. Borunda Holdings,
Inc. v. Lake Proctor Irrigation Auth. of Comanche Cty., 540 S.W.3d 548, 552 (Tex. 2018) (quoting
City of Galveston v. State, 217 S.W.3d 466, 472 (Tex. 2007)). Properly applying these principles,
I would hold that Reata, its predecessors, and its progeny dictate that the State’s claims under the
Medicaid Fraud Act constitute affirmative claims for monetary relief; the Providers’ counterclaims
6
are germane, connected, and defensive to those claims; and allowing the Providers to offset the
State’s recovery with their counterclaims comports with the policies underlying immunity.
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 Texas Medical
Liability Act did not apply to the State’s enforcement action against a healthcare provider because
the State was acting “in its sovereign capacity and us[ing] its police powers to impose and recover
a civil penalty,” rather than as a “claimant” seeking “damages.” 497 S.W.3d at 179–80. The court
of appeals here concluded that “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.” Id. at
181.
7
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 TEX. HUM.
RES. CODE § 36.052(a). The Providers argue that, although Reata happened to involve tort claims
for compensatory damages, our holding was not limited to those types of claims seeking that type
of monetary relief. The court of appeals thus created a “distinction that Reata neither contemplates
nor supports.”
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 “damages” reveals that we used the word
thirteen times throughout the opinion, but the majority of the references are not relevant to the
issue before us.16 As relevant to the Court’s analysis, we referred to the City’s claim for “damages”
four times in Reata, noting that the City had sued for damages and reasoning that the City’s
16
For example, two of the references appear in a discussion of the United States Supreme Court’s sovereign
immunity jurisprudence. Reata, 197 S.W.3d at 375 (“The United States Supreme Court has also recognized that suits
for money damages against states ‘may threaten the financial integrity of the States’ and that ‘at the time of the
founding, many of the States could have been forced into insolvency but for their immunity from private suits for
money damages.’” (quoting Alden v. Maine, 527 U.S. 706, 750 (1999))). One reference is contained in a recitation of
our often-repeated principle that “[s]overeign immunity protects the State from lawsuits for money damages.” Id. at
374. Similarly, two references describe the relief sought by the private party, not the State. Id. at 377 (“Absent the
Legislature’s waiver of the City’s immunity from suit, however, the trial court did not acquire jurisdiction over [the
defendants’] claim for damages against the City in excess of damages sufficient to offset the City’s recovery, if any.”).
And four of the references appear under the Court’s analysis of waiver of immunity under the Texas Tort Claims Act,
which is wholly separate from the abrogation issue. Id. at 377–78.
8
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
9
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 immunity would still preclude jurisdiction over any
counterclaim “for damages against the City in excess of damages sufficient to offset the City’s
recovery.” Id. at 377. Finally, we concluded that the City did not have immunity “to the extent
any recovery on [the counterclaims] will offset any recovery by the City from Reata.” Id. at 378.
We have since characterized Reata’s holding by using the broader terms, 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
17
See also City of Dallas v. Martin, 361 S.W.3d 560, 561 n.4 (Tex. 2011) (“In Reata we held that a
governmental entity does not have immunity from monetary claims against it that are ‘germane to, connected with,
and properly defensive to’ affirmative claims made by the entity, to the extent the claims against the entity offset the
entity’s claims.”); City of Irving v. Inform Constr., Inc., 201 S.W.3d 693, 694 (Tex. 2007) (“As we explained in Reata,
however, the City retains immunity from suit . . . to the extent Inform’s damages exceed amounts offsetting the City’s
monetary recovery.”).
10
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 defendant 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
11
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 are 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,
12
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, the San Antonio Court of Appeals held the County was not
immune from a counterclaim for breach of a Rule 11 agreement where the underlying suit involved
the State’s claim for “taxes due, together with interest, penalties, costs, expenses, and attorney’s
fees.” 419 S.W.3d 639, 642–44 (Tex. App.—San Antonio 2013, no pet.). Similarly, in Redburn
v. Garrett, the City brought, among other claims, “an enforcement action for statutory penalties in
the amount of $5,000 per day pursuant to Chapter 54 of the Texas Local Government Code.” No.
13-12-00215-CV, 2013 WL 2149699, at *2 (Tex. App.—Corpus Christi, May 16, 2013, pet.
denied) (mem. op.). Despite the inclusion of penalties in the monetary relief sought, the Corpus
Christi Court of Appeals applied Reata, holding that the City did “not have immunity from suit for
claims germane to, connected with, and properly defensive to its [cross-claims] to the extent
[appellant’s] claims act as an offset against the City’s recovery.” Id. at *10 (quoting Inform
13
Constr., 201 S.W.3d at 694). And in City of Conroe v. TPProperty LLC, the city sought judgment
against the defendant for “unpaid taxes, and statutory penalties, attorneys’ fees, and court costs.”
480 S.W.3d 545, 564 (Tex. App.—Beaumont 2015, no pet.). Without distinguishing between any
of these forms of monetary recovery, the Beaumont Court of Appeals compared the city’s and the
defendant’s claims, concluding that they “arise from the same transactions” and “rely on the trial
court’s resolution of similar disputed facts.” Id. Accordingly, the Court held that the city was not
immune to the extent the defendant’s “claims act as offsets to the City’s [claims].” Id. (citing
Reata, 197 S.W.3d at 376–77). As these cases illustrate, nothing in the language of Reata, its
predecessors, or its progeny indicates that the Reata rule applies only when the government seeks
to recover “damages” or “compensatory damages.”
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
14
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 operate 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 claim for “monetary relief” or “monetary recovery,” not just for “damages” or
“compensatory damages,” as the State suggests. And here, the State is undeniably seeking
monetary relief. In this circumstance, as in Reata, “the governmental entity has joined into the
litigation process by asserting its own affirmative claims for monetary relief.” Id. at 376–77. I
therefore “see no ill befalling the governmental entity or hampering of its governmental functions”
in this case by allowing the Providers to assert, as an offset, claims germane to, connected with,
and properly defensive to those asserted by the State. Id.
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,
15
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,
16
allowing “spurious counterclaims” would “severely undermine their effectiveness” and “would
interfere with the state’s ability to enforce its laws.” Id. at ___.18
The Court’s law-enforcement rationale is unfounded. First, the State highlights that, when
it acts in a law-enforcement capacity, it necessarily is not acting as an “ordinary litigant” as Reata
requires. But the State’s argument mischaracterizes our description of the government as an
“ordinary litigant” in Reata. We used the term in explaining that once the government “asserts
affirmative claims for monetary recovery, [it] must participate in the litigation process as an
ordinary litigant, save for the limitation that [it] continues to have immunity from affirmative
damage claims against it for monetary relief exceeding amounts necessary to offset [its] claims.”
Reata, 197 S.W.3d at 377. We did not hold that the Reata rule applies only if the government is
participating in litigation as an “ordinary litigant”; rather, we held that when the Reata rule applies
the government must participate as an “ordinary litigant.” Id. This is consistent with the well-
recognized principle that our procedural and evidentiary rules apply to the State as they would to
any other litigant when it appears in court. See State v. Naylor, 466 S.W.3d 783, 792 (Tex. 2015)
(“[W]here the Legislature has given no indication to the contrary the State must abide by the same
rules to which private litigants are beholden.”). These references to the State as an “ordinary
litigant” do not address the sovereign-immunity question of whether the State may be required to
appear in court. Nothing in Reata’s text or reasoning limits its application to cases in which the
State appears as an “ordinary litigant,” as opposed to “enforcement actions.” See Reata, 197
S.W.3d at 376 (discussing Kinnear v. Tex. Comm’n on Human Rights, 14 S.W.3d 299, 300 (Tex.
18
The Court’s reference to “spurious counterclaims” is curious, as it implies a connection between a claim’s
merits and the government’s immunity. Whether the government is immune from suit has nothing to do with the
strength or weakness of the claims asserted against it.
17
2000) (holding that the State was not immune from a counterclaim for attorney’s fees in an
enforcement action under the Texas Fair Housing Act)).
Second, a law-enforcement exception would swallow the Reata rule. The Court gives little
guidance on how 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 plea 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-
18
settled doctrine into limbo because almost any action brought by a governmental body arguably
constitutes a “law-enforcement” action.19
I see no principled basis for adopting the State’s position that the Medicaid Fraud Act
enables it to bring a specialized law-enforcement action that justifies an exception to the Reata
rule. By participating in the federal Medicaid program and enacting the Act and its enabling
regulations, the Legislature has already established a balanced statutory scheme for protecting the
public against fraud. Under federal law, a state must have a “Medicaid fraud control unit,” 42
U.S.C. § 1396a(a)(42)(B)(ii)(IV)(cc), which investigates program violations and can refer matters
for criminal prosecution or “to an appropriate State agency” for other action, 42 C.F.R.
§ 1007.11(b)(3) (2018). In Texas, such enforcement actions can take the form of criminal,20
administrative,21 and civil proceedings.22 Here, if the State desired the deference and protection
of its sovereignty, it could have brought (and can still bring) a criminal action against the Providers
in this case, subject to, of course, the corresponding burden of proof. Likewise, the State could
(and did) bring an administrative action for sanctions for the same alleged violations. The State
19
See, e.g., TEX. AG. CODE §§ 17.152, .153 (providing for civil action for actual damages, treble damages,
and civil penalties, or action under the DTPA for failing to post notice of fuel tax rates, or document or record those
rates); TEX. BUS. & COM. CODE §§ 15.21 (providing that any “person or governmental entity” who is harmed by unfair
trade practices under the Antitrust Act “shall recover” actual damages, interest, and treble damages), 17.953 (providing
for the State’s recovery of restitution and civil penalties for violations of the Deceptive Trade Practices Act); TEX.
INS. CODE § 541.151 (providing for civil penalties for unfair competition and deceptive acts in insurance industry);
TEX. OCC. CODE §§ 351.603, .604 (providing for civil penalties for violations of the Optometrists Act).
20
See TEX. PEN. CODE § 35A.02(a)(1)–(12); see also TEX. HUM. RES. CODE § 32.0391 (establishing a
criminal offense for kickback and bribery schemes).
21
See TEX. HUM. RES. CODE §§ 32.039 (outlining “Damages and Penalties” the State may seek in an
administrative action against a provider accused of Medicaid fraud), 36.006 (“The application of a civil remedy under
this chapter does not preclude the application of another common law, statutory, or regulatory remedy, except that a
person may not be liable for a civil remedy under this chapter and civil damages or a penalty under Section 32.039 if
the civil remedy and civil damages or penalty are assessed for the same act.”).
22
See id. §§ 36.002 (defining “Unlawful Acts” relating to Medicaid fraud), .052 (establishing “civil
remedies” and authorizing the State to initiate an action for civil remedies or an injunction under the Act).
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 connected, 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 subject matter jurisdiction is a question of law
reviewed de novo. Tex. Dep’t of Parks & Wildlife v. Miranda, 133 S.W.3d 217, 226 (Tex. 2004).
We must construe the pleadings liberally in favor of the nonmovant and look to the nonmovant’s
intent. Heinrich, 284 S.W.3d at 378.
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
20
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 the 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 TEX. HUM. RES. CODE § 36.002. The Providers allege
that the State and Xerox conspired to mislead the Providers into believing that their requests
complied with the Program’s requirements. As the Providers frame their complaint, “the State
now seeks to recoup the payments that it made to the [Providers] after the [Providers] provided the
very services the State had deemed to be medically necessary.” (Footnote omitted). Thus, contrary
to the Court’s conclusion, the Providers’ allegations, if true, negate the State’s assertion that they
knew the services submitted for reimbursement were not medically necessary, which is a material
element of each of the State’s claims. These allegations are clearly connected and relevant to the
parties’ claims, and if the Providers are correct, their counterclaims will rebut the allegations on
which the State’s claims are based. See State v. Martin, 347 S.W.2d 809, 814 (Tex. 1961)
(“Appellee’s claim to recover the very money which the State seeks to retain, the claim of each
arising from the same single transaction between the parties, could not be more closely related or
21
more germane.”). Applying the appropriate standard of review at this early stage in the
proceedings, I must conclude that the Providers have met their burden of alleging facts overcoming
the State’s assertion of immunity.
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 governmental 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 here and would hold that the State is not entitled
to dismissal of the Providers’ counterclaims. Because the Court holds otherwise, I must
respectfully express my dissent.
________________________________
Debra H. Lehrmann
Justice
OPINION DELIVERED: June 22, 2018
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