Nigen Biotech, L.L.C. v. Ken Paxton

Case: 14-10923 Document: 00513213635 Page: 1 Date Filed: 09/30/2015

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

United States Court of Appeals

Fifth Circuit

FILED

No. 14-10923 September 30, 2015

Lyle W. Cayce

Clerk

NIGEN BIOTECH, L.L.C., a Utah limited liability company,

Plaintiff - Appellant

v.

KEN PAXTON, in his official capacity as the Attorney General for the State

of Texas,

Defendant - Appellee

Appeal from the United States District Court

for the Northern District of Texas

Before DAVIS, JONES, and CLEMENT, Circuit Judges.

EDITH H. JONES, Circuit Judge:

A manufacturer and distributor of over-the-counter dietary

supplements, Isodrene and The HCG Solution, appeals the district court’s

order dismissing its constitutional and state law claims against the Attorney

General of the State of Texas on the sole basis of state sovereign immunity.

We conclude that it is at least partially correct that NiGen’s claims are not

barred from federal jurisdiction on the basis of Ex parte Young; federal

jurisdiction plainly exists over most of the constitutional claims pled; and

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NiGen has standing to sue. Accordingly, we affirm in part, and vacate and

remand in part for further proceedings.

BACKGROUND

NiGen makes and sells dietary supplements, two of which contain the

“individual amino acid building blocks” of prescription-drug ingredient hCG. 1

The company labels the packages of these products with the term “hCG,” which

the Attorney General of the State of Texas (the “AG” or the State) determined

was “false, misleading, or deceptive” in violation of the Texas Deceptive Trade

Practices Act (“DTPA”) because, among other reasons, “the claim is trying to

mimic claims that FDA considers off-label for the prescription drug.” In

October 2011, the AG sent letters to this effect to NiGen and its retailers,

including CVS, Walgreens, and Wal-Mart, intimating that formal enforcement

was on the horizon for both NiGen and the retailers. The retailers pulled the

products from their shelves in Texas and other states, allegedly costing NiGen

millions of dollars in lost revenue.

NiGen filed suit in December 2011 under 42 U.S.C. § 1983, alleging

violations of its rights under the First Amendment, Fourteenth Amendment

Due Process and Equal Protection Clauses, the Commerce Clause, and the

Supremacy Clause. The company also alleged a state law claim of tortious

interference with existing business relations. NiGen sought 1) a declaration

that its labeling did not violate federal law and that it was entitled to use

“HCG” on its labels; 2) preliminary and permanent injunctive relief; 3) money

damages; and 4) costs and attorneys’ fees.

1 hCG is an acronym for human chorionic gonadotropin hormone, a protein found in

pregnant women that is an ingredient in prescription drugs sold under the brand names

Novarel, Ovidrel, and Pregnyl.

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The AG moved for dismissal, alleging both jurisdictional and pleading

defects. As for the jurisdictional claims, the AG argued that the plaintiff

lacked Article III standing because the only injury to NiGen was the result of

third-party action; that the “federal statutory claim” was non-justiciable

because NiGen asked for a declaration that its labeling did not violate FDA

law, though the AG was never attempting to enforce federal law; and that state

sovereign immunity barred the money damages and state law claims. The

AG alternatively averred that NiGen’s claims fail to state a claim as required

by Federal Rule of Civil Procedure 12(b)(6). Substantial briefing and pretrial

motions preceded the submission of these motions to the court in July 2012.

For reasons not apparent in the record, the district court did not rule for

almost two years. Then, despite the plethora of jurisdictional issues before it,

the court dismissed the entire case as barred by state sovereign immunity.

NiGen seasonably appealed.

STANDARD OF REVIEW

We review the trial court’s jurisdictional determinations de novo.

Fontenot v. McCraw, 777 F.3d 741, 746 (5th Cir. 2015). “The question of

whether state defendants are entitled to sovereign immunity is likewise

reviewed de novo.” Moore v. La. Bd. of Elementary & Secondary Educ.,

743 F.3d 959, 962 (5th Cir. 2014); see also Hale v. King, 642 F.3d 492, 497 (5th

Cir. 2011) (per curiam). We review the court’s rulings on Rule 12(b)(6)

motions de novo and must determine whether the pleaded facts state plausible

claims that are cognizable in law. Bell Atl. Corp. v. Twombly, 550 U.S. 544,

570, 127 S. Ct. 1955, 1974 (2007). Federal courts may analyze arguments

that question our jurisdiction in any order. In this unusual situation, all of

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the jurisdictional arguments must be addressed for NiGen’s suit to proceed in

federal court.

DISCUSSION

The district court concluded that state sovereign immunity barred

NiGen’s entire suit and therefore pretermitted analysis of the AG’s other

arguments. The district court cited Aguilar v. Texas Department of Criminal

Justice for the broad proposition that “a suit against state officials that is in

fact a suit against a State is barred regardless of whether it seeks damages or

injunctive relief.” 160 F.3d 1052, 1053 (5th Cir. 1998) (quoting Pennhurst

State Sch. & Hosp. v. Halderman, 465 U.S. 89, 102, 104 S. Ct. 900, 909 (1984)).

This is deficient not least because shortly thereafter the opinion acknowledges

the availability of Ex parte Young suits to enforce federal law. 2 Rather than

fully defend the district court’s reasoning, the AG resurrects its original

arguments against federal jurisdiction and raises new ones.

A. State Sovereign Immunity

The several states of our union retained those aspects of sovereignty that

the people did not explicitly assign to the federal government. 3 Since the

judicial article does not “create new and unheard of remedies,” Hans v.

Louisiana, 134 U.S. 1, 12, 10 S. Ct. 504, 506 (1890), the sovereign states cannot

be sued without their consent. See Papasan v. Allain, 478 U.S. 265, 276,

106 S. Ct. 2932, 2939 (1986). As a result, “Federal courts are without

2 Moreover, Aguilar itself was filed not against an individual state officer acting in

his official capacity, but against the Texas Department of Criminal Justice, a state agency

that shares the sovereign immunity of the State of Texas.

3 Alden v. Maine, 527 U.S. 706, 713, 119 S. Ct. 2240, 2246-47 (1999); see also In re

New York, 256 U.S. 490, 497, 41 S. Ct. 588, 589 (1921) (discussing state sovereign immunity

as “the fundamental rule of which the amendment is but an exemplification”).

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jurisdiction over suits against a state, a state agency, or a state official in his

official capacity unless that state has waived its sovereign immunity or

Congress has clearly abrogated it.” Moore, 743 F.3d at 963. Texas has not

consented by statute, and § 1983 does not abrogate state sovereign immunity.

Quern v. Jordan, 440 U.S. 332, 340, 99 S. Ct. 1139, 1145 (1979).

“A suit is not ‘against’ a state, however, when it seeks prospective,

injunctive relief from a state actor . . . based on an alleged ongoing violation of

the federal constitution.” K.P. v. LeBlanc, 729 F.3d 427, 439 (5th Cir. 2013).

Under the doctrine articulated in Ex parte Young, 4 209 U.S. 123, 28 S. Ct. 441

(1908), a state official attempting to enforce an unconstitutional law “is

stripped of his official clothing and becomes a private person subject to suit.”

K.P. v. LeBlanc, 627 F.3d 115, 124 (5th Cir. 2010). “Suits by private citizens

against state officers in their official capacit[ies] are not, therefore,

categorically barred.” Fontenot, 777 F.3d at 752. NiGen sued the Attorney

General in his official capacity, satisfying the first requirement of Ex parte

Young.

Certain of NiGen’s claims fail, however, to the extent they request

retrospective money damages. A claim for money damages “seek[s] to impose

a liability which must be paid from public funds in the state treasury.”

Edelman v. Jordan, 415 U.S. 651, 663, 94 S. Ct. 1347, 1356 (1974). As the AG

correctly points out, the Eleventh Amendment bars federal court jurisdiction

over such claims.

4 Although the doctrine is universally associated with Ex parte Young, the central

conceit can be traced further back. See, e.g., United States v. Lee, 106 U.S. 196, 197, 1 S. Ct.

240, 241 (1882).

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Further, NiGen’s state law claim for tortious interference with contract

fails to establish federal jurisdiction because the Ex parte Young doctrine only

reaches alleged violations of federal law. McKinley v. Abbott, 643 F.3d 403,

406 (5th Cir. 2011); see also Pennhurst State Sch. & Hosp., 465 U.S. at 106,

104 S. Ct. at 911.

A final prerequisite of Ex parte Young is that “the relief sought must be

declaratory or injunctive in nature and prospective in effect.” Saltz v. Tenn.

Dep’t of Emp’t Sec., 976 F.2d 966, 968 (5th Cir. 1992). Notably, in the trial

court, the AG did not move to dismiss NiGen’s federal claims for declaratory

and injunctive relief on the grounds that they failed to request prospective

relief. Now, on appeal, the AG argues for the first time that even the

injunctive and declaratory claims are ineligible for Ex parte Young because the

plaintiff does not allege an “ongoing violation of federal law.” It is true that a

complaint must allege that the defendant is violating federal law, not simply

that the defendant has done so. 5 See Green v. Mansour, 474 U.S. 64, 71-73,

106 S. Ct. 423, 427-29 (1985). The State argues that whatever “smattering of

present tense language” is in the complaint does not suffice to allege an ongoing

violation of federal law. Assuming arguendo that the AG has not waived this

argument by failing to raise it in the district court, 6 we are unpersuaded, for

the Supreme Court has explained that courts generally conduct a

“straightforward inquiry into whether [the] complaint alleges an ongoing

This requirement is similar but not identical to the Article III minimum for standing

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to request an injunction, which requires ongoing harm or a threat of imminent harm. See

City of Los Angeles v. Lyons, 461 U.S. 95, 105, 103 S. Ct. 1660, 1667 (1983).

See Union Pac. R.R. Co. v. La. Pub. Serv. Comm’n., 662 F.3d 336, 342 (5th Cir. 2011)

6

(state did not waive Eleventh Amendment immunity defense by not raising it in the district

court, where it defended the suit on the merits).

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violation of federal law.” Verizon Md., Inc. v. Pub. Serv. Comm’n., 535 U.S.

635, 645, 122 S. Ct. 1753, 1761 (2002) (alteration in original). NiGen points

to the complaint’s straightforward allegations, of which there are many, that

the AG’s continued refusal (now after nearly four years) to justify its

threatening letters still inflicts, inter alia, an unconstitutional restraint on its

commercial speech, punishment without due process, and other constitutional

violations. These allegations are sufficient to demonstrate the ongoing nature

of the alleged unconstitutional conduct, which a federal court could remedy

through prospective relief.

B. Federal Question Jurisdiction

The parties also join issue over this court’s subject matter jurisdiction,

yet all of NiGen’s claims except for tortious interference are brought under

§ 1983, a federal statute, and allegedly arise under the U.S. Constitution. “A

suit arises under the law that creates the cause of action.” Am. Well Works

Co. v. Layne & Bowler Co., 241 U.S. 257, 260, 36 S. Ct. 585, 586 (1916).

The AG argues that all of the federal claims here are really defenses to

its threatened DTPA enforcement action. According to the well-pleaded

complaint rule, federal jurisdiction is absent when the federal issue appears in

the guise of an anticipated defense. E.g., New Orleans & Gulf Coast Ry. Co.

v. Barrios, 533 F.3d 321, 328 (5th Cir. 2008). And in an action for declaratory

judgment, the inquiry is inverted: Since a declaratory judgment action is

inherently anticipatory, the federal issue must form part of the hypothetical

well-pleaded complaint that the declaratory judgment defendant would have

filed but for the anticipatory action. See Skelly Oil Co. v. Phillips Petroleum

Co., 339 U.S. 667, 671, 70 S. Ct. 876, 879 (1950).

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To the extent that NiGen seeks as its first cause of action a declaration

that “its use of the letters ‘HCG’ on its packaging and labeling has not violated

any federal law, and that Plaintiff is entitled to use the letters ‘HCG’ on its

packaging and labeling for Isodrene and The HCG Solution,” the company’s

allegations plainly assert a defense to a not-yet-commenced state enforcement

action. Although the question whether NiGen’s product and labelling

comport with federal FDA law may become a defense in such an enforcement

action, this is hardly a sure thing; the State’s letters principally alleged

potential violations of state deceptive trade practices law. This court’s recent

decision in Singh v. Duane Morris LLP, 538 F.3d 334, 338 (5th Cir. 2008) set

out a four-part test, determining that a federal court may exercise jurisdiction

over a state law cause of action when: “(1) resolving a federal issue is

necessary to the resolution of the state-law claim; (2) the federal issue is

actually disputed; (3) the federal issue is substantial; and (4) federal

jurisdiction will not disturb the balance of federal and state judicial

responsibilities.” The party asserting jurisdiction has the burden to prove all

of these elements. NiGen’s stand-alone pleading for declaratory relief plainly

does not satisfy the first three tenets on the present state of the record.

The AG more generally contends that all of NiGen’s claims are

essentially anticipatory defenses to the threatened enforcement action, hence

all are barred. We disagree with this proposition. A number of cases have

held that where a plaintiff in NiGen’s position seeks both declaratory and

injunctive relief, the Wycoff rule 7 does not prevent that plaintiff from

7 Public Service Comm’n. of Utah v. Wycoff Co., 344 U.S. 237, 248, 73 S. Ct. 236, 242-

43 (1952)(looking to whether federal jurisdiction exists over threatened action, not the

defense, in a claim for declaratory relief).

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establishing federal jurisdiction. In A&R Pipeline Corp. v. Commissioner,

State of Oklahoma, 860 F.2d 1571 (10th Cir. 1988) the court, when faced with

an analogous case, sustained federal jurisdiction:

We express no opinion concerning the dicta in Wycoff and its

progeny because this suit is not based solely on a claim for

declaratory judgment but also includes a claim for injunction.

...

The district court’s jurisdiction to resolve the pipeline’s claim for

injunction extends to enable the court also to resolve the issues

raised by the declaratory judgment action.

We reached a similar conclusion in Braniff International, Inc. v. Florida

Public Service Commission, 576 F.2d 1100 (5th Cir. 1978). In that case we

stated:

We hold that where a party seeks injunctive and declaratory relief

based upon the unconstitutionality of a state statute where there

are no other concrete impediments to a proper exercise of federal

question jurisdiction, the mere fact that the constitutional claims

might be raised before a state administrative body charged with

enforcement of the statute does not alone deprive the court of

jurisdiction.

Regardless of the ultimate merit of NiGen’s claims, with the sole

exception of the stand-alone declaratory judgment cause of action, there is

federal question jurisdiction over the constitutional claims NiGen asserts

under § 1983.

C. Standing

The State also challenges NiGen’s standing to bring this suit. It is true

that “a plaintiff must demonstrate standing separately for each form of relief

sought.” Friends of the Earth, Inc. v. Laidlaw Envtl. Servs. (TOC), Inc.,

528 U.S. 167, 185, 120 S. Ct. 693, 706 (2000). To have standing to sue, the

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plaintiff must demonstrate injury in fact that is fairly traceable to the

defendant’s conduct and that would be redressed by a favorable judicial

decision. Lujan v. Defenders of Wildlife, 504 U.S. 555, 560, 112 S. Ct. 2130,

2136 (1992). However, the complaint need only “allege facts from which it

reasonably could be inferred,” Warth v. Seldin, 422 U.S. 490, 504, 95 S. Ct.

2197, 2208 (1975), that it is “likely, as opposed to merely speculative, that the

injury will be redressed by a favorable decision,” Lujan, 504 U.S. at 61,

112 S. Ct. at 2137 (internal quotation marks omitted).

The injury-in-fact and traceability requirements are not disputed here.

The AG has again taken a different tack on appeal and for the first time

challenges redressability. We must address this contention as it goes to

federal jurisdiction and cannot be waived, but the fact that it is late-raised

reduces the credibility of the AG’s argument and disserves the efficiency of the

judicial process.

In challenging redressability, the AG cites Lujan, which observed that

standing to challenge government action “depends considerably upon whether

the plaintiff is himself an object of the action (or forgone action) at issue.”

504 U.S. at 561, 112 S. Ct. at 2137 (denying standing, in part because the only

entities whose actions could redress the plaintiff’s alleged injury were

nonparties that would not be bound by the judgment). Further, in Simon v.

Eastern Kentucky Welfare Rights Organization, the plaintiffs complained that

an IRS revenue ruling allowed favorable tax treatment for hospitals that

treated indigents only in their emergency rooms (instead of also admitting

them to inpatient care). 426 U.S. 26, 33, 96 S. Ct. 1917, 1922 (1976). The

Supreme Court held that even an order forcing the IRS to change its policy

would not necessarily result in the hospitals admitting indigent patients. Id.

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at 43, 96 S. Ct. at 1926. The Court held that “unadorned speculation will not

suffice to invoke the federal judicial power.” Id. at 44, 96 S. Ct. at 1927; see

also Allen v. Wright, 468 U.S. 737, 758, 104 S. Ct. 3315, 3328 (1984) (IRS’s

failure to enforce tax disadvantage against discriminatory private schools

would not necessarily redress harm to students in segregated public schools).

These cases, however, turned on remedying conduct that was not

initially directed at the plaintiffs themselves. Here, the AG sent threatening

letters not only to NiGen’s retailers in Texas but also to the company itself.

As NiGen cogently explains, “these letters harmed NiGen directly because they

amounted to a preliminary injunction against the lawful sale of NiGen’s

products. NiGen’s retailers removed the products from their shelves only as

a direct result of receiving the threatening letters from the Attorney General.”

NiGen Reply Br. at 17. Further, because “NiGen itself continues to be

effectively enjoined from selling its products,” a favorable court decision “would

allow NiGen to again sell its products freely in Texas, whether directly,

through its prior retailers, through other retailers, etc. It would allow NiGen

to repair its damaged relationship with its retailers that has resulted from the

Attorney General’s conduct. This is not speculative and is not dependent on

the actions of third parties.” Id. at 17-18. As the Supreme Court has noted,

where a plaintiff’s complaint alleges a continuing violation or the imminence

of a future violation, a prayer for injunctive relief satisfies redressability.

Steel Co. v. Citizens for a Better Env’t, 523 U.S. 83, 108, 118 S. Ct. 1003, 1019

(1998).

Other court decisions cited by the Attorney General have found the

“chain of forward causation” to be broken for redressability purposes, but they

are distinguishable. For example, in Frank Krasner Enterprises, Ltd. v.

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Montgomery County, the owner of an expo venue refused to grant a lease to a

plaintiff gun vendor because of a law withdrawing local subsidies for shows

where guns were sold. 401 F.3d 230, 232 (4th Cir. 2005). The Fourth Circuit

held that even if the law were enjoined, the non-party owner might still decline

to do business with the gun seller. Id. at 236. The court emphasized the

absence of a case granting standing to a plaintiff that challenged a

government’s decision not to subsidize a third party. Id. at 235-36.

Similarly, in Glanton ex rel. ALCOA Prescription Drug Plan v. AdvancePCS

Inc., 465 F.3d 1123, 1125 (9th Cir. 2006), the plaintiffs were beneficiaries of a

mismanaged ERISA drug plan. But the court held that even if their suit

against the manager’s misdeeds succeeded, it would not follow that the

sponsors of the plan would reduce the price of the plaintiff’s benefits;

consequently, the court could not redress their alleged injury. Id. at 1127.

Of a similar nature is Pritikin v. Department of Energy, 254 F.3d 791, 799-801

(9th Cir. 2001), in which the plaintiffs sued one federal agency on their claim

that it had to fund another, with no guarantee that a favorable judgment would

in fact cause the funding to occur.

None of these cases sought, like NiGen’s, to lift a yoke of alleged

unconstitutional conduct from the plaintiff’s own shoulders. None of them

involved government enforcement threats against third parties. Were NiGen

to succeed here and nullify the threats, the likelihood of NiGen’s success in

returning its products to store shelves in Texas, given the normal marketplace

incentives, is much greater than in these other cases. We make no predictions

about the outcome of this case except to acknowledge that if NiGen succeeds in

enjoining the AG’s conduct, which would require a retraction of the offending

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letters and/or the instigation of procedurally adequate enforcement measures,

NiGen could again conduct business as usual.

The district court did not rule on the AG’s Rule 12(b)(6) motion for failure

to state a claim. For two reasons, we remand this ordinarily legal question to

that court. First, nearly four years have passed since the delivery of the AG’s

letters, and we cannot be certain that the facts concerning this case are the

same as they were when suit was filed. Second, the dismissal motion seems

to rely on discovery and matters outside the pleadings, suggesting that the

entire record must be consulted, which is the province of summary judgment

rather than a 12(b)(6) motion. The district court is the better venue for this

analysis in the first instance.

CONCLUSION

For the foregoing reasons, the judgment of the district court is

AFFIRMED insofar as it dismissed NiGen’s claims for money damages, for

state law violations, for retrospective relief, and for declaratory relief against

a threatened enforcement action; the judgment is REVERSED insofar as it

dismissed NiGen’s constitutional law claims; and the case is REMANDED for

further proceedings.

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