Dr. Behzad Nazari, D.D.S. D/B/A Antoine Dental Center Dr. Behzad Nazari Harlingen Family Dentistry, P.C. A/K/A Practical Business Solutions, Series LLC Juan D. Villarreal D.D.S., Series PLLC D/B/A Harlingen Family Dentistry Group v. State

ACCEPTED

03-15-00252-CV

6435117

THIRD COURT OF APPEALS

SEE AMEND BRF AUSTIN, TEXAS

8/10/2015 7:41:59 PM

FLD ON 8/19/15 JEFFREY D. KYLE

CLERK

No. 03-15-00252-CV

In the Court of Appeals for the Third Judicial District of Texas

FILED IN

3rd COURT OF APPEALS

AUSTIN, TEXAS

DR. BEHZAD NAZARI, D.D.S. D/B/A ANTOINE D ENTAL

8/10/2015 7:41:59 PM

CENTER ET. AL., Defendants–Appellants,JEFFREY D. KYLE

Clerk

v.

STATE OF TEXAS, Plaintiff–Appellee,

v.

XEROX CORPORATION AND XEROX STATE HEALTHCARE, LLC, F/K/A ACS

STATE HEALTHCARE, LLC, Third-Party Defendants–Appellees.

On Appeal from the 53rd Judicial District Court,

Travis County, Texas, No. D-1-GB-13-005380

BRIEF FOR APPELLEE THE STATE OF TEXAS

KEN PAXTON SCOTT A. KELLER

Attorney General of Texas Solicitor General

CHARLES E. ROY J. CAMPBELL BARKER

First Assistant Attorney General Deputy Solicitor General

State Bar No. 24049125

RAYMOND C. WINTER

cam.barker@texasattorneygeneral.gov

Chief, Civil Medicaid Fraud

Philip A. Lionberger

REYNOLDS B. BRISSENDEN

Assistant Solicitor General

Assistant Attorney General

State Bar No. 12394380

Office of the Attorney General

P.O. Box 12548 (MC 059) AUTUMN HAMIT PATTERSON

Austin, Texas 78711-2548 Assistant Attorney General

Tel.: (512) 936-1700 State Bar No. 24092947

Fax: (512) 474-2697

Counsel for the State of Texas

Oral argument requested

Identity of Parties and Counsel

The parties and their trial and appellate counsel are as follows:

Plaintiff–Appellee:

• The State of Texas

Counsel for Plaintiff–Appellee:

J. Campbell Barker Raymond C. Winter

Autumn Hamit Patterson Reynolds B. Brissenden

Philip A. Lionberger David Drew Wright

Office of the Attorney General Office of the Attorney General

P.O. Box 12548 (MC 059) P.O. Box 12548 (MC 056)

Austin, Texas 78711-2548 Austin, Texas 78711-2548

Defendants–Appellants:

• Dr. Behzad Nazari, D.D.S. d/b/a Antoine Dental Center

• Dr. Behzad Nazari

• Dr. Wael Kanaan

• Harlingen Family Dentistry, P.C., n/k/a Practical Business Solutions, Se-

ries LLC

• Juan D. Villareal D.D.S., Series, PLLC d/b/a Harlingen Family Dentistry

Group

• Dr. Juan Villareal

• Dr. Vivian Teegardin

• Richard F. Herrscher, D.D.S., M.S.D., P.C.

• Dr. Richard F. Herrscher

• M & M Orthodontics, PA

• Dr. Scott Malone

• Dr. Diana Malone

• Michelle Smith

• National Orthodontix, MGMT, PLLC

• Dr. John Vondrak

• RGV Smiles by Rocky L. Salinas, D.D.S. PA

• Dr. Rocky Salinas

-i-

Counsel for Defendants–Appellants:

Jason Ray E. Hart Green

Riggs & Ray, P.C. Mitchell A. Toups

700 Lavaca St., Suite 920 Weller, Green, Toups & Terrell, L.L.P.

Austin, Texas 78701 P.O. Box 350

Beaumont, Texas 77704-0350

Third-Party Defendants–Appellees:

• Xerox Corporation

• Xerox State Healthcare, LLC f/k/a ACS State Healthcare, LLC

Counsel for Third-Party Defendants–Appellees:

Constance H. Pfeiffer Robert C. Walters

Beck Redden LLP Gibson, Dunn & Crutcher LLP

1221 McKinney St., Suite 4500 2100 McKinney Ave., Suite 1100

Houston, Texas 77010 Dallas, Texas 75201

Eric J.R. Nichols

Christopher R. Cowan

Beck Redden LLP

515 Congress Ave., Suite 1750

Austin, Texas 78701

- ii -

Table of Contents

Page

Identity of parties and counsel .......................................................................i

Index of authorities ...................................................................................... iv

Statement of the case .................................................................................... x

Statement regarding oral argument .............................................................. xi

Statement of jurisdiction .............................................................................. xi

Issues presented ........................................................................................... xi

Statement of facts ......................................................................................... 1

A. Medicaid program overview.............................................................. 1

B. Medicaid fraud controls .................................................................... 4

C. Facts regarding defendant dental groups ........................................... 6

D. Facts regarding Xerox ....................................................................... 8

E. Procedural history ............................................................................. 9

Summary of the argument ........................................................................... 12

Argument.................................................................................................... 14

I. The district court correctly dismissed defendants’ counterclaims

based on sovereign immunity. ............................................................... 14

A. The Legislature has not waived sovereign immunity. ...................... 15

B. No common-law exception to immunity applies.............................. 18

1. Because the State acts within its sovereign powers in

bringing this TMFPA enforcement action, it does not leave

its sphere of sovereign immunity from suit................................ 18

2. Additionally, defendants’ counterclaims fall outside the

class of counterclaims covered by the Reata exclusion from

sovereign immunity. ................................................................. 33

3. Even were it relevant, federal precedent would also bar

defendants’ counterclaims against the State in a False

Claims Act suit. ........................................................................ 37

C. The counterclaims are in the nature of an estoppel affirmative

defense that does not apply here. .................................................... 39

II. This Court lacks jurisdiction over defendants’ interlocutory appeal

from the dismissal of their third-party claims against Xerox. ................. 43

Prayer ......................................................................................................... 46

Certificate of service ................................................................................... 48

Certificate of compliance ............................................................................ 49

- iii -

Index of Authorities

Page(s)

Cases:

Anderson, Clayton & Co. v. State ex rel. Allred,

62 S.W.2d 107 (Tex. Comm’n App. 1933, judgm’t adopted) .... 21, 22, 23

Bally Total Fitness Corp. v. Jackson,

53 S.W.3d 352 (Tex. 2001) .............................................................. 43–44

Bates v. Republic,

2 Tex. 616 (1847) ............................................................................ 20, 24

Beers v. Arkansas,

61 U.S. (20 How.) 527 (1857) ................................................................ 18

Bobbitt v. Cantu,

992 S.W.2d 709 (Tex. App.—Austin 1999, no pet.) ........................ 44, 45

Challenger Gaming Solutions, Inc. v. Earp,

402 S.W.3d 290 (Tex. App.—Dallas 2013, no pet.) ..............................46

City of Dallas v. Albert,

354 S.W.3d 368 (Tex. 2011) ........................................................... passim

City of Dallas v. Redbird Dev. Corp.,

143 S.W.3d 375 (Tex. App.—Dallas 2004, no pet.) ............................... 30

City of El Paso v. Heinrich,

284 S.W.3d 366 (Tex. 2009) ................................................................ 22

City of Galveston v. State,

217 S.W.3d 466 (Tex. 2007) ............................................................ 26–27

City of Hutchins v. Prasifka,

450 S.W.2d 829 (Tex. 1970) ................................................................ 40

City of New Braunfels v. Carowest Land, Ltd.,

432 S.W.3d 501 (Tex. App—Austin 2014, no pet.) ......................... 30, 36

City of San Antonio v. KGME, Inc.,

340 S.W.3d 870 (Tex. App.—San Antonio 2011, no pet.) .....................30

City of White Settlement v. Super Wash, Inc.,

198 S.W.3d 770 (Tex. 2006)............................................................ 39, 40

Dickson v. Dickson,

516 S.W.2d 28 (Tex. Civ. App.—Austin 1974, no writ) ............ 44, 45, 46

Dillard v. Tex. Elec. Co-op,

157 S.W.3d 429 (Tex. 2005) .................................................................. 36

- iv -

Ellet Bros., Inc. v. U.S. Fidelity & Guar. Co.,

275 F.3d 384 (4th Cir. 2001) ................................................................. 32

Ex parte Young,

209 U.S. 123 (1908) ............................................................................. 22

Fed. Sign v. Tex. S. Univ.,

951 S.W.2d 401 (Tex. 1997) .................................................................. 30

Gabelli v. SEC,

133 S. Ct. 1216 (2013) ........................................................................... 24

Gen. Servs. Comm’n v. Little-Tex. Insulation Co.,

39 S.W.3d 591 (Tex. 2001) .............................................................. 15, 25

Guillory v. Port of Houston Auth.,

845 S.W.2d 812 (Tex. 1993) .................................................................. 19

Harlingen Family Dentistry, P.C. v. HHSC,

452 S.W.3d 479 (Tex. App.—Austin 2014, pet. filed) ............................. 7

Harris Cnty. v. Luna-Prudencio,

294 S.W.3d 690 (Tex. App.—Houston [1st Dist.] 2009, no pet.) ..........30

Heckler v. Cmty. Health Servs. of Crawford Cnty., Inc.,

467 U.S. 51 (1984) ....................................................................... 3, 40, 41

Henderson v. Shell Oil Co.,

182 S.W.2d 994 (Tex. 1944)................................................................. 44

In re Malinowski,

156 F.3d 131 (2d Cir. 1998) .................................................................... 34

In re S.A.P.,

156 S.W.3d 574 (Tex. 2005) ................................................................. 42

In re Univ. Med. Ctr.,

973 F.2d 1076 (3d Cir. 1992) ................................................................. 34

Jack B. Anglin Co. v. Tipps,

842 S.W.2d 266 (Tex. 1992) ........................................................... 43, 45

Janek v. Harlingen Family Dentistry, P.C.,

451 S.W.3d 97 (Tex. App.—Austin 2014, no pet.) .............................. 7–8

Lee v. Schweiker,

739 F.2d 870 (3d Cir. 1984) ................................................................... 34

Lehmann v. Har-Con Corp.,

39 S.W.3d 191 (Tex. 2001) .............................................................. 43, 45

-v-

Qwest Commc’ns Corp. v. AT&T Corp.,

24 S.W.3d 334 (Tex. 2000) .................................................................. 44

Reata Construction Corp. v. City of Dallas,

197 S.W.3d 371 (Tex. 2006) ........................................................... passim

Rusk State Hosp. v. Black,

392 S.W.3d 88 (Tex. 2012) ................................................................... 15

SEC v. City of Miami,

581 F. App’x 757 (11th Cir. 2014)......................................................... 24

Stary v. DeBord,

967 S.W.2d 352 (Tex. 1998) ................................................................. 44

State v. City of Greenville,

726 S.W.2d 162 (Tex. App.—Dallas 1987, writ ref’d n.r.e.) .................. 27

State v. Durham,

860 S.W.2d 63 (Tex. 1993)................................................................... 42

State v. Emeritus Corp.,

No. 13-13-00529-CV, 2015 WL 1456436 (Tex. App.—Corpus

Christi Mar. 26, 2015, pet. filed) .......................................................... 24

State v. Zanco’s Heirs,

18 Tex. Civ. App. 127, 44 S.W. 527 (1898, writ ref’d) ..........................29

Sweeny Cmty. Hosp. v. Mendez,

226 S.W.3d 584 (Tex. App.—Houston [1st Dist.] 2007, no pet.) ..........30

Tex. Dep’t of Parks & Wildlife v. Miranda,

133 S.W.3d 217 (Tex. 2004) .................................................................. 15

Tex. Dep’t of Transp. v. A.P.I. Pipe & Supply, LLC,

397 S.W.3d 162 (Tex. 2013) ................................................................. 40

Tex. Dep’t of Transp. v. Jones,

8 S.W.3d 636 (Tex. 1999) ...................................................................... 15

Tex. Natural Res. Conservation Comm’n v. IT-Davy,

74 S.W.3d 849 (Tex. 2002) ............................................................. 14, 27

United States ex rel. Madden v. Gen. Dynamics Corp.,

4 F.3d 827 (9th Cir. 1993) ..................................................................... 38

United States v. Campbell,

No. 08-cv-1951, 2011 WL 43013 (D.N.J. Jan. 4, 2011) ..................... 38, 39

- vi -

Waller County v. Simmons,

No. 01-07-00180-CV, 2007 WL 3038420 (Tex. App.—Houston

[1st Dist.] Oct. 18, 2007, no pet.) .................................................... 30–31

Wichita Falls State Hosp. v. Taylor,

106 S.W.3d 692 (Tex. 2003) .......................................................... passim

Wyeth-Ayerst Labs. Co. v. Medrano,

28 S.W.3d 87 (Tex. App.—Texarkana 2000, no pet.) ...........................46

Statutes, regulations, and rules:

42 U.S.C. § 1396a(a)(43) .............................................................................. 1

Tex. Civ. Prac. & Rem. Code ch. 105 .................................................... 17, 29

Tex. Civ. Prac. & Rem. Code § 51.014(a)(8) .................................... xi, 43, 45

Tex. Gov’t Code:

§ 311.005 ................................................................................................ 4

§ 311.034 .......................................................................................... 16, 17

§ 531.102(g)(2)........................................................................................ 7

Tex. H.B. 1396, Act of May 31, 2015, 84th Leg., R.S., ch. 1251,

§ 27, 2015 Tex. Sess. Law Serv. 1251 ...................................................... 5

Tex. Hum. Res. Code:

§ 32.001 .................................................................................................. 1

§ 32.024(a) ............................................................................................. 1

§ 32.024(b) ............................................................................................. 1

tit. 2, subt. C, ch. 36 ............................................................................ 1, 4

§ 36.0011................................................................................................. 5

§ 36.0011(a) .......................................................................................... 37

§ 36.0011(b) .......................................................................................... 37

§ 36.002(1).............................................................................................. 5

§ 36.002(2) ............................................................................................. 5

§ 36.002(13) ............................................................................................ 5

§ 36.003 .................................................................................................. 5

§ 36.007 ................................................................................................. 6

§ 36.051 ................................................................................................. 6

§ 36.052 ................................................................................................. 6

- vii -

Tex. Hum. Res. Code (cont’d):

§ 36.052(a) ................................................................................. 31, 32, 46

§ 36.054 .................................................................................................. 5

§ 36.101.................................................................................................. 6

§ 36.101(a) ............................................................................................. 6

§ 36.102 ................................................................................................. 6

§ 36.104 ................................................................................................. 6

§ 36.106 ................................................................................................. 6

§ 36.107 .................................................................................................. 6

§ 36.107(b) ............................................................................................. 6

§ 36.107(d) ............................................................................................. 6

§ 36.110 .................................................................................................. 6

§ 36.111 .................................................................................................. 6

§ 36.112 ........................................................................................... 17, 29

§ 36.113 .................................................................................................. 6

§ 36.116 ........................................................................................... 17, 29

Tex. Penal Code § 35A.02 ........................................................................ 4–5

1 Tex. Admin. Code tit. I, part 15, ch. 371, subch. G ..................................... 4

1 Tex. Admin. Code § 371.1709(b) ................................................................ 7

25 Tex. Admin. Code § 33.2(2) ..................................................................... 1

25 Tex. Admin. Code § 33.2(8) .................................................................... 2

25 Tex. Admin. Code § 33.2(8)(A) .............................................................. 2

25 Tex. Admin. Code § 33.2(8)(F)............................................................... 2

25 Tex. Admin. Code § 33.40(b) ................................................................... 1

25 Tex. Admin. Code § 33.71(a)................................................................... 2

42 C.F.R. § 455.2 .......................................................................................... 7

42 C.F.R. § 455.23(a) .................................................................................... 7

Tex. R. Civ. P. 38(a) ............................................................................. 11, 46

Tex. R. Civ. P. 91a ...................................................................................... 46

- viii -

Other authorities:

2003 Texas Medicaid Provider Procedures Manual ..................................... 2

2003 Texas Medicaid Provider Procedures Manual § 18.20.7 ...................... 4

2003 Texas Medicaid Provider Procedures Manual § 2.1.1 ........................... 3

2003 Texas Medicaid Provider Procedures Manual § 2.2.7........................... 3

2003 Texas Medicaid Provider Procedures Manual § 2.3 ............................. 3

2003 Texas Medicaid Provider Procedures Manual, § 18.20.1 .................. 2, 3

HHSC, Texas Medicaid and CHIP in Perspective (10th ed. 2015) .................... 1

The Federalist No. 81 (Alexander Hamilton) ................................................ 19

U.S. Sentencing Guidelines § 2B4.1 ............................................................ 32

- ix -

Statement of the Case

Nature of the case: This is an action under the Texas Medicaid Fraud

Prevention Act seeking statutory remedies from

dental groups for material misrepresentations to

the Texas Medicaid program.

Trial court: 53rd Judicial District Court, Travis County,

The Honorable Stephen Yelenosky

Course of proceedings: The State brought this civil enforcement action.

CR.3–25. Defendants answered with a general de-

nial. CR.30. They also asserted counterclaims

against the State and third-party claims against

the State’s claims-processing contractor (Xerox).

CR.30–42. In response, the State filed a general

denial, plea to the jurisdiction to the counter-

claims, plea in bar to the counterclaims, and mo-

tion to dismiss the third-party claims. CR.43–58.

Trial court disposition: The trial court granted the State’s plea to the ju-

risdiction and dismissed the counterclaims with

prejudice. CR.383–84. The court also granted the

State’s motion to dismiss the third-party claims.

Id.

-x-

Statement Regarding Oral Argument

The State believes that the briefing suffices to resolve this appeal. If oral

argument would be helpful to the Court, however, the State respectfully re-

quests time equal to that allotted to defendants.

Statement of Jurisdiction

This Court’s jurisdiction over defendants’ interlocutory appeal from the

dismissal of their counterclaims against the State rests on Texas Civil Practice

and Remedies Code § 51.014(a)(8).

This Court does not have jurisdiction over defendants’ interlocutory ap-

peal from the dismissal of their third-party claims against Xerox because no

statute authorizes such an appeal. See infra Part II.

Issues Presented

1. Whether the district court correctly granted the State’s plea to the ju-

risdiction and dismissed defendants’ counterclaims against the State based on

sovereign immunity.

2. Whether this Court has appellate jurisdiction over defendants’ inter-

locutory appeal from the dismissal of their third-party claims against Xerox

(and if so whether that dismissal was correct).

- xi -

Statement of Facts

This is a civil enforcement action by the State against dental groups for

making material misrepresentations to the Texas Medicaid program, in vio-

lation of the Texas Medicaid Fraud Prevention Act, Tex. Hum. Res. Code

tit. 2, subt. C, ch. 36. The Clerk’s Record is cited herein as “CR.”

A. Medicaid program overview

Texas Medicaid, funded by the federal and state government, is a pro-

gram designed to provide medical assistance to needy individuals. Tex.

Hum. Res. Code § 32.001. Administered by the Texas Health and Human

Services Commission (“HHSC”), the program is charged with providing

assistance to a range of beneficiaries, from low-income families, to children,

to individuals with disabilities. See Tex. Hum. Res. Code § 32.024(a)–(b);

HHSC, Texas Medicaid and CHIP in Perspective 1-1 to 1-2 (10th ed. 2015),

www.hhsc.state.tx.us/medicaid/about/PB/PinkBook.pdf.

Among other things, Texas Medicaid provides certain persons with pe-

riodic dental exams and with “medically necessary” follow-up dental treat-

ment. 25 Tex. Admin. Code § 33.40(b); see 42 U.S.C. § 1396a(a)(43)

(providing for this early-screening-and-treatment program). Those ser-

vices, provided in Texas under the moniker Texas Health Steps, are made

available to Medicaid-eligible persons who are under 21 years of age. 25 Tex.

Admin. Code § 33.2(2) (defining the term “client”).

-1-

Medicaid does not cover orthodontic services for cosmetic reasons,

such as to straighten a twisted or rotated tooth. See 25 Tex. Admin. Code

§§ 33.2(8), 33.71(a). Rather, orthodontic services are covered only if needed

due to an unusual medical conditions affecting a person’s secondary (adult)

teeth, namely, “severe handicapping malocclusion and other related condi-

tions.” Id. § 33.71(a). That standard follows from general Medicaid policy

reserving scarce public funds for only those services needed to prevent or

cure conditions that cause suffering or pain, physical deformity or disability,

or a threat to life or bodily functioning. Id. § 33.2(8)(A), (F).

To ensure that Medicaid funding is being used only to treat patients with

severe handicapping malocclusion, such a condition must be “measured by

the procedures and standards published in” the Texas Medicaid Provider

Procedures Manual. Id.; see 2003 Texas Medicaid Provider Procedures Man-

ual, www.tmhp.com/TMHP_File_Library/Provider_Manuals/TMPPM/

Archives%20(TMPPM%202003,%202004)/2003_TMPPM.pdf (short URL:

goo.gl/7WGrQ0) (version in effect at beginning of alleged period of fraud;

hereinafter Provider Manual). Moreover, orthodontic services for which a

provider seeks payment must be “prior authorized.” 25 Tex. Admin. Code

§ 33.71(a). Prior authorization requires providers to provide full and accu-

rate information to the Medicaid program, allowing for review of whether

the proposed treatment meets the criteria for coverage. See Provider Manual

18-44, § 18.20.1.

-2-

Crucially, given the size of the program, the State relies not only on its

own processes but also on the duty of enrolled providers themselves to hon-

estly represent patients’ condition when seeking prior authorization and to

know and adhere to Medicaid policies and requirements. Any provider seek-

ing payment from Medicaid accepts a responsibility to maintain a current

understanding of Medicaid policies and procedures, to abide by them and

claim payment only for covered services, and to submit full and complete

claims information. Provider Manual 2-2, § 2.1.1 (requirement of provider

agreement); id. at 2-7, § 2.2.7 (provider agrees that all information on a

claim is true, accurate, and complete); id. at 2-11, § 2.3 (duty to maintain

current understanding of procedures and policies); cf. Heckler v. Cmty.

Health Servs. of Crawford Cnty., Inc., 467 U.S. 51, 63 (1984) (“Protection of

the public fisc requires that those who seek public funds act with scrupulous

regard for the requirements of law; respondent could expect no less than to

be held to the most demanding standards in its quest for public funds.”).

Providers are warned that omitting pertinent facts or submitting false state-

ments, whether to obtain greater compensation than allowed or to meet

prior-authorization requirements, is forbidden and has consequences. Pro-

vider Manual 2-11, § 2.3.

In the orthodontia context, a request for prior authorization must fea-

ture a complete orthodontic treatment plan and be accompanied by items

and information demonstrating that the patient has severe handicapping

malocclusion. See Provider Manual 18-44, § 18.20.1 (requiring, e.g., dental

-3-

models, x-rays, photographs, and a scoresheet reflecting the severity of a

client’s dental deformities); see, e.g., id. 18-49 to 18-50, § 18.20.7 (detailed

instructions for completing scoresheet, including instruction that scoring

must be conservative because the program can address only “handicap-

ping” malocclusion). With accurate information submitted, the request for

prior authorization is approved or denied. Here, that review function was

assigned to a claims-administration company contracted by Texas Medicaid

to perform the prior-authorization reviews (Xerox). CR.45–46.

B. Medicaid fraud controls

When anyone makes false statements to the Texas Medicaid program—

whether a medical practitioner, a drug company, or a state contractor—the

public fisc is jeopardized. Three general categories of enforcement proceed-

ings exist to deter such violations. The HHSC Office of the Inspector Gen-

eral can bring administrative enforcement proceedings against enrolled

medical-services providers, to cut off funds or exclude them from the Med-

icaid program. See 1 Tex. Admin. Code tit. I, part 15, ch. 371, subch. G (“Ad-

ministrative Actions and Sanctions”). Additionally, the State can bring a

civil proceeding for statutory remedies against a person who makes false

statements to Texas Medicaid, whether that person is a provider or contrac-

tor. See Tex. Hum. Res. Code tit. 2, subt. C, ch. 36 (Texas Medicaid Fraud

Prevention Act or “TMFPA”); Tex. Gov’t Code § 311.005. Finally, the

State can bring criminal charges for Medicaid fraud. See Tex. Penal Code

-4-

§ 35A.02 (amended to increase penalties by Tex. H.B. 1396, Act of May 31,

2015, 84th Leg., R.S., ch. 1251, § 27, 2015 Tex. Sess. Law Serv. 1251).

This case is the second type of enforcement action—a civil action under

the Texas Medicaid Fraud Prevention Act. CR.110. The TMFPA defines

several “unlawful acts” related to the Medicaid program, several of which

the State intends to prove here. CR.120–127; see, e.g., Tex. Hum. Res. Code

§ 36.002(1) (“knowingly makes or causes to be made a false statement or

misrepresentation of a material fact to permit a person to receive a benefit

or payment under the Medicaid program that is not authorized or that is

greater than the benefit or payment that is authorized”); id. § 36.002(2)

(“knowingly conceals or fails to disclose information that permits” such

overpayment); id. § 36.002(13) (knowingly commits cross-referenced con-

duct, including presenting information a person should know to be false and

soliciting or receiving a kickback for referrals to third parties). A person can

“knowingly” commit a TMFPA violation without awareness of the

TMFPA or that his conduct violates the TMFPA; a “knowing” violation

requires only reckless disregard or conscious indifference to the truth of in-

formation submitted to the Texas Medicaid program. Id. § 36.0011.

The Attorney General has a range of enforcement powers under the

TMFPA, such as civil investigative demands and inspection of agency rec-

ords. Id. §§ 36.003, 36.054. To adequately punish and deter Medicaid fraud,

the State may recover from any person who violates the Act a civil remedy

of three times the amount of any Medicaid payment that is made directly or

-5-

indirectly as a result of the unlawful act, plus additional civil penalties, rea-

sonable attorney’s fees, and costs. Id. §§ 36.007, 36.052. Augmenting the

State’s enforcement efforts, private plaintiffs may institute actions in the

State’s name as qui tam relators, although the State remains the real party

in interest and retains ultimate control over the action. Id. §§ 36.101,

36.107(b), (d). 1

C. Facts regarding defendant dental groups

The State’s petition sets forth the facts the State intends to prove in this

case, described below. CR.117–31. Defendants are six dental groups and af-

filiated persons (referred to for convenience here simply as dental groups).

CR.117–19. Seeking to receive funds from Texas Medicaid, these dental

groups enrolled as Medicaid providers and agreed to abide by the Provider

Manual and Medicaid regulations. CR.116.

This civil enforcement action arises on the State’s allegations that de-

fendants enriched themselves by making misrepresentations to the Medi-

caid system. CR.120–27. Specifically, the State intends to prove that de-

fendants violated the TMFPA in connection with orthodontic services by

1 The TMFPA establishes comprehensive rules governing qui tam actions. For ex-

ample, only the State or a qui tam relator can bring suit, and no one but the State can

intervene in a TMFPA suit. Tex. Hum. Res. Code §§ 36.051, 36.101(a), 36.106. Strict

rules govern when a qui tam relator can bring suit and what percentage of awards a qui

tam relator can receive. Tex. Hum. Res. Code §§ 36.110, 36.111, 36.113. The TMFPA

also dictates how a qui tam relator must initiate the action and how the action will con-

tinue based on whether the State decides to intervene. Tex. Hum. Res. Code §§ 36.102,

36.104, 36.107.

-6-

making misrepresentations on prior-authorization forms, to misstate the se-

verity of patients’ dental conditions in order to receive payment for services

not covered by Medicaid. CR.120–27. All defendants are accused of that

type of misrepresentation. Id. Additionally, certain defendant dental groups

are accused of other violations, including making claims for services and

products never provided or more costly than provided, soliciting kickbacks

for referral of patients to third parties, and falsifying the credentials of per-

sons who performed work for which claims were filed. Id. Defendants filed

a general denial. CR.30.

Before the State brought this civil enforcement action, HHSC through

its Office of the Inspector General pursued administrative remedies against

most of the defendant dental groups. CR.45. Those remedies can include an

administrative payment hold on claims for reimbursement by dental groups.

See Tex. Gov’t Code § 531.102(g)(2) (requiring payment hold in certain cir-

cumstances); 1 Tex. Admin. Code § 371.1709(b) (describing payment hold);

see 42 C.F.R. § 455.23(a) (requiring that a State’s Medicaid program sus-

pend payments upon finding a “credible allegation of fraud”); id. § 455.2

(defining “credible allegation of fraud”). One of the dental groups named

in this case appealed from the administrative payment hold imposed on it,

and this Court ruled on issues related to the payment hold. See Harlingen

Family Dentistry, P.C. v. HHSC, 452 S.W.3d 479 (Tex. App.—Austin 2014,

pet. filed); Janek v. Harlingen Family Dentistry, P.C., 451 S.W.3d 97 (Tex.

-7-

App.—Austin 2014, no pet.). Those cases do not address any issues pre-

sented in this case, but they are noted here for the sake of completeness. In

December 2014, HHSC dismissed its administrative enforcement actions,

and the State filed this civil enforcement action. CR.45.

D. Facts regarding Xerox

In May 2014, before this lawsuit was filed, the State sued three compa-

nies for making misrepresentations related to implementation of the Texas

Medicaid program, in violation of the TMFPA. CR.45 (describing that sep-

arate Travis County District Court lawsuit, Case No. D-1-GV-14-000581).

Those three companies are Xerox Corporation; Xerox State Healthcare,

LLC; and ACS State Healthcare, LLC, a Xerox Corporation (“Xerox,” col-

lectively). CR.45.

Xerox was under contract to the Texas Medicaid program to perform

claims-administration services. CR.45. Those services included providing

qualified medical personnel and having them perform a substantive review

of prior-authorization requests and apply Texas Medicaid policies to reject

or approve those requests. CR.45–46. Investigations into Xerox’s conduct

culminated in the termination of Xerox’s contract and the lawsuit against

Xerox. That lawsuit alleges that Xerox violated the TMFPA by making mis-

representations to Texas officials about its failure to provide qualified med-

ical professionals and personnel to review prior-authorization requests.

CR.106 (copy of motion paper in that lawsuit, which is also presided over by

Judge Yelenosky).

-8-

Some of the dental groups attempted to intervene in the State’s separate

action against Xerox, but the trial court struck the petition in intervention.

CR.47; CR.61 (copy of trial court’s order in that case). Likewise, the trial

court denied Xerox’s motion to consolidate the suit against it for its conduct

with separate suits by the State against dental groups for their own conduct.

CR.47. The trial court explained that the State is “entitled to pursue a Med-

icaid Fraud claim against a defendant to the exclusion of all other parties.”

CR.65 (copy of trial court’s order in that case).

E. Procedural history

The State filed this TMFPA enforcement action against the dental

groups. CR.3. Defendants answered with a general denial. CR.30. They also

alleged damages counterclaims against the State, claiming that the State had

waived sovereign immunity by filing this enforcement action. CR.30. Like

defendants’ earlier attempt to intervene in the State’s action against Xerox,

defendants’ counterclaims appear to try to blame the State or at Xerox for

defendants’ own conduct. Specifically, the counterclaims allege:

(1) Conspiracy by the State with Xerox “to allow Xerox to violate its

various contractual duties” by “rubber stamp[ing]” or doing “no

legitimate review” of prior authorizations. CR.31. Defendants’ ap-

parent theory of causation is that this rubber stamping caused them

to succeed in and continue submitting prior authorizations with mis-

representations, which in turn exposed them to enforcement ac-

tions. See CR.31 (alleging injury to them by the State’s “recouping

money from providers” through enforcement proceedings).

(2) Breach of the State’s contract with Xerox, “which allowed non-per-

formance by Xerox.” CR.32. Again, defendants’ theory of liability

-9-

is that the State caused defendants to incur liability for violating the

law because the State did not catch defendants at the outset. CR.32

(alleging that the State is liable to defendants in the amount of the

State’s own claims against defendants in this action).

(3) Conversion by HHSC instituting the administrative payment holds.

CR.32–33. Defendants allege that this is conversion on the theory

that the prior authorization they received (based on their own state-

ments) confers unconditional entitlement to payment. CR.32–33.

As remedies on their counterclaims, defendants pray for over a million dol-

lars from the State. CR.31–33.

In addition to those counterclaims, defendants filed a third-party peti-

tion against Xerox. CR.33. On much the same theories as underlie their

counterclaims against the State, defendants alleged that Xerox is liable to

them in damages for: (1) common law fraud, (2) breach of Xerox’s contract

with the State, (3) promissory estoppel, (4) negligent hiring and supervision,

(5) negligence, (6) negligent misrepresentation, and (7) gross negligence and

misapplication of fiduciary property. CR.34–39. Defendants also made a

contribution claim against Xerox for complete satisfaction of defendants’ li-

ability to the State in this enforcement action. CR.40.

In response to the counterclaims, the State filed a general denial along

with a plea to the jurisdiction, a plea in bar, and a motion to dismiss the third-

party claims. CR.43-58. The plea to the jurisdiction rested on the State’s

sovereign immunity, which the State explained is jurisdictional and is not

waived in an enforcement action under the TMFPA. CR.46–50. Defend-

ants’ counterclaims cited only a single case for the alleged waiver of sover-

eign immunity. CR.30 (citing Reata Construction Corp. v. City of Dallas, 197

- 10 -

S.W.3d 371, 377 (Tex. 2006)). The State explained that their reliance is mis-

placed because the governmental entity in the cited case proceeded as a mar-

ket participant and not a sovereign and, moreover, because the scope of the

waiver in that case would not embrace defendants’ counterclaims here.

CR.48–49.

The plea in bar addressed the fact that four of the dental groups assert-

ing counterclaims here had previously raised those same claims against the

State in other actions, only to have those claims dismissed on a plea to the

jurisdiction. CR.52–54 (explaining issue-preclusion principles).

The State’s motion to dismiss the third-party claims against Xerox

rested on the fact that the TMFPA does not allow a defendant who made

misrepresentations to Medicaid to reduce or eliminate its liability by claim-

ing against a third party, which would be contrary to the text and deterrent

scheme of the Act. CR.55 (adopting by reference arguments made at CR.91–

108). The State thus explained that defendants could not file a third-party

claim because Xerox is not a party that “may be liable to [defendants] for all

or part of [the State’s] claim against [them].” Tex. R. Civ. P. 38(a). The

State also suggested that the third-party claims against Xerox could be

barred by sovereign immunity because Xerox was contracted to perform

functions as the State’s Medicaid claims administrator. CR.55–57.

After receiving defendants’ responses and the State’s reply, CR.141–56,

265–75, 323–40, the trial court granted the State’s plea to the jurisdiction

and dismissed the counterclaims with prejudice, CR.384. The court also

- 11 -

granted dismissal of the third-party claims. The trial judge noted that his

ruling is “consistent with my prior rulings interpreting the TMFPA,”

CR.382, in which he held that “the State is entitled to bring this action

against defendants to the exclusion of all other parties.” CR.384.

Defendants filed a timely notice of appeal. CR.385–87.

Summary of the Argument

1. The district court correctly granted the State’s plea to the jurisdic-

tion and dismissed defendants’ counterclaims against the State. This is an

enforcement action under the Texas Medicaid Fraud Prevention Act,

brought by the State in an exercise of its police powers to seek statutory rem-

edies for violations of Medicaid rules and regulations. The Legislature has

not waived the State’s sovereign immunity from suit when it brings such a

civil enforcement action. Nor does the State’s initiation of such a civil en-

forcement action allow third parties to sue the State for liability, any more

than the State’s initiation of a criminal enforcement action would allow that

result. When the State acts as a sovereign in bringing law-enforcement ac-

tions, rather than as a market participant bringing claims seeking damages

in the same way an ordinary litigant can, courts do not hold that the State

steps outside its sphere of sovereign immunity from suit. Defendants

wrongly argue that a case about the government acting as an ordinary litigant

means that the State falls within an exemption from sovereign immunity any

time it brings an action seeking a monetary remedy. No court has reached

- 12 -

such a conclusion, which would erect serious impediments to the State’s

law-enforcement efforts.

The district court’s dismissal of defendants’ counterclaims can be af-

firmed on an alternative basis as well. Even assuming that the State’s initia-

tion of this enforcement action allows the limited class of counterclaims to

which a private damages action could expose the State, the counterclaims

here do not fall within that limited class. Such counterclaims must be suffi-

ciently connected with and properly responsive to the State’s asserted

claim. Here, however, the State asserts a violation of the Texas Medicaid

Fraud Prevention Act by certain false statements. No part of the State’s case

involves whether those false statements went undetected for any amount of

time or whether they should have been detected. Such determinations have

no consequence because the Medicaid system imposes a duty on enrolled

providers to act scrupulously in their own dealings with the State, and they

are penalized for failing in that duty alone.

Even if the Court accepted defendants’ comparison to federal law gov-

erning liability from suit in federal court, it would not help defendants. Un-

der that law too, the counterclaims here would not fall within an exemption

to a government’s sovereign immunity because the counterclaims seek what

is effectively indemnification, asserting that the government is liable to de-

fendants because its conduct has caused their liability for submitting false

claims. Such assertions do not allow counterclaims against the sovereign un-

der either Texas law or federal law. Rather, those assertions amount to an

- 13 -

argument for recognition of the affirmative defense of estoppel. Such an af-

firmative defense is not the same as a counterclaim for damages. And such

an affirmative defense is not available in cases in which it affects governmen-

tal functions, including in a TMFPA action.

Defendants can of course resist the State’s claim in the usual course,

including by putting on evidence to argue that their statements to Texas

Medicaid were not incorrect or that they did not know that their statements

were incorrect. Defendants cannot, however, respond to this law-enforce-

ment action with counterclaims asserting that the State is liable to defend-

ants for causing defendants’ conduct underlying this proceeding.

2. This Court lacks appellate jurisdiction over the district court’s dis-

missal of defendants’ third-party claims against Xerox because that order is

interlocutory and no statute permits an appeal from it. The statutory per-

mission to appeal on the State’s successful plea to the jurisdiction does not

extend to any other ruling simply because it is in the same order.

Argument

I. The District Court Correctly Dismissed Defendants’

Counterclaims Based on Sovereign Immunity.

The trial court correctly dismissed defendants’ counterclaims for lack

of jurisdiction based on the State’s sovereign immunity from suit. See Tex.

Natural Res. Conservation Comm’n v. IT-Davy, 74 S.W.3d 849, 853 (Tex.

2002). There has been no waiver of sovereign immunity, and no common-

law exception to sovereign immunity applies.

- 14 -

A. The Legislature has not waived sovereign immunity.

Sovereign immunity is a common-law doctrine, depriving a court of ju-

risdiction unless the State consents to suit by waiving its immunity. City of

Dallas v. Albert, 354 S.W.3d 368, 373 (Tex. 2011); Tex. Dep’t of Parks &

Wildlife v. Miranda, 133 S.W.3d 217, 224 (Tex. 2004); Tex. Dep’t of Transp.

v. Jones, 8 S.W.3d 636, 638 (Tex. 1999) (per curiam).2 Of course, if the doc-

trine of sovereign immunity does not cover certain claims in the first place,

then those claims will not be barred even though immunity has not been

“waived.”

Defendants argue that the State waived its sovereign immunity by filing

this suit. Appellants’ Br. 8–9; see also CR.30 (defendants’ counterclaims as-

serting waiver of sovereign immunity because the State brought this action).

That is incorrect. A waiver exists only when the State enacts “a statute or

resolution [that] contain[s] a clear and unambiguous expression of the Leg-

islature’s waiver of immunity” to consent to suit. Wichita Falls State Hosp.

v. Taylor, 106 S.W.3d 692, 696 (Tex. 2003); see also Rusk State Hosp. v. Black,

392 S.W.3d 88, 93 (Tex. 2012); Gen. Servs. Comm’n v. Little-Tex. Insulation

Co., 39 S.W.3d 591, 594 (Tex. 2001).

Defendants do not seriously contend that such a waiver exists, and the

authority upon which they principally rely, Reata Construction Corp. v. City

2 For simplicity, this brief uses the term “sovereign immunity” to include the im-

munity of the sovereign State of Texas and its agencies, as well as the immunity of other

governmental entities that is often described as “governmental immunity.” See Wichita

Falls State Hosp. v. Taylor, 106 S.W.3d 692, 694 n.3 (Tex. 2003).

- 15 -

of Dallas, 197 S.W.3d 371 (Tex. 2006), is not a waiver case. Rather, that case

concerns the scope of immunity as an initial matter—the circumstances in

which immunity does not exist at common law. The Supreme Court in Reata

thus distinguished “waiver,” which may occur only by legislative or consti-

tutional enactment, from judicial interpretation of the scope of sovereign

immunity. Id. at 375 (distinguishing “waiver” from “the judiciary’s respon-

sibility to define the boundaries of the common-law doctrine and to deter-

mine under what circumstances sovereign immunity exists in the first in-

stance”); accord Albert, 354 S.W3d at 375 (noting that the Reata court had

jurisdiction to hear the claims against the governmental entity, “not because

the entity effected a change in its immunity by filing a claim, but because the

judiciary has abrogated the entity’s common law immunity from suit as to

certain offsetting claims”). The State adheres to that strict usage of the term

“waiver” here, although it recognizes that some writers distinguish those

two concepts as “waiver by statute” and “waiver by conduct.”

Reata did not change the rule that a waiver of sovereign immunity arises

only from a clear and unambiguous legislative or constitutional provision.

See Wichita Falls State Hosp., 106 S.W.3d at 695; Tex. Gov’t Code § 311.034

(“In order to preserve the legislature’s interest in managing state fiscal mat-

ters through the appropriations process, a statute shall not be construed as

a waiver of sovereign immunity unless the waiver is effected by clear and

unambiguous language”). And defendants do not identify any statutory or

constitutional provision waiving sovereign immunity and allowing their

- 16 -

claims against the State. There is none. The only provision of the TMFPA

that addresses sovereign immunity refers to a specific and limited waiver for

a claim that is not and could not be brought here. In the TMFPA subchapter

authorizing private plaintiffs to bring qui tam actions in the State’s name,

the Legislature provided that the State’s choice to proceed with such a qui

tam action makes the State subject to the pre-existing statute authorizing

attorney’s fees for a frivolous claim by a state agency. Tex. Hum. Res. Code

§ 36.112 (citing chapter 105 of the Texas Civil Practice and Remedies Code).

This case is not a qui tam action, of course, nor do defendants assert a chap-

ter 105 claim.

That single type of claim in a qui tam action is the only claim against the

State contemplated by the TMFPA. No other TMFPA subchapter contem-

plates a claim against the State at all. And the Legislature made clear that

the TMFPA’s qui tam subchapter waives sovereign immunity only as pro-

vided in section 36.112. Id. § 36.116 (“Except as provided by Section 36.112,

this subchapter does not waive sovereign immunity.”). That explicit cabin-

ing of this sole waiver of sovereign immunity confirms the Legislature’s in-

terest in controlling the public fisc through appropriations. See Tex. Gov’t

Code § 311.034 (stating policy behind clear-statement rule). Because no

constitutional provision or legislative enactment expresses consent to suit

against the State when it brings a TMFPA action, there is no waiver of sov-

ereign immunity.

- 17 -

B. No common-law exception to immunity applies.

Defendants assert a broad theory: that the State’s initiation of an en-

forcement action “for monetary relief” means that the State has left the

sphere of its sovereign immunity from suit and must face damages counter-

claims. Appellants’ Br. 9. That theory would have serious consequences,

and no court has gone that far. The State does not leave its sphere of sover-

eign immunity when it acts within its sovereign powers to enforce laws pro-

tecting state programs. Defendants’ reliance on Reata is misplaced because

that case did not involve a government exercising its police power, but ra-

ther a government acting in its private capacity by suing in tort for property

damage to a water pipeline. Moreover, Reata recognized only a limited class

of claims outside the sphere of immunity when a government proceeds in its

private capacity, and that class of claims would not include defendants’

counterclaims here even if this case involved the same type of action as in

Reata, which it does not.

1. Because the State acts within its sovereign powers in

bringing this TMFPA enforcement action, it does not

leave its sphere of sovereign immunity from suit.

a. Sovereign immunity is “an established principle of jurisprudence in

all civilized nations,” Beers v. Arkansas, 61 U.S. (20 How.) 527, 529 (1857),

and it was specifically emphasized by the framers of the United States Con-

stitution, Wichita Falls State Hosp., 106 S.W.3d at 694–95. As Alexander

Hamilton recognized in The Federalist Papers, “It is inherent in the nature

- 18 -

of sovereignty not to be amenable to the suit of an individual without its con-

sent . . . [and], as one of the attributes of sovereignty, [that immunity] is now

enjoyed by the government of every State in the Union.” The Federalist No.

81, at 487 (Alexander Hamilton) (Clinton Rossiter ed. 1961) (dismissing

fears that the new Constitution would abrogate States’ sovereign immun-

ity).

The Texas Supreme Court “ha[s] not absolutely foreclosed the possi-

bility that the judiciary may abrogate immunity by modifying the common

law,” but it has been careful when asked to do so. Wichita Falls State Hosp.,

106 S.W.3d at 696; see Reata, 197 S.W.3d at 375 (“[w]e have generally de-

ferred to the Legislature to waive immunity”). That care is based on two

reinforcing principles. First, “the people’s will [regarding sovereign im-

munity] is expressed in the Constitution and laws of the State,” and courts

should be reluctant to second-guess that popular will on policy grounds.

Wichita Falls State Hosp., 106 S.W.3d at 695. Second, as compared to the

judicial branch, “the Legislature is better suited to balance the conflicting

policy issues” presented by abrogating sovereign immunity. Id.

Applying those principles, the Supreme Court has declined to judicially

abrogate a governmental entity’s sovereign immunity even though the Leg-

islature had waived another governmental entity’s immunity for the same

conduct. Guillory v. Port of Houston Auth., 845 S.W.2d 812, 814 (Tex. 1993).

Likewise, the Supreme Court has declined to judicially abrogate the State’s

sovereign immunity even though a statute provided in general terms that a

- 19 -

patient may sue a mental health facility for damages caused by statutory vi-

olations. Wichita Falls State Hosp., 106 S.W.3d at 696, 698. That deferential

approach is appropriate because it leaves decisions about the wisdom of ex-

posing the State to suit in the hands of policymakers.

b. In Bates v. Republic, 2 Tex. 616 (1847), the Supreme Court recog-

nized that when the government seeks to recoup public funds, counter-

claims against it remain barred by sovereign immunity. There, the State

sued a district court clerk (Bates) for wrongfully failing to turn over money

to which the State was entitled based on the seizure of two ships but which

Bates held in his possession because the money had been paid to him. Id. at

616–17. The clerk was ordered to show cause why he refused to pay over the

money, and his answer was that the State was indebted to him for a greater

amount of money. Id. at 617. Bates argued that, once the State “brings a

party into court, the same rules obtain as between individuals.” Id. at 617.

The Supreme Court rejected that argument and did not allow his claim

against the State. Id. at 618. It explained that Bates’ claimed set-off “is in

the nature of a cross action . . . and therefore cannot be instituted or set up

against the government without its consent.” Id. The Court reasoned that

the “high purposes of public policy” behind “the exemption of the govern-

ment from suits at the instance of private individuals would be thwarted to

a great extent” if courts allow claims against the government “by permitting

the claimant to retain public money.” Id. (emphasis added). The Court might

have ruled narrowly by reasoning that Bates’ claim was topically unrelated

- 20 -

to the State’s claim. But it instead relied on the broader principle that the

State’s suit for funds to which the public is entitled does not place the State

outside its sovereign function and thus its sovereign immunity.

Were the rule otherwise, inconsistencies would result when the State

proceeds in its sovereign capacity by instituting law-enforcement actions.

When the State seeks criminal penalties, defendants have no right to raise

counterclaims, as if to reduce imprisonment or criminal fines by establishing

a competing liability (e.g., an asserted liability for invasion of privacy in a

government search). But when sued in a civil penalty proceeding for the

same conduct, the illegitimate rule argued here would mean that defendants

could seek to reduce their punishment and delay the action by counterclaim-

ing for damages. Bates properly forecloses that result. Courts are rightly re-

luctant to create such an unwise policy, which the people of Texas have not

approved through legislative enactment.

c. Defendants prominently cite two cases, see Appellants’ Br. 8–9, but

neither case supports their theory of sovereign immunity.

1. First, defendants cite Anderson, Clayton & Co. v. State ex rel. Allred,

62 S.W.2d 107, 110 (Tex. Comm’n App. 1933, judgm’t adopted). Appel-

lants’ Br. 8. But Anderson is consistent with Bates; it looks at the nature of

the claim to determine sovereign immunity.

Anderson dealt with a counterclaim seeking relief fundamentally differ-

ent than the relief sought here: an injunction against state officers enforcing

an allegedly invalid law. 62 S.W.2d at 110. The lawsuit in Anderson began

- 21 -

when the Attorney General brought an enforcement action to enjoin the de-

fendants from “operating . . . trucks over the highways of Texas for trans-

porting property for compensation or hire without obtaining permits from

the State Railroad Commission.” Id. at 107. Defendant Anderson, Clayton

& Co. argued that the permitting law was invalid, and it sought by counter-

claim an order restraining certain members of the Railroad Commission

from “further arresting, prosecuting, and threatening to arrest” their driv-

ers for violation of that law. Id. Hence, the counterclaim was to enjoin the

enforcement of an allegedly invalid law. Id.

The Commission of Appeals explained that sovereign immunity does

not apply to a claim of that nature: “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.” Id. at 110; see generally City

of El Paso v. Heinrich, 284 S.W.3d 366, 368–69 (Tex. 2009) (“[W]hile gov-

ernmental immunity generally bars suits for retrospective monetary relief,

it does not preclude prospective injunctive remedies in official-capacity

suits against government actors who violate statutory or constitutional pro-

visions.”); Ex parte Young, 209 U.S. 123, 154 (1908) (allowing federal courts

to award prospective relief against state officials for violations of federal

law).

In other words, the state officers never had sovereign immunity from

such a claim, regardless of how it was asserted. The question before the

Commission on Appeals was thus about the venue in which the claim for

- 22 -

injunctive relief could be brought. The question certified to the Commission

asked: “Did the District Court of Nueces County acquire jurisdiction over the

defendants named in the cross bill [i.e., over the state officials]?” 62 S.W.2d

at 109 (emphasis added). If jurisdiction over a specific state officer as op-

posed to the State is conceived of as a further hurdle imposed by sovereign

immunity, then Anderson would stand for the proposition that this aspect of

immunity is “waived” when the State brings an enforcement suit and then

“answer[s] [a counterclaim seeking to enjoin officers] in a court of compe-

tent jurisdiction.” Id. at 110. That appears to be how the Supreme Court

views Anderson. See Reata, 197 S.W.3d at 377. But the important point is that

this rule applies to create jurisdiction in a given court where there is some

basis for finding that the claim can be brought against the State. In Anderson,

that basis was the nature of the claim: prospective relief to enjoin alleged

ultra vires actions. That is not the nature of the counterclaims here. And no

other case makes defendants’ claims exempt from sovereign immunity.

2. Defendants argue that Reata supplies that exemption—that it abro-

gates the State’s sovereign immunity when and to the extent that the State

files any action that seeks any “monetary relief.” Appellants’ Br. 9. That is

incorrect. The government in Reata decided “to leave its sphere of immun-

ity” by filing a suit that any ordinary litigant could file: a “suit for damages”

resulting from negligence during construction work. 197 S.W.3d at 377.

In contrast, when the State exercises its sovereign powers to bring a law

enforcement action, it is not seeking “damages” and it retains its sovereign

- 23 -

immunity from claims against it. E.g., Bates, 2 Tex. at 618 (holding the State

immune from counterclaims where it sued, not for “damages,” but to col-

lect public money wrongfully withheld); see Gabelli v. SEC, 133 S. Ct. 1216,

1223 (2013) (“In a civil penalty action, the Government is not only a differ-

ent kind of plaintiff, it seeks a different kind of relief.”); SEC v. City of Mi-

ami, 581 F. App’x 757, 760 (11th Cir. 2014) (rejecting the argument that a

suit for “any type of monetary award” is a suit for “damages” entitling a

state official to qualified immunity: “The SEC does not seek damages from

Boudreaux in a private suit; rather this is a government enforcement action

that seeks civil monetary penalties against the defendants”); State v. Emer-

itus Corp., No. 13-13-00529-CV, 2015 WL 1456436, at *10–11 (Tex. App.—

Corpus Christi Mar. 26, 2015, pet. filed) (holding that the State’s enforce-

ment action under the Deceptive Trade Practices Act does not seek “dam-

ages” within the meaning of a tort-reform statute). Because this suit is of

the latter type, it is not within the exception recognized in Reata.

The facts of Reata are illustrative of the sort of claim to which its rea-

soning applies. There, the City had contracted with a construction company

to install fiber optic cable in Dallas. 197 S.W.3d at 373. The contractor hired

a subcontractor, who inadvertently drilled into a water main, which in turn

flooded a building. Id. The building’s owner sued the contractor and sub-

contractor, seeking damages for negligence. Id. The subcontractor filed a

third-party claim against the City, alleging it was negligent in identifying the

water main. Id. The City intervened, asserted negligence claims against the

- 24 -

contractor, and answered the subcontractor’s third-party claim while seek-

ing its dismissal based on sovereign immunity. Id. The Supreme Court held

that by intervening in the case and asserting a claim for monetary damages

related to the property, the City left its sphere of immunity and was subject

to Reata’s claims that are “germane to, connected with, and properly de-

fensive to the City’s claims, to the extent Reata’s claims offset those as-

serted by the City.” Id.

Unlike the case here, Reata did not involve a government exercising its

sovereign powers to enforce a public-welfare statute. Rather, the City was

acting as any ordinary litigant could, in its private capacity, seeking to re-

cover damages for a tort. Id. at 373–77. That featured in the Court’s reason-

ing, which rested on the idea that, once the government acts as a normal

litigant by “fil[ing] suit for damages,” “it must participate in the litigation

process as an ordinary litigant.” Reata, 197 S.W.3d at 377.

The Court’s reasoning is based on that idea of parity; hence, its reason-

ing does not apply when there is no parity because the State acts in its sov-

ereign capacity rather than its private capacity. See Little-Tex, 39 S.W.3d at

599 (making similar distinction in the contract context: “Texas courts have

long recognized that the State wears two hats: the State as a party to the

contract and the State as sovereign.”). The Court in Reata did not have be-

fore it any law-enforcement action, in which the State proceeds under its

police powers. Hence, the Court’s opinion embraces only the sort of “mon-

etary recovery” lawsuit before it—one in which “the governmental entity

- 25 -

interjects itself into or chooses to engage in litigation to assert affirmative

claims for monetary damages.” Reata, 197 S.W.3d at 375 (emphasis added).

Nor would the Court’s reasoning regarding those private actions extend

to sovereign law-enforcement actions. Reata relied on its parity reasoning,

notwithstanding the Court’s strong deference to the Legislature in defining

the extent of sovereign immunity, because the Court perceived no room for

reasonable policy debate about immunity from the limited class of counter-

claims at issue there: those integral with, properly defensive to, and not ex-

ceeding offset of, the government’s damages claim. Id. at 376–77. The Court

explained that it could not see any issue with “hampering of its governmen-

tal functions,” id. at 376-77, and that the State’s inability to recover on “af-

firmative claims for monetary damages” (due to an offset otherwise not pay-

able) should not affect “the fiscal planning of the governmental entity,” id.

at 375.

But the issues on which the Court perceived no significant debate in the

context of a private tort lawsuit present greatly heightened concern in the

context of a sovereign’s law-enforcement suits. This case is squarely within

mold of those in which courts defer to the Legislature to make the policy-

based balancing underlying sovereign immunity’s scope. See, e.g., Wichita

Falls State Hosp., 106 S.W.3d at 695 (“Courts in other jurisdictions have oc-

casionally abrogated sovereign immunity by judicial decree. We have held,

however, that the Legislature is better suited to balance the conflicting pol-

icy issues associated with waiving immunity.”) (footnote omitted); City of

- 26 -

Galveston v. State, 217 S.W.3d 466, 473 (Tex. 2007) (“Judges cannot simply

abrogate immunity every time they believe the Legislature’s failure to do so

‘defies logic.’”).

The heightened concerns arise because law-enforcement actions under

a government’s police power seek to protect the public welfare, meaning

that impediments to suit can delay or derail vindication of public safety and

vital state programs. See State v. City of Greenville, 726 S.W.2d 162, 169

(Tex. App.—Dallas 1987, writ ref’d n.r.e.) (observing that a public-welfare

statute is one intended to “safeguard the public health, welfare, and physical

property of the people” (citation omitted)). Expanding the Reata rule to that

context would empower wrongdoers who target state programs by giving

them a tool to impede the State’s law-enforcement action through cross-

litigation that should instead be resolved (or barred) through another statute

(such as the Tort Claims Act).

Indeed, the Supreme Court has recognized the mechanism underlying

that concern, noting that a conduct-based exception to immunity would

“force the State to expend its resources to litigate the waiver-by-conduct

issue before enjoying sovereign immunity’s protections—and this would

defeat many of the doctrine’s underlying policies.” IT-Davy, 74 S.W.3d at

857. That defeat could affect the public interest in compliance with a host of

important state programs, from compliance with child-support laws, to res-

titution recovery in Deceptive Trade Practices Act actions, to deterrence of

Medicaid fraud. When considering actions in the entity’s sovereign capacity

- 27 -

to enforce obligations under state programs, courts understand that the Leg-

islature is better situated to perform the policy-based balancing of interests.

The Legislature’s knowledge about fiscal appropriations and the state pro-

grams gives it the best vantage point to balance the interest in orderly en-

forcement proceedings with the effects of enlisting those judicial actions

themselves, as opposed to other processes, to address interests and claims

asserted by defendants.

Moreover, offset claims obstructing a sovereign’s law-enforcement ac-

tions could indeed affect “the fiscal planning of the governmental entity.”

Cf. Reata, 197 S.W.3d at 375. Whereas a private claim for damages merely

restores the governmental entity to the position in which it would have been

but for a tort, governmental enforcement actions arise in a more complicated

environment. They serve a deterrent function and thus help ensure that fu-

ture violations do not occur. Second, the money they recover is often pur-

suant to a systematic effort of fraud control and collection of money belong-

ing in the public fisc; they are not simply one-off actions resulting in unex-

pected recoveries. By the same token, when a governmental entity does not

budget for any liability on possible claims against it but then has those claims

affect an ongoing stream of enforcement actions that it has budgeted for,

that liability on the counterclaims very much affects governmental budget-

ing and hampers its operations. The Court need not balance those policy

concerns them here. The point is that those concerns were not present or

noted in the private-action context of Reata but present significant concerns

- 28 -

in the sovereign-action context here. Those concerns confirm that why ab-

rogation of sovereign immunity is left to the traditional avenue of legislative

action.

Reata does not negate any of those principles. Indeed, the Court noted

that “the Legislature is better suited to address the conflicting policy issues

involved” in the application of sovereign immunity. 197 S.W.3d at 375. The

Court recognized the limited exception to sovereign immunity only because

it could see no conflicting policy views in the context before it. See id. at 375–

77. Those conflicting interests exist in the context here, as explained.

And there is no need to guess about the Legislature’s policy views re-

garding sovereign immunity in a TMFPA action. Whereas Reata involved a

common-law tort (negligence), the TMFPA speaks to sovereign immunity

and makes clear that the only exclusion the Legislature has determined is

appropriate in a TMFPA action is for a claim against the State for certain

litigation expenses if the State proceeds with a frivolous qui tam action initi-

ated by a private plaintiff. See Tex. Hum. Res. Code §§ 36.112, 36.116 (ref-

erencing state liability under chapter 105 of the Civil Practice and Remedies

Code).

3. Just as Anderson and Reata do not support defendants’ claimed ex-

emption from sovereign immunity in this enforcement action, neither do the

rest of the cases on which they rely.

Defendants first cite State v. Zanco’s Heirs, 18 Tex. Civ. App. 127, 129,

44 S.W. 527, 529 (1898, writ ref’d), for the principle that “[w]hen the state

- 29 -

of Texas enters its courts as a litigant, it must be held subject to the same

rules that govern other litigants.” Appellants’ Br. 8. But the principle that

the State “‘must have its rights determined by the same principles applica-

ble to other litigants’” is an “unremarkable proposition” that “has nothing

to do with immunity from suit.” Fed. Sign v. Tex. S. Univ., 951 S.W.2d 401,

406–07 (Tex. 1997) (“To state what happens if the State consents to be sued

says nothing about whether the State consents to be sued.”).

And the cases that apply the Reata exception all comport with the anal-

ysis above: they allow a counterclaim when the governmental entity is as-

serting claims in its private capacity but not when it exercises its police pow-

ers to bring an enforcement action. Compare Albert, 354 S.W.3d at 370–71,

374 (applying Reata to allow claims against a governmental entity that as-

serted breach of contract), City of New Braunfels v. Carowest Land, Ltd., 432

S.W.3d 501, 510–11, 527 (Tex. App—Austin 2014, no pet.) (same), City of

San Antonio v. KGME, Inc., 340 S.W.3d 870, 873, 877–78 (Tex. App.—San

Antonio 2011, no pet.) (same), Sweeny Cmty. Hosp. v. Mendez, 226 S.W.3d

584, 586, 594 (Tex. App.—Houston [1st Dist.] 2007, no pet.) (same), Harris

Cnty. v. Luna-Prudencio, 294 S.W.3d 690, 698 (Tex. App.—Houston [1st

Dist.] 2009, no pet.) (applying Reata exception to allow claims against a gov-

ernmental entity that asserted a tort claim), and City of Dallas v. Redbird Dev.

Corp., 143 S.W.3d 375, 378, 383 (Tex. App.—Dallas 2004, no pet.) (apply-

ing Reata exception to allow claims against a governmental entity that as-

serted breach of lease), with Waller County v. Simmons, No. 01-07-00180-

- 30 -

CV, 2007 WL 3038420, at *3 (Tex. App.—Houston [1st Dist.] Oct. 18,

2007, no pet.) (mem. op.) (explaining that although the governmental entity

was seeking monetary relief, the Reata exception did not apply because “a

suit to recover delinquent taxes is, by its very nature, not a claim for mone-

tary damages, but rather a foreclosure of a lien”). In short, those cases do

not allow counterclaims when the government is proceeding in its sovereign

capacity.

And that is the nature of a TMFPA action: it is not a private claim for

“damages” but rather a law-enforcement action under a public-welfare stat-

ute that serves to deter and punish violations of laws and regulations gov-

erning the Texas Medicaid program. An action under the TMFPA may be

brought only by the State or a qui tam relator authorized to proceed in the

State’s shoes (subject to the State’s control). See supra p. 68 & n.1. The fact

that a private plaintiff must step into the State’s shoes to sue (through the

qui tam mechanism) signals that this is not a case in which the State proceeds

as an ordinary litigant. The TMFPA is designed precisely to provide the

State with new ways to deter and punish violations of the Medicaid program

requirements.

Moreover, the statutory remedies under the TMFPA are not “dam-

ages” within the meaning of Reata. The TMFPA makes each person who

commits an unlawful act liable to the State for three times the amount of any

benefit or payment provided by Medicaid as a direct or indirect result of the

unlawful act. Tex. Hum. Res. Code § 36.052(a) (“Civil Remedies”). That

- 31 -

amount does not turn on actual loss to the State; rather, the statute uses the

amount of any payment or benefit linked directly or indirectly to the unlaw-

ful act as a measure of the severity of the violation for purposes of tailoring

the assessment owed for that violation. See CR.96 (explaining that the

TMFPA reflects criminal-law principles); cf., e.g., U.S. Sentencing Guide-

lines § 2B4.1 (adjusting the recommended punishment level based on the

amount of the improper benefit “to be conferred” in a kickback scheme,

whether or not any actual loss was caused). Hence, the TMFPA rightly does

not refer to its statutory remedies as “damages.” Tex. Hum. Res. Code

§ 36.052(a); see, e.g., Ellet Bros., Inc. v. U.S. Fidelity & Guar. Co., 275 F.3d

384, 388 (4th Cir. 2001) (distinguishing “damages” from restitution of pro-

ceeds and fines and assessments payable to the government).

The TMFPA further imposes a civil penalty of between $5,500 and

$15,000 for each statutory violation. Tex. Hum. Res. Code § 36.052(a).

That is an additional penalty, on top of the assessment of three times the

amount of any payment or benefit linked to the unlawful act. Id.

In short, defendants’ simplistic labeling of this enforcement action as “a

simple tort” suit, Appellants’ Br. 24, ignores critical defining characteristics

of the TMFPA. That argument fails to grapple with the important distinc-

tions of such an enforcement action from the private-capacity “damages”

suit addressed in Reata. The Supreme Court in Reata did not address sover-

eign law-enforcement actions, and Reata in fact notes the special legislative

- 32 -

role in balancing complex policy interests that inform the application of sov-

ereign immunity. The State’s initiation of a TMFPA law-enforcement ac-

tion does not expose the State to counterclaims to which it is otherwise im-

mune, any more than the State’s initiation of a judicial proceeding seeking

fines as criminal punishment brings the State outside of its sphere of sover-

eign immunity from claims against it.

2. Additionally, defendants’ counterclaims fall outside

the class of counterclaims covered by the Reata exclu-

sion from sovereign immunity.

Even if this TMFPA enforcement action did generally allow some coun-

terclaims within the class described in Reata (and it does not), defendants’

counterclaims would not fall within that class. The district court’s dismissal

of their counterclaims may be affirmed for that reason as well.

Reata allowed only counterclaims if they are “germane to, connected

with[,] and properly defensive to” the asserted claims. 197 S.W.3d at 377.

For example, Reata explained that a defendant in a tax suit could not coun-

terclaim for an offset resulting from its prior overpayment of taxes: that

claim “was not connected with the State’s claim as the two involved taxes

for different months and years.” Id. at 376. As that example illustrates, “ger-

mane” and “connected” counterclaims require at a minimum that the op-

erative facts are the same for the claim and counterclaim. 3 The counterclaim

3 Indeed, were that connection not so tight as to require the same transaction in dis-

pute, this exemption to sovereign immunity would present concerns of equity and lim-

ited funds by giving some citizens priority to receive credit for their claims against the

public fisc; those sued by the State would strangely possess a comparative advantage over

- 33 -

cannot assert rights arising from conduct different from the conduct that the

plaintiff asserts creates the defendant’s liability. Similarly, a “properly de-

fensive” counterclaim must be one that “would at least inferentially rebut”

the governmental entity’s claim. Albert, 354 S.W.3d at 375 (where a govern-

ment alleged that officers were overpaid, holding a counterclaim “properly

defensive” where the officers alleged they were underpaid).

Defendants’ counterclaims do not meet those criteria. This action al-

leges that defendants knowingly made misleading statements and omissions

in submitting Medicaid requests. CR.120–28. That is a violation of the

TMFPA. The statute does not require the State to prove anything about

how the fraud could or could not have been detected. That makes sense

given that the size of the Medicaid program and the role of providers within

it has led to the State imposing a duty on enrolled providers directly to learn

and honestly abide by Medicaid rules and regulations.

In contrast, defendants want to turn this case into a dispute about fraud

detection, rather than whether they knowingly made false statements. De-

fendants thus seek to inject collateral issues into this suit by asserting coun-

terclaims that revolve around: (1) the approval of defendants’ requests for

other citizens who must have their liabilities satisfied through the normal presentment

process. Hence, to reflect that reality and respect the interests of third parties, bank-

ruptcy practice also draws narrowly the term “transaction” for purposes of equitable

recoupment. E.g., In re Malinowski, 156 F.3d 131, 133 (2d Cir. 1998); In re Univ. Med. Ctr.,

973 F.2d 1076, 1081 (3d Cir. 1992) (observing that “the open-ended standard, endorsed

in the context of discerning compulsory counterclaims, is inadequate for determining

whether two claims arise from the same transaction for the purposes of equitable recoup-

ment in bankruptcy”); Lee v. Schweiker, 739 F.2d 870, 875 (3d Cir. 1984) (holding that

the counterclaim must be so closely related that it “is essentially a defense”).

- 34 -

prior authorization and defendants’ reliance on the approval of their re-

quests, (2) an allegedly improper review process implemented by the State’s

contractor and the State’s failure to detect the impropriety for some time,

and (3) the Medicaid program withholding some funds pursuant to a pay-

ment hold. Appellants’ Br. 9–11.

None of those issues are “connected with” or “properly defensive to”

the State’s TMFPA case. Rather, they are like the counterclaims in Reata’s

tax-suit example; they may involve the same government and the same reg-

ulatory scheme, but they involve different aspects of the defendant’s inter-

action with that scheme than have been put into dispute by the plaintiff’s

claims. Likewise, defendants’ counterclaims here do not pass Albert’s test

of “at least inferentially rebut[ting]” the State’s claims, 354 S.W.3d at 375,

in the same way that a counterclaim for underpayment inferentially rebuts a

claim for overpayment.

Put simply, it is not an element of the State’s case against the dental

groups whether their false statements were detected by the State, should

have resulted in rejection of their requests, or led to any sort of payment

hold. The State need only prove that defendants knowingly made prohibited

statements to the Medicaid program. See CR.120–28. Defendants’ counter-

claims are not germane to, connected with, and properly defensive to the

claim that they did so. Accordingly, even assuming Reata’s conduct-based

exclusion from sovereign immunity applies here, the filing of this action

- 35 -

would not be deemed to invite judicial resolution of the counterclaims as

properly defensive and connected to the sovereign’s suit.

Defendants gain no ground by citing City of New Braunfels v. Carowest.

Appellants’ Br. 11. There, the City was sued for breach of contract and then

counterclaimed for breach. 432 S.W.3d at 525. Carowest’s breach claims

against the City were held within the class allowed by Reata because those

claims “implicate[d] the same core operative facts underlying the City’s

monetary claim—namely, whether the City and Carowest complied with

their respective obligations.” Id. at 526. Here, defendants wish to bring into

this case the issue of Xerox’s own separate actions in approving prior-au-

thorization requests and representing to the State the nature of its claims-

administration work. But that ventures far outside the “core operative

facts” underlying the State’s claim. Xerox’s own misdeeds and misrepre-

sentations to the State do not excuse defendants’ knowing false statements

to the State.

Defendants cite no case in which such a claim was deemed to pose the

necessary close connection. Cf. Albert, 354 S.W.3d at 375 (explaining that

the officers’ claims were germane and connected to the City’s because

“they were both based on the question of pay for the Officers’ employ-

ment”). Nor are those counterclaims “properly defensive” given that they

could not “rebut an essential element” of the State’s case. Cf. id.; Dillard

v. Tex. Elec. Co-op, 157 S.W.3d 429, 430 (Tex. 2005). Even if defendants’

counterclaims could show that they believed the services they described on

- 36 -

the requests for prior authorization were covered by Medicaid, see Appel-

lants’ Br. 14, that is not defensive to the State’s claims. The point of the

State’s claims is that the providers made false statements in describing those

services and the medical necessity for them. And a TMFPA violation does

not require anything more, such as a specific intent to defraud Medicaid.

Tex. Hum. Res. Code § 36.0011(b).

Of course, if defendants wish to argue that they did not make misstate-

ments (see Appellants’ Br. 15), they do not need counterclaims to negate an

element of the State’s case with their own proof. Likewise, if defendants

wish to argue that they were not even consciously indifferent to the truth of

the statements they made, see Tex. Hum. Res. Code § 36.0011(a), that op-

tion is available to them by way of simply defending against the State’s

charges. Defendants can always introduce proof they believe will defeat the

State’s allegations and thus negate liability. Defendants’ counterclaims,

however, are designed to assert some liability on behalf of the State based on

its conduct in reviewing defendants’ statements, which is not any part of the

alleged violation in this statutory proceeding.

3. Even were it relevant, federal precedent would also

bar defendants’ counterclaims against the State in a

False Claims Act suit.

The sovereign-immunity analysis here proceeds under Texas law about

the State’s immunity from suit in its own courts, which here involves the

nature of the claims brought under the Texas Medicaid Fraud Prevention

Act. Nonetheless, defendants suggest a comparison to federal law about the

- 37 -

State’s immunity from claims in federal court when bringing a False Claims

Act suit. Appellants’ Br. 17–23. Even assuming the relevance of federal law,

it would not support defendants’ ability to sue the State here.

A False Claims Act defendant’s claims for indemnification or contribu-

tion are not permitted, while claims for damages independent of False

Claims Act liability may be permitted so long as they “do not have the effect

of providing for indemnification or contribution.” United States v. Campbell,

No. 08-cv-1951, 2011 WL 43013, at *11 (D.N.J. Jan. 4, 2011) (quotation

marks omitted). For example, a qui tam defendant can assert misappropria-

tion of trade secrets against an employee who becomes a qui tam plaintiff,

provided the claim does not depend on the defendant’s False Claims Act

liability. See United States ex rel. Madden v. Gen. Dynamics Corp., 4 F.3d 827,

829, 831 (9th Cir. 1993). The court in Campbell explained that this classifi-

cation requires looking past whether claims are “worded to include allega-

tions of fraud and misrepresentation,” but instead to look at the claims’ sub-

stance and “basis for damages.” 2011 WL 43013, at *11–12.

Defendants’ argument, however, is simply that someone could imagine

writing a jury question asking if the State defrauded defendants or breached

duties to them. Appellants’ Br. 22-23. But any counterclaim could be stated

on a jury form. The question is not whether a claim could be stated using the

word “fraud” or “breach”—that simply looks at the form of the pleading,

- 38 -

contrary to Campbell. Rather, what matters is the basis for the damages as-

serted in the counterclaim: whether those damages are independent of the

defendant’s liability False Claims Act.

The counterclaims here are not independent. If defendants are not liable

for making false statements to Texas Medicaid, then this enforcement ac-

tion does not deprive them of money and thus “injure” them. As in Camp-

bell, the counterclaims here in effect seek indemnification for defendants’

liability and are thus be impermissible. 2011 WL 43013, at *12.

C. The counterclaims are in the nature of an estoppel af-

firmative defense that does not apply here.

Defendants’ counterclaims articulate concepts that sound in estoppel—

specifically, that the State cannot prevail because the State allegedly con-

spired with Xerox or violated its contract with Xerox, as to encourage the

dental groups to continue submitting the misleading statements for which

they are now sued. Even if defendants had answered with an affirmative de-

fense of estoppel as opposed to bringing counterclaims, that estoppel de-

fense would not apply here, as they argue. Cf. Appellants’ Br. 25–26.

For example, in defendants’ cited case City of White Settlement v. Super

Wash, Inc., 198 S.W.3d 770, 773 (Tex. 2006), the Supreme Court restated

its longstanding rule that cities generally may not be estopped from exercis-

ing government functions, although a city may be estopped when acting in a

proprietary capacity. The Court explained that estoppel is available against

a city only “where justice requires . . . application [of the doctrine] and there

- 39 -

is no interference with the exercise of governmental functions.” Id. at 774.

The Court cautioned that estoppel is “available ‘only in exceptional cases

where the circumstances clearly demand its application to prevent manifest

injustice.’” Id. (citing City of Hutchins v. Prasifka, 450 S.W.2d 829, 836

(Tex. 1970)); accord Heckler, 467 U.S. at 60 (“When the Government is un-

able to enforce the law . . . the interest of the citizenry as a whole in obedi-

ence to the rule of law is undermined. It is for this reason that it is well set-

tled that the Government may not be estopped on the same terms as any

other litigant.”).

The Supreme Court then applied both elements to the facts at hand,

finding that the city had not benefitted from its failure to enforce an ordi-

nance previously and that applying estoppel would interfere with the City’s

enforcement of the ordinance and thus impede a governmental function. Su-

per Wash, 198 S.W.3d at 776–78. Hence, neither element justified the rare

recourse to estoppel against the government. See also Tex. Dep’t of Transp.

v. A.P.I. Pipe & Supply, LLC, 397 S.W.3d 162, 170–71 (Tex. 2013) (declining

to apply the doctrine, and noting that “[t]his case stands in stark contrast to

two cases where we have held the government estopped—cases where the

government stalled private citizens from providing proper notice of claims

until after the notice deadline passed”).

That analysis confirms that defendants’ arguments about allegedly be-

ing induced into continuing with their fraud are arguments for an estoppel

- 40 -

defense. They are not arguments for a counterclaim seeking to hold the

State liable for damages. Those are different concepts.

Of course, even if defendants were to plead it as an affirmative defense,

estoppel would not be available as an affirmative defense in this TMFPA

enforcement action, for the reasons just explained. There can be no coher-

ent suggestion that the State deliberately induced the dental groups to sub-

mit false requests for prior authorization and false reimbursement claims to

Medicaid, much less that the State somehow benefitted from the dental

groups’ unlawful conduct doing so or Xerox’s approval of the prior-author-

ization requests. And recognizing an estoppel defense when the State’s

claims administrator fails in its independent duty to timely catch and reject

fraud would greatly interfere with the State’s governmental function of en-

force the TMFPA. Such a result would essentially reshape the State’s multi-

front approach to Medicaid fraud control, in which the State seeks to detect

fraud but in which providers themselves have a duty to know and abide by

Medicaid rules and regulations as a condition of participation and payment.

See Heckler, 467 U.S. at 64 (“As a participant in the Medicare program, re-

spondent had a duty to familiarize itself with the legal requirements for cost

reimbursement.”).

Imagine a store clerk who fails in his obligation to keep watch over a

store, instead listening to headphones and playing video games. A patron

may seize the moment to take items without paying. If the shoplifter is being

disciplined, it is no excuse that he waved at the inattentive clerk, and the

- 41 -

clerk did not see any wrongdoing and waved him out of the store. The store

owner gains nothing by his employee’s failure to perform his monitoring

function, and there can be no plausible basis for finding estoppel if the owner

sues the shoplifter. The employee’s own dereliction of duty is a second

problem, not an excuse for the shoplifter’s wrongdoing.

Defendants have cited no case in which a Texas court applied the doc-

trine of equitable estoppel against the State in an action in which the State

proceeds in its sovereign capacity to enforce a public-welfare statute, such

as the TMFPA. Cf., e.g., In re S.A.P., 156 S.W.3d 574, 577 (Tex. 2005) (per

curiam) (equitable estoppel generally does not apply to a sovereign); State

v. Durham, 860 S.W.2d 63, 67 (Tex. 1993) (same). Instead, the cases cited

by defendants all involve a finding that (1) manifest injustice demanded ap-

plication of the doctrine in light of misconduct by city officials and (2) no

government function would be impaired. See Appellants’ Br. 26–27.

In short, the affirmative defense of estoppel is available in appropriate

cases even if the defendant is barred by sovereign immunity from asserting

a claim that the government is liable to him for the alleged wrongful conduct.

Such a defense would be unavailable on the facts here, but that is no excuse

to attempt to slip in such a defense through the mechanism of a counter-

claim. The State does not invite judicial resolution of such claims against it

when bringing a law-enforcement action in its sovereign capacity and, even

if it did, defendants’ counterclaims would not be within the limited class of

- 42 -

germane, connected, and properly defensive counterclaims that could be as-

serted in this action by way of offset.

II. This Court Lacks Jurisdiction over Defendants’ Inter-

locutory Appeal from the Dismissal of Their Third-Party

Claims Against Xerox.

The order from which defendants appeal dismisses their counterclaims

on the State’s plea to the jurisdiction and dismisses their third-party claims

on the state’s motion to dismiss. CR.384. That is an interlocutory order be-

cause it does not dispose of all pending claims and parties. As an interlocu-

tory order, it is generally not appealable absent statutory authorization. A

statute does authorize the appeal from an order granting the State’s plea to

the jurisdiction, Tex. Civ. Prac. & Rem. Code § 51.014(a)(8), but no statute

authorizes the appeal from the order dismissing the third-party claims

against Xerox on non-jurisdictional grounds. Accordingly, this Court lacks

appellate jurisdiction to hear that aspect of the appeal.

A. When an order does not “indicate[] that it is a final judgment, and

[does] not dispose of all pending claims and parties,” it is not “a final and

appealable judgment.” See Lehmann v. Har-Con Corp., 39 S.W.3d 191, 206

(Tex. 2001) (emphasis added); see also Jack B. Anglin Co. v. Tipps, 842

S.W.2d 266, 272 (Tex. 1992) (“A final judgment is one which disposes of

all legal issues between all parties.” (emphasis added)). Generally, only final

orders, not interlocutory orders, are appealable. Bally Total Fitness Corp. v.

- 43 -

Jackson, 53 S.W.3d 352, 352 (Tex. 2001) (“A party may not appeal an inter-

locutory order unless authorized by statute.”); accord Henderson v. Shell Oil

Co., 182 S.W.2d 994, 995 (Tex. 1944).

If a statute does not specifically provide an exception to that general

rule, then “[a]n appellate court lacks jurisdiction to review an interlocutory

order.” Qwest Commc’ns Corp. v. AT&T Corp., 24 S.W.3d 334, 336 (Tex.

2000) (per curiam); see also Stary v. DeBord, 967 S.W.2d 352, 352–53 (Tex.

1998) (“Appellate courts have jurisdiction to consider immediate appeals of

interlocutory orders only if a statute explicitly provides appellate jurisdic-

tion.”) (per curiam). Even if portions of an interlocutory order are made

appealable by statute, those appealable portions do not give the appellate

court jurisdiction over the entire order. See Dickson v. Dickson, 516 S.W.2d

28, 30 (Tex. Civ. App.—Austin 1974, no writ) (“Further, the fact that an

interlocutory order contains elements which are, under the law, appealable,

does not authorize review of elements of the order which are not made spe-

cifically appealable.”). In those situations, “the proper course is to dismiss

that portion which is non-appealable, and to rule on the portion from which

an appeal may be taken.” Bobbitt v. Cantu, 992 S.W.2d 709, 712 (Tex.

App.—Austin 1999, no pet.).

B. Defendants’ appeal of the order dismissing their third-party claims

against Xerox is an impermissible interlocutory appeal that must be dis-

missed. That order is interlocutory because it only disposed of only some

- 44 -

claims and one party. See CR.383–84. The State and defendants remain par-

ties to the action and the State’s claims against defendants remain pending,

meaning that the order is not a final judgment. See Lehmann, 39 S.W.3d at

206; Jack B. Anglin Co., 842 S.W.2d at 272.

Accordingly, that interlocutory order is not appealable unless permitted

by statute, and no statute exists. Defendants’ statement of jurisdiction (Ap-

pellants’ Br. xi) cites Civil Practice and Remedies Code § 51.014(a)(8). But

that provision only confers authority to appeal only from the order granting

the State’s plea to the jurisdiction, not the State’s motion to dismiss the

third-party claims as barred on non-jurisdictional grounds. Id. (authorizing

interlocutory appeal from an order that “grants or denies a plea to the juris-

diction by a governmental unit”). And this Court has jurisdiction only over

the aspects of the district court’s order that are explicitly made appealable

by statute; it does not gain jurisdiction over the entirety of an order with one

appealable component. Dickson, 516 S.W.2d at 30 (“Further, the fact that

an interlocutory order contains elements which are, under the law, appeala-

ble, does not authorize review of elements of the order which are not made

specifically appealable.”); Bobbitt, 992 S.W.2d at 711–13 (where, “in the

same order,” the district court partially granted summary judgment and

temporarily enjoined certain conduct, dismissing appeal as to the summary

judgment because “the district court’s grant of partial summary judgment

- 45 -

is non-appealable, although it comes along with the interlocutory order of

temporary injunction” (quotation marks omitted)). 4

Therefore, the Court should dismiss for lack of appellate jurisdiction de-

fendants’ appeal of the dismissal of their third-party claims against Xerox.

Dickson, 516 S.W.2d at 30 (“Consequently, we dismiss this portion of the

appeal as not being properly before this Court.”). The Court has appellate

jurisdiction only to rule on defendants’ appeal from the order granting the

State’s plea. Id.

Prayer

The Court should affirm the portion of the district court’s order grant-

ing the plea to the jurisdiction and thus dismissing the counterclaims against

the State. The Court should dismiss the remainder of the appeal for lack of

appellate jurisdiction.

4 Even if the dismissal of defendants’ third-party claims could be before this Court

for review on the merits, the claims were properly stricken under Texas Rule of Civil

Procedure 38(a) because the TMFPA does not authorize a defendant to bring a third-

party claim; that fact also makes the third-party claims baseless under Texas Rule of Civil

Procedure 91a. See CR.70–74, 92–108; Tex. Hum. Res. Code § 36.052(a) (making civil

remedies recoverable from any violator, and defining a violator’s liability to include the

amount of any payment to a third party) cf. Wyeth-Ayerst Labs. Co. v. Medrano, 28 S.W.3d

87, 94 (Tex. App.—Texarkana 2000, no pet.) (holding that, because a DTPA action is

specified by statute, only statutory defenses and not common-law defenses apply); Chal-

lenger Gaming Solutions, Inc. v. Earp, 402 S.W.3d 290, 296-99 (Tex. App.—Dallas 2013,

no pet.) (holding that the fault-allocation scheme in chapter 33 of the Civil Practice and

Remedies Code does not apply to the Uniform Fraudulent Transfers Act because it con-

flicts with that Act’s liability scheme).

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Respectfully submitted.

KEN PAXTON SCOTT A. KELLER

Attorney General of Texas Solicitor General

CHARLES E. ROY /s/ J. Campbell Barker

First Assistant Attorney General J. CAMPBELL BARKER

Deputy Solicitor General

RAYMOND C. WINTER State Bar No. 24049125

Chief, Civil Medicaid Fraud cam.barker@texasattorneygeneral.gov

REYNOLDS B. BRISSENDEN Philip A. Lionberger

Assistant Attorney General Assistant Solicitor General

State Bar No. 12394380

AUTUMN HAMIT PATTERSON

Assistant Attorney General

State Bar No. 24092947

Office of the Attorney General

P.O. Box 12548 (MC 059)

Austin, Texas 78711-2548

Tel.: (512) 936-1700

Fax: (512) 474-2697

Counsel for the State of Texas

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Certificate of Service

On August 10, 2015, this document was served by mail or electronic

means on:

Counsel for Defendants–Appellants:

Jason Ray E. Hart Green

Riggs & Ray, P.C. Mitchell A. Toups

700 Lavaca St., Suite 920 Weller, Green, Toups & Terrell, L.L.P.

Austin, Texas 78701 P.O. Box 350

Beaumont, Texas 77704-0350

Counsel for Third-Party Defendants–Appellees:

Constance H. Pfeiffer Robert C. Walters

Beck Redden LLP Gibson, Dunn & Crutcher LLP

1221 McKinney St., Suite 4500 2100 McKinney Ave., Suite 1100

Houston, Texas 77010 Dallas, Texas 75201

Eric J.R. Nichols

Christopher R. Cowan

Beck Redden LLP

515 Congress Ave., Suite 1750

Austin, Texas 78701

/s/ J. Campbell Barker

J. CAMPBELL BARKER

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Certificate of Compliance

In compliance with Texas Rule of Appellate Procedure 9.4(i)(2), Mi-

crosoft Word reports that this brief contains 11,792 words, excluding the

portions of the brief exempted by Rule 9.4(i)(1).

/s/ J. Campbell Barker

J. CAMPBELL BARKER

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