On June 22, 2018, the Texas Supreme Court issued two opinions arising from civil enforcement actions brought under the Texas Medicaid Fraud Prevention Act (TMFPA): Nazari v. State (No. 16-0549) and In re Xerox Corp. (No. 16-0671), a case that has been closely watched by Texas practitioners. These cases impose two significant limitations on defendants in civil enforcement proceedings brought by the State under TMFPA. First, defendants may not reduce their liability for civil penalties by asserting counterclaims against the State, because the State’s act of filing a civil enforcement action for penalties does not waive the State’s sovereign immunity from suit for damages. And second, defendants may not shift liability to other wrongdoers using the Texas proportionate-responsibility statute, because that statute does not apply to TMFPA claims. Although both cases arose in the Medicaid context, the Court’s analysis of sovereign immunity and proportionate responsibility could have broader implications for parties engaged in any type of regulated conduct that is subject to a civil enforcement scheme.
In Nazari, the State sued a group of dental providers (“Providers”) who participated in the Texas Medicaid Program, alleging that the Providers violated the TMFPA by committing various types of fraud: submitting false prior-authorization and payment requests, seeking payment for services not rendered, misrepresenting the qualifications of service providers, and, in some cases, accepting illegal kickbacks. (Slip op. at 4.) The Providers denied the State’s allegations and attempted to reduce their potential liability for civil penalties by asserting counterclaims against the State and by asserting third-party claims against Xerox Corporation, the entity that administered the program under a contract with the State. The State responded with a plea to the jurisdiction on the ground that it was immune from suit on the counterclaims. The State also moved to dismiss the third-party claims on the ground that they were not permitted by the statute. The court of appeals affirmed the trial court’s dismissal of the counterclaims and held that it did not have jurisdiction to review the trial court’s interlocutory order dismissing the third-party claims.
The Texas Supreme Court affirmed in a split decision authored by Justice Brown. The immunity issue turned on whether the State, by filing suit, waived immunity only for claims seeking “money damages” or, more broadly, for claims seeking any type of “monetary relief.” The Court, based on its prior decision in Reata Construction Corp. v. City of Dallas, 197 S.W.3d 374 (Tex. 2006), adopted the narrow view, holding that the Reata abrogation-of-immunity rule “never applies when the state initiates litigation to enforce a substantive prohibition against unlawful conduct by imposing a monetary penalty.” (Slip op. at 19.) Thus, “[s]overeign immunity protects the state from counterclaims that seek to offset a penalty.” (Id.) Having concluded that civil penalties sought under the TMFPA are penalties, not damages, the Court held that “sovereign immunity bars the Providers from asserting their counterclaims against the state.” (Id. at 24.) Justice Lehrmann (joined by Justice Johnson) would have adopted the broader view and held that “the State’s pursuit of monetary relief under the Medicaid Fraud Act subjected it to jurisdiction of the Court for offsetting, related counterclaims.” (Dissenting op. at 16.)
In re Xerox, a mandamus proceeding, arose from the State’s civil-penalty action against Xerox. Xerox attempted to reduce its potential liability by designating the orthodontic providers as responsible third parties under the Texas Proportionate Responsibility Act (Chapter 33 of the Civil Practice and Remedies Code). The issue was whether the Texas proportionate-responsibility scheme applies to civil-remedy actions under the TMFPA. The Court held that Chapter 33 does not apply for two reasons: (1) the statutory remedies are not “damages” subject to apportionment; and (2) applying Chapter 33 would conflict with the TMFPA’s mitigation and fault-allocation scheme. (Slip op. at 1-2.)
Although these opinions arose in the Medicaid context, the legal principles announced therein could readily be applied to other types of civil enforcement actions. If so, they could affect a broader class of potential parties in other regulated industries by limiting options for mitigating civil penalties sought by the State. That, in turn, could inform strategic decisions made in response to civil enforcement actions.