United States v. Caremark Inc ( 2009 )

                        FOR THE FIFTH CIRCUIT United States Court of Appeals
                                                       Fifth Circuit
                                                                               July 21, 2009
                                         No. 08-50354                     Charles R. Fulbruge III
                                      Consolidated with                           Clerk
                                   Nos. 08-50357, 08-50358,
                                    08-50359 and 08-50360
                       Appeal from the United States District Court
                            for the Western District of Texas
                                 USDC No. 5:99-CV-914
    Before SMITH, GARZA, and CLEMENT, Circuit Judges.
           This interlocutory appeal arises out of litigation involving the United
    States, several individual states (the “States”), and Defendant-Appellee
    Caremark, Inc. (“Caremark”). The States moved, on the grounds of sovereign
             Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not
    be published and is not precedent except under the limited circumstances set forth in 5TH CIR.
    R. 47.5.4.
                                      No. 08-50354
    immunity, to dismiss an affirmative defense asserted by Caremark that the
    States characterize as a “counterclaim”. The district court summarily denied the
    motion as “premature” given other threshold legal issues. The States appealed.
    We vacate the order and remand to the district court to consider and rule upon
    the sovereign immunity issue in the first instance.
          This appeal arises out of a qui tam suit that was filed by relator Janaki
    Ramados (“Ramados”). Ramados initiated the action by filing a complaint on her
    own behalf and on behalf of the United States and the states of Arkansas,
    California, Florida, Illinois, Louisiana, Tennessee and Texas alleging
    Caremark’s violation of the False Claims Act (31 U.S.C. § 3729 et seq.) as well
    as violations of analogous provisions of state law (including the Texas Medicaid
    Fraud Prevention Act) and other statutory and common law duties. Soon
    thereafter several of the States and the United States filed notices of
    intervention and filed a joint complaint in intervention (“Joint Intervention
    Complaint”); the state of Louisiana separately filed its own complaint in
    intervention (“Louisiana Complaint”). Ramados subsequently filed a First
    Amended Complaint (“Relator’s Complaint”) acknowledging the interventions
    by the United States and the States. The United States’ and States’ complaints
    alleged that Caremark, a pharmacy benefit manager, fraudulently withheld
    reimbursement payments due to the States under the federal Medicaid program.
    Caremark responded to each complaint with motions to dismiss, which were
    denied by the district court.
          After the district court’s denial of its motions to dismiss, Caremark filed
    its answers. In each answer, Caremark pled the same “Seventh Affirmative
    Defense,” which stated that it was entitled to “a set-off and/or recoupment of all
    amounts paid to the [plaintiffs] to which [such plaintiffs were] not entitled.” In
    essence, Caremark asserted that, due to miscalculations Caremark had made
                                       No. 08-50354
    regarding the amounts due to the States on their claims for Medicaid
    reimbursements, it had overpaid the States and was entitled to recover the
    overpayments. The States, arguing that the Seventh Affirmative Defense is
    actually a “counterclaim,” moved to dismiss the Seventh Affirmative Defense on
    the grounds of sovereign immunity. The district court noted that, while the
    States’ sovereign immunity arguments were potentially meritorious, dismissal
    of the Seventh Affirmative Defense was “premature”; without giving further
    reasons, the court denied the States’ motion. The States filed a notice of
    interlocutory appeal. The district court subsequently issued an “Advisory to the
    Fifth Circuit,” stating that it had denied the States’ motion “because. . . it was
    necessary to first address the numerous motions for summary judgment
    regarding threshold legal questions,” and that the district court’s “inclination. . .
    has been to address the major legal issues in the action in logical order,” with the
    first step being resolution of the pending summary judgment motions. The
    district court expressed its view that this court should not rule on the sovereign
    immunity issue until other legal issues were resolved and further discovery was
    conducted in the proceedings below.
          Caremark argues that we do not have jurisdiction to consider the district
    court’s order denying the motion to dismiss as premature.            Alternatively,
    Caremark argues that even if we possess jurisdiction, the States have waived
    sovereign immunity as to Caremark’s Seventh Affirmative Defense by initiating
    the litigation at hand. Because the district court summarily denied the States’
    motion without considering the merits, it did not reach the latter question.
          We have jurisdiction to review the district court’s denial of a motion to
    dismiss pursuant to the collateral order doctrine, which permits review of orders
    that “[1] conclusively determine the disputed question, [2] resolve an important
    issue completely separate from the merits of the action, and [3] [are] effectively
                                      No. 08-50354
    unreviewable on appeal from a final judgment.” Will v. Hallock, 
    546 U.S. 345
    349 (2006)(quoting Puerto Rico Aqueduct & Sewer Auth. v. Metcalf & Eddy, Inc.,
    506 U.S. 139
    , 144 (1993)). Denials of motions to dismiss on sovereign immunity
    grounds fall within the collateral order doctrine, and are thus immediately
    appealable. McCarthy ex rel. Travis v. Hawkins, 
    381 F.3d 407
    , 411-12 (5th Cir.
    2004)(citing Puerto Rico Aqueduct, 506 U.S. at 144-45).
          Caremark argues that the district court’s order was “tentative, informal,
    or incomplete,” which would remove it from the ambit of the collateral order
    doctrine. See Swint v. Chambers County Comm’n, 
    514 U.S. 35
    , 42 (1995)(quoting
    Cohen v. Beneficial Indus. Loan Corp., 
    337 U.S. 541
    , 546(1949)). Pointing to the
    district court’s statement that the Motions to Dismiss are “premature” given the
    need to resolve the “threshold legal issues” contained in the motions for
    summary judgment, Caremark argues that the district court has not issued a
    “final order” for the purposes of the collateral order doctrine.
          We disagree. Because sovereign immunity protects states from suit,
    Puerto Rico Aqueduct, 506 U.S. at 144-45, orders denying dismissal on the basis
    of sovereign immunity are immediately appealable regardless of the district
    court’s reasons for its decision. In Sherwinski v. Peterson, 
    98 F.3d 849
    , 851 (5th
    Cir. 1996), this court maintained jurisdiction over an appeal from a district court
    order that denied a sovereign immunity-based motion to dismiss against the
    Texas Department of Criminal Justice. The district court in that case had stated
    that “[u]ntil the factual and legal basis of the case has been further developed,
    no defendants will be dismissed.” Id. We held that because the very object and
    purpose of sovereign immunity is to protect the state from the “coercive process
    of judicial tribunals at the instance of private parties,” and because the value of
    sovereign immunity is “for the most part lost as litigation proceeds past motion
    practice,” we had jurisdiction over the appeal pursuant to the collateral order
    doctrine. Id.
                                       No. 08-50354
          Sherwinski controls the present question. The district court’s description
    of the Motions to Dismiss as premature, and its stated desire to delay the issue
    until after the resolution of the motions for summary judgment, do not render
    its order “tentative, informal or incomplete.” Swint, 514 U.S. at 42. As the
    States point out, the denial of their motions leaves them open to potentially
    intrusive discovery related to Caremark’s Seventh Affirmative Defense—i.e.,
    discovery into how the Medicaid Drug Rebate Program is administered,
    including the agreements between private drug manufacturers and the federal
    and state agencies that regulate Medicaid. Thus, the sovereign immunity
    question must be decided before further litigation proceeds; otherwise, the object
    and purpose of sovereign immunity—to shield the states from the burden of suits
    to which they have not consented—is violated. See, e.g., Fed. Mar. Comm’n v.
    S.C. State Ports Auth., 
    535 U.S. 743
    , 760 (2002). We therefore have jurisdiction
    over this appeal.
          Though we have jurisdiction over the appeal, we decline to decide the
    merits of the sovereign immunity issue at this time. Due to the summary nature
    of the district court’s denial of the motions to dismiss, the record is insufficiently
    developed for us to resolve the sovereign immunity question.
          The sovereign immunity issue turns on the relationship between
    Caremark’s Seventh Affirmative Defense and the claims asserted by the States
    in the underlying suit. The States argue that Caremark’s pleading of the
    Seventh Affirmative Defense is more accurately characterized as Caremark’s
    attempt to assert a “permissive counterclaim” against the States, and thus, the
    States contend, they can assert sovereign immunity as a defense against these
    claims. Under Federal Rule of Civil Procedure 13, a counterclaim may be
    compulsory or permissive; it is compulsory if it “arises out of the transaction or
    occurrence that is the subject matter of the opposing party’s claim,” FED. R. CIV.
                                           No. 08-50354
    P. 13(a), and permissive if it does not meet this “same transaction or occurrence”
    test. See FED. R. CIV. P. 13(b).
           Whether States’ sovereign immunity extends to Caremark’s alleged
    “counterclaim” is controlled by this compulsory-permissive distinction. When a
    state initiates a lawsuit, it waives its sovereign immunity to the extent required
    for the lawsuit’s complete determination. Clark v. Barnard, 
    108 U.S. 436
    , 448
    (1883); see also Meyers ex rel. Benzing v. Tex., 
    410 F.3d 236
    , 241 (5th Cir.
    2005)(“Generally, the Court will find a waiver either if (1) the state voluntarily
    invokes federal court jurisdiction, or (2) the state makes a ‘clear declaration’ that
    it intends to submit itself to federal court jurisdiction”). The state waives its
    sovereign immunity only as to compulsory counterclaims, however; that is, those
    “arising out of the same transaction or occurrence which is the subject matter of
    the government’s suit.” Frederick v. United States, 
    386 F.2d 481
    , 488 (5th Cir.
    1967). Sovereign immunity is not waived as to permissive counter-claims,
    “which do not meet the ‘same transaction or occurrence test’ nor to [counter-
    ]claims of a different form or nature than that sought by it as plaintiff nor to
    [counter-]claims exceeding in amount that sought by it as plaintiff.” Id.1
           Though Caremark maintains that its Seventh Affirmative Defense
    challenges an essential component of the States’ claims and is thus an
    affirmative defense rather than a counterclaim, Caremark argues in the
    alternative that, even if the Seventh Affirmative Defense is considered a
    counterclaim, it is compulsory. Caremark contends that its reimbursements to
    the States for Medicaid payments failed to subtract the amounts due to the
    States from the federal government and from the private pharmaceutical
             Though the rule in Frederick was applied to waiver of immunity by the United States,
    it is equally applicable here, as there is no reason to distinguish between waiver asserted by
    the United States and that asserted on the basis of state sovereign immunity. See, e.g.,
    Regents of Univ. of New Mexico v. Knight, 
    321 F.3d 1111
    , 1126 (Fed. Cir. 2003).
                                          No. 08-50354
    companies.        Thus, Caremark argues, its “counterclaim” is inextricably
    intertwined with the claims asserted by the States in the underlying suit.
           Resolution of the question requires factual examination of the transactions
    that form the basis of the underlying complaint and the transactions that are at
    the heart of Caremark’s “counterclaims.”                If, as Caremark argues, its
    “counterclaims” are for “recoupment,” they may be considered compulsory
    (bringing them within the scope of the States’ waiver of sovereign immunity); if,
    on the other hand, they are for “set-off”, they may be considered permissive. See,
    e.g., Matter of Gober, 
    100 F.3d 1195
    , 1207-08 (5th Cir. 1996)(“Recoupment is a
    demand asserted to diminish or extinguish the plaintiff’s demand that arises out
    of the same transaction forming the basis of the plaintiff's claim; setoff, on the
    other hand, arises out of a transaction extrinsic to the plaintiff’s claim.”).
    Determination of whether the “counterclaims” are for recoupment or for set-off
    is a factual question that must be decided with reference to the relevant
    Medicaid statutes and regulations. As such, it should be first addressed by the
    district court.
           The district court improperly denied the States’ motion to dismiss without
    considering the merits.2 As we noted before, the sovereign immunity issue must
    be resolved before further litigation (including discovery and motions for
    summary judgment) proceeds, so that the States are not subjected to litigation
    to which they have not consented. Our judgment is reserved until the record is
    developed below. See, e.g.,Helton v. Clements, 
    787 F.2d 1016
    , 1017 (5th Cir.
    1986)(holding that the court of appeals had jurisdiction over a district court’s
    refusal to rule on motions to dismiss based on governmental immunity, but
    remanding the case for consideration of those motions.)
           As a prudential matter, the district court’s decision to delay ruling on the sovereign
    immunity issue was understandable in light of how the proceedings unfolded below.
    Nonetheless, our case law requires that sovereign immunity be resolved as an initial matter.
                                 No. 08-50354
         We therefore VACATE the district court’s order denying the States’
    motions to dismiss on the basis of sovereign immunity as premature, and
    REMAND to the district court to consider and decide those motions on the