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 ( 2015 )

ACCEPTED
03-15-00252-CV
5754360
THIRD COURT OF APPEALS
AUSTIN, TEXAS
6/19/2015 4:04:25 PM
JEFFREY D. KYLE
CLERK
NO. 03-15-00252-CV
In the FILED IN
3rd COURT OF APPEALS
Third Court of Appeals AUSTIN, TEXAS
Of Texas 6/19/2015 4:04:25 PM
JEFFREY D. KYLE
Clerk
DR. BEHZAD NAZARI, D.D.S., ET AL
Appellants,
V.
THE STATE OF TEXAS
Appellees,
V.
ACS STATE HEALTHCARE, LLC
Appellees.
On appeal from the 53rd District Court, Travis County, Texas
Cause No. NO. D-1-GV-14-005380
APPELLANTS’ BRIEF ON THE MERITS
Jason Ray E. Hart Green
State Bar No. 24000511 Texas Bar No. 08349290
RIGGS & RAY, P.C. WELLER, GREEN, TOUPS & TERRELL, L.L.P.
700 Lavaca Street, Suite 920 Post Office Box 350
Austin, Texas 78701 Beaumont, Texas 77704-0350
Telephone: (512) 457-9806 Telephone: (409) 838-0101
Telecopier: (512) 457-9066 Telecopier: (409) 832-8577
jray@r-alaw.com hartgr@wgttlaw.com
Attorneys for Appellants Dr. Behzad Nazari, D.D.S., et al
Oral Argument Requested
Appellants’ Brief on the Merits
Page i
IDENTITY OF PARTIES AND COUNSEL
Appellants: 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,
Dr. Juan Villarreal, 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 Salinas, D.D.S. PA, and Dr. Rocky Salinas
(hereinafter “Dental Group”)
Counsel for Appellant: Jason Ray
State Bar No. 24000511
RIGGS & RAY, P.C.
700 Lavaca Street, Suite 920
Austin, Texas 78701
Telephone: (512) 457-9806
Facsimile: (512) 457-9066
jray@r-alaw.com
E. Hart Green
Texas Bar No. 08349290
Mitchell A. Toups
WELLER, GREEN, TOUPS & TERRELL, L.L.P.
Post Office Box 350
Beaumont, Texas 77704-0350
Telephone: (409) 838-0101
Telecopier: (409) 832-8577
hartgr@wgttlaw.com
matoups@wgttlaw.com
Appellees: The State of Texas; and ACS State Healthcare, LLC
Counsel for State: Raymond Winter
Appellants’ Brief on the Merits
Page ii
State Bar No. 21791950
Chief, Civil Medicaid Fraud Division
Office of the Attorney General
Reynolds B. Brissenden
Office of the Attorney General
P.O. Box 12548
Austin, Texas 78711-2548
Telephone: (512) 936-1709
Facsimile: (512) 499-0712
raymond.winter@texasattorneygeneral.gov
reynolds.brissenden@texasattorneygeneral.gov
Counsel for the ACS: Robert C. Walters
State Bar No. 2820300
Gibson Dunn & Crutcher, LLP
2100 McKinney Avenue, Suite 1100
Dallas, Texas 75201
Telephone: (214) 698-3100
Facsimile: (214) 571-2900
RWalters@gibsondunn.com
Eric J. R. Nichols
State Bar No. 14994500
Beck Redden, LLP
515 Congress Avenue, Suite 1900
Austin, Texas 78701
Telephone: (512) 708-1000
Facsimile: (512) 708-1002
enichols@beckredden.com
Appellants’ Brief on the Merits
Page iii
TABLE OF CONTENTS
IDENTITY OF PARTIES AND COUNSEL ........................................................... ii
TABLE OF CONTENTS .........................................................................................iv
TABLE OF AUTHORITIES ....................................................................................vi
STATEMENT OF THE CASE .................................................................................. x
STATEMENT OF JURISDICTION.........................................................................xi
RECORD REFERENCES ........................................................................................xi
ISSUES PRESENTED............................................................................................ xii
STATEMENT OF FACTS ........................................................................................ 1
SUMMARY OF ARGUMENT ................................................................................. 5
ARGUMENT ............................................................................................................. 8
Issue 1. Did the trial court err in dismissing the Dental Group’s
counterclaims against the State? ................................................. 6
A. The State initiated this case seeking monetary relief against the
Dental Group, invoking the waiver of immunity rule set out in
Reata v. City of Dallas. ......................................................................... 8
B. The counterclaims are compulsory and/or inextricably
intertwined with the State’s TMFPA claims. ........................................ 9
B.1. The counterclaims are compulsory counterclaims. ........... 11
B.2. The counterclaims would rebut the State’s claims............ 12
B.3. The counterclaims share a common core of facts. ............ 16
C. Counterclaims and third party claims are common in
Federal False Claims Act cases, and those federal cases
provide strong logic and persuasive authority for adopting the
Federal approach to allowing such claims. ......................................... 17
C.1. FCA counterclaims permit defendants
to prove government liability and damages, but only up
to the level necessary to offset the government’s
monetary recovery (just like Reata).......................................... 18
C.2. What type of counterclaims are proper? Any
claim that does not depend on finding the defendants
liable. ......................................................................................... 20
C.3. The Dental Groups’ counterclaims and third
Appellants’ Brief on the Merits
Page iv
-party claims are independent claims ........................................ 21
D. None of the State’s bases for asserting a lack of jurisdiction are
applicable............................................................................................. 23
D.1. A Medicaid Fraud case is still a fraud case; that is,
a tort action................................................................................ 23
D.2. Counterclaims do not have to mirror the State’s
cause of action........................................................................... 24
D.3. The Dental Group has not asserted the affirmative
defense of estoppel, but it could rightfully do so later,
especially based on these facts.................................................. 25
D.4. The statute does not have to expressly waive sovereign
immunity, waiver by action will suffice in this case. ............... 27
D.5. Standing is not really a jurisdictional question, so a
plea to the jurisdiction is improper to resolve the State’s ........ 28
Issue 2. Did the trial court err in dismissing the Dental Group’s
third party claims against Xerox, since:....................................................... 29
A. The arguments and logic regarding the Dental Group’s
counterclaims is equally applicable to third party claims. .................. 29
B. In any event, the Dental Group’s claims should have been
severed, not dismissed. ........................................................................ 32
CONCLUSION ................................................................................................... 32
PRAYER ................................................................................................... 33
CERTIFICATE OF COMPLIANCE ....................................................................... 35
CERTIFICATE OF SERVICE ................................................................................ 36
APPENDIX
Appellants’ Brief on the Merits
Page v
TABLE OF AUTHORITIES
CASES
Anderson, Clayton & Co. v. State ex rel. Allred,
122 Tex. 530, 537, 62 S.W.2d 107, 110 (Comm'n App. 1933)...................... 8
Cell Therapeutics, Inc. v. Lash Grp., Inc.,
586 F.3d 1204, 1213 (9th Cir. 2009)............................................................. 20
City of Austin v. Garza,
124 S.W.3d 867, 875 (Tex. App.—Austin 2003, no pet.)............................. 26
City of Dallas v. Albert,
354 S.W.3d 368 (Tex. 2011) ......................................................................... 13
City of Fredericksburg v. Bopp,
126 S.W.3d 218 (Tex. App.—San Antonio 2003, no pet.) .......................... 26
City of Galveston v. State, 217 S.W.3d 466, 472 (Tex. 2007) .................................. 27
City of Hutchins v. Prasifka,
450 S.W.2d 829, 835-36 (Tex. 1970 ............................................................. 27
City of New Braunfels v. Carowest Land, Ltd.,
432 S.W.3d 501, 524 (Tex.App.—Austin 2014, no pet.).........11,12,16,17,24
City of San Antonio v. Schautteet,
706 S.W.2d 103, 105 (Tex. 1986) ................................................................. 26
City of White Settlement v. Super Wash, Inc.,
198 S.W.3d 770 (Tex. 2006) ......................................................................... 26
Dillard v. Tex. Elec. Coop.,
157 S.W.3d 429, 430 (Tex.2005) .................................................................. 12
Harlingen Family Dentistry, P.C. v. Texas Health & Human Services Comm'n,
452 S.W.3d 479 (Tex. App.—Austin 2014, pet. filed) .................................. 5
Appellants’ Brief on the Merits
Page vi
Harris Cnty. v. Luna–Prudencio,
294 S.W.3d 690, 697 (Tex.App.-Houston [1st Dist.] 2009, no pet. .............. 11
Heartland Holdings, Inc. v. U.S. Trust Co. of Texas N.A.,
316 S.W.3d 1, 7 (Tex.App.—Houston [14th Dist] 2010, no pet) ................ 29
Janek v. Harlingen Family Dentistry,
P.C., 451 S.W.3d 97 (Tex. App.—Austin 2014, no pet.).......................... 5,22
MCI Telecomm. Corp. v. Tex. Utils. Elec. Co.,
995 S.W.2d 647, 650–54 (Tex.1999), et al.) ................................................. 29
Reata Const. Corp. v. City of Dallas,
197 S.W.3d 371 (Tex. 2006) ...............................................7,8,18,23,24,27,28
Roberts v. Haltom City,
543 S.W.2d 75 (Tex. 1976) ........................................................................... 26
Rothensies v. Elec. Storage Battery Co.,
329 U.S. 296, 299, 67 S. Ct. 271, 91 L. Ed. 296 (1946) ................................. 19
State v. Zanco's Heirs, 18 Tex. Civ. App.
127, 129, 44 S.W. 527, 529 (1898), writ refused ............................................ 8
Sweeny Cmty. Hosp. v. Mendez,
226 S.W.3d 584, 592 (Tex.App.—Houston [1st Dist.] 2007 ....................12,25
Texas v. Caremark, Inc.,
584 F.3d 655, 659 (5th Cir. 2009) ................................................................. 18
The State of Texas v. Xerox Corporation; Xerox State Healthcare,
LLC; ACS State Healthcare, LLC, a Xerox Corporation,
in the 53rd Judicial District Travis County,
Cause No. D-1-GV-14-000581........................................................................ 2
United States v. Agnew,
423 F.2d 513, 514 (9th Cir.1970 ................................................................... 19
United States v. Campbell,
No. CIV.A. 08-1951, 2011 WL 43013, at *11 (D.N.J. Jan. 4, 2011)...19,20,29
Appellants’ Brief on the Merits
Page vii
United States v. Dalm,
494 U.S. 596, 611, 110 S. Ct. 1361, 108 L. Ed. 2d 548 (1990) ....................... 19
United States v. Intrados/Int'l Mgmt. Grp.,
277 F. Supp. 2d 55, 62 (D.D.C. 2003)........................................................... 19
United States v. Nardone,
782 F. Supp. 996, 999 (M.D.Pa.1990)............................................................ 30
U.S. ex rel. Battiata v. Puchalski,
906 F. Supp. 2d 451, 461 (D.S.C. 2012) ....................................................... 21
U.S. ex rel. Colquitt v. Abbott Labs.,
864 F. Supp. 2d 499, 537 (N.D. Tex. 2012) ................................................. 18
United States ex rel. Madden v. Gen. Dynamics Corp.,
4 F.3d 827, 830–31 (9th Cir.1993) ................................................................ 19
U.S. ex rel. Miller v. Bill Harbert Int'l Const., Inc.,
505 F. Supp. 2d 20, 26-27 (D.D.C. 2007) ...........................................29,30,31
U.S. ex rel. Salvatore v. Fleming,
No. CIV.A. 11-1157, 2015 WL 1326330,
at *3 (W.D. Pa. Feb. 24, 2015) report and recommendation adopted,
No. CIV.A. 11-1157, 2015 WL 1384487 (W.D. Pa. Mar. 25, 2015) ............ 21
William V. Dorsaneo III, et. al,
Texas Litigation Guide § 293.01 [1A] (2013) ............................................... 12
Yasuda Fire & Marine Ins. Co. of Am. v. Criaco,
225 S.W.3d 894, 898 (Tex.App.-Houston [14th Dist.] 2007, no pet.) .......... 29
STATUTES
25 Tex. Admin. Code § 33.71 .................................................................................... 1
Texas Medicaid Fraud Protection Act §36.116 ....................................................... 27
Appellants’ Brief on the Merits
Page viii
GOVERNMENT REPORTS
Sunset Advisory Commission, Staff Report, Health and Human Services
Commission and System Issues, (Oct. 2014),
www.sunset.texas.gov/public/uploads/files/reports/HHSC and System Staff
Report.pdf . ..................................................................................................................... 2
ARTICLES
Kiah Collier, J. David McSwane, Jonathan Tilove, “A Second Top Texas Health
Official Resigns, and Probe is Launched”, Austin American-Statesman (Dec. 19,
2014, 9:37 AM), www.mystatesman.com/news/news/state-regional-govt-
politics/a-second-top-texas-health-official-resigns-and-pro/njXd2/. ....................... 3
Eric Dexheimer, “Auditors: State Medicaid Fraud Investigations Poorly Manages,
Unfair”, Austin American Statesman, (Oct. 3, 2014),
www.mystatesman.com/news/news/state-regional-govt-politics/auditors-state-
medicaid-fraud-investigations-poorl/nhbnL/? ........................................................... 2
Eric Dexheimer, “Fraud Inspector’s Falsified Work Could Cost State Millions”,
Statesman (October 18, 2014, 7:16 PM),
www.statesman.com/news/news/state-regional-govt-politics/fraud-inspectors-
falsified-work-could-cost-state-m/nhmr5/ ................................................................. 2
J. David McSwane, “Fired State Health Worker Sues Embattled Texas Health
Agency”, Austin American Statesman (Dec. 19, 2014, 10:04),
www.mystatesman.com/news/news/state-regional-govt-politics/fired-state-health-
worker-sues-embattled-texas-hea/njXfH/#adaafd2c.3917081.735751 . .................. 3
J. David McSwane, “State Officials: Fraud Contract Bypassed Two Reviews”,
Austin American-Statesman, (Dec. 22, 2014, 9:57 PM),
www.mystatesman.com/news/news/state-regional/state-officials-fraud-contract-by-
passed-to-review/njYwb/ ........................................................................................... 3
Update: “Cooked Books” Caused OIG to Settle for $39,000 in $16 Million Dental
Medicaid Case, Texas Dentists For Medicaid Reform, Texas Dentists for Medicaid
Reform (TDMR, Harlingen, TX) Oct. 23, 2014, www.tdmr.org/cooked-books-
caused-oig-settlement-dental-medicaid-case/ ............................................................ 2
Appellants’ Brief on the Merits
Page ix
STATEMENT OF THE CASE
Nature of the Case: This is an appeal from the trial court’s grant
of: 1) the State’s plea to the jurisdiction,
which dismissed the Dental Groups’
counterclaims against the State, and 2) the
State’s Motion to Dismiss the Dental Groups’
third-party claims against Xerox.
Trial Court: The Honorable Judge Yelonosky, Judge of the
53rd District Court, Travis County, Texas.
Trial Court Disposition: On April 28, 2015, Judge Yelonosky signed
an Order Granting State’s Plea to the
Jurisdiction and Motion to Dismiss third-party
Claims.
Appellants’ Brief on the Merits
Page x
STATEMENT OF JURISDICTION
The court has jurisdiction to consider this interlocutory appeal pursuant to
Tex. Civ. Prac. and Rem. Code section 51.014(a)(8) because this appeal follows
the granting of a plea to the jurisdiction brought by a governmental unit.
RECORD REFERENCES
References to the parties and record are as follows:
“Dental Group” refers to Appellants.
“TMFPA” refers to Texas Medicaid Fraud Prevention Act.
“Harlingen I” refers to Janek v. Harlingen Family Dentistry, P.C., 451 S.W.3d 97
(Tex. App.—Austin 2014, no pet.).
“Harlingen II” refers to Harlingen Family Dentistry, P.C. v. Texas Health &
Human Services Comm'n, 452 S.W.3d 479 (Tex. App.—Austin 2014, pet. filed).
“FCA” refers to Federal False Claims Act.
References to the Record will be to the Court Record at “CR ___”
Appellants’ Brief on the Merits
Page xi
ISSUES PRESENTED
Issue 1. Did the trial court err in dismissing the Dental Group’s
counterclaims against the State since:
A. The State initiated this case seeking monetary relief against the
Dental Group, invoking the waiver of immunity rule set out in
Reata v. City of Dallas,
B. The Dental Group’s counterclaims are compulsory and/or
inextricably intertwined with the State’s TMFPA claim, so
denying the ability to bring counterclaims denies due process,
C. Counterclaims and third party claims are common in Federal
False Claims Act cases, and those federal cases provide strong
logic and persuasive authority for adopting the Federal
approach to allowing such claims, and
D. None of the State’s bases for asserting a lack of jurisdiction are
meritorious.
Issue 2. Did the trial court err in dismissing the Dental Group’s third
party claims against Xerox, since:
A. Many of the same arguments and logic regarding the Dental
Group’s counterclaims is equally applicable to third party
claims, and
B. In any event, the Dental Group’s claims should have been
severed, not dismissed.
Appellants’ Brief on the Merits
Page xii
STATEMENT OF FACTS
Texas Medicaid provides a full range of orthodontic services to eligible
Texas citizens. Medicaid orthodontics are not provided under the standard fee-for-
service model, wherein providers are paid for a service after they have provided it
and submitted the bill for payment. Instead, the law requires that all orthodontic
services be “prior authorized.” 25 Tex. Admin. Code § 33.71. Prior authorization
requires a review of the patient’s dental condition and the requested orthodontic
services, confirmation of the medical necessity of the services, and notification to
the provider that the services will be covered for payment (absent some subsequent
or intervening disqualifying factor). Xerox was the State’s agent charged with
administering the prior authorization program for orthodontics from January 1,
2004 through February 29, 2012.
Appellants (hereinafter “Dental Group”) were Medicaid orthodontic
providers. (CR 7 at paragraph 2.19). Beginning in 2011, the State, through Texas
Health and Human Services Commission Office of Inspector General, filed
separate administrative cases against members of the Dental Group.1 After some
1
See, e.g. Harlingen Family Dentistry v. Texas Health and Human Services Commission Office
of Inspector General, SOAH Cause No. XXX-XX-XXXX; Antoine Dental Center v. Texas Health
and Human Services Commission Office of Inspector General, SOAH Cause No. XXX-XX-XXXX;
National Orthodontix Management, LLC v. Texas Health and Human Services Commission
Office of Inspector General, SOAH Cause No. XXX-XX-XXXX and XXX-XX-XXXX.
Appellants’ Brief on the Merits
Page 1
members of the Dental Group complained publicly that the State, through its agent
Xerox, had reviewed and prior authorized all of the services at issue in the
administrative cases, the State cancelled Xerox’s contract and sued it under the
Texas Medicaid Fraud Prevention Act (“TMFPA”). See Cause No. D-1-GV-14-
000581; The State of Texas v. Xerox Corporation; Xerox State Healthcare, LLC;
ACS State Healthcare, LLC, a Xerox Corporation, in the 53rd Judicial District
Travis County, Texas. Inter alia, the State’s lawsuit against Xerox claims that
Xerox fraudulently issued prior authorization approvals to Medicaid providers,
including the Dental Group. That lawsuit further claims that Xerox did so without
conducting a proper review of the patients’ dental condition, without using
licensed personnel, without conclusively determining medical necessity, and
without applying Medicaid policy. Throughout 2014, the State pursued its civil
TMFPA lawsuit against Xerox who pre-approved and oversaw the delivery of the
orthodontic services, while simultaneously pursing its administrative claims
against the Dental Group providers who actually rendered the orthodontic services.
Following a series of high profile news stories, Legislative reports, and
Attorney General investigations regarding fabrication of evidence in the
administrative investigations,2 misuse of administrative power in the cases,3 and
2
Eric Dexheimer, “Fraud Inspector’s Falsified Work Could Cost State Millions”, Statesman
(October 18, 2014, 7:16 PM), www.statesman.com/news/news/state-regional-govt-
politics/fraud-inspectors-falsified-work-could-cost-state-m/nhmr5/; Update: “Cooked Books”
Appellants’ Brief on the Merits
Page 2
general corruption in the OIG,4 the State abandoned and nonsuited the
administrative cases against the Dental Group in December 2014.
The day after it nonsuited the administrative cases, the State initiated this
civil lawsuit against the Dental Group. (CR 2)5. Like its case against Xerox, the
State’s claims were made under the TMFPA. This lawsuit contains six categories
of allegations, but only one of those allegations is particularly relevant to this
appeal. That allegation, which applies to all members of the Dental Group, is
restated exactly the same for all members of the Dental Group:
Caused OIG to Settle for $39,000 in $16 Million Dental Medicaid Case, Texas Dentists For
Medicaid Reform, Texas Dentists for Medicaid Reform (TDMR, Harlingen, TX) Oct. 23, 2014;
3
Sunset Advisory Commission, Staff Report, Health and Human Services Commission and
System Issues, (Oct. 2014),; Eric Dexheimer, “Auditors: State Medicaid Fraud Investigations
Poorly Manages, Unfair”, Austin American Statesman, (Oct. 3, 2014),
www.mystatesman.com/news/news/state-regional-govt-politics/auditors-state-medicaid-fraud-
investigations-poorl/nhbnL/?
4
J. David McSwane, “State Officials: Fraud Contract Bypassed Two Reviews”, Austin
American-Statesman, (Dec. 22, 2014, 9:57 PM), www.mystatesman.com/news/news/state-
regional/state-officials-fraud-contract-by-passed-to-review/njYwb/ ; J. David McSwane, “Fired
State Health Worker Sues Embattled Texas Health Agency”, Austin American Statesman (Dec.
19, 2014, 10:04), www.mystatesman.com/news/news/state-regional-govt-politics/fired-state-
health-worker-sues-embattled-texas-hea/njXfH/#adaafd2c.3917081.735751 ; Kiah Collier, J.
David McSwane, Jonathan Tilove, “A Second Top Texas Health Official Resigns, and Probe is
Launched”, Austin American-Statesman (Dec. 19, 2014, 9:37 AM),
www.mystatesman.com/news/news/state-regional-govt-politics/a-second-top-texas-health-
official-resigns-and-pro/njXd2/.
5
The State subsequently filed an Amended Petition (CR 110) that is substantively identical to its
Original Petition (CR 2) on all claims and issues that are relevant in this appeal.
Appellants’ Brief on the Merits
Page 3
(CR 14 (Antoine), 14-15 (Harlingen), 16 (Herrscher), 17 (M&M), 19 (National),
20 (RGV Smiles)).
The Dental Group answered, asserting counterclaims against the State and
third party claims against Xerox. (CR 29). The State answered the Dental Group’s
counterclaims with a Plea to the Jurisdiction and Plea in Bar regarding the Dental
Groups’ counterclaims against the State. (CR 43). That same answer included a
Motion to Dismiss the Dental Group’s claims against Xerox. (CR 43). On April 28,
2014, the trial court granted both motions. (CR 383). The Dental Group timely
filed this interlocutory appeal. (CR 385).
Appellants’ Brief on the Merits
Page 4
SUMMARY OF ARGUMENT
This case is the final leg in the “Triple Crown” of State overreach that this
court has already dealt with in Janek v. Harlingen Family Dentistry, P.C., 451
S.W.3d 97 (Tex. App.—Austin 2014, no pet.) (Harlingen I) and Harlingen Family
Dentistry, P.C. v. Texas Health & Human Services Comm'n, 452 S.W.3d 479 (Tex.
App.—Austin 2014, pet. filed) (Harlingen II). In Harlingen I, this Court stopped
the State from continuing to withhold Harlingen’s money even after Harlingen
established that it had not acted fraudulently. In Harlingen II, this Court rejected
the State’s efforts to maintain a draconian payment hold just because a simple
program violation had been alleged. Harlingen and similarly situated Medicaid
dental practices (hereinafter, the Dental Group) are now back for a third time, in a
case which is truly the most ominous of the three. Here, the State claims that it can
sue the Dental Group for millions of dollars (which the State, through its agent
Xerox, actually pre-reviewed and approved for payment), but that the Dental
Group cannot bring any counterclaim against the State or third-party claims against
Xerox arising out of those parties’ conduct in the same transactions that are the
basis of the State’s claims. In prior opinions, this Court specifically pointed out
the due process concerns that plagued the State’s actions in Harlingen I and II.
Here, those due process problems are even more obvious, as the State is essentially
saying “We can sue you for millions, but you can’t seek an offset for our actions,
Appellants’ Brief on the Merits
Page 5
nor can you attempt to recover from our agent as a third-party defendant (even
though we have also sued them for the exact same transactions and funds in a
different lawsuit).” This is a complete abuse of both State power and the judicial
system, and the Court should rightly be disturbed at the State’s arrogant refusal to
act reasonably with regard to the providers that serve Texas’ indigent and needy.
A core principle of civil law is that when you get sued, you have the right—
in fact, an obligation—to bring any associated counterclaims and third-party claims
to the case. The State’s position turns that rule on its head with this inventive
argument: the State is not subject to counterclaims, and a defendant cannot bring
third party claims, because the TMFPA does not expressly say that counterclaims
and third-party claims are allowed. The State’s argument is completely
unsupported. For over 75 years, both the U.S. Supreme Court and Texas Supreme
Court have held “it would be fundamentally unfair to allow a governmental entity
to assert affirmative claims against a party while claiming it had immunity as to the
party's claims against it.”
Yet the trial court’s order does just that, forestalling any attempt by the
Dental Group to recover damages for different, but related, wrongdoing by the
State and Xerox with regard to orthodontic services. Not only does the ruling
misread the TMFPA, it creates a “superstatute” that subverts the Rule of Civil
Procedure and offends due process.
Appellants’ Brief on the Merits
Page 6
Logic, precedent, and due process demand this court follow the Texas
Supreme Court’s opinion in Reata. Reata dovetails perfectly with years of federal
court consideration of how counterclaims and third-party claims are handled in
Federal False Claims Act cases. Appellants seek a reversal of the trial court order
striking the Dental Groups counterclaims and third party claims.
Appellants’ Brief on the Merits
Page 7
ARGUMENT
Issue 1. Did the trial court err in dismissing the Dental Group’s
counterclaims against the State?
A. The State initiated this case seeking monetary relief against the Dental
Group, invoking the waiver of immunity rule set out in Reata v. City of Dallas.
For over 100 years, it has been the rule that sovereign immunity is waived
“where a state voluntarily files a suit and submits its rights for judicial
determination, it will be bound thereby, and the defense will be entitled to plead
and prove all matters properly defensive. This includes the right to make any
defense by answer or cross-complaint germane to the matter in controversy.”
Anderson, Clayton & Co. v. State ex rel. Allred, 122 Tex. 530, 537, 62 S.W.2d
107, 110 (Comm'n App. 1933) citing State v. Zanco's Heirs, 18 Tex. Civ. App.
127, 129, 44 S.W. 527, 529 (1898), writ refused (“When the state of Texas enters
its courts as a litigant, it must be held subject to the same rules that govern other
litigants…”). More recently, the Texas Supreme Court reaffirmed this rule in the
well-known case Reata Const. Corp. v. City of Dallas, 197 S.W.3d 371 (Tex.
2006). In that case, the Texas Supreme Court found that the City of Dallas waived
its sovereign immunity when it intervened in a lawsuit related to flood damage
from a broken City water main. The Reata court stated:
Therefore, we hold that the decision by the City of Dallas to file suit
for damages encompassed a decision to leave its sphere of immunity
from suit for claims against it which are germane to, connected with
and properly defensive to claims the City asserts. Once it asserts
Appellants’ Brief on the Merits
Page 8
affirmative claims for monetary recovery, the City must participate in
the litigation process as an ordinary litigant…
Reata at 377 (emphasis added). The Texas Supreme Court’s reaffirmation of the
consequences of filing suit with regard to sovereign immunity could not be more
purely stated:
In circumstances such as those now before us, where the
governmental entity has joined into the litigation process by asserting
its own affirmative claims for monetary relief, we see no ill befalling
the governmental entity or hampering of its governmental functions
by allowing adverse parties to assert, as an offset, claims germane to,
connected with, and properly defensive to those asserted by the
governmental entity. And, our decisions that immunity from suit does
not bar claims against the governmental entity if the claims are
connected to, germane to, and defensive to the claims asserted by the
entity, in effect, modified the common-law immunity doctrine and, to
an extent, abrogated immunity of the entity that filed suit.
Reata at 376-77. Because the State initiated this action against the Dental Group in
the form of affirmative claims for monetary relief, it should be indisputable that the
State has waived its immunity from the Dental Group’s counterclaims that relate to
the subject matter of this lawsuit.
B. The counterclaims are compulsory and/or inextricably intertwined with the
State’s TMFPA claims.
The Dental Group counterclaims that from 2004 through 2012 the State
acted independently and/or in conspiracy with Xerox to commit:
1) Common Law Fraud, Fraudulent Misrepresentation and Fraudulent
Inducement by knowingly issuing (and/or allowing Xerox to issue) prior
Appellants’ Brief on the Merits
Page 9
authorization approvals that conclusively stated every single patient
treated by the Dental Groups’ dentists was qualified to receive the
orthodontic services and that the orthodontic services were medically
necessary when the State knew or should have known that a full and
accurate review of the patients’ qualification by a licensed dentist
employed by the State had not been completed. From 2004-2012, the
State repeatedly assured the Dental Group that proper reviews were being
conducted. (CR 30-31 at paragraph 3; CR 34).
2) Breach of Contract by failing to provide qualified staff to review the
patients’ conditions, by violating Texas law regarding the issuance of
medical opinions, by permitting non-dentists to make determinations of
medical necessity, and by failing to conduct a reasonable and prudent
examination of evidence. (CR 35).
3) Promissory Estoppel because the Dental Group reasonably, substantially,
and foreseeably relied on the State’s promises regarding prior approval,
and regarding the medical necessity of the orthodontic procedures that
were provided. (CR 36).
4) Negligence/ Negligent Hiring/ Negligent Supervision/ Negligent
Misrepresentation by failing to supervise its agent Xerox, who exercised
authority to issue pre-approvals, but did so in violation of the law in
Appellants’ Brief on the Merits
Page 10
numerous ways, including consistently misstating the proper standard for
prior authorization approval to the Dental Group, issuing diagnoses
without a dental license, permitting non-licensed and/or unqualified
employees to issue approvals, and failing to conduct a reasonable and
prudent examination of the dental condition of the patients. (CR 36-38).
5) Gross Negligence/ Misapplication of Fiduciary Property/ Conversion by
unlawfully withholding funds from certain Dental Groups under the
pretext of an administrative payment hold that was manufactured by the
State’s own actions. (CR 30-31, 39).
In City of New Braunfels v. Carowest Land, Ltd., 432 S.W.3d 501, 524 (Tex.
App.—Austin 2014, no pet.) this Court stated that counterclaims against the State
are proper if the counterclaims: 1) are compulsory counterclaims, or 2) would
directly or inferentially rebut the facts on which the State’s claims are predicated,
or 3) share common or related core underlying facts.
B.1. The counterclaims are compulsory counterclaims.
Analyzing the facts of this case demonstrates that the counterclaims are
proper. The Carowest decision acknowledged that compulsory counterclaims are
considered necessarily “ ‘germane to,’ ‘connected with,’ and/or ‘properly
defensive’ to” a governmental body’s claims by some Courts of Appeals and
commentators. Id. at 524, FN 82 citing Harris Cnty. v. Luna–Prudencio, 294
Appellants’ Brief on the Merits
Page 11
S.W.3d 690, 697 (Tex.App.—Hous.[1st Dist.] 2009, no pet.); Sweeny Cmty. Hosp.
v. Mendez, 226 S.W.3d 584, 592-93 (Tex. App.—Hous. [1st Dist.] 2007, no pet.);
William V. Dorsaneo III, et. al, Texas Litigation Guide § 293.01 [1A] (2013)
(citing these cases and concluding that “[a] Defendant's compulsory counterclaim
to a governmental unit's affirmative claim for relief necessarily qualifies under
Reata as a claim that is germane to, connected with, and properly defensive to the
governmental entity's claims.”). The Dental Groups’ counterclaims against the
State meet the Tex. R. Civ. Proc. 97 definition of compulsory counterclaims; the
counterclaims are factual mirror images of the State’s claims on the issue of fraud.
The Dental Groups’ other counterclaims are so intertwined factually and legally
they must be considered compulsory. The Carowest Court’s nod to the Houston
and Dallas Courts of Appeals on the issue of compulsory counterclaims requires
that the Dental Groups’ counterclaims against the State be sustained.
B.2. The counterclaims would rebut the State’s claims.
Second, the Dental Groups’ counterclaims would, either inferentially or
directly,6 rebut the State’s claims that the Dental Groups’ independently and
intentionally made false statements in order to receive payments that would not
otherwise have been authorized. See State’s First Amended Petition at 4.2- 4.3, 6.1
(against Antoine), 7.1 (against Harlingen Family Dentistry), 8.1 (against
6
See Dillard v. Tex. Elec. Coop., 157 S.W.3d 429, 430 (Tex.2005) (“An inferential rebuttal
defense operates to rebut an essential element of the plaintiff's case by proof of other facts.”).
Appellants’ Brief on the Merits
Page 12
Herrscher), 9.1 (against M&M), 10.1 (against National), and 11.1 (against RGV
Smiles). The Texas Supreme Court case of City of Dallas v. Albert, 354 S.W.3d
368 (Tex. 2011) is instructive on this point, because Albert held that counterclaims
that rebutted the government’s claims were germane to and connected with the
government’s claims. In Albert, police and fire fighters sued seeking breach of
contract damages for failure to pay them a higher amount required by a City
ordinance. The City subsequently counterclaimed, alleging that, if anything, the
police and fire fighters had been overpaid; the City sought reimbursement for those
overpayments.
The Texas Supreme Court first found that the City’s intervention in the
lawsuit had waived immunity because “once a governmental entity has asserted an
affirmative claim for monetary relief, it must participate in the litigation process as
an ordinary litigant as to that claim.” Albert at 375. The Court then analyzed the
police and fire fighters’ claims against the City. The Court found the police and
fire fighters’ claims were necessarily defensive to the City’s claims because the
group could not be both overpaid and underpaid at the same time. Stated
differently, if the police and fire fighters were right about being underpaid then the
City must be wrong about the group being overpaid, and vice versa.
In this case, the Dental Groups’ counterclaims against the State at
paragraphs 3 and 13-29 (CR 30-31, 34-39) include allegations that the State
Appellants’ Brief on the Merits
Page 13
independently, or in a conspiracy with Xerox, committed fraud, breach of contract,
negligence and gross negligence by acting:
1) to induce members of the Dental Group to make certain representations
to the State from 2004-2012, although the State now claims those
representations were false;
2) to make members of the Dental Group believe that the services were
properly authorized for payment at the time, although the State now
claims the services should not have been authorized for payment;
3) to lead members of the Dental Group to apply from 2004-2012 what the
State now claims is an improper standard of medical necessity;
4) to withhold information regarding the proper standard for medical
necessity;
5) to make members of the Dental Group believe the services had been
properly reviewed and/or irrevocably deemed to be medically necessary;
and
6) to fabricate a pretext upon which the State could allege the members of
the Dental Group made misstatements of fact and/or withhold funds
under a payment hold.
The Dental Group allegations rebut the State’s claim that the Dental Group
intentionally “submitted or caused to be submitted false statements, information or
Appellants’ Brief on the Merits
Page 14
misrepresentations of material facts, or omitted pertinent facts to Texas Medicaid
to obtain Medicaid prior authorization and payment for orthodontic services and
appliances.”7 (CR 110) If the Dental Group was induced or fraudulently led to
make certain statements, then it would at least inferentially rebut the State’s
assertion that the Dental Group intended to make misstatements of facts since the
Dental Group members were acting at the State’s direction regarding what to
represent, how to represent it, what could be authorized, what the standard for
medical necessity was, who was ultimately responsible for determining medical
necessity, etc. Intent is important because the State’s fraud claims under the
TMFPA require scienter.
Likewise, it would be impossible for the Dental Group to have actually
made misstatements of fact if the statements were true when they were made in
2004-2012. But what if the State defrauded the Dental Group by deliberately
misleading and misstating what to represent on HLD score sheets, how to represent
conditions on HLD scores sheets, what could be authorized for treatment, what the
standard for medical necessity was, or who was ultimately responsible for
determining medical necessity? If that is the case, and the State committed fraud
against the Dental Group members by misleading them, then the Dental Group
7
See CR 110 State’s First Amended Petition at 6.1 (against Antoine), 7.1 (against Harlingen
Family Dentistry), 8.1 (against Herrscher), 9.1 (against M&M), 10.1 (against National), and 11.1
(against RGV Smiles).
Appellants’ Brief on the Merits
Page 15
should be entitled to offset the State’s claims that the Dental Group made actual
misstatements (assuming, for the sake of argument, the State might be technically
correct), by proving that those technical misstatements were due to the State’s
fraud, breach of contract, negligence and/or gross negligence. Thus, the Dental
Groups’ counterclaims, if proven, would directly or inferentially rebut the scienter
element of fraud, as well as the ultimate issue of whether members of the Dental
Group made any statements that were actually, materially false.
B.3. The counterclaims share a common core of facts.
Finally, it should be undisputed that the Dental Groups’ counterclaims share
a common core of underlying facts. In Carowest, the Court analyzed Carowest’s
counterclaims against the government, which equated to a “this is not our fault, this
is yours” argument by Carowest:
As a threshold observation, the fact that Carowest's claims sound in
tort rather than contract does not in itself mean that they cannot be
“germane to, connected with, and properly defensive to” the City's
contract claim, as the inquiry's proper focus is on the operative facts
rather than the particular legal theories asserted. Turning to that
inquiry, the chief focus of these tort claims, which are styled in terms
of “fraud,” “breach of fiduciary duty,” and “conspiracy” to commit
fraud, is the City's alleged efforts to conceal or mislead Carowest …
while purporting to enforce Carowest's obligations…Consequently,
these tort claims, like Carowest's contract claims, implicate the same
core operative facts underlying the City's monetary claim—namely,
whether the City and Carowest complied with their respective
obligations … —and proof that Carowest complied, the City did not,
or both would inferentially rebut the City's claim. The same would be
true to the extent Carowest's claims complain of any additional
conduct by the City that would amount to a breach of the City's
Appellants’ Brief on the Merits
Page 16
contractual obligations or a defense to Carowest's asserted failure to
perform. In these ways, Carowest's tort claims… are “germane to,
connected with, and properly defensive to” the City's contract claim.
Carowest at 526.The same considerations are at play in this case. The State’s core
contention is that the Dental Group submitted false prior authorization forms and
HLD score sheets that misrepresented the severity of patients’ dental conditions.
(CR 120 at paragraph 6.1). Like Carowest, the counterclaims here assert that the
State concealed facts, failed to meet its own obligations, and intentionally misled
the Dental Group to create a pretext for asserting that the Dental Group did not
meet their obligations. The Carowest court found similar fraud allegations under
those facts were germane to, connected with and properly defensive to the
government’s claims. Thus, Carowest supports the proposition that the
counterclaims are proper on any of the three bases for sustaining counterclaims
against the State.
C. Counterclaims and third party claims are common in Federal False
Claims Act cases, and those federal cases provide strong logic and persuasive
authority for adopting the Federal approach to allowing such claims.
One line in the State’s pleadings summarizes the State’s and the trial court’s
improper interpretation of TMFPA cases: “The State is entitled to pursue a
Medicaid Fraud claim against a defendant to the exclusion of all other parties.”
(CR 47, 65). Stated more bluntly, the State believes that a TMFPA case is a one-
sided, State v. whoever the State wants to sue, and only whoever the State wants to
Appellants’ Brief on the Merits
Page 17
name, proposition; no counterclaims by a defendant are available, and no third
party claims from a defendant are allowed. That position lacks any legal basis, and
is a self-serving interpretation that is at odds with the Federal False Claims Act.
Admittedly, the TMFPA is silent regarding the propriety of counterclaims
and third-party claims by TMFPA defendants like the Dental Group. But the
TMFPA is modelled after the Federal False Claims Act (FCA). See U.S. ex rel.
Colquitt v. Abbott Labs., 864 F. Supp. 2d 499, 537 (N.D. Tex. 2012) (finding
“provisions of the state and federal false claims acts are substantively identical”). If
the court needs persuasive authority for the applicability of Reata and its logic for
permitting counterclaims and third-party claims, this court should look at the sound
reasoning in federal FCA cases. Federal FCA cases hold “recoupment
counterclaims” against the Government are viable in reaction to Federal FCA
complaints, despite equally robust doctrines of sovereign immunity for the federal
government.
C.1. FCA counterclaims permit defendants to prove government
liability and damages, but only up to the level necessary to offset the
government’s monetary recovery (just like Reata).
“When a state initiates a [False Claims Act] lawsuit, it waives its sovereign
immunity to the extent required for the lawsuit's complete determination.” Texas v.
Caremark, Inc., 584 F.3d 655, 659 (5th Cir. 2009). Like the limited waiver of
immunity discussed in Reata at 376-77, counterclaims in federal FCA waive
Appellants’ Brief on the Merits
Page 18
immunity up to the level permitted to “defeat or diminish the sovereign’s
recovery.” United States v. Intrados/Int'l Mgmt. Grp., 277 F. Supp. 2d 55, 62
(D.D.C. 2003); see United States v. Agnew, 423 F.2d 513, 514 (9th Cir.1970); see
also United States v. Dalm, 494 U.S. 596, 611, 110 S. Ct. 1361, 108 L. Ed. 2d 548
(1990) (noting that the doctrines of recoupment and sovereign immunity “only [ ]
permit a transaction which is made the subject of suit by plaintiff to be examined in
all its aspects, and judgment to be rendered that does justice in view of the one
transaction as a whole”) (quoting Rothensies v. Elec. Storage Battery Co., 329 U.S.
296, 299, 67 S. Ct. 271, 91 L. Ed. 296 (1946))”). Stated differently, the government
waives immunity, but only to the level necessary to offset the government’s
monetary recovery against the defendant. See United States ex rel. Madden v. Gen.
Dynamics Corp., 4 F.3d 827, 830–31 (9th Cir.1993) (denial of qui tam defendant's
right to bring counterclaim that may be compulsory offends due process); Agnew,
at 514 (“Although a counterclaim may be asserted against a sovereign by way of
set off or recoupment to defeat or diminish the sovereign's recovery, no affirmative
relief may be given against a sovereign in the absence of consent.”); United States
v. Campbell, No. CIV.A. 08-1951, 2011 WL 43013, at *11 (D.N.J. Jan. 4, 2011).
Given the massive amount of Federal precedent concluding that a defendant’s
counterclaims are permissible to offset false claims damages, this conclusion is
unassailable. The logic used in parsing, and adopting, this limited waiver of
Appellants’ Brief on the Merits
Page 19
immunity is exactly what the Texas Supreme Court considered, and adopted, in
Reata.
C.2. What type of counterclaims are proper? Any claim that does not
depend on finding the defendants liable.
The court in United States v. Campbell No. CIV.A. 08-1951, 2011 WL
43013, at *11 (D.N.J. Jan. 4, 2011) concisely delivered the rule for what
counterclaims are allowed:
Counterclaims or third party claims by an FCA Defendant that are
based on damages which are independent claims may be permitted, so
long as those claims do not “have the effect of providing for
indemnification or contribution.” Miller, 505 F. Supp. 2d 20 at 27
(internal citations omitted); see also United States ex rel. Madden v.
Gen. Dynamics Corp., 4 F.3d 827 (9th Cir.1993). Permissible third
party claims in the FCA context are available, for example, when a
FCA Defendant has a cause of action for damage to him independent
of his FCA liability. “[A] claim by an FCA Defendant which requires
for its success a finding that the FCA Defendant is liable is the kind of
claim barred by the FCA.” Miller, 505 F. Supp. 2d at 28; see also
United States v. Nardone, 782 F. Supp. 996, 999 (M.D.Pa.1990)
(dismissing FCA Defendants' counterclaim and third party complaint
seeking indemnification).
Campbell is not alone. It is well settled that claims, other than claims for
indemnification or contribution, are permissible in FCA actions. See Cell
Therapeutics, Inc. v. Lash Grp., Inc., 586 F.3d 1204, 1213 (9th Cir. 2009), as
amended on denial of reh'g and reh'g en banc (Jan. 6, 2010) (“[Q]ui tam [FCA]
Defendants may bring third party claims under the circumstances outlined in this
Appellants’ Brief on the Merits
Page 20
opinion.”).8 The same analysis applies throughout FCA litigation whether brought
by the government directly or through a qui tam action. See U.S. ex rel. Salvatore
v. Fleming, No. CIV.A. 11-1157, 2015 WL 1326330, at *3 (W.D. Pa. Feb. 24,
2015) report and recommendation adopted, No. CIV.A. 11-1157, 2015 WL
1384487 (W.D. Pa. Mar. 25, 2015). (“[T]he Court concludes that the same analysis
equally estops a qui tam Defendant from asserting cross-claims for indemnification
and contribution against co-Defendants [or third-party Defendants] based upon
their liability under the FCA, but permits cross-claims for ‘independent damages’
against co-Defendants [or third-party Defendants].”) So the only question is
whether the Dental Groups’ counterclaims are “independent” or not.
C.3. The Dental Groups’ counterclaims and third-party claims are
independent claims.
The Dental Groups counterclaims and third-party claims fall into two
categories: 1) completely independent claims that would permit a separate
recovery against the State and/or Xerox regardless of the Dental Group’s liability
under the TMFPA, and 2) claims whereby the Dental Group can prevail against the
State and/or Xerox if the Dental Group is found to be not liable under the TMFPA
8
U.S. ex rel. Battiata v. Puchalski, 906 F. Supp. 2d 451, 461 (D.S.C. 2012) (FCA Defendants’
counterclaims for damages which were not dependent on a finding of liability under the FCA
were not barred); U.S. ex rel. Salvatore v. Fleming, No. CIV.A. 11-1157, 2015 WL 1326330, at
*3 (W.D. Pa. Feb. 24, 2015) report and recommendation adopted, No. CIV.A. 11-1157, 2015
WL 1384487 (W.D. Pa. Mar. 25, 2015); U.S. ex rel. Miller v. Bill Harbert Int'l Const., Inc., 505
F. Supp. 2d 20, 26-27 (D.D.C. 2007).
Appellants’ Brief on the Merits
Page 21
allegations. Since neither of those are an attempt to shift liability to the State or
Xerox in the event the Dental Group is found liable, those claims are permissible.
Assume, for the sake of argument, that a jury determines Dental Group
member Harlingen Family Dentistry did not intentionally inflate HLD score sheets
in an attempt to receive payments for unqualified orthodontic services. 9 Harlingen
Family Dentistry’s claims for liability and damages against the State and Xerox
for, inter alia, failing to fulfill its duty to definitively determine medical necessity
prior to the rendering of orthodontic services might be the next question on the jury
charge. Or perhaps the next question might be whether the State and Xerox made
false statements to Harlingen Family Dentistry regarding the standard for what
would qualify a patient for orthodontic services. Or the next jury question could be
whether the State and/or Xerox induced Harlingen Family Dentistry to make
technical, but unintentional (and thus not fraudulent under the TMFPA),
misstatements about whether patients were qualified for orthodontic services.
Likewise, Harlingen Family Dentistry’s claims that the State and Xerox made false
and misleading representations (e.g. regarding its review/prior authorization
9
A court has, in fact, already determined this fact. In Janek v. Harlingen Family Dentistry, P.C.,
451 S.W.3d 97 (Tex. App.—Austin 2014, no pet.), Harlingen mandamused the Executive
Director of the Texas Health and Human Services Commission to force compliance with a
HHSC Final Order requiring release of sequestered funds. The release of those funds was
required because an administrative proceeding had determined the State had no evidence
Harlingen committed fraud or willful misrepresentation with regard to HLD score sheets.
Nevertheless, that is exactly the same claim the State has brought in this civil case.
Appellants’ Brief on the Merits
Page 22
process, regarding the dispositive nature of its prior authorization decisions vis-a-
vis medical necessity, and regarding payments for prior authorized services) will
be actionable and recoverable if Harlingen itself did not makes those false and
misleading statements. Thus, the counterclaims are “independent claims.”
D. None of the State’s bases for asserting a lack of jurisdiction are applicable.
The State’s Plea to the Jurisdiction argued that the District Court did not
have jurisdiction because:
1) Reata involved a tort action, while the State claims this Medicaid Fraud
action is not a tort case, so the State believes Reata should not apply;
2) The State claims the only germane counterclaims are claims under the
TMFPA;
3) The State asserts that the counterclaims are not counterclaims at all, but
are instead the affirmative defense of estoppel;
4) Since the TMFPA does not expressly say that when the State files a
TMFPA suit that it waives sovereign immunity, there is no waiver; and
5) The Dental Group does not have standing to sue for breach of contract.
Each point will be addressed in turn below.
D.1. A Medicaid Fraud case is still a fraud case; that is, a tort action.
The State wants this Court to believe there is something special about this
TMFPA case that changes the normal rules and makes relevant case law become
Appellants’ Brief on the Merits
Page 23
inapplicable. The State’s claim that this is a “statutory law enforcement action” is a
transparent attempt to elevate this case and convert it into something that it is not.
Anytime the State or an agency bases a legal action on a statute, the case could be
called a “statutory law enforcement action.” And while the State has cited to a
statute (the TMFPA) as the basis for its claims, this case is more plainly described
as a suit to recover money and monetary damages (CR 129 at paragraph 17.2) for
intentional acts by members of the Dental Group. The fact that the monies were
paid through the Medicaid program instead of some other State program, such as
the State’s windstorm insurance program, does not transform this case into
something wildly special. The alleged intentional act in this case—fraud—is a
simple tort, albeit one for which the remedies are statutorily created under the
TMFPA. Thus, there is no reason why Reata, which was a case where the
government asserted tort claims, should not govern in this case.
D.2. Counterclaims do not have to mirror the State’s cause of action.
It is pure fabrication for the State to claim that the only claims the Dental
Group could bring in this case are claims under the TMFPA. (CR 48). This court
has specifically rejected the contention that counterclaims against the government
must be reciprocal or brought under the same legal theory. City of New Braunfels
v. Carowest Land, Ltd., 432 S.W.3d 501, 524 (Tex.App.—Austin 2014, no pet.)
(“As a threshold observation, the fact that Carowest's claims sound in tort rather
Appellants’ Brief on the Merits
Page 24
than contract does not in itself mean that they cannot be ‘germane to, connected
with, and properly defensive to’ the City's contract claim, as the inquiry's proper
focus is on the operative facts rather than the particular legal theories asserted.”);
see also Sweeny Cmty. Hosp. v. Mendez, 226 S.W.3d 584, 592 (Tex.App.—
Houston [1st Dist.] 2007) (holding that it is not necessary for counterclaims to
mirror the cause of action brought by the governmental body, and finding tortious
interference, defamation, and retaliation claims were proper where the government
had sued for breach of contract).
D.3. The Dental Group has not asserted the affirmative defense of
estoppel, but it could rightfully do so later, especially based on these
facts.
The State recasts the Dental Group’s counterclaims as “estoppel” in the hope
that this Court will conclusively hold that the State is not subject to equitable
defenses like estoppel. The State is incorrect on both counts: the Dental Group’s
counterclaims are not the equivalent of estoppel, and even if they were, the State
can be subject to estoppel.
The fact that the State and its agent, Xerox, pre-authorized everything that
the State is now seeking to recover is an important, and undisputed, fact.
Somewhere down the line that fact may be part of an estoppel defense, but the
facts surrounding any alleged estoppel are independent of the Dental Group’s tort
and contract counterclaims. Stated differently, just because some of the facts that
Appellants’ Brief on the Merits
Page 25
will be revealed as part of some of the counterclaims might support an estoppel
defense by the Dental Group does not mean the counterclaims equate to estoppel.
They do not. The Dental Group’s counterclaims require factual and legal elements
that are far beyond what would be relevant to an estoppel claim.
And even if the State could change the Dental Group’s counterclaims into
affirmative defenses, it is simply not true that estoppel, laches and other equitable
remedies cannot apply against the State. This Court is not a stranger to applying
estoppel to the government to prevent an unjust result. City of Austin v. Garza, 124
S.W.3d 867, 875 (Tex. App.—Austin 2003, no pet.) (“While we acknowledge that
the applicability of estoppel against municipalities is rare, we conclude that it
would be manifestly unjust for the City to retain the benefits of its mistake yet
avoid its obligations… it would be manifestly inequitable for the City to retain the
land Garza donated so that he could take advantage of transfer credit provisions
available only under the [ordinance] and later deny him the benefit of developing
under the [ordinance].”); see also City of Fredericksburg v. Bopp, 126 S.W.3d 218
(Tex. App.—San Antonio 2003, no pet.). The Texas Supreme Court has addressed
and/or applied estoppel against the government many times. See City of San
Antonio v. Schautteet, 706 S.W.2d 103, 105 (Tex. 1986) (applying estoppel);
Roberts v. Haltom City, 543 S.W.2d 75 (Tex. 1976) (applying estoppel); City of
White Settlement v. Super Wash, Inc., 198 S.W.3d 770 (Tex. 2006) (citing City of
Appellants’ Brief on the Merits
Page 26
Austin v. Garza with approval); City of Hutchins v. Prasifka, 450 S.W.2d 829, 835-
36 (Tex. 1970)
Directing the Dental Group to provide orthodontic services and later
claiming that the delivery of those same services was illegal or improper is
manifestly unjust. But this court may not need to decide the issue at all, and it
certainly does not need to do so immediately. The Dental Group has not pled any
affirmative defenses such as estoppel.
D.4. The statute does not have to expressly waive sovereign immunity,
waiver by action will suffice in this case.
As stated above, it does not matter that the TMFPA does not contain a
waiver of sovereign immunity. It does not need to. By filing suit against the Dental
Group, the State affirmative placed itself in the position of an ordinary litigant. “It
would be fundamentally unfair to allow a governmental entity to assert affirmative
claims against a party while claiming it had immunity as to the party's claims
against it.” City of Galveston v. State, 217 S.W.3d 466, 472 (Tex. 2007) quoting
Reata at 375-76.
The State references TMFPA §36.116 for its idea that the Legislature
specifically intended to not waive sovereign immunity when the State brings
TMFPA claims. The State’s argument takes TMFPA language out of context.
Section 36.116 is found in Subchapter C of the TMFPA titled “Actions By Private
Appellants’ Brief on the Merits
Page 27
Persons”10; which concerns fraud actions brought in the name of the State by a
citizen of the State. Subchapter C section 36.116 operates only to prevent the
citizen from waiving sovereign immunity on behalf of the State when the citizen
files a TMFPA claim. The purpose is to prevent citizens from being able to waive
the State’s immunity at any time by simply bringing an ill-conceived lawsuit under
the TMFPA.
The State references §36.116 to argue that the State never waives sovereign
immunity in a TMFPA case. But that is not what that section says. And Reata does
not require that the TMFPA or any other statute expressly do so. Simply filing
affirmative claims for monetary relief is enough to waive the State’s sovereign
immunity, and the State has done so. The TMFPA does not need to say that when
the State files suit it waives sovereign immunity—case law already says that is the
consequence of bringing a claim for monetary relief.
D.5. Standing is not really a jurisdictional question, so a plea to the
jurisdiction is improper to resolve the State’s
The State claims that the Dental Groups’ counterclaims fail to plead facts to
support standing, and that the lack of standing is jurisdictional. The State is
incorrect on the facts and the law. “The question of whether a party is entitled to
sue on a contract is often informally referred to as a question of ‘standing,’ it is not
truly a standing issue because it does not affect the jurisdiction of the court; it is,
10
Subchapter B of the TMFPA is titled “Action By the Attorney General.”
Appellants’ Brief on the Merits
Page 28
instead, a decision on the merits. [citation omitted] When it is established that a
breach of contract plaintiff lacks entitlement to sue on a contract, the proper
disposition may be summary judgment on the merits, but it is not dismissal for
want of jurisdiction.” Heartland Holdings, Inc. v. U.S. Trust Co. of Texas N.A., 316
S.W.3d 1, 7 (Tex.App.—Houston [14th Dist] 2010, no pet) citing Yasuda Fire &
Marine Ins. Co. of Am. v. Criaco, 225 S.W.3d 894, 898 (Tex.App.-Houston [14th
Dist.] 2007, no pet.), MCI Telecomm. Corp. v. Tex. Utils. Elec. Co., 995 S.W.2d
647, 650–54 (Tex.1999), et al.). Thus, the State’s arguments on this point are not
jurisdictional. The trial court has not taken any evidence on standing, so there were
no facts developed to support a factual disposition on the Dental Groups’ standing.
Issue 2. Did the trial court err in dismissing the Dental Group’s third
party claims against Xerox, since:
A. The arguments and logic regarding the Dental Group’s counterclaims is
equally applicable to third party claims.
The TMFPA is silent regarding third party claims. However, Federal FCA
precedent treats counterclaims and third party claims the same way. They are often
discussed in the same breath. See United States v. Campbell No. CIV.A. 08-1951,
2011 WL 43013, at *11 (D.N.J. Jan. 4, 2011) (“Counterclaims or third party claims
by an FCA Defendant that are based on damages which are independent claims
may be permitted…”); see Miller, 505 F. Supp. 2d at 27 (FN 1) (indicating that
whether the claims should be properly called counterclaims, cross-claims, or third-
Appellants’ Brief on the Merits
Page 29
party claims was irrelevant to the analysis about whether the claims were viable).
Permissible third party claims in the FCA context are available, for example, when
a FCA Defendant has a cause of action for damage to him independent of his FCA
liability. “[A] claim by an FCA Defendant which requires for its success a finding
that the FCA Defendant is liable is the kind of claim barred by the FCA.” Miller,
505 F. Supp. 2d at 28; see also United States v. Nardone, 782 F. Supp. 996, 999
(M.D.Pa.1990) (dismissing FCA Defendants' counterclaim and third party
complaint seeking indemnification). Thus, the analysis set out above regarding the
Dental Groups’ counterclaims against the State is equally applicable to the third
party claims.
Part and parcel with the need to maintain Providers’ claims is the fact that
this Court cannot make the ultimate decision regarding whether any of Providers’
third-party claims are essentially contribution or indemnity claims (and therefore
may be barred) until each Provider’s liability has been determined. U.S. ex rel.
Miller explored two prior, consistent, FCA cases and expressly found that allowing
the counterclaims and cross-claims to be maintained and proceed through a final
determination was necessary:
Illustrations are provided by the cases. For instance, in Burch ex rel.
U.S. v. Piqua Engineering, Inc., 145 F.R.D. 452, 456–57 (S.D.Ohio
1992), an FCA Defendant counterclaimed against the relator, alleging
breach of various duties based on poor work performance, and also
defamation. The court allowed all claims to go forward, which was
decidedly correct. The poor work performance claim was
Appellants’ Brief on the Merits
Page 30
independent of the FCA claims in the first sense described by this
Court—it could succeed or fail regardless of whether Defendant
violated the FCA. The defamation claim was separate from the FCA
claims in the second sense described by this Court; the Defendant
could sustain its claim only if it prevailed on the FCA claims and
demonstrated there was no truth to the relator's allegations.
Similarly, in United States ex rel. Stephens v. Prabhu, 1994 WL
761237 at *1, Civil Action No. 92–653 (D.Nev.1994), the Defendants
brought claims against relator for libel, trade libel, abuse of process,
malicious prosecution, and infliction of emotional distress, all arising
from the relators' allegations that Defendants had submitted false
claims. The court allowed the claims to go forward, recognizing
that if Defendants were found not liable in the FCA case, their
counterclaims would be viable. If they were found liable in the FCA
case, then their counterclaims would fail as a matter of law, and in
addition would be barred by the FCA as impermissible attempts to
seek contribution or indemnity. But when Defendants brought third-
party claims against other individuals who they alleged had
participated in submitting the false claims, the court disallowed these
claims, since they could only succeed if Defendants were held liable,
and thus were barred under the FCA.
U.S. ex rel. Miller, 505 F. Supp. 2d at 28 (emphasis added).
In summary of the argument presented above, federal FCA cases permit
counterclaims and third-party claims to be made by a FCA Defendant, subject to
this sensible rule: counterclaims and third-party claims by a FCA Defendant are
permitted as long as they do not require, as a prerequisite, a finding of the
Defendant’s liability. Id. at 26. Truly independent claims are permitted; and even
dependent claims are permitted when the counterclaims and third-party claims can
only prevail if the Defendant is found not liable, because those claims can succeed
upon a finding that the State’s accusations were untrue. Id. at 27-28. Finally, for
Appellants’ Brief on the Merits
Page 31
claims that may succeed if the State’s accusations are untrue, those claims must be
maintained until a decision on the Defendant’s liability is final. Id. at 28. Only then
can the Court determine whether the Defendant’s claims must be dismissed on the
ground that they will have the effect of providing for indemnification or
contribution. Id. The Dental Group encourages this Court to adopt the common
sense and well-settled Federal framework for analyzing both the counterclaims and
third-party claims.
B. In any event, the Dental Group’s claims should have been severed, not
dismissed.
The trial court clearly believes that when it comes to the TMFPA, the State
is entitled to exclude whatever claims it wants to exclude, even if those claims
come from another party. (CR 65). Assuming, arguendo, that is the case, the
Dental Group’s claims against Xerox are not barred as a matter of law, they are
just not permitted to be adjudicated as part of a TMFPA case. Thus, the trial should
have severed the third party claims against Xerox, not struck them. Striking the
claims creates possible statute of limitation concerns, as well as concerns about res
judicata, collateral estoppel, and other possible affirmative defenses.
CONCLUSION
In Harlingen I and Harlingen II, the State tried to interpret the law to suit its
immediate needs in those particular cases. Its interpretation in those case defied
plain language and common sense, and it led to untenable results that infringed on
Appellants’ Brief on the Merits
Page 32
due process for those caught in its nets. This case is no different. The idea that
defendants can be forestalled from bringing counterclaims and third-party claims is
anathema to the concepts of due process and judicial economy.
PRAYER
Appellants pray this court:
1) reverse the trial court order granting the State’s Plea to the Jurisdiction so
that the Appellants’ claims against the State may proceed in this case,
and
2) reverse the trial court order granting the State’s Motion to Dismiss so that
the Appellants’ claims against the third party Xerox may proceed in this
case, or
3) in the alternative, reverse the trial court’s grant of the Motion to Dismiss
the Appellants’ third party claims, and instruct the court to sever the
Appellants’ third party claims against Xerox into a different cause.
___________________________________
Jason Ray
RIGGS & RAY, P.C.
700 Lavaca, Suite 920
Austin, Texas 78701
Telephone: (512) 457-9806
Facsimile: (512) 457-9866
jray@r-alaw.com
E. Hart Green
Appellants’ Brief on the Merits
Page 33
Mitchell A. Toups
WELLER, GREEN, TOUPS & TERRELL, L.L.P.
Post Office Box 350
Beaumont, Texas 77704-0350
Telephone: (409) 838-0101
Telecopier: (409) 832-8577
hartgr@wgttlaw.com
matoups@wgttlaw.com
ATTORNEYS FOR 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, DR. JUAN
VILLARREAL, 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
SALINAS, D.D.S. PA, AND DR. ROCKY
SALINAS.
Appellants’ Brief on the Merits
Page 34
CERTIFICATE OF COMPLIANCE
I certify that this Brief complies with TRAP Rule 9.4 and contains 7,815
words in Times New Roman typeface of 14-point.
Jason Ray
Appellants’ Brief on the Merits
Page 35
CERTIFICATE OF SERVICE
I hereby certify that a true and correct copy of the Response to Request for
Disclosure was served via e-mail and e-service on the 19th day of June, 2015 on the
following:
Counsel for Plaintiff State of Texas
Raymond C. Winter
Chief, Civil Medicaid Fraud Division
Reynolds B. Brissenden
Assistant Attorneys General
Office of the Attorney General
P.O. Box 12548
Austin, Texas 78711-2548
Telephone: (512) 936-1709
Facsimile: (512) 936-0674
E-mail: raymond.winter@texasattorneygeneral.gov
E-mail: reynolds.brissenden@texasattorneygeneral.gov
Counsel for Xerox Corporation, et al.
Robert C. Walters Eric J. R. Nichols
Gibson, Dunn, & Crutcher, LLP Christopher R. Cowan
2100 McKinney Avenue, Suite 1100 Beck Redden, LLP
Dallas, Texas 75201 515 Congress Avenue, Suite 1750
Telephone: (214) 698-3100 Austin, Texas 78701
Facsimile: (214) 571-2900 Telephone: (512) 708-1000
E-mail: RWalters@gibsondunn.com Facsimile: (512) 708-1002
E-mail: enichols@beckredden.com
W. Curt Webb E-mail: ccowan@beckredden.com
Constance H. Pfeiffer
Beck Redden, LLP
1221 McKinney Street, Suite 4500
Houston, Texas 77010
Telephone: (713) 951-3700
Facsimile: (713) 951-3720
E-mail: cwebb@beckredden.com
E-mail: cpfeiffer@beckredden.com
Appellants’ Brief on the Merits
Page 36
Counsel for Defendants/Third-Party Plaintiffs
E. Hart Green J.A. “Tony” Canales
Mitchell A. Toups CANALES & SIMONSON, P.C.
WELLER, GREEN, TOUPS & TERRELL, 2601 Morgan Ave.
L.L.P. P.O. Box 5624
Post Office Box 350 Corpus Christi, Texas 78465-5624
Beaumont, Texas 77704-0350 Telephone: (361) 883-0601
Telephone: (409) 838-0101 Facsimile: (361) 884-7023
Facsimile: (409) 832-8577 E-mail:
E-mail: hartgr@wgttlaw.com tonycanales@canalessimonson.com
E-mail: matoups@wgttlaw.com Counsel for M&M Orthodontics, P.A.,
Counsel for Defendants Dr. Scott Malone, Dr. Diana Malone,
Michelle Smith, National Orthodontix
Richard B. Pecore Mgmt., PLLC and Dr. John Vondrak
LILES PARKER, PLLC
3400 N. McColl Rd., Suite F-35 Oscar X. Garcia
McAllen, Texas 78501 Law Offices of Oscar X. Garcia
Telephone: (202) 298-9750 302 Kings Highway, Suite 112
Facsimile: (202) 337-5804 Brownsville, Texas 78521
E-mail: rpecore@lilesparker.com Telephone: (956) 554-3000
Counsel for RGV Smiles by Rocky Salinas, Facsimile: (956) 554-3248
DDS PA, E-mail: oxgarcia@aol.com
and Dr. Rocky Salinas Counsel for Dr. Vivian Teegardin
Robert M. Anderton Philip H. Hilder
Law Offices of Hanna & Anderton William B. Graham
900 Congress Avenue, Suite 250 Hilder & Associates, PC
Austin, Texas 78701 819 Lovett Boulevard
Telephone: (512) 477-6200 Houston, Texas 77006
Facsimile: (512) 477-1188 Telephone: (713) 234-1416
E-mail: andertonr@msn.com Facsimile: (713) 655-9112
Counsel for Richard F. Herrscher, DDS, E-mail: philip@hilderlaw.com
MMSC, PC and Dr. Richard F. Herrscher E-mail: will@hilderlaw.com
Counsel for Dr. Wael Kanaan
____________________________
Jason Ray
Appellants’ Brief on the Merits
Page 37
APPENDIX I
Order Granting State’s Plea to the
Jurisdiction and Motion to Dismiss
Third Party Claims
April 28th, 2015
Judge Stephen Yelenosky
DC BK15120 PG81
,- Filed in The Distric~ Court
of Travis County, 1exas
~
CAUSE NO. D-1-GN-14-005380
THE STATE OF TEXAS § IN THE DISTRICT COURT OF
§
Plaintiff, §
§
v. §
§
DR. BEHZAD NAZARI, D.D.S. § TRAVIS COUNTY, TEXAS
D/B/A ANTOINE DENTAL §
CENTER, DR. BEHZAD NAZARI, §
DR. WAEL KANAAN, §
HARLINGEN FAMILY §
DENTISTRY, P.C., N/K/A, §
PRACTICAL BUSINESS §
SOLUTIONS, SERIES 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, P A, DR. SCOTT §
MALONE, DR. DIANA MALONE, §
MICHELLE SMITH, NATIONAL §
ORTHODONTIX, MGMT, PLLC, §
DR. JOHN VONDRAK, RGV §
SMILES BY ROCKY L. SALINAS, §
D.D.S. P A, AND DR. ROCKY §
SALINAS § 53RD JUDICIAL DISTRICT
§
Defendants. §
ORDER GRANTING STATE'S PLEA TO THE JURISDICTION
AND MOTION TO DISMISS THIRD PARTY CLAIMS
On April15, 2015, the Court heard the State ofTexas's Plea to the Jurisdiction, Plea
in Bar and Motion to Dismiss Third Party Claims, filed on January 20, 2015. All parties
appeared through their respective counsel and announced ready.
Case # D-1-GN-14-005380
~~~~m~m~m~m~m~~~~~w~w~~~
004002256
383
DC BK15120 PG82
r b--\--fl{\)- tLV-00?3 go
~S9~ t of 2-
Having considered the Pleas, Motion, response briefs, and arguments of counsel,
the Court ORDERS that the State of Texas's Plea to the Jurisdiction is GRANTED.
Defendants' counterclaims against the State are DISMISSED with prejudice. The Court
further ORDERS that the State of Texas's Motion to Dismiss Third Party Claims is also
GRANTED. Consistent with this Court's rulings in the State's litigation against Xerox,
the Court finds that the State is entitled to bring this action against defendants to the
exclusion of other parties. Defendants' third party claims against Xerox are DISMISSED.
J.h A~
Signed this,{]_ day of~' 2015
I
2
384