U.S. ex rel. Barron v. Deloitte & Touche, L.L.P., 03-50507.

• Decision Date: 11 August 2004
• Docket Number: No. 03-50507.,03-50507.
• Citation: 381 F.3d 438
• Parties: UNITED STATES of America, ex rel., Toni R. BARRON; Vicky J. Scheel, Plaintiffs-Appellants, v. DELOITTE & TOUCHE, L.L.P.; Deloitte & Touche Consulting Group, L.L.C.; Deloitte & Touche Consulting Group Holding, L.L.C.; Medicaid Claim Solutions of Texas, Inc.; National Heritage Insurance Co., Defendants-Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

381 F.3d 438

UNITED STATES of America, ex rel., Toni R. BARRON; Vicky J. Scheel, Plaintiffs-Appellants, v. DELOITTE & TOUCHE, L.L.P.; Deloitte & Touche Consulting Group, L.L.C.; Deloitte & Touche Consulting Group Holding, L.L.C.; Medicaid Claim Solutions of Texas, Inc.; National Heritage Insurance Co., Defendants-Appellees.

No. 03-50507.

United States Court of Appeals, Fifth Circuit.

August 11, 2004.

Appeal from the United States District Court for the Western District of Texas.

Katherine Martinez-Vitela (argued), Marlene M. Martin, San Antonio, TX, for Barron and Scheel.

F. Joseph Warin, Robert C. Blume, Daniel A. Cantu, Miguel Angel Estrada (argued), Gibson, Dunn & Crutcher, Washington, DC, for Deloitte & Touche, L.L.P., Deloitte & Touche Consulting Group L.L.C. and Deloitte & Touche Consulting Group Holding, L.L.C.

Andrew L. Kerr, Holland & Knight, San Antonio, TX, for Medicaid Solutions of Texas.

David John Schenck (argued), Weston C. Loegering, Christopher Donald Kratovil, Hughes & Luce, Dallas, TX, Brittan L. Buchanan, Van Osselaer, Cronin & Buchanan, Austin, TX, for Nat. Heritage Ins. Co.

Stephanie Robin Marcus (argued), Michael S. Raab, U.S. Dept. of Justice, Civ. Div.-Appellate Staff, Washington, DC, for U.S., Amicus Curiae.

Before KING, Chief Judge, and REAVLEY and EMILIO M. GARZA, Circuit Judges.

REAVLEY, Circuit Judge:

This is a qui tam action under the False Claims Act, 31 U.S.C. § 3729, against National Heritage Insurance Company ("NHIC"), Deloitte & Touche, and Medicaid Claim Solutions of Texas (collectively, "Defendants"). Toni Barron and Vicky Scheel ("Relators") assert that Defendants participated in the knowing submission to the United States of false claims for Medicaid reimbursement. Relators, who are both medical professionals, maintain that they learned of Defendants' false claims in the course of providing therapeutic services to students in several Texas public school districts. According to Relators, consultants from both Deloitte and Medicaid Solutions alerted local school districts to the opportunity to gain reimbursement through Medicaid for health services that the districts were already providing. Those consultants also allegedly instructed the districts to maximize their recovery through improper billing practices. Relators further aver that NHIC, which processes claims and distributes federal Medicaid funds for the State of Texas, acquiesced in the fraudulent billing practices described in the complaint. The district court concluded that any action arising out of NHIC's role as a Medicaid fiscal intermediary is barred by Texas's Eleventh Amendment immunity. We disagree.¹

This court reviews the issue of Eleventh Amendment immunity de novo. Cozzo v. Tangipahoa Parish Council— President Gov't.² In order to determine whether the district court properly concluded that NHIC is an arm of the state and thus entitled to sovereign immunity from this damages action, we employ a six factor test:

1. Whether the state statutes and case law view the agency as an arm of the state;

2. The source of the entity's funding;

3. The entity's degree of local autonomy;

4. Whether the entity is concerned primarily with local as opposed to state-wide, problems;

5. Whether the entity has the authority to sue and be sued in its own name;

6. Whether the entity has the right to hold and use property.

Hudson v. City of New Orleans.³ This Clark test seeks to determine "if the state is the real, substantial party in interest because the suit seeks to impose a liability which must be paid from public funds in the state treasury."⁴

The second Clark factor—the source of the entity's funding—is the weightiest factor, and it is controlling here. See Vogt v. Bd. of Comm'rs.⁵ The Eleventh Amendment exists mainly to protect state treasuries. See id. To determine if the state treasury is being protected, this court looks first to whether the state would be liable for a judgment against the defendant and then to whether the state would be liable for the defendant's "general debts and obligations." Hudson.⁶ In this case, the state is neither directly responsible for a judgment, nor would it indemnify the defendant. The contract between NHIC and the State of Texas resolves the matter because it dictates that NHIC is to pay its own judgments and indemnify the State from any liability.⁷ Additionally, the parties do not contend that the State is responsible for NHIC's general debts and obligations. This court's inquiry about a judgment's effect on state treasuries does not extend to suppositions about whether NHIC will: (1) pay its judgment from funds derived from the state for performing its contractual obligations; (2) attempt to pass on future litigation costs to the state through higher prices; or (3) demand future indemnification agreements or contribution to future judgments. See Williams v. Dallas Area Rapid Transit⁸; Pendergrass v. Greater New Orleans Expressway Comm'n⁹; see also United States ex rel. Ali v. Daniel, Mann, Johnson & Mendenhall.¹⁰

Turning to the other Clark factors, the court is to look at how state statutes and case law characterize NHIC. Texas law does authorize the Texas Department of Health to "use any fiscal intermediary" to assist in the administration of federally authorized medical-assistance programs. TEX. HUM. RES.CODE ANN. § 32.029(b) (Vernon 2001). But no indicia of state law — "constitution, laws, judicial opinions, attorney general's opinions, [or] other official statements"¹¹ — identify NHIC as something other than a purely private corporation. In particular, there is no state case law identifying NHIC as an arm of the state. See Jacintoport Corp. v. Greater Baton Rouge Port Com'n.¹²

The third Clark factor, the entity's degree of local autonomy, is difficult to evaluate in the context of a private corporation. Most "arm of the state" cases address the distinction between local and state control. See, e.g., Minton v. St. Bernard Parish Sch. Bd.¹³ NHIC has little discretion in executing its contract with the State; the State provides NHIC with specific instructions on how to pay Medicaid claims for the school-based health services that are at issue in this case. Yet, NHIC is an autonomous entity; the State neither appoints nor approves of NHIC's board of directors or its corporate officers. Cf. Delahoussaye v. City of New Iberia.¹⁴ Moreover, to determine an entity's autonomy, this court is directed to look at the "`extent of the [entity's] independent management authority,' not just the independence of the individual [board members]." Jacintoport Corp.¹⁵ As a private corporation, NHIC has the independent authority to make internal decisions about compensation and the authority to contract for needed services. Additionally, even if we were to conclude this factor weighed in favor of NHIC's immunity, control is not a dispositive factor. See Hess v. Port Auth. Trans-Hudson Corp.¹⁶

The fourth Clark factor, the entity's concern with "local, as opposed to statewide problems,"¹⁷ is also difficult to assess for a private corporation. The usual test is "whether the entity acts for the benefit and welfare of the state as a whole or for the special advantage of local inhabitants." Pendergrass.¹⁸ In acting as Texas's claim administrator, NHIC demonstrates a concern for a statewide rather than local problem. But, of course, private corporations operate for the benefit of their investors, rather than the State. See generally TEX. BUS. CORP. ACT ANN. art. 13.06 § A (Vernon 2003); Dunagan v. Bushey.¹⁹

The last two Clark factors also weigh against granting immunity. NHIC has the "authority to sue and be sued in its own name" and may "hold and use property." Clark.²⁰

We conclude that NHIC is not an arm of the State of Texas and is therefore not shielded by Eleventh Amendment immunity.

We observe, however, that several district courts have held NHIC to be an arm of the State of Texas. See Texas Hosp. Ass'n v. National Heritage Ins. Co.;²¹ United States ex rel. Churchill v. Texas;²² United States v. Mack;²³ St. Joseph Hosp. v. Elec. Data Sys. Corp.²⁴ These cases rely primarily on a combination of four arguments: (1) the requested or ultimate relief in a given case would be an increased outlay of Medicaid funds which would come directly from the State; (2) since some NHIC funds come from the State, the judgment is inevitably paid by the State; (3) all fiscal intermediaries are immune under Fifth Circuit precedent; and (4) NHIC's lack of discretion renders it an agent of the State. We do not find these arguments to be persuasive.

First, some of the decisions rely in part on the fact that the relief requested by the plaintiffs would involve an increased outlay of Medicaid funds coming directly from the State. See Churchill;²⁵ see also Texas Hosp. Ass'n.²⁶ But, here, the requested damages sought by Relators would not come from Medicaid outlays; those damages would be paid by NHIC from its corporate funds.²⁷

A second (related) line of reasoning contends that NHIC should be granted immunity simply because it might use funds earned through its contract with the State to pay any damages award. Churchill;²⁸ Mack.²⁹ Accepting this argument would convert all private contractors, not just fiscal intermediaries, into immune agents whenever they are doing work for the State. In addition, as we explained above, the prospective impact on the state's treasury is not the same as the Clark inquiry into direct implications for the state fisc.

Another ground offered in favor of immunity relies on Fifth Circuit precedent where Medicare fiscal intermediaries are entitled to federal immunity.³⁰ See Matranga v. Travelers Ins. Co.;³¹ Peterson v. Blue Cross/Blue Shield of Texas;³² Peterson v. Weinberger.³³ In Weinberger (the case on which Matranga and Blue Cross/Blue Shield depend), the fiscal intermediaries in question were governed by regulations that provided that "[i]n the performance of their...