United States District Court, D. Oregon, Portland Division
PATRICK ALLEN, in his official capacity as director of, OREGON HEALTH AUTHORITY, an agency of the State of Oregon, Plaintiff,
FAMILYCARE, INC., an Oregon nonprofit corporation, Defendant. FAMILYCARE, INC., an Oregon nonprofit corporation, Plaintiff,
OREGON HEALTH AUTHORITY, an agency of the State of Oregon, and PATRICK ALLEN, both individually and in his official capacity as director of the Oregon Health Authority, Defendants.
OPINION AND ORDER
MICHAEL W. MOSMAN CHIEF U.S. DISTRICT JUDGE
matter comes before me on Oregon Health Authority's
Motions to Dismiss ,  and FamilyCare Inc.'s
Motion to Dismiss .
is a national medical assistance program that provides
medical care for low-income and disabled individuals. See
Douglas v. Indep. Living Ctr. of S. Cat., Inc., 565 U.S.
606, 610 (2012). It is administered at the federal level by
the Department of Health and Human Services' Centers for
Medicare & Medicaid Services ("CMS").
Id. Under the program, the CMS provides financial
assistance to participating states to reimburse the cost of
providing medical care to the states' Medicaid-eligible
citizens. Id. To qualify for federal funds, a state
must submit to CMS "a state Medicaid plan that details
the nature and scope of the state's Medicaid program,
" and CMS must approve the plan. Id.; see also
42 U.S.C. § 1396a(a), (b); 42 C.F.R. § 430.10.
Participation is voluntary, but once a state chooses to
participate, it must comply with the Medicaid Act and its
implementing regulations. Wilder v. Va. Hosp. Ass'n,
496 U.S. 498, 502 (1990).
Medicaid Program, known as the Oregon Health Plan, is
administered by the Oregon Health Authority ("OHA")
and operates with federal approval as a "demonstration
project" under Section 1115 of the Social Security Act.
ORS 413.032; Compl., Case 3:18-cv-00212  [hereinafter
"OHA Complaint"] ¶ 13-14; see 42 U.S.C. §
1315. Section 1115 gives CMS the authority to approve
experimental state plans and in turn gives states additional
flexibility to design and improve their Medicaid programs for
the benefit of their citizens. 42 U.S.C. § 1315; OHA
Complaint ¶ 13.
implemented one such plan in which it contracts with
Coordinated Care Organizations ("CCOs"), which in
turn contract with health care providers to provide care. OHA
Complaint ¶¶ 11-12. Federal law and regulations
require OHA to submit its contracts with CCOs to CMS for
approval each year. 42 U.S.C. § 1396b(m)(2)(A)(iii); 42
C.F.R. § 438.4(b). If the contracts are not approved,
CMS will withhold federal funding. See 42 U.S.C.
§ 1396b(m)(2)(A)(iii). Among other requirements, the
contract rates must be actuarially sound. Id. State
law incorporates these requirements. See ORS 413.071
("Notwithstanding any other provision of law, federal
laws shall govern the administration of federally granted
funds."); see also OAR 410-141-3010(14)
("The Authority shall interpret and apply this rule to
satisfy federal procurement and contracting requirements in
addition to state requirements applicable to contracts with
CCOs. The Authority must seek and receive federal approval of
Inc. is one such CCO. Third Am. Compl., Case 3:18-cv-00296
 Ex. 1 at 501-53 [hereinafter "FamilyCare
Complaint"] ¶ 11. Operating since 1985, it was the
second-largest CCO in Oregon before it shut down early this
year. Id. ¶¶ 1, 4.
2014, FamilyCare signed a five-year contract ("the
Contract") with OHA to operate as a CCO. Id.
¶ 20. Since at least 2015, FamilyCare has battled with
OHA over the per person ("capitation") rates OHA
set for FamilyCare. See Id. ¶ 21. Generally,
FamilyCare alleges that OHA made actuarial errors that
resulted in too-low rates for FamilyCare and other CCOs.
Id. ¶¶ 20-23. FamilyCare first filed suit
against OHA in May 2015. Id. ¶ 23. There, it
alleged that its 2015 rates, which had decreased
FamilyCare's capitation by over 10%, were not actuarially
sound. Id. ¶¶ 21-25; id, Ex. 2.
FamilyCare sued again in 2016. Id. ¶ 28. The
parties reached a settlement agreement ("the Settlement
Agreement") to resolve both suits. Id.
¶¶ 30-33. Among other provisions, FamilyCare agreed
to the lower rates, and OHA gave FamilyCare a $24.8 million
settlement credit. Id. ¶ 31.
when OHA released its 2017 rates, FamilyCare again disputed
the numbers. Id. ¶¶ 38-41. In December
2016, the parties entered into a dispute resolution agreement
("the Dispute Resolution Agreement"), in which
FamilyCare accepted the 2017 rates but reserved its right to
challenge them. Id. ¶ 39. OHA agreed to openly
discuss the actuarial soundness of the rates. Id.
¶ 41. But, according to FamilyCare, OHA did not comply
with the Dispute Resolution Agreement. Id.
¶¶ 47-59. FamilyCare alleges that over the course
of the next few months, OHA, among other things, instituted a
smear campaign ("the Communications Plan") against
FamilyCare, in order to portray FamilyCare negatively in the
press. Id. ¶ 47. The then-Director of OHA
resigned after internal emails that discussed the
Communications Plan were published in the news. Id.
she resigned, and Director Patrick Allen took over, OHA was
in the process of setting 2018 rates. Id. ¶ 60.
FamilyCare and others continued to identify suspected errors
to OHA. Id. ¶¶ 61-70. On December 8, 2017,
OHA agreed that the errors FamilyCare identified necessitated
a redetermination of the rates. Id. ¶ 70. OHA
committed to give FamilyCare a preliminary analysis of the
necessary redetermination on December 29, the last business
day of that year, and the last day FamilyCare could agree the
2018 rates. Id. ¶¶ 70-71. But on December
20, OHA told FamilyCare that it had 24 hours to decide
whether to accept or reject the 2018 rates, before OHA had
provided the preliminary analysis. Id. ¶¶
12-15. FamilyCare decided to reject the rates, since
it could not afford to accept them as they were. Id.
¶ 74. FamilyCare shut down. Id. ¶ 77.
sued OHA in Oregon state court. OHA removed the case to
federal court. In its Third Amended Complaint (filed before
the case was removed), FamilyCare asserts numerous claims
against OHA associated with OHA's 2017 and 2018 rate
setting process. Claim 1 of the Third Amended Complaint
alleges violation under §§ 1983 and 1985.
Id. ¶¶ 82-90. Claims 2, 3, 5, and 6 allege
breach of the Settlement Agreement. Id. ¶¶
91-111, 119-128. Claims 4 and 11 asserts violations of the
Oregon Administrative Procedure Act and request judicial
review of the 2017 and 2018 rates. Id. ¶¶
112-118, 152-57. Claims 7 and 8 allege violations of the
Dispute Resolution Agreement. Id. ¶¶
129-38. Claim 9 asserts intentional interference with
business relations. Id. ¶¶ 139-45. Claim
10 asserts violations of the five-year Contract. Id.
FamilyCare's case was removed, OHA moved to dismiss
Claims 6, 7, 8, and 9 on state law contract grounds.
See Mot. to Dismiss . The motion was fully
briefed below, but I asked the parties to revise the briefs
to reflect the federal standard for motions to dismiss.
Minutes of Proceedings . After the case was removed, OHA
moved to dismiss all of FamilyCare's claims on grounds
that FamilyCare had no right to actuarially-sound rates; that
FamilyCare's state APA claims are preempted; and that
qualified immunity bars FamilyCare's claim for damages
against Director Allen in his individual capacity. Mot. to
it removed FamilyCare's suit, OHA filed its own
declaratory judgment action. I granted the parties'
motion to consolidate. Order . OHA seeks a declaratory
judgment that federal law provides no basis for FamilyCare to
privately challenge, under the Oregon APA or otherwise,
whether its rates comply with federal Medicare laws. OHA
Complaint ¶¶ 31-37.
moved to dismiss OHA's one claim for relief. Mot. to
evaluating a motion to dismiss under Rule 12(b)(6), courts
are to accept the well-pleaded factual allegations of a
complaint as true and construe all inferences in favor of the
nonmoving party. Ariz. Students' Ass'n v. Ariz.
Bd. of Regents, 824 F.3d 858, 864 (9th Cir. 2016).
Dismissal under Rule 12(b)(6) is warranted if a complaint
fails "to state a claim to relief that is plausible on
its face." BellAtl. Corp. v. Twombly, 550 U.S.
544, 570, (2007). "Conclusory allegations of law ... are
insufficient to defeat a motion to dismiss." Lee v.
City of Los Angeles, 250 F.3d 668, 679 (9th Cir. 2001),
overruled on other grounds by Galbraith v. Cty. Of Santa
Clara, 307 F.3d 1119 (9th Cir. 2002).
pleading should be dismissed with prejudice if "the
court determines that the allegation of other facts
consistent with the challenged pleading could not possibly
cure the deficiency." Schreiber Distrib. Co. v.
Serv-WellFurniture Co., 806F.2d 1393, 1401 (9th Cir.
I. OHA's Motion to Dismiss Claims 1-6, 8, and
Motion to Dismiss , OHA advances four related arguments.
It argues first that I should dismiss FamilyCare's claims
1-6, 8, and 10-11 on the basis that FamilyCare does not have
a right to actuarially sound rates. Second, OHA argues that
FamilyCare's § 1983 and § 1985 claim (claim 1)
against Director Allen in his individual capacity fail
because FamilyCare lacks a constitutionally protected
interest in goodwill and actuarially sound rates and because
any violation was not clearly established. Third, OHA
contends that FamilyCare's state APA claims (4 and 11)
are preempted. Fourth, OHA contends that FamilyCare's
contract claims (claims 2-3, 5-6, 8, and 10) fail because
FamilyCare lacks a right to actuarially-sound rates.
Whether FamilyCare lacks a right to actuarially sound rates
(claims 1-6, 8, 10-11)
claims OHA moves to dismiss under this theory can be grouped
into three categories: (a) a claim under § 1983 and
§ 1985 for due process violations (claim 1); (b) claims
under the state APA for violation of state law (claims 4 and
11); and (c) claims under its contracts with OHA, for alleged
violations of various contractual provisions (claims 2-3,
5-8, and 10). OHA contends that all of these claims fail
because FamilyCare lacks a right to actuarially sound rates.
is wrong to suggest that each of these claims necessarily
depends on a right to actuarially sound rates. OHA's
reliance on Armstrong v. Exceptional Child Center,
Inc., 135 S.Ct. 1378 (2015) is misplaced, in part
because Armstrong address rights of action, not
rights. In Armstrong, plaintiffs were providers of
habilitation services to persons covered by Idaho's
Medicaid plan. 135 S.Ct. at 1382. They sued two officials in
Idaho's Department of Health and Welfare in federal
district court, claiming that Idaho violated Medicaid §
30(A) by reimbursing providers of habilitation services at
lower rates than § 30(A) permits. Id. The
providers asked the court to order the state officers to
increase these rates. Affirming the district court, the Ninth
Circuit said that the providers had an implied right of
action under the Supremacy Clause to seek injunctive relief
against the enforcement of or implementation of state
legislation. Id. at 1382-83. The Supreme Court
disagreed. It held that neither the Supremacy Clause, nor the
equitable power of federal courts provided an implied right
of action. Id. at 1384-86.
analysis of the second question-whether the suit could
proceed in equity-the Court noted that the "power of
federal courts of equity to enjoin unlawful executive action
is subject to express and implied statutory
limitations." Id. at 1385. Accordingly, the
Court turned to the statute to determine whether Congress had
expressly or impliedly limited the power of federal courts to
enjoin noncompliance with the Act. Here, the Court noted two
aspects of § 30(A). First, it considered that the
"sole remedy Congress provided for a State's failure
to comply with Medicaid's requirements ... is the
withholding of Medicaid funds by the Secretary of Health and
Human Services." Id. The Court explained that
this provision "might not, by itself, preclude
the availability of equitable relief." Id. So
the Court turned to the second aspect, which was the
"judicially unadministrable nature of §
30(A)." Id. Section 30(A) required that state
plans provide for payments that are "consistent with
efficiency, economy, and quality of care." Since
Congress "explicitly confer[ed] enforcement of this
judgment-laden standard upon the Secretary, " the Court
reasoned, it is clear that "Congress wanted to make the
agency remedy that it provided exclusive." Id.
(internal quotations and citations omitted). A plurality in
Armstrong further determined that Medicaid itself
did not imply a right of action for plaintiffs to sue for
violations of Medicaid section 30(A). Id. at
Armstrong is a right-of-action case: it asked
whether the Supremacy Clause, the federal court's
equitable powers, or the Medicaid Act provided the providers
a vehicle to challenge the state officers' failure to
comply with the Medicaid Act. Here, there is no question that
FamilyCare has a right of action. In fact, it has three:
FamilyCare has sued under § 1983, the Oregon APA, and
state law contract remedies.
the rights that FamilyCare seeks to enforce through those
rights of action are not rights to actuarially-sound rates.
Instead, FamilyCare asserts its due process rights, its right
to judicial review of illegal agency action, and its
contractual rights. Thus, at the initial stages of analysis,
none of FamilyCare's claims depends on a right to
actuarially sound rates. It would therefore be improper to
dismiss the claims at the outset on that basis, even though
FamilyCare's claims may ultimately implicate whether
FamilyCare has a right to actuarially-sound rates.
Whether qualified immunity bars FamilyCare's § 1983
claim (claim 1)
first claim for relief alleges civil rights violations and
conspiracy to commit civil rights violations on the theory
that OHA deprived and conspired to deprive FamilyCare of its
constitutionally-protected property interests without due
process. The parties agree that FamilyCare cannot bring a
claim for money damages against OHA and Director Allen in his
official capacity. Accordingly, FamilyCare seeks equitable
relief against Director Allen in his official capacity and
$50 million in damages against Director Allen in his
§ 1983 claim based on procedural due process has three
elements: (1) a liberty or property interested protected by
the Constitution; (2) a deprivation of the interest by the
government; (3) lack of process. Portman v. Cty. of Santa
Clara, 995 F.2d 898, 904 (9th Cir. 1993). FamilyCare
alleges (1) that it had a constitutionally-protected property
interest in its business goodwill and in actuarially sound
rates; (2) that Director Allen's decision to give
FamilyCare only twenty-four hours to decide whether to agree
to the 2018 rates, without telling FamilyCare what those
rates would be, and knowing that FamilyCare could not accept
the proposed rates, deprived FamilyCare of those rights; and
(3) that because FamilyCare was forced to immediately shut
down, any post-deprivation process was inadequate.
qualified immunity, OHA moves to dismiss only the claim for
monetary damages against Director Allen in his individual
immunity attaches when an official's conduct does not
violate clearly established statutory or constitutional
rights of which a reasonable person would have known."
White v. Pauly, 137 S.Ct. 548, 551 (2017) (per
curiam) (alterations and internal quotation marks omitted).
Under a two-step process, courts assess whether the state
actor's conduct violated a constitutional right when
viewed in the light most favorable to the party asserting the
injury. Saucier v. Katz, 533 U.S. 194, 201 (2001).
If such a violation exists, courts then must determine
whether the right violated was clearly established. Id.;
see Pearson v. Callahan, 555 U.S. 223, 226 (2009)
(noting that courts may address these steps in either order).
Step one: whether Director Allen's conduct violated a
first step, OHA argues that FamilyCare's § 1983
claim against Director Allen fails on two independent
grounds: (a) because FamilyCare failed to allege a
constitutionally-protected property interest and (b) because
FamilyCare received all process due.
Whether business goodwill and actuarially sound rates
constitute constitutionally-protected property
order to demonstrate a due process claim, a plaintiff must
show that it has a liberty or property interest protected by
the Constitution. Board of Regents v. Roth, 408 U.S.
564, 569 (1972). A protected property interest is present
where an individual has a reasonable expectation of
entitlement deriving from "existing rules or
understandings that stem from an independent source such as
state law." Id. at 577. "A reasonable
expectation of entitlement is determined largely by the
language of the statute and the extent to which the
entitlement is couched in mandatory terms.
"Ass'n of Orange Co. Deputy Sheriffs v.
Gates, 716 F.2d 733, 734 (9th Cir.1983).
Ninth Circuit has held that reputation is not a
constitutionally-protected property interest; thus, to state
a protected property interest in goodwill, a plaintiff must
allege that it has an interest (stemming from an independent
source such as state law) that goes beyond mere injury to
business reputation. See WMX Techs., Inc. v. Miller,
197 F.3d 367, 376 (9th Cir. 1999) (en banc). Depending on the
contours of state law, then, goodwill can be a protected
property interest. See Soranno 's Gasco, Inc. v.
Morgan, 874 F.2d 1310, 1315-16 (9th Cir. 1989)
(recognizing protected property interest in goodwill as
defined by California law).
does not point to an Oregon statute defining an interest in
goodwill, but Oregon cases do discuss the concept. In the
context of dividing marital assets, courts in Oregon have
defined "goodwill" as the value of a business
"over and above the value of its assets, "
including the "favor or advantage in the way of custom
that a business has acquired beyond the mere value of what it
sells." See, e.g., In re Marriage of McDuffy,56 P.3d 449, 453 (Or. Ct. App. 2002). Citing those cases,
this Court has held that Oregon law recognizes goodwill as a
property interest protected by due process. Speeds Auto
Servs. Grp., Inc. v. City of Portland, No.
3:12-CV-738-AC, 2014 WL 2809825, at *9 (D. Or. June 20,
2014); Westwood v. City of Hermiston, 787 F.Supp.2d
1174, 1197 (D. Or. 2011). Affirming Westwood, the
Ninth Circuit "agree[d] with the district court that
Plaintiffs' procedural due process claim based on the
deprivation of their property interest in goodwill failed
because the record contains no evidence of Nookie's
goodwill." Westwood ...