S J Assoc Patholgst v. Cigna Hlth, et al

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT

No. 20-20188

S J ASSOCIATED PATHOLOGISTS, P.L.L.C.,

Plaintiff - Appellant

v.

CIGNA HEALTHCARE OF TEXAS, INCORPORATED; CONNECTICUT
GENERAL LIFE INSURANCE COMPANY; CIGNA HEALTH AND LIFE
INSURANCE COMPANY,

Defendants - Appellees

Appeal from the United States District Court
for the Southern District of Texas

Before DENNIS, SOUTHWICK, and HO, Circuit Judges.
JAMES L. DENNIS, Circuit Judge:
This case involves state-law claims between a health insurance company
and a medical services provider. Although the parties dispute the propriety of
various actions taken by the federal district court after the case was removed
from Texas state court, we do not reach these points. Because the claims
between the plaintiff-appellant and defendant-appellee do not derive from the
same “nucleus of fact” as the federal claim that was the sole source of the
district court’s original jurisdiction, United Mine Workers of America v. Gibbs,
383 U.S. 715, 725 (1966), the district court lacked supplemental jurisdiction
over these state-law claims. We therefore VACATE the district court’s final
United States Court of Appeals
Fifth Circuit
FILED
July 6, 2020

Lyle W. Cayce
Clerk
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judgment compelling arbitration and dismissing the case and REMAND the
case with instructions that the case be remanded back to the state court.
I.
A.
S J Associated Pathologists (“SJAP”) is a Houston-area anatomic and
clinical pathology group that provides diagnostic lab testing at a number of
local hospitals. On May 1, 2002, SJAP and Cigna Healthcare of Texas
(“Cigna”) entered into a “Group Practice Managed Care Agreement” (“the In-
Network Agreement”) under which SJAP became an in-network provider for
Cigna’s customers.
1

In 2019, Cigna requested documentation of fifty randomly selected
claims that it had paid to SJAP on behalf of its customers as part of an audit
of its billing practices. Cigna sent its initial request to St. Joseph’s Medical
Center, a hospital out of which SJAP had operated at the time it entered into
the In-Network Agreement. SJAP had ended its relationship with St. Joseph’s
in 2012, and, based on St. Joseph’s response to the audit inquiry, Cigna placed
a “flag” on SJAP’s account that caused all future claims filed by SJAP to be
automatically denied.
2
SJAP eventually received notice of the audit and
provided Cigna with documentation of thirty-five of the identified claims,
stating that the records of the remaining fifteen were in the hands of a third-
party hospital and that it was unable to obtain them in time for the audit.
Cigna claims that the audit revealed that SJAP had been engaging in
“pass-through” billing, or billing Cigna for services that were rendered by third

1
In exchange for their billing Cigna for medical services at a negotiated rate, Cigna
refers its customers to in-network providers for their medical care and charges customers a
lower co-payment for treatment rendered by in-network providers, making in-network
providers more attractive to Cigna customers.
2
Cigna alleges that SJAP had failed to provide Cigna with timely notice of its change
in location as the In-Network Agreement required.
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parties, which Cigna asserts is prohibited by the In-Network Agreement.
Because 100% of the audited transactions used this billing structure, Cigna
demanded repayment of all claims that it had paid to SJAP between January
1, 2015 and April 3, 2019, totaling $4,628,601.07. The letter noted that the
auto-denial flag would be maintained until SJAP refunded the full amount
demanded. SJAP continued to provide services to Cigna customers and submit
claims that were automatically denied during the coming months. When
negotiations ultimately proved fruitless, Cigna sent SJAP notice that it was
terminating the In-Network Agreement pursuant to the “without cause”
termination clause, effective January 29, 2020.
B.
1.
In response to the termination letter, SJAP filed suit against Cigna in
Texas state court, asserting a range of state statutory and common law claims.
After the state trial court denied SJAP’s initial application for a temporary
restraining order, Cigna sent SJAP a letter formally invoking the allegedly
mandatory arbitration clause in the In-Network Agreement. SJAP declined to
voluntarily dismiss its case, and Cigna proceeded to file a motion to compel
arbitration.
While the motion to compel arbitration was pending, SJAP amended its
petition to add Connecticut General Life Insurance Company and Cigna
Health and Life Insurance Company (collectively, the “Cigna Affiliates”), along
with Insight Labs, LLC (“Insight”), Sim-Meds, Inc., and Justin Simons
(collectively, the “Insight Defendants”) as defendants, alleging federal
securities violations against the Insight Defendants under the Securities
Exchange Act of 1934. According to allegations in its amended complaint,
Cigna entered into a separate agreement in 2017 with Insight to acquire a 7.5%
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ownership share in the company and to take over operation of a lab location in
Dallas on behalf of Insight Labs (“the Lab Operating Agreement”). SJAP
claims that Insight, its parent company, and the parent company’s owner all
failed to make required payments and disclosures both before and after
entering into the Lab Operating Agreement. SJAP further asserts that,
without informing SJAP, Insight Labs entered into a confidential settlement
agreement in 2018 with the Cigna Affiliates to release claims that Insight Labs
had fraudulently billed Cigna for pathology services prior to SJAP taking over
operation of the lab. Importantly, these claims bear no apparent connection to
those against Cigna.
Following the amendment of SJAP’s complaint, Cigna amended its
motion to compel arbitration to add a request that the state trial court sever
SJAP’s claims against it from those asserted against the Insight Defendants.
The state trial court denied Cigna’s motion to compel arbitration without
explaining its reasoning. Cigna perfected an interlocutory appeal of the denial
to the Texas First Court of Appeals, which denied Cigna’s emergency motion
for a stay of proceedings in the trial court.
Thereafter, the state trial court held an evidentiary hearing on SJAP’s
application for a temporary injunction and granted the application.
Concluding that SJAP was likely to prevail on its claims against Cigna because
credible evidence indicated SJAP had never engaged in pass-through billing,
the court ordered Cigna to, inter alia, continue the In-Network Agreement, pay
SJAP for all automatically rejected claims, and adjudicate SJAP’s future
claims based on their individual merits. Cigna perfected a second interlocutory
appeal to the Texas First Court of Appeals, this time challenging the trial
court’s temporary injunction.
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2.
While the two state appeals remained pending, Cigna consented to the
Insight Defendants’ removal of the case to the United States District Court for
the Southern District of Texas. The Insight Defendants asserted federal
question jurisdiction as the basis for removal, citing the federal securities
claims SJAP had raised against them.
Once in federal court, Cigna filed a motion to vacate or modify the
temporary injunction granted by the state trial court. At a hearing on the
motion, the district court sua sponte stayed operation of the temporary
injunction and ordered briefing on its jurisdiction and on the In-Network
Agreement’s arbitration provision. Thereafter, Cigna again filed a motion to
compel arbitration.
Meanwhile, SJAP voluntarily dismissed all claims against the Insight
Defendants—including the federal securities claims that were the basis for
removal—and then moved to remand the case to state court. The district court
held a hearing on all three pending motions on February 28, 2020. The district
court concluded that it was free to reconsider the state court’s orders and orally
granted Cigna’s motion to compel arbitration. The district court denied Cigna’s
motion to vacate the temporary injunction and SJAP’s motion to remand as
moot and dismissed the case without prejudice. SJAP timely appealed.
II.
This court reviews a district court’s subject matter jurisdiction de novo,
applying the same standards as the district court. See Nat’l Football League
Players Ass’n v. Nat’l Football League, 874 F.3d 222, 225 (5th Cir. 2017).
III.
In their briefing, the parties raise at least three distinct issues, including
whether the district court should have remanded the case to state court after
all federal claims were voluntarily dismissed, whether the district court had
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jurisdiction to reconsider the state court’s interlocutory orders that were the
subject of pending appeals prior to removal, and whether the In-Network
Agreement’s arbitration clause was mandatory. But a threshold jurisdictional
issue not raised by the parties is dispositive.
3

Subject to limited exceptions not here applicable, any civil action brought
in state court “that originally could have been filed in federal court may be
removed to federal court by the defendant.” Caterpillar Inc. v. Williams, 482
U.S. 386, 392 (1987) (citing 28 U.S.C. § 1441). This includes cases like this
one, in which the requirements for diversity jurisdiction are not met but at
least one asserted claim falls within the district court’s federal question
jurisdiction because it is based in federal law. Id. (citing 28 U.S.C. § 1331).
After such a case is removed, the federal court may elect to exercise jurisdiction
over any state-law claims in the case only if those claims meet the requirements
for supplemental jurisdiction under 28 U.S.C. § 1367(a). See Venable v.
Louisiana Workers’ Comp. Corp., 740 F.3d 937, 944 (5th Cir. 2013).
28 U.S.C. § 1367(a) grants the district court supplemental jurisdiction
“in any civil action of which the district courts have original jurisdiction . . .
over all other claims that are so related to claims in the action within such
original jurisdiction that they form part of the same case or controversy under
Article III of the United States Constitution.” “The question under section
1367(a) is whether the supplemental claims are so related to the original

3
“[F]ederal courts must address jurisdictional questions whenever they are raised and
must consider jurisdiction sua sponte if not raised by the parties.” Howery v. Allstate Ins.
Co., 243 F.3d 912, 919 (5th Cir. 2001) (citing Kidd v. Southwest Airlines, Co., 891 F.2d 540,
546 (5th Cir.1990)); see also 28 U.S.C. § 1447(c) (specifying that a motion to remand for a lack
of subject matter jurisdiction cannot be waived and that the case must be remanded to state
court if at any time it appears the district court lacks subject matter jurisdiction); Grubbs v.
Gen. Elec. Credit Corp., 405 U.S. 699, 702–03 (1972) (contrasting a defect in removal
requirements with a defect in subject matter jurisdiction, the latter of which remains an issue
on appeal despite not being objected to in district court).
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claims that they . . . ‘derive from a common nucleus of operative fact.’” Mendoza
v. Murphy, 532 F.3d 342, 346 (5th Cir. 2008) (quoting United Mine Workers of
America v. Gibbs, 383 U.S. 715, 725 (1966)).
All of SJAP’s claims against Cigna arise from or concern the In-Network
Agreement and the resulting business relationship. SJAP’s federal claim
against the Insight Defendants, by contrast, was based on SJAP’s purchase of
securities from Insight as part of the Lab Operating Agreement, a completely
separate contract that had nothing to do with Cigna that was consummated
several years before the events giving rise to SJAP’s claims against Cigna.
Other than SJAP’s vague assertion that Insight and the Cigna Affiliates
previously “had a lengthy and sordid relationship” that resulted in an
undisclosed settlement agreement, the operative complaint when the case was
removed demonstrated no connection between Cigna and the Insight
controversy, let alone the specific federal security claim that conferred original
jurisdiction on the district court. Indeed, Cigna itself argued in its motion to
sever that “[t]he claims against the Cigna Defendants and Insight Defendants
have no relation to one another and, even if tried together, would be decided
on evidence that would have no bearing on the claims asserted against the
other.” The standard for supplemental jurisdiction is clearly not met here.
When the requirements of original or supplemental jurisdiction are not
satisfied, 28 U.S.C. § 1441(c)(2) governs the disposition of the extraneous state
law claims. The provision makes clear that immediately upon removal, “the
district court shall sever from the action all claims” that are not within its
original or supplemental jurisdiction “and shall remand the severed claims to
the State court from which the action was removed.” 28 U.S.C. § 1441(c)(2).
Thus, because SJAP’s state-law claims against Cigna did not fall within
the district court’s supplemental jurisdiction, the district court had no
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discretion to retain the claims in federal court and was required to immediately
remand them. See Prolite Bldg. Supply, LLC v. MW Manufacturers, Inc., 891
F.3d 256, 259 (7th Cir. 2018) (“The federal claim would make the whole suit
removable, and § 1441(c)(2) would require the immediate remand of any state-
law claim not within the supplemental jurisdiction.”). The district court
therefore erred in ruling on the motion to compel arbitration rather than
immediately remanding SJAP’s claims against Cigna.
* * *
Based on the foregoing, we VACATE the district court’s final judgment
compelling arbitration and dismissing the case and REMAND to the district
court with instructions that the case be remanded to state court.
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