In the

United States Court of Appeals

For the Seventh Circuit

No. 07-1272

HANSEL DEBARTOLO and the H.M. DEBARTOLO, JR., M.D.,

S.C. PENSION PLAN and TRUST,

Plaintiffs-Appellants,

v.

HEALTHSOUTH CORPORATION, SURGICARE OF JOLIET,

INC., and JOLIET SURGICAL CENTER, LIMITED PARTNERSHIP,

Defendants-Appellees.

Appeal from the United States District Court 

for the Northern District of Illinois, Eastern Division. 

No. 06 C 2542—James B. Zagel, Judge.

ARGUED JANUARY 10, 2008—DECIDED JUNE 26, 2009

Before EASTERBROOK, Chief Judge, and RIPPLE and

ROVNER, Circuit Judges. 

ROVNER, Circuit Judge. Hansel DeBartolo, a surgeon, is

a limited partner in an ambulatory surgical center managed by the general partner, Surgicare of Joliet, Inc. When

DeBartolo failed to certify that his practice at the

facility met the threshold mandated by the partnership
2 No. 07-1272

agreement, Surgicare notified him that it was exercising

a clause in the agreement allowing it to buy out his interest. DeBartolo balked and brought this federal action

against Surgicare, its parent company, and the partnership, claiming that the term of the partnership agreement

requiring him to conduct one-third of his surgical

practice at the center violates federal criminal law and

cannot be enforced. The district court dismissed the suit

for failure to state a claim, but because this litigation

is simply a state-law contract dispute between nondiverse parties, we vacate the judgment and remand

with instructions to dismiss for lack of subject-matter

jurisdiction.

I.

The Medicare and Medicaid Patient Program Protection

Act of 1987, see Pub. L. No. 100-93, 101 Stat. 680, recodified

and strengthened existing criminal prohibitions against

paying physicians to refer patients for medical services

that might be covered by Medicare or Medicaid. When

Congress debated this legislation, however, some

healthcare providers expressed concern that it swept too

broadly and would criminalize even innocuous fee arrangements. See Medicare and State Health Care

Programs: Fraud and Abuse; Clarification of the Initial

OIG Safe Harbor Provisions and Establishment of Additional Safe Harbor Provisions Under the Anti-Kickback

Statute, 64 Fed. Reg. 63,518, 63,518 (Nov. 19, 1999);

S. REP. No. 100-109, at 27 (1987), as reprinted in 1987

U.S.C.C.A.N. 682, 707-08. Consequently, the updated
No. 07-1272 3

statute, see 42 U.S.C. § 1320a-7b(b), commonly known as

the Anti-Kickback Act, see McNutt ex rel. United States v.

Haleyville Med. Supplies, Inc., 423 F.3d 1256, 1259 (11th Cir.

2005), includes a “safe harbor” exception for any

payment practice authorized by the Secretary of Health

and Human Services, see Pub. L. No. 100-93, § 14(a), (b)(3),

101 Stat. 680 (1987) (codified at 42 U.S.C. § 1320a7b(b)(3)(E)).

In 1999 the Secretary of HHS used that safe-harbor

authority to permit some payments from ambulatory

surgical centers to qualified physician-investors. See

Medicare and State Health Care Programs, 64 Fed. Reg.

at 63,534 (now codified at 42 C.F.R. § 1001.952(r)). Ambulatory surgical centers are non-hospital facilities

equipped with operating and recovery rooms where

physicians perform outpatient surgeries and other procedures. See Ambulatory Surgery Center Association,

Frequently Asked Questions About Ambulatory Surgery

Centers, http://ascassociation.org/faqs/faqaboutascs/ (last

visited May 28, 2009). HHS was concerned that physician

ownership of ambulatory surgical centers could lead to

violations of the Anti-Kickback Act because the promise

of higher dividends (which would presumably be

roughly proportional to the number of patients using the

center) could provide a financial incentive for physicianowners to refer patients to the center. See Medicare and

State Health Care Programs, 64 Fed. Reg. at 63,536-37.

Indeed, a facility might even offer shares to physicians

precisely so that it could buy referrals through the guise

of dividends. Id. at 63,536. At the same time, however,

HHS also acknowledged that ambulatory surgical centers
4 No. 07-1272

could legitimately serve as an extension of the office

practice of physicians who would invest for practical

reasons, including physical proximity and a desire to

maintain quality control, and for those investor-physicians,

the risk that dividends would induce improper referrals

was low. Id. at 63,534-37. The Secretary of HHS therefore

crafted safe-harbor conditions designed to authorize

ambulatory surgical centers to make payments to

physician-investors who use the center as an extension

of their office practice. Id.

Four categories of ambulatory surgical centers received

safe-harbor status, each with slightly different requirements. See 42 C.F.R. § 1001.952(r)(1)-(4). The parties

agree that the facility in Joliet, Illinois, owned by the

partnership and managed by Surgicare is a multi-specialty

center and, hence, that 42 C.F.R. § 1001.952(r)(3) provides

the relevant safe harbor. That section reserves safeharbor status for payments to physician-owners who

earn at least one-third of their medical income from

performing Medicare-approved procedures and who

perform at least one-third of those procedures at the

center. Id. § 1001.952(r)(3)(ii), (iii), (r)(5). These two thresholds, collectively known as the “one-third/one-third” test,

are designed to ensure that the physician-investor uses

the center as an extension of his or her office practice,

and not as an engine for illegal referral-based compensation. See Medicare and State Health Care Programs, 64

Fed. Reg. at 63,534-35.

In 2004 the owners of the Joliet facility sought shelter

in this safe harbor and amended their partnership agree-
No. 07-1272 5

ment to require that physician-investors certify annually

that they are meeting the “one-third/one-third” test.

Another amendment compelled noncompliant physicianinvestors to sell out to Surgicare or other partners.

DeBartolo had bought into the partnership (through a

trust he controls) in 1981 for $250,000, and had practiced

at the center for many years. Then in 2001 he lost his

surgical privileges at the center and never again

performed a procedure there. He still received dividends,

although, including $91,000 in 2004, but after the partnership agreement was amended, he was unable to certify

that his practice met the “one-third/one-third” test. And

when DeBartolo did not vouch for his safe-harbor eligibility, Surgicare exercised its right to buy out his interest

and sent him a check representing the cost of his shares

and his portion of undistributed dividends.

DeBartolo refused the money and initiated this action

in federal court for declaratory and injunctive relief. He

argued that the 2004 amendment requiring physicianinvestors to conduct one-third of their surgical practice

at the center, although written to track the safe-harbor

regulation, see 42 C.F.R. § 1001.952(r)(3)(iii), cannot be

reconciled with a different safe-harbor limitation, which

mandates that the “terms on which an investment

interest is offered to an investor must not be related to

the previous or expected volume of referrals, services

furnished, or the amount of business otherwise

generated from that investor to the entity,” id.

§ 1001.952(r)(3)(i). Observing that contract law makes

unenforceable any agreement for the performance of

an illegal act, DeBartolo asked the district court to
6 No. 07-1272

declare the amendments void in view of this perceived

conflict, see 28 U.S.C. § 2201, and enjoin Surgicare from

purchasing his shares. As for the district court’s jurisdiction, DeBartolo cited 28 U.S.C. § 1331 and asserted

that his lawsuit poses “a substantial federal question

because the court is required to rule on the legality of

an agreement that, as applied by the Defendants,

violates the federal Anti-Kickback Statute.”

Surgicare and the other partners did not challenge

DeBartolo’s invocation of federal jurisdiction and argued

instead that the complaint should be dismissed for

failure to state a claim. The defendants reasoned that

DeBartolo, a private litigant, was seeking to enforce the

Anti-Kickback Act, a criminal statute, and they insisted

that Congress had not authorized a private right of

action. Moreover, the defendants contended, the 2004

amendments to the partnership agreement are consistent with the safe harbor. DeBartolo replied that, although he indeed seeks a ruling that the partnership

agreement’s practice threshold is illegal, he is not

pursuing a private right of action under the AntiKickback Act: he simply wants the district court to invalidate the 2004 amendments to the partnership agreement

on the ground that giving effect to the practice threshold

would violate the statute.

The district court heeded the defendants and construed

DeBartolo’s suit as an attempt at private enforcement of

the Anti-Kickback Act. Relying on West Allis Memorial

Hospital, Inc. v. Bowen, 852 F.2d 251, 255 (7th Cir. 1988),

which holds that Congress did not authorize private
No. 07-1272 7

enforcement when it enacted the statute, the district court

concluded that DeBartolo’s suit fails to state a claim. The

court added, however, that it was skeptical whether it

even possessed subject-matter jurisdiction because, in

the court’s view, the lawsuit essentially is a state-law

contract dispute between parties who are mostly

citizens of Illinois.

II.

In briefing this appeal, both parties included jurisdictional statements asserting that the district court

possessed subject-matter jurisdiction because, they said,

DeBartolo’s lawsuit “arises under” the Anti-Kickback

Act, a federal law. On the merits, however, DeBartolo

argued that the district court had misconstrued his suit

as an attempt at private enforcement of that statute

when instead he wanted the court to apply principles

of state contract law to invalidate the 2004 amendments

to the partnership agreement. For their part, the defendants acknowledged the court’s uncertainty about its

subject-matter jurisdiction but nevertheless contended

that the judgment should be affirmed because the

court’s merits analysis is correct.

The parties may be content to assume that the

district court had jurisdiction to resolve this dispute, but

we are not. Subject-matter jurisdiction is not an issue

that can be brushed aside or satisfied by agreement

between the litigants, see Arbaugh v. Y & H Corp., 546 U.S.

500, 514 (2006); United States v. Tittjung, 235 F.3d 330, 335

(7th Cir. 2000), and so at oral argument we pressed the
8 No. 07-1272

parties to explain why this lawsuit belongs in federal

court. Neither side has ever asserted that jurisdiction is

supplied by the diversity statute or by some other

source apart from 28 U.S.C. § 1331. That jurisdictional

provision empowers district courts to adjudicate civil

matters arising under federal law, but the parties could

not even agree about the nature of the claim presented

by DeBartolo’s lawsuit. At argument DeBartolo,

perhaps hoping to salvage a second chance in state

court by skirting an affirmance on the merits, quickly

conceded that federal jurisdiction over his lawsuit is

dubious because, he says, it is a contract dispute

between non-diverse parties. In a post-argument submission DeBartolo has gone further and now concedes

that neither does this state-law contract action necessarily raise a substantial and disputed question of law

concerning the Anti-Kickback Act which would demand

resolution in a federal forum. See Empire Healthchoice

Assurance, Inc. v. McVeigh, 547 U.S. 677, 700-01 (2006);

Grable & Sons Metal Prods., Inc. v. Darue Eng’g & Mfg., 545

U.S. 308, 315-16 (2005); Bennett v. Southwest Airlines Co., 484

F.3d 907, 910-11 (7th Cir. 2007). The defendants, on the

other hand, insist that their dispute with DeBartolo

is not a contract action at all. Rather, they still maintain

that DeBartolo is trying to privately enforce the AntiKickback Act and that, although misguided, this effort

raises a claim under federal law. DeBartolo, they say,

has simply seized the opportunity to change his legal

theory to one under state contract law so as to

frustrate federal jurisdiction.

In fact, DeBartolo’s position has not shifted. Again and

again—in response to the defendants’ motion to dismiss,
No. 07-1272 9

in his appellate briefs, and at argument—DeBartolo has

insisted that the Anti-Kickback Act renders the 2004

amendments to the partnership agreement unenforceable

and thus provides him with a defense to Surgicare’s

invocation of the amended agreement’s practice

threshold to force him to liquidate his partnership interest. He has consistently maintained that his suit is not an

attempt at private enforcement of the Anti-Kickback Act,

and we agree with DeBartolo that this litigation is simply

a state-law contract dispute. Simply put, the defendants

want to enforce the 2004 amendments to the partnership

agreement against DeBartolo, and he wants to prevent

them from doing so. It is the import of these competing

goals that the defendants fail to appreciate; Surgicare, not

DeBartolo, precipitated this dispute when it tried to force

DeBartolo to exit the partnership, and it is the defendants

who are unwilling to countenance DeBartolo’s refusal to

accept Surgicare’s money and relinquish his stake in the

Joliet facility. And rather than wait for the defendants to

sue to enforce their asserted contractual right to buy him

out, DeBartolo took preemptive action.

The Declaratory Judgment Act, 28 U.S.C. § 2201, allows

a party like DeBartolo who expects to eventually be

sued, to determine his rights and liabilities without

waiting for his adversary, the presumptive plaintiff, to

bring suit. Pub. Serv. Comm’n v. Wycoff Co., 344 U.S. 237,

248 (1952); Ceres Terminals, Inc. v. Indus. Comm’n of Ill., 53

F.3d 183, 185 (7th Cir. 1995). That act, however, is not an

independent grant of federal subject-matter jurisdiction,

so jurisdiction depends upon the nature of the

anticipated claims. Samuel C. Johnson 1988 Trust v. Bayfield
10 No. 07-1272

County, 520 F.3d 822, 827-28 (7th Cir. 2008). Thus, although

the presence or absence of a federal question normally

turns on an examination of the face of the plaintiff’s

complaint, Nelson v. Stewart, 422 F.3d 463, 466 (7th Cir.

2005), in an action for declaratory judgment the positions of the parties are reversed: the declaratoryjudgment plaintiff would have been the defendant in

the anticipated suit whose character determines the

district court’s jurisdiction, e.g., County Materials Corp. v.

Allan Block Corp., 502 F.3d 730, 734 (7th Cir. 2007),

cert. denied, 128 S. Ct. 1709 (2008); Ne. Ill. Reg’l Commuter

R.R. Corp. v. Hoey Farina & Downes, 212 F.3d 1010, 1014

(7th Cir. 2000); Cardtoons, L.C. v. Major League Baseball

Players Ass’n, 95 F.3d 959, 964 (10th Cir. 1996). Consequently, DeBartolo’s complaint, which invokes the AntiKickback Act as a defense to his partners’ anticipated statelaw contract action to enforce their rights under the

partnership agreement, cannot be a source of federal

jurisdiction unless DeBartolo’s statutory defense raises

a pure question of federal law of the caliber at stake in

Grable & Sons Metal Products, Inc., 545 U.S. 308 (2005),

which, even the defendants concede, it does not. See

Franchise Tax Bd. v. Constr. Laborers Vacation Trust, 463 U.S.

1, 16 (1983); Wycoff Co., 344 U.S. at 248; Samuel C. Johnson

1988 Trust, 520 F.3d at 827-28; Ne. Ill. Reg’l Commuter R.R.

Corp., 212 F.3d at 1014. After all, a federal defense

does not establish federal-question jurisdiction. Merrell

Dow Pharm. Inc. v. Thompson, 478 U.S. 804, 808 (1986); Blue

Cross Blue Shield of Ill. v. Cruz, 495 F.3d 510, 512 (7th

Cir. 2007). In the context of this action for a declaratory

judgment, therefore, the allegations in DeBartolo’s com-
No. 07-1272 11

plaint must demonstrate that the defendants could file

a federal claim. See Stuart Weitzman, LLC v. Microcomputer

Res., Inc., 542 F.3d 859, 862 (11th Cir. 2008); County

Materials Corp., 502 F.3d at 734; Rodriguez v. Tenn. Laborers

Health & Welfare Fund, 463 F.3d 473, 476-77 (6th Cir. 2006);

Ne. Ill. Reg’l Commuter R.R. Corp., 212 F.3d at 1014. The

defendants, however, have not attempted to identify any

federal claim they might have brought, and we can

think of none. DeBartolo’s lawsuit has belonged in state

court all along, and it must be pursued in that forum if

at all.

III.

Accordingly, we VACATE the district court’s order and

REMAND with instructions to dismiss for lack of subjectmatter jurisdiction.

6-26-09