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Antitrust Advocate

State Action Update (Part II): Fifth Circuit Reaffirms Narrow Municipal Immunity in Megatel Homes v. City of Mansfield

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The Fifth Circuit has revisited Megatel Homes, L.L.C. v. City of Mansfield, Texas on panel rehearing, withdrawing its prior opinion and issuing a substituted decision that reaches the same result while clarifying the limits of its review. 176 F.4th 399 (5th Cir. May 21, 2026). We previously analyzed the <a href="https://www.antitrustadvocate.com/blogs/state-action-update-megatel-homes-l-l-c-v-city-of-mansfield-texas/" target="_blank" rel="noreferrer noopener">Fifth Circuit’s original decision in Megatel Homes, L.L.C. v. City of Mansfield, Texas</a>.

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The operative holding remains unchanged: The City of Mansfield is not entitled to state action immunity at the pleading stage because Texas law does not clearly delegate anticompetitive authority to the City itself. The May 21 opinion replaces the court’s earlier reported decision, which has been formally withdrawn following rehearing.

The Fifth Circuit again grounded its analysis in the two-step inquiry derived from Phoebe Putney and its own precedent: (1) whether state law authorizes the defendant to engage in the challenged conduct and (2) whether the state intended that conduct to displace competition. The decisive point, left undisturbed on rehearing, is that here, failure at the first step ended the inquiry. Specifically, while Texas has clearly adopted a policy of displacing competition in the retail water market, it has done so through a specific regulatory mechanism, namely certificates of convenience and necessity (CCN) that confer exclusive service rights on designated utilities; here, the relevant CCN for the Cipriani property belonged to the Johnson County Special Utility District (JCSUD), not Mansfield, and accordingly, the statutory scheme conferred monopoly authority on the utility, not the City. Mansfield therefore could not rely on the state action doctrine to argue that Texas law delegated to it the power to act anticompetitively. As in the prior opinion, the court makes clear that a municipality cannot rely on a generalized state policy favoring monopoly regulation. Instead, it must identify a specific, affirmative delegation of authority to itself.

The substituted opinion rejected any claim that Mansfield’s contractual control over the CCN holder gave it immunity. Even though Mansfield’s agreement with JCSUD required municipal consent before water service could be extended within the City’s extraterritorial jurisdiction, that arrangement was irrelevant to the state action inquiry, which turns exclusively on statutory authorization. Municipalities cannot create state action immunity through contractual leverage over regulated utilities where the state has not directly conferred that authority by statute.

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