In the

United States Court of Appeals

For the Seventh Circuit

No. 99-3706

Vera L. Floyd, Floyd Griffin, Jr.,

Curlee Williams, individually and on behalf

of all others similarly situated, et al.,

Plaintiffs-Appellants,

v.

Tommy Thompson, individually and in

his official capacity as Governor of the

State of Wisconsin, et al.,

Defendants-Appellees.

Appeal from the United States District Court

for the Western District of Wisconsin.

No. 99-C-0268-C--Barbara B. Crabb, Judge.

Argued February 23, 2000--Decided September 19, 2000

 Before Flaum, Chief Judge, and Kanne and Diane P.

Wood, Circuit Judges.

 Diane P. Wood, Circuit Judge. In November 1998,

the major tobacco companies and all but four

states entered into a settlement agreement, known

as the Master Settlement Agreement or the MSA,

valued at a whopping $200 billion or so. This

case involves the way that Wisconsin’s not

inconsiderable share of that settlement--some

$5.9 billion, to be paid out over the next

quarter century--is to be allocated. The

plaintiffs, a group of smokers who have received

medical assistance payments under Wisconsin’s

federally supported Medicaid program, believe

that both federal and state law require the state

to give them a piece of the pie. The district

judge concluded that their claims were barred by

the Eleventh Amendment and dismissed the action

on that ground. While we think it possible that

the district court’s Eleventh Amendment analysis

was correct, the answer is not obvious, and we

find it unnecessary to delve into the

complexities of that area of law. Instead, both

the terms of the MSA and the limited nature of

the assignment of claims Wisconsin takes permit

us to affirm the district court on that more

limited ground.
I

 In order to understand the claims of the Floyd

group, which is what we will call these

plaintiffs, it is necessary to take a closer look

both at the Medicaid reimbursement scheme

Wisconsin uses and at the precise nature of the

claims that were at stake in the litigation that

produced the MSA. We begin with Medicaid.

A.

 Medicaid is the federal program designed to

furnish health care services to the indigent. It

was established in Title XIX of the Social

Security Act, 42 U.S.C. sec.sec. 1396-1396v. As

a cooperative federal-state venture, it is

administered by an appropriate state agency in

virtually every state. That agency in Wisconsin

is the Wisconsin Department of Health and Family

Services (DHFS), whose secretary Joe Leean is a

party to this action, along with Wisconsin

Governor Tommy Thompson and Peggy Bartels, the

Administrator of the Division of Health Care

Financing in DHFS. 

 One requirement of the federal Medicaid law is

that participants in the program (i.e., persons

receiving benefits) must assign any and all

claims against third parties who might be

responsible for paying their medical expenses to

the state Medicaid administrator. The assignment

obligation is as follows:

 (a) For the purpose of assisting in the

collection of medical support payments and other

payments for medical care owed to recipients of

medical assistance under the State plan approved

under this subchapter, a State plan for medical

assistance shall--

 (1) provide that, as a condition of

eligibility for medical assistance under the

State plan to an individual who has the legal

capacity to execute an assignment for himself,

the individual is required--

(A) to assign the State any rights, of the

individual or of any other person who is eligible

for medical assistance under this subchapter and

on whose behalf the individual has the legal

authority to execute an assignment of such

rights, to support (specified as support for the

purpose of medical care by a court or

administrative order) and to payment for medical

care from any third party.

42 U.S.C. sec. 1396k. Wisconsin has implemented

that federal command through a statute spelling
out a "deemed assignment" system:

As a condition of eligibility for medical

assistance, a person shall:

. . .

Notwithstanding other provisions of the statutes,

be deemed to have assigned to the state, by

applying for or receiving medical assistance, any

rights to medical support or other payment of

medical expenses from any other person, including

rights to unpaid amounts accrued at the time of

application for medical assistance as well as any

rights to support accruing during the time for

which medical assistance is paid.

Wis. Stat. sec. 49.45(19)(a)2. 

 Both the federal statute and Wisconsin’s

implementation of it reflect the unsurprising

notion that when third parties inflict injuries

on Medicaid participants, the program should

enjoy a right of subrogation similar to that

found in typical private insurance policies.

Congress, and then the state, also regulated the

distribution of any recovery from a third party

in a manner that parallels the usual subrogation

rules:

 (b) Such part of any amount collected by the

State under an assignment made under the

provisions of this section shall be retained by

the State as is necessary to reimburse it for

medical assistance payments made on behalf of an

individual with respect to whom such assignment

was executed (with appropriate reimbursement of

the Federal Government to the extent of its

participation in the financing of such medical

assistance), and the remainder of such amount

collected shall be paid to such individual.

42 U.S.C. sec. 1396k(b). A regulation, 42 C.F.R.

sec. 433.154, elaborates further on that statute:

The [state] agency must distribute collections as

follows--

 (a) To itself, an amount equal to State

Medicaid expenditures for the individual on whose

right the collection was based.

 (b) To the Federal Government, the Federal

share of the State Medicaid expenditures, minus

any incentive payment made in accordance with

sec. 433.153.

 (c) To the recipient, any remaining amount.

This amount must be treated as income or

resources under Part 435 or Part 436 of this
subchapter, as appropriate.

The Floyd plaintiffs claim that the net result of

these laws is to require that some portion of the

payments Wisconsin is to receive under the MSA go

to them. They reason that the fact of their

deemed assignment of claims to the state, coupled

with the language of the MSA, means that the

state resolved their claims in the MSA. The

tobacco companies are thus third parties from

whom the state has succeeded in collecting money,

and the distribution of that money must follow

the protocol spelled out in sec. 433.154. In

order to evaluate this theory, it is necessary to

take a closer look at the litigation that led to

the MSA, as well as at the terms of the

settlement itself.

B.

 At the time the State of Wisconsin commenced

its lawsuit against the major tobacco companies

(Tobacco) in February 1997, it was well aware

that smokers had a very poor track record in

trying to hold Tobacco responsible for the myriad

health problems to which cigarette smoking and

other forms of tobacco use give rise. Tobacco had

defeated these claims using a combination of

defenses, including preemption, see Cipollone v.

Liggett Group, Inc., 505 U.S. 504 (1992);

assumption of risk, see, e.g., Barnes v. American

Tobacco Co., 161 F.3d 127 (3d Cir. 1998); and

lack of reliance, see, e.g., Insolia v. Philip

Morris Inc., 53 F. Supp. 2d 1032 (W.D. Wis.

1999). See generally Richard L. Cupp, Jr., A

Morality Play’s Third Act: Revisiting Addiction,

Fraud, and Consumer Choice in "Third Wave"

Tobacco Litigation, 46 U. Kan. L. Rev. 465, 466-

68 (1998) (discussing plaintiffs’ historically

poor record in tobacco cases and predicting a

change in tide). The last thing the state wanted

to do, therefore, was to bring claims that were

doomed to fail on exactly these grounds. Compare

International Brotherhood of Teamsters v. Philip

Morris Inc., 196 F.3d 818, 821 (7th Cir. 1999)

(noting that in a subrogation action the insurer

must demonstrate both the existence of a tort and

the lack of any defenses to liability in the

underlying case); see also Health Care Service

Corp. v. Brown & Williamson Tobacco Corp., 208

F.3d 579, 581 (7th Cir. 2000) (also reviewing

normal requirements for subrogation cases in

context of suit by insurer against tobacco

companies). 

 The 1997 litigation therefore took a different

tack. The state’s complaint accused Tobacco of

committing an array of deceitful practices in

violation of different state laws. Specifically,

it based its claims on the following theories:
Deceptive advertising and fraudulent

representations contrary to Wis. Stat. sec.

100.18;

The tort of intentional misrepresentation;

The tort of negligent misrepresentation;

The tort of strict responsibility for

misrepresentations;

Anti-competitive conspiracy in restraint of

trade contrary to Wisconsin’s antitrust laws,

Wis. Stat. Ch. 133;

The tort of undertaking of and failure to

perform a special duty;

Unjust enrichment;

Restitution;

Public nuisance;

Common law conspiracy and concert of action; and

The Wisconsin Organized Crime Control Act, Wis.

Stat. sec.sec. 946.80 et seq.

The complaint sought damages only for direct

losses to the state. It asked for a variety of

forms of injunctive relief, including a ceaseand-desist order against marketing and sales

practices appealing to children, public

disclosure of research about the connection

between smoking and health, public education

campaigns, annulment of the defendant companies’

corporate charters or authority to do business in

Wisconsin, and other controls on their business

operations. In addition, it asked for monetary

relief, including things like disgorgement of

profits resulting from misrepresentations,

compensation for pecuniary injuries suffered by

the state, restitution and disgorgement for

unjust benefits, treble damages for antitrust

violations, damages for public nuisance, and

punitive damages. Finally, and this is the part

on which the Floyd plaintiffs focus, it asked for

damages "including but not limited to health care

expenditures."

 Tobacco initially attempted to have the suit

dismissed on grounds similar to those we

discussed in the Teamsters case: namely, that

this was really a suit pressing the assigned

claims of the smokers, and thus was subject to

all the defenses Tobacco could raise against

them. The state court rejected its arguments,

except insofar as they applied to the state’s
claims on the counts claiming a special duty, the

right to restitution, and the Organized Crime

Control Act. It dismissed the latter three

counts. See State of Wisconsin v. Phillip Morris

Inc., Case No. 97-CV-328 (Circuit Court of Dane

County, March 17, 1998). It held that under

Wisconsin law subrogation was not the state’s

exclusive remedy for recovering damages related

to Medicaid payments, and it also found that the

state’s claims were not too remote to pursue.

C.

 Obviously, there was never a final judicial

resolution of those questions, because Tobacco

and the states involved in the settlement (the

Settling States) chose to enter into the MSA.

There is no doubt that the MSA covered a wide

variety of claims. Its definition of "released

claims" reads as follows:

 (1) for past conduct, acts or omissions

(including any damages incurred in the future

arising from such past conduct, acts or

omissions), those Claims directly or indirectly

based on, arising out of or in any way related,

in whole or in part, to (A) the use, sale,

distribution, manufacture, development,

advertising, marketing or health effects of, (B)

the exposure to, or (C) research, statements or

warnings regarding, Tobacco Products . . . .

 (2) for future conduct, acts or omissions,

only those monetary Claims directly or indirectly

based on, arising out of or in any way related

to, in whole or in part, the use of or exposure

to Tobacco Products manufactured in the ordinary

course of business, including without limitation

any future Claims for reimbursement of health

care costs allegedly associated with the use of

or exposure to Tobacco Products.

MSA para. II(nn).

 This language could be read, we agree, as if

the states were indeed releasing claims that

their public assistance recipients had assigned

to them for the recovery of health care

expenditures. But it needs to be considered in

light of the language of the agreement that

describes who is releasing what claims. That

section of the agreement provides as follows:

(pp) "Releasing Parties" means each Settling

State and any of its past, present and future

agents, officials acting in their official

capacities, legal representatives, agencies,

departments, commissions and divisions; and also

means, to the full extent of the power of the

signatories hereto to release past, present and
future claims, the following: (1) any Settling

State’s subdivisions . . . , public entities,

public instrumentalities and public educational

institutions; and (2) persons or entities acting

in a parens patriae, sovereign, quasi-sovereign,

private attorney general, qui tam, taxpayer, or

any other capacity, whether or not any of them

participate in this settlement, (A) to the extent

that any such person or entity is seeking relief

on behalf of or generally applicable to the

general public in such Settling State or the

people of the State, as opposed solely to private

or individual relief for separate and distinct

injuries, or (B) to the extent that any such

entity (as opposed to an individual) is seeking

recovery of health-care expenses (other than

premium or capitation payments for the benefit of

present or retired state employees) paid or

reimbursed, directly or indirectly, by a Settling

State.

MSA para. II(pp). Last, the MSA contains

provisions governing the way that the settlement

payments will be made to each state. Essentially,

it requires payments to be funneled through an

escrow agent, who each year transmits the proper

amount to each Settling State.

 Based on these provisions and the underlying

laws, Wisconsin argued to the district court both

that any claim the Floyd plaintiffs had to the

settlement funds was barred by the Eleventh

Amendment and that the MSA in any event did not

give rise to any rights on their part under the

Medicaid assignment rules because it did not

constitute the kind of Medicaid recovery to which

those rules applied. For what it is worth, the

parties at oral argument directed our attention

to a statute indicating that Congress itself may

agree with the states on the latter point (or it

may just have been feeling generous). Either way,

in 42 U.S.C. sec. 1396b(d)(3)(B)(i), it said that

the provisions of the Medicaid law requiring

reimbursement of the federal government "shall

not apply to any amount recovered or paid to a

State as part of the comprehensive settlement of

November 1998 (i.e. the MSA) between

manufacturers of tobacco products [and the

states]."

II

 Although the district court rested its decision

on the Eleventh Amendment, we prefer to rely on

the terms of the MSA itself to dispose of the

case. The Eleventh Amendment analysis is complex.

It would require us to decide, for example,

whether the MSA had the effect of immediately

vesting the right to the full proceeds to be

given the state over the next 25 years in the
state, such that any injunctive order affecting

their distribution would impermissibly reach into

the state’s treasury. It would require us to

consider whether the fact that the state’s

Medicaid payments are made under the broader

umbrella of a cooperative grant-in-aid program

significantly funded by the federal government,

which was enacted under Congress’s spending

powers, allows federal action with respect to

future allocations of the state’s funds. Cf.

Board of Education v. Kelly E., 207 F.3d 931, 935

(7th Cir. 2000). It would require us to consider

whether this is the kind of case in which the

doctrine of Ex parte Young, 209 U.S. 123 (1908),

permits an injunction against the responsible

state officers, or if it is instead the kind of

action so fundamentally against the state that a

change in caption cannot alter the Eleventh

Amendment analysis. See Idaho v. Coeur d’Alene

Tribe of Idaho, 521 U.S. 261 (1997); compare MCI

Telecomm. Corp. v. Illinois Bell Tel. Co., 2000

WL 1010863 (7th Cir. July 24, 2000).

 None of those questions is easily answered. The

only remaining question is whether we can pass

over them, or if the Eleventh Amendment is such

a fundamental bar to our power to decide the case

that we must reach it first no matter what, just

as we must consider federal subject matter

jurisdiction before assessing whether a claim has

been stated. See Steel Co. v. Citizens for a

Better Environment, 523 U.S. 83, 93-94 (1998).

The Supreme Court has indicated that the Eleventh

Amendment occupies its own unique territory.

Unlike basic subject matter jurisdiction, which

can never be stipulated or waived, a state is

entitled to waive its Eleventh Amendment immunity

from suit if it so desires. See College Savings

Bank v. Florida Prepaid Postsecondary Education

Expense Board, 527 U.S. 666, 675-76 (1999). A

court is not required to reach out and decide an

Eleventh Amendment issue that has never been

raised, see Wisconsin Dept. of Corrections v.

Schacht, 524 U.S. 381, 389 (1998), but it is free

to consider an Eleventh Amendment defense on its

own initiative if it chooses to do so. See

Higgins v. Mississippi, 217 F.3d 951, 953-54 (7th

Cir. 2000). Finally, as the Court pointed out in

Vermont Agency of Natural Resources v. United

States, 120 S.Ct. 1858, 1864 (2000), it is

permissible to reach the question whether a

statute provides for suits against a state before

reaching the Eleventh Amendment. Here, we face a

very preliminary question about the scope of the

MSA. If it appeared in any way possible for these

plaintiffs to sue the state under its terms, then

Vermont Agency indicates we should resolve the

Eleventh Amendment issue first. But we believe it

is permissible to make that initial inquiry about

the agreement, if that can be done more readily.
Naturally, if the result of that analysis

suggests that the state could be sued, it would

become necessary to reach the Eleventh Amendment

issue before considering the specifics of the

plaintiffs’ case, including whether they had

stated a claim. But if the outcome either way

would result in a decision that could not by

definition infringe on the state’s sovereign

immunity, we may look at the agreement issue

first. 

 The Floyd plaintiffs’ case hinges critically on

the assumption that the MSA settled claims that

originally belonged to them. They recognize that

in the final analysis those claims would not

cover amounts the State of Wisconsin spent in

furnishing medical services to them, because the

state would always be entitled to recover those

payments out of any third party recovery before

it had to distribute any money back to the

plaintiffs. What concerns them is the possibility

that the third party might pay more to the state

than the state and federal government expended on

their medical services. When that happens for an

assigned claim, of course, 42 U.S.C. sec.

1396k(b) and 42 C.F.R. sec. 433.154(c) require

the residual funds to go to the individual.

 The state argues that the fact that its

original suit against Tobacco did not include

subrogated or assigned claims means that the

monies it recovers under the settlement are not

subject to this distribution scheme at all. We

are dubious about that point, given the breadth

of the language of MSA para. II(nn), which

describes the "claims released." Nothing

prevented the parties to the settlement from

negotiating a broader release than might have

been necessary under the lawsuits that began the

case. Furthermore, this was a global settlement

involving a great many states. (Indeed, we have

an amicus brief before us filed by 34 states,

plus the Commonwealth of the Northern Mariana

Islands and the Commonwealth of Puerto Rico, lest

we had been under any misapprehension about the

scope of these proceedings.) Some of the states

may have included assigned or subrogated claims

in their initial litigation, even if Wisconsin

did not. At this point the only relevant document

is the MSA itself, and it is not hard for us to

imagine that the definition of "released claims"

set forth above should be construed to include

claims that the state holds by virtue of an

assignment from another party.

 But what exactly was assigned in Wisconsin? If

the only thing the individuals assigned was their

right to recover the amounts paid by the Medicaid

program--not their right to recover any excess--

then there is nothing left to distribute to them
to which they could have any claim. Two things

persuade us that this is exactly what happened.

The first is a recent decision of the Wisconsin

Supreme Court construing the assignment rules

that Wisconsin follows for its Medicaid program,

Ellsworth v. Schelbrock, 611 N.W.2d 764 (Wis.

2000), and the second is the language of MSA

para. II(pp) defining the "releasing parties" in

a way that preserves the rights of individuals to

continue trying to sue Tobacco.

 In Ellsworth, the court confronted a rather

ordinary tort case. Mark Schelbrock, while

driving his car, struck the vehicle driven by

Hope Ellsworth, and Ellsworth suffered serious

injuries as a result. Ellsworth then sued

Schelbrock and his insurance company; because

Ellsworth had been the recipient of medical

assistance payments from Dunn County, Wisconsin,

the county intervened as a party plaintiff to

assert a claim of subrogation. One of the

important questions before the Wisconsin Supreme

Court dealt with the way to value the medical

services Ellsworth had received. She claimed that

the proper valuation was the market value of

those services, which amounted to $597,448.27,

notwithstanding the fact that they had been

rendered by medical providers who had agreed to

cap their recovery at the amount authorized by

Wisconsin’s medical assistance program. That

amount was significantly lower--$354,941--and

Schelbrock argued that he should not have to pay

any more than that as damages. 

 A majority of the Wisconsin Supreme Court sided

with Ellsworth. After holding that the collateral

source rule applies to cases in which the injured

person is treated under the public assistance

program and that the proper measure of the

tortfeasor’s liability was the market value of

services received, not the actual price, the

court turned to the questions of subrogation and

assignment. With respect to subrogation, the

court held that Dunn County was indeed subrogated

to Ellsworth’s claim, to the extent that it was

entitled to recoup from the tortfeasor the

amounts it expended for her medical services

(i.e., the $354,941). With respect to the

assignment, Schelbrock had tried to argue that

Dunn County held all of Ellsworth’s claim, and

thus that it could not recover any more than it

had spent (perhaps referring implicitly to ideas

of unjust enrichment). The court disagreed, in

the following passage:

 Finally, Schelbrock contends that Ellsworth has

assigned all rights for the collection of medical

expenses to the state pursuant to Wis. Stat. sec.

49.45(19) (a)2 . . . and therefore cannot collect

any damage award for medical expenses that is not
subrogated to the state. We disagree. Wisconsin

Stat. sec. 49.65 [now codified at sec. 49.89],

not sec. 49.45(19)(a)2, specifically addresses

assignment of actions and subrogation of rights

by a public assistance recipient who is injured

and has a tort claim against a third party.

Within the context of a tort action, the

assignment is to the extent that Medical

Assistance payments were made for injuries

arising as a result of the injury. . . . 

 Read together, [sec. 49.89] and sec.

49.45(19)(a)2 assign to the state the amount of

assistance expended as a result of the injury by

the tortfeasor. The statute contemplates any

"remainder" being available for payment to the

public assistance beneficiary after the state

receives its subrogated amount. Therefore, we

find Schelbrock’s argument on this point

unpersuasive.

611 N.W.2d at 770-71. (Justice Sykes, joined by

two other members of the court, dissented to this

part of the holding.)

 Several points are important for our purposes.

First, despite wording in sec. 49.45(19)(a)2 that

might make one think that public assistance

recipients cannot bring an independent action

against a tortfeasor because they have assigned

their claim to the state, that is plainly not the

way the Wisconsin Supreme Court construes the

statute. Ellsworth’s entire case would have been

barred if that had been true, and it clearly was

not. Second, again despite the wording of sec.

49.45(19)(a)2, which speaks of the assignment of

"any rights to medical support or other payment

of medical expenses from any other person" and

thus might have meant all such rights, the

Wisconsin Supreme Court took a narrower approach

to the statute. Instead of viewing the assignment

as covering the full claim, including claims for

medical services that were not covered by Medical

Assistance, it held that the assignment

corresponds exactly to the amounts the state

pays. Someone like Ellsworth, therefore, can

either get a windfall (if she was ultimately able

to keep the $242,507.27 difference between the

amounts the providers agreed to accept for

treating her and the amount Dunn County received

in subrogation), or, if there is any legal way

providers can assert a right to reimbursement for

the balance after the fact (which seems unlikely,

but is a complex point on which we express no

opinion), the tort recovery might enable the

person either to cover expenses that were outside

the scope of Medical Assistance or to reimburse

others who could not collect more earlier.

 The MSA language concerning "releasing parties"
suggests that this possibility was not entirely

foreign to the people who drafted the agreement.

MSA para. II(pp) is careful to limit the parties

releasing claims to the Settling States and their

various subdivisions and constituent

institutions. Individual persons under MSA para.

II(pp)(2)(A) release claims only insofar as they

are acting for the state and suing on general

injuries, not insofar as they are seeking "solely

. . . private or individual relief for separate

and distinct injuries." Again, MSA para.

II(pp)(2)(B) is careful to distinguish between

recovery that an entity of the state might

receive for health-care expenses, as opposed to

the same kind of recovery that an individual

might seek. We read this to indicate that the MSA

itself recognized that the assignments the states

received might not include all claims related to

health-care expenses and that it did not purport

to extinguish the claims of individual persons

who were not part of the settlement process (a

move that would have been problematic at best).

Ellsworth shows that in Wisconsin at least some

claims will fall into that category.

 The Floyd plaintiffs recognize that they have

no right to the monies actually expended by the

state for the provision of medical services to

recipients of assistance. The subrogation right

of sec. 49.89(2) makes that clear, as does the

allocation scheme of 42 C.F.R. sec. 433.154.

Since those are the only claims for medical

treatment that Wisconsin settled, or perhaps even

could settle given the restrictive scope the

Wisconsin Supreme Court has now given to the

assignment provision of sec. 49.45(19)(a)2, it

follows that there is nothing in the MSA to which

the plaintiffs may assert a claim. It also means

that it is possible that this settlement

agreement resolved somewhat less than Tobacco had

hoped, although as we just noted, that is not

clear given the language of MSA para. II(pp).

That, however, is not our concern; all parties to

the MSA were represented by prominent counsel,

and any questions of interpretation of that

agreement beyond what we have addressed are for

another day.

 We add that the administrative problems that

would be created by any other ruling would be

nightmarish. As Wisconsin and the other states

point out, the total sums of money to be paid

under the MSA are not earmarked for different

claims. Some of it is to go to educational

programs; some of it to research; some to

reimbursement of the state’s expenses in treating

sick people and in supporting families whose

wage-earners are disabled from smoking; some is

frankly punitive. The final amount to be paid,

after 25 years have elapsed, is unknown and
unknowable at this point, because it depends

partly on how successful the anti-smoking

campaigns turn out to be.

 For all these reasons, we AFFIRM the judgment of

the district court dismissing this action.