Court Opinion

ID: 770571
Source: CourtListenerOpinion
Date Created: 2012-04-18 10:36:26+00
Date Added: 2024-06-11T08:30:30.123269
License: Public Domain

227 F.3d 1029 (7th Cir. 2000)
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.
No. 99-3706
In the  United States Court of Appeals  For the Seventh Circuit
Argued February 23, 2000Decided September 19, 2000

Appeal from the United States District Court  for the Western District of Wisconsin.  No. 99-C-0268-C--Barbara B. Crabb, Judge.
Before Flaum, Chief Judge, and Kanne and Diane P.  Wood, Circuit Judges.
Diane P. Wood, Circuit Judge.

1
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.

2
* 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.

3
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.

4
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:

5
(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--

6
(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--

7
(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.

8
42 U.S.C. sec. 1396k. Wisconsin has implemented  that federal command through a statute spelling  out a "deemed assignment" system

9
As a condition of eligibility for medical  assistance, a person shall

10
. . .

11
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.

12
Wis. Stat. sec. 49.45(19)(a)2.

13
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

14
(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.

15
42 U.S.C. sec. 1396k(b). A regulation, 42 C.F.R.  sec. 433.154, elaborates further on that statute

16
The [state] agency must distribute collections as  follows--

17
(a)  To itself, an amount equal to State  Medicaid expenditures for the individual on whose  right the collection was based.

18
(b)  To the Federal Government, the Federal  share of the State Medicaid expenditures, minus  any incentive payment made in accordance with  sec. 433.153.

19
(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.

20
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.

21
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).

22
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;

23
* The tort of intentional misrepresentation;

24
* The tort of negligent misrepresentation;

25
* The tort of strict responsibility for  misrepresentations;

26
* Anti-competitive conspiracy in restraint of  trade contrary to Wisconsin's antitrust laws,  Wis. Stat. Ch. 133;

27
* The tort of undertaking of and failure to  perform a special duty;

28
* Unjust enrichment;

29
* Restitution;

30
* Public nuisance;

31
* Common law conspiracy and concert of action; and

32
* The Wisconsin Organized Crime Control Act, Wis.  Stat. sec.sec. 946.80 et seq.

33
The complaint sought damages only for direct  losses to the state. It asked for a variety of  forms of injunctive relief, including a cease-  and-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."

34
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.

35
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:

36
(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 . . . .

37
(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.

38
MSA para. II(nn).

39
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:

40
(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.

41
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.

42
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

43
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., 222 F.3d 323 (7th Cir.2000).

44
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.

45
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.

46
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.

47
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.

48
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.

49
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

50
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. . . .

51
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.

52
611 N.W.2d at 770-71. (Justice Sykes, joined by  two other members of the court, dissented to this  part of the holding.)

53
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.

54
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.

55
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.

56
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.

57
For all these reasons, we AFFIRM the judgment of  the district court dismissing this action