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 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."

  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.
