Floyd et al v. Thompson

• Decision Date: 19 September 2000
• Docket Number: No. 99-3706,99-3706
• Citation: 227 F.3d 1029
• Parties: (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
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1029

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, 2000

Decided 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.

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...