Watson v. State of Texas

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 00-41269

BOBBY WATSON, On Behalf of Himself
and All Others Similarly Situated,
Plaintiff-Appellant,

versus
STATE OF TEXAS,
Defendant-Appellee.

Appeal from the United States District Court
for the Eastern District of Texas

August 7, 2001

Before HIGGINBOTHAM and BENAVIDES, Circuit Judges, and LITTLE,*
District Judge.

PATRICK E. HIGGINBOTHAM, Circuit Judge:

Texas smokers, suffering smoking-related illnesses treated

with Medicaid assistance, filed this suit asserting a right to

share in the settlement that resolved the lawsuit filed by the

State of Texas against members of the tobacco industry. The

district court dismissed the smokers’ complaint in the suit now

before us for failure to state a claim upon which relief can be

granted. It accepted the state’s contention that Texas sought and

is to be paid only for its own damages; that Texas did not sue as

*
District Judge of the Western District of Louisiana, sitting
by designation.
an assignee of Medicaid recipients. The district court rejected

the state’s plea that the Eleventh Amendment deprived the district

court of jurisdiction. We agree with the district court and

AFFIRM.

I

The facts are simple. The State of Texas and numerous other

states sued various tobacco companies. In 1998, these states and

defendants from the tobacco industry reached an agreement termed

a Comprehensive Settlement Agreement. Pursuant to the Agreement

the tobacco companies agreed to pay Texas an amount in excess of

$17,000,000,000.00, payable to the state over an extended period.

Bobby Watson seeks a share of the settlement for himself and

the class he represents. Watson and his class members are smokers

who have been treated for smoking-related illnesses and whose

medical expenses were covered in part under the Texas Medicaid

program.

The class argued before the district court that it was

entitled to a share of the settlement proceeds pursuant to 42

U.S.C. § 1396k. That statutory provision, entitled “Assignment,

enforcement, and collection of rights of payments for medical care;

establishment of procedures pursuant to State plan; amounts

retained by State,” provides in pertinent part that:

(a) For the purpose of assisting in the collection of medical

support payments and other payments for medical care owed to

2
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.

* * *

(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

3
 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.1

According to plaintiffs, they comprise the class of “such

individual[s]” to whom “the remainder of such amount collected

shall be paid.”

The district court was not convinced. It first held that it

had jurisdiction under the Settlement Agreement, and that Texas’s

limited waiver of Eleventh Amendment immunity included this

dispute. It then held that Texas’s claims against the tobacco

industry were made directly and not as an assignee of Medicaid

recipients. It concluded that section 1396k therefore did not

apply, and dismissed the case under Rule 12(b)(6) as failing to

state a claim upon which relief can be granted.

Watson appeals, asking that we reverse the 12(b)(6) dismissal.

The State of Texas urges that we affirm, preferably on Eleventh

Amendment immunity grounds. We are persuaded that the waiver of

Eleventh Amendment immunity contained in the Comprehensive

Settlement Agreement reached this suit, narrow though the waiver

is. We are also persuaded that Texas proceeded directly and not as

1
42 U.S.C. § 1396k (2001).

4
an assignee, and we therefore AFFIRM the judgment of the district

court.

II

In reviewing a dismissal under Rule 12(b)(6), we accept as

true all well-pleaded facts and view them in the light most

favorable to the plaintiff, asking whether it “appears beyond doubt

that the plaintiff can prove no set of facts in support of his

claim which would entitle him to relief.”2 We first examine the

State of Texas’s Eleventh Amendment immunity defense.

We begin with the black letter, or to borrow a student phrase,

the “red eye law.” “[T]he Constitution does not provide for

federal jurisdiction over suits against nonconsenting States.”3

Texas’s Eleventh Amendment immunity 4 will bar this suit unless it

has been validly abrogated or waived. No party here argues

2
See Conley v. Gibson, 355 U.S. 41, 45-46 (1957); see also
Baker v. Putnal, 75 F.3d 190, 196 (5th Cir. 1996).
3
Kimel v. Florida Bd. of Regents, 528 U.S. 62, 73 (2000).
4
We will refer to a state’s immunity from suit in federal
court as Eleventh Amendment immunity, for convenience to
distinguish it from a state’s sovereign immunity from suit in its
own courts. Cf. Atascadero State Hosp. v. Scanlon, 473 U.S. 234,
241 (1985) (distinguishing for waiver purposes between a state’s
sovereign immunity from suit in state courts and a state’s immunity
from suit in federal courts). We recognize that the text of the
Eleventh Amendment refers only to suits against states by citizens
of other states. The immunity invoked in this case, by a citizen
of Texas against Texas, thus comes not from the text of the
Eleventh Amendment, but rather from the constitutional
presupposition of sovereign immunity the Supreme Court has
recognized. See Kimel, 528 U.S. at 72-73.

5
abrogation, so the question is whether Texas’s waiver of immunity

included this dispute.5 We find that it did.

While Eleventh Amendment immunity “partakes of the nature of

a jurisdictional bar,”6 unlike any other issue of federal subject

matter jurisdiction, it can be waived by the state.7 A state’s

waiver must be unequivocal, but it can be either express or

implied.8 Where waiver is by express statement, the intent to

waive immunity from suit in federal court must be “stated by the

most express language or by such overwhelming implications from the

text as [will] leave no room for any other reasonable

construction.”9 We will find waiver by implication from conduct

5
Watson urges a third theory: that the court possesses
ancillary jurisdiction over this case. It is true that
supplemental jurisdiction (the rubric under which ancillary
jurisdiction is now contained) would permit a court to exercise
jurisdiction over a case even where the court would not otherwise
have jurisdiction to hear the case. See Manges v. McCamish,
Martin, Brown & Loeffler, 37 F.3d 221, 224 (5th Cir. 1994). It is
also true that Eleventh Amendment immunity is jurisdictional in
character. See Edelman v. Jordan, 415 U.S. 651, 677-78 (1974).
However, the presence of supplemental jurisdiction does not
eliminate an Eleventh Amendment bar. See County of Oneida v.
Oneida Indian Nation, 470 U.S. 226, 251 (1985). The mere presence
of a jurisdictional basis cannot defeat the Eleventh Amendment,
lest the Amendment become a nullity.
6
Edelman, 415 U.S. at 677-78.
7
See Clark v. Barnard, 108 U.S. 436, 447 (1883) (“The
immunity from suit belonging to a state . . . is a personal
privilege which it may waive at pleasure.”); Atascadero, 473 U.S.
at 238.
8
See Neinast v. Texas, 217 F.3d 275, 279 (5th Cir. 2000).
9
Edelman, 415 U.S. at 673 (internal quotation marks omitted).

6
only under narrow circumstances: we require that the state employ

the power of the federal court in such a way that its intent to

forego its acceptance of immunity be unequivocal.10

The Comprehensive Settlement Agreement was signed by the

attorney general of Texas, on behalf of the State of Texas.11 Two

clauses of the Agreement in combination unequivocally waive Texas’s

Eleventh Amendment immunity for a limited class of disputes. They

acknowledge the parties’ acceptance of federal jurisdiction and the

retention by the court of jurisdiction to enforce the settlement

and recite their agreement to present all disputes over the

settlement agreement to the court.

[The parties] acknowledge that this Court has jurisdiction

over the subject matter of this action and over each of the

parties hereto, and that this court shall retain jurisdiction

for the purposes of implementing and enforcing this Settlement

Agreement.

10
See Neinast, 217 F.3d at 279.
11
We presume that the attorney general for the State of Texas
had the power to sign the Agreement on behalf of Texas and had the
power to waive the state’s sovereign immunity. See Ford Motor Co.
v. Dept. of Treasury, 323 U.S. 459, 467 (1945) (“It is conceded .
. . that if it is within the power of the administrative and
executive officers of Indiana to waive the state’s immunity, they
have done so in this proceeding. The issue thus becomes one of
their power under state law to do so.”).

7
The second clause is the disputes clause, which states that the

parties:

agree to present any disputes under this Settlement Agreement,

including without limitation any claims for breach or

enforcement of this Settlement Agreement, exclusively to this

Court.

It is undisputed that these two clauses waive immunity for the

class of cases they cover.

The phrase “this Court” refers to the United States District

Court for the Eastern District of Texas, Texarkana Division, the

court suit was brought in and from which this appeal was taken.

The court referred to in the Agreement is a federal court.12

The enforcement clause acknowledged that the federal court had

subject matter13 and personal jurisdiction over the State of Texas.

12
Compare Kennecott Copper Corp. v. State Tax Comm’n., 327
U.S. 573, 579-80 (1946) (finding insufficiently clear a statute
permitting suit in “any court of competent jurisdiction”), with
Kimel v. Florida Bd. of Regents, 528 U.S. 62, 74-76 (2000) (finding
sufficiently clear a statute authorizing suit in “any Federal or
State court of competent jurisdiction”).
13
The provision purporting to vest a federal court with
subject matter jurisdiction cannot, of course, create federal
subject matter jurisdiction where it otherwise would not exist.
See Commodity Futures Trading Comm’n v. Schor, 478 U.S. 833, 850-51
(1986). We need not concern ourselves with that issue here,
however. Plaintiffs have sued under a federal statute, 42 U.S.C.
§ 1396k, thereby raising a federal question.

8
While vesting of jurisdiction alone is not sufficient to overcome

the Eleventh Amendment,14 the state consented to the vesting of

jurisdiction “for the purposes of implementing and enforcing” the

Agreement. Ordinary usage suggests that “enforcing” the Agreement

might entail one party suing the other, which would be impossible

unless Texas’s consent to jurisdiction embodied a waiver of its

Eleventh Amendment immunity.

By the disputes clause, the parties (including Texas) agreed

to present to the court below “any disputes” under the agreement.

“Any disputes” encompasses not only disputes initiated by Texas,

but also disputes initiated by the tobacco industry. The clause

goes on to say “including without limitation any claims for breach

or enforcement.” This phrase encompasses all claims, including

claims brought by tobacco companies against the sovereign State of

Texas. By its plain language, then, the disputes clause expresses

Texas’s consent that covered claims are to be presented exclusively

to the United States District Court for the Eastern District of

Texas. That is an express and unequivocal waiver of Texas’s

Eleventh Amendment immunity.

Watson contends that the State of Texas of necessity sued the

tobacco companies under an assignment of rights from himself and

the class he represents. Texas, according to Watson, stood in the

14
See County of Oneida v. Oneida Indian Nation, 470 U.S. 226,
251 (1985).

9
class’s shoes when it signed the Agreement, and thus Watson and the

class are not strangers to the Agreement. Rather, Watson and the

class, while not named parties, were real parties in interest in

the underlying tobacco litigation. This highlights the fact that

the claim here is to the proceeds of a settlement fund assertedly

created by settlement of a claimed breach of duty owed both to

Texas and the Watson class.

This is not a case where the plaintiff seeks to recover money

from the state for breach of some duty owed only by the state, and

tries to bootstrap his way into an Eleventh Amendment waiver by

demanding the proceeds of the Settlement Agreement. Here, the

basis for Watson’s claim is inextricable from the issues raised by

the case that the Settlement Agreement settled. Watson bases his

claim on the theory that he was an implied party to the underlying

tobacco litigation. That claim goes directly to the judgment of

the district court in the underlying tobacco litigation, and to the

assumptions upon which the Settlement Agreement was based. If

Watson submits that issue to a state court, and returns with a

state court judgment ordering that he be paid proceeds from the

Settlement Agreement as an assignor of the state, the Agreement’s

goal of resolving all disputes over the Agreement in one court will

be frustrated. The gathering of disputes is reinforced by the

district court’s retention of control over the disbursement of the

settlement proceeds. Paragraph 11 of the Agreement provides that

all payments under the Agreement will be made into the court’s

10
registry, and shall be disbursed “only in accordance with the

orders of the Court.” Watson and his class are urging the court to

order that a portion of the proceeds be disbursed to the class, a

request assertedly under the Settlement Agreement. And another

court will be ordering disbursement from the settlement proceeds.

We conclude that this suit is within the waiver in the

Settlement Agreement. In so concluding, we agree with the state

that its waiver was not general. Rather, it was a narrow and

carefully crafted instrument intended to relinquish no more of the

state’s sovereign immunity than it must to effectuate the

settlement in a sound and efficient manner. In short, we today

treat only the claims of Watson and his class with their uniquely

snug fit with the case that was settled.

III

Watson seeks to recover proceeds of the Settlement Agreement

under 42 U.S.C. § 1396k(b). Section 1396k requires states who wish

to participate in Medicaid to require individual beneficiaries to

assign to the state any rights to support and payment of medical

care by any third party.15 It then creates a distribution scheme

by which any money governed by section 1396k(b) is used first to

reimburse the Federal Government, then to reimburse the state, with

any surplus paid over to the beneficiary:

15
42 U.S.C. § 1396k(a)(1)(A).

11
 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.16

The Federal Government has waived any claim it may have to

reimbursements.17 Hence, the claim of the class is that under

section 1396k(b) the settlement proceeds are to be paid first to

Texas, up to the amount spent by Texas, with any surplus paid to

the class. Our task is to decide whether section 1396k(b) applies.

Watson’s assertion is empty beside the plain text of section

1396k(b). The text reaches only recoveries made under an

assignment of rights. The statute begins with “[s]uch part of any

amount collected by the State under an assignment made under the

provisions of this section shall be . . . .”18

16
42 U.S.C. § 1396k(b).
17
See 42 U.S.C. § 1396b(d)(D)(3)(B)(i).
18
42 U.S.C. § 1396k(b) (emphasis added).

12
 Whether section 1396k(b) applies turns on whether the State of

Texas proceeded directly or under an assignment. In the underlying

tobacco litigation, the district court held that the state

proceeded directly.19 The tobacco industry urged an assumption of

the risk defense available against the State only if it were

proceeding as an assignee. The contention was in part that §

32.033 of the Texas Human Resources Code was Texas’s exclusive

remedy; that the State was only authorized to proceed as an

assignee and was not authorized to proceed directly.20 The district

court rejected this argument, holding that the State was authorized

by law to proceed directly and had a quasi-sovereign interest

warranting a direct action.21 In short, the district court held

that Texas asserted its own claim and did not assert the claims of

assignees; that it was not required to do so.

Having reviewed the complaint independently, we agree with the

district court that the State of Texas proceeded directly. The

first place to look when attempting to characterize the underlying

lawsuit is, of course, the complaint itself.22 If this action were

19
See State of Texas v. Am. Tobacco Co., 14 F. Supp. 2d 956,
961-65 (E.D. Tex. 1997) (holding that the subrogation provisions of
Texas law do not provide the state’s exclusive remedy, but rather
that the state can and did proceed directly under a common law
theory).
20
Tex. Human Resources Code § 32.033 (2001).
21
See Am. Tobacco Co., 14 F. Supp. 2d at 961-65.
22
Cf. Caterpillar Inc. v. Williams, 482 U.S. 386, 392-93
(1987) (holding that the plaintiff is the master of the complaint

13
brought under an assignment of rights, the complaint would have to

plead the state’s right to file suit for an injury to citizen

smokers. Texas’s Fourth Amended Complaint in the underlying action

does not do so. It nowhere alleges that the state holds an

assignment of rights from smokers, nor does it plead that such

assignment entitles it to enforce the rights of smokers.

Texas’s complaint in the tobacco litigation makes clear that

as regards the Medicaid reimbursement theories of recovery, the

state is not suing for the full amount of injury the tobacco

companies may have inflicted upon smokers, but rather only for the

money spent by the state. The complaint states that the action is

“to recover funds expended by the State to provide medical

treatment to citizens suffering from smoking-related illnesses.”23

It also says “For decades, the State has incurred significant

expenses associated with the provision of necessary health care .

. . .”24

for purposes of determining federal question jurisdiction, and may
choose not to assert federal causes of action that he or she would
by law be entitled to assert).
23
The italics in this and subsequent quotations from the
complaint are ours.
24
Plaintiff places great emphasis on the fact that the
complaint expressly seeks reimbursement of Medicaid expenses. That
misses the point. Mere invocation of the Medicaid statute does not
require the state to split a recovery under 1396k(b), rather as we
have explained, the lawsuit must be under an assignment for
1396k(b) to apply.

14
 The payments provided for in the Agreement are not broken down

by claim. Thus, it would be difficult, if possible at all, to

calculate the percentage of the state’s recovery based on Medicaid

expenses and the percentage, for example, based on RICO punitive

damages.25 The Medicaid portion of the payment stream might only

be the amount the state itself spent on Medicaid.26 If so, then

there would be no surplus Medicaid recovery to be distributed under

section 1396k(b) – all excess funds in the payment stream might

properly be attributed to the state’s myriad other theories of

recovery.27 The relevant point is that absence of earmarking is

inconsistent with the assertion that the parties to the Settlement

25
Cf. Floyd v. Thompson, 227 F.3d 1029, 1038 (7th Cir. 2000)
(“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
M.S.A. are not earmarked for different claims. . . . 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.”).
26
The complaint would support this reading. Texas’s Fourth
Amended Complaint in the underlying action makes abundantly clear
that the action is “to recover funds expended by the State to
provide medical treatment to citizens suffering from smoking-
related illnesses.” We do not insist that this is necessarily the
correct view of the agreement; rather we mention this
interpretation to demonstrate the difficulties associated with
trying to apply section 1396k(b) to this case.
27
For example, the state asserted a RICO claim, a federal
antitrust claim, a state law antitrust claim, a common law nuisance
claim, a common law unjust enrichment claim, and a product
liability claim. If the Medicaid recovery was only the amount
actually spent by Texas, Watson would have no claim to any portion.
Cf. Floyd, 227 F.3d at 1037.

15
Agreement understood the settlement to be for the benefit of the

state and not others.

Nothing in Section 32.033 of the Texas Human Resources Code is

intolerant of the state pursuing only its own claim. After

requiring the assignment of rights mandated by federal law, the

code provides that “[a] separate and distinct cause of action in

favor of the state is hereby created, and the department may,

without written consent, take direct civil action . . . .”28

Where the relevant statute authorizes a direct action, the

complaint makes no mention of an assignment of rights but does

repeatedly assert a direct injury to the state, and the case was

allowed to proceed on the understanding that it was a direct

action, we have no difficulty in concluding that the distribution

scheme in section 1396k(b) does not apply. If the distribution

scheme upon which plaintiff rests his case is inapplicable, then

Watson can prove no set of facts in support of his claim which will

entitle him to relief. Dismissal under Rule 12(b)(6) was therefore

appropriate.29

IV

The judgment of the district court is AFFIRMED.

28
Tex. Human Resources Code § 32.033(d).
29
See Conley v. Gibson, 355 U.S. 41, 45-46 (1957).

16