Petition for Writ of Certiorari — Brown v. Minnesota
Supreme Court brief2001
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ouoOreme Corr ul Ss.
001339 FEB 202008
OFFICE OF
No. :
In the
Supreme Court of the United States
October Term, 2000
JESSE LEE BROWN AND RONALD J. BERGERON
ON BEHALF OF THEMSELVES AND ALL OTHERS
SIMILARLY SITUATED,
Petitioners,
Vv.
STATE OF MINNESOTA,
Respondent.
ON PETITION FOR WRIT OF CERTIORARI
TO THE MINNESOTA SUPREME COURT
PETITION FOR WRIT OF CERTIORARI
Anthony J. Nemo Hugh V. Plunkett II]
Counsel of Record Robert K. Shelquist
Ronald I. Meshbesher LOCKRIDGE GRINDAL
MESHBESHER & NAUN P.L.L.P.
SPENCE, LTD. 100 Washington Ave. South
1616 Park Avenue South Suite 2200
Minneapolis, MN 55404 Minneapolis, MN 55401-2179
(612) 339-9121 (612) 339-6900
John A. Cochrane
COCHRANE &
BRESNAHAN
24 East Fourth Street
St. Paul, MN 55101
(651) 298-1950
Attorneys for Petitioners
2001 — Bachman Legal Printing @ (612) 339-9518 @ 1-800-715-3532 @ Fax (612) 337-8053
IT.
QUESTIONS PRESENTED FOR REVIEW
WHETHER AN IMPERMISSIBLE TAKING OF
PROPERTY WITHOUT JUST COMPENSATION
OCCURS, IN VIOLATION OF THE FIFTH
AMENDMENT TO THE UNITED STATES
CONSTITUTION, WHEN A STATE UNILATERALLY
SETTLES FUTURE DAMAGES CLAIMS
BELONGING TO MEDICAID RECIPIENTS
WITHOUT NOTICE OR OPPORTUNITY. TO BE
HEARD AND WHERE THE STATE RETAINS THE
SETTLEMENT PROCEEDS IN DEROGATION OF
FEDERAL AND STATE STATUTES.
WHETHER DUE PROCESS IS VIOLATED WHEN A
STATE UNILATERALLY SETTLES FUTURE
DAMAGES CLAIMS BELONGING TO MEDICAID
RECIPIENTS WITHOUT NOTICE OR
OPPORTUNITY TO BE HEARD AND WHEN IT
RETAINS THE SETTLEMENT PROCEEDS IN
DEROGATION OF FEDERAL AND STATE
STATUTES.
QUESTIONS PRESENTED FOR REVIEW
TABLE OF AUTHORITIES
OPINIONS BELOW .
JURISDICTION
CONSTITUTIONAL, STATUTORY AND ORDINANCE
PROVISIONS
I.
TABLE OF CONTENTS
THERE HAS BEEN AN IMPERMISSIBLE
TAKING OF PROPERTY WITHOUT JUST
COMPENSATION WHEN THE STATE OF
MINNESOTA UNILATERALLY SETTLED
FUTURE DAMAGES CLAIMS BELONGING
TO MEDICAID RECIPIENTS WITHOUT
NOTICE OR OPPORTUNITY TO BE HEARD
AND WHEN IT RETAINED THE
SETTLEMENT PROCEEDS IN
DEROGATION OF FEDERAL AND STATE
S A PUTTES «cisicccccessecuie cane aieecaiean inane
A. Petitioners Had A Property Interest In Their
Causes Of Action, In the Contract of
Assignment With The State, And In the
Administration Of Medicaid Benefits As
Set Fortis Bey SRW ss<caiscscorccsasannecmesbeteetasons
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POORER EEE EEE HEE EEE EEE HEE ETH EEE HEHEHE HEHEHE EH E®
OORT EHH HEHEHE EEE EEE EEE EEE EEE EE EEE HEHEHE EEE HEHEHE He
PROPER EERE HEHEHE TEETH EEE EEE HEHEHE EEE EEE EEE SETHE HEHEHE HEHEHE HEHE Ee
SOOO H EEE EHH E®
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IT.
CONCLUSION
B. Petitioners’ Property Was Taken For Public
Use Without Compensation...............00000.......
DUE PROCESS IS VIOLATED WHEN A
STATE UNILATERALLY SETTLES
FUTURE DAMAGES CLAIMS BELONGING
TO MEDICAID RECIPIENTS WITHOUT
NOTICE OR OPPORTUNITY TO BE HEARD
AND WHEN IT RETAINS’ THE
SETTLEMENT PROCEEDS IN
DEROGATION OF FEDERAL AND STATE
oo ec gh SETS nO Oe
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25
Ys
TABLE OF AUTHORITIES
CASES:
Board of Regents v. Roth, 408 U.S. 564 (1972) ............ 20, 25
Brown v. State, 617 N.W.2d 421 (Minn. Ct. App. 2000),
RE SE CIEE Bs sacsaisnanctantosastusenesehoants 13-15, 23, 24
Castano v. American Tobacco Co., Cir. No. 94-10445
(E.D. i UE Fg. Rs caniicna veces neninddadaalnaptaenthucnnnddldigiidd 8
Engle v. R.J. Revnolds Tobacco Co., Civ. No. 94-08273
CE Re FR ap cccscensrsrne icc neriencsoenmiameneaae 8
Federal Deposit Ins. Corp. v. Mallen, 486 U.S. 230
ET ssiccricichesicksodieinnconpashacneineniadaendiommenaianieauasbanaiaandstaien 25
Floyd v. Thompson, 227 F.3d 1029 ti Cir. 2000)........ 17, 24
Goldberg v. Kelly, 397 U.S. 254 (1970)............... sews 17, 21
Great West Life & Annuity Ins. Co.. et al. v. Janette
eee IR SRS HID « jnicinintadencsiaccadsadiosblnsdnnininnsdbassivesates 16
Harrie vy McRae 448 U.S. 297 (1960) ....sccsesccsesassssnsanssonessace 3
Logan v. Zimmerman Brush Co., 455 U.S. 422 (1982) . 16, 20
Martin v. City of Rochester, 615 N.W.2d 867 (Minn.
App. 2000), review granted (Minn. Oct. 17, 2000)........... 6
Mullane v. Central Hanover Bank & Trust Co., 339 U.S.
BE PIO acsosedecioncicosanaceigicincin te maciateasunintiasbal =z... 20
Olim v. Wakinekona, 461 U.S. 238 (1983) ........c ee eeeeee 26
iv
Perry v. Sindermann, 408 U.S. 593 CRORE sien andehabvtseiiniagas 17, 21
Pritchard v. Norton, 106 U.S. 124 RUN inscchtetncntieuss 16, 20
Pumpelly v. Green Bay Co., 80 U.S. (13 Wall.) 166
GEO FE J sncsinonsoninsdiataamaenales a ede 20
Schweiker v. Gray Panthers, 453 U.S. 34 ti | rete 4
State by Humphrey v. Philip Morris. Inc., 551 N.W.2d
TN RN, TI scisienccsinsic ce ee 9
State of California v. Superior Court, 83 Cal. App. 4"
597, 99 Cal. Rptr. 2d 735 (2000) .oeeceecccccecececscsosecececeeceen. 18
United States v. James Daniel Good Real Prop., 510 U.S.
RF CROP venisnceiscpsinsastaaonesin aaa ee 25
Webb’s Fabulous Pharmacies. Inc. v. Beckwith, 449 U.S.
Be COPED scinsiecnaodencaunenaes Lal 20
CONSTITUTIONS AND STATUTES:
42 U.S.C. § 1396-1396 Looeccecccccssessssesssscstecsecsseeeeeeseecccccce. 3
42 U.S.C. § 1396, et SeQ.....cesccecssesssssssesosesccsscsescoeseosccceccccc. 3
42 U.S.C. § 1396a(a)(25)(A), Ot S€Q. coececsececcesccsseceseeeeeecccccce. 4
42 U.S.C. § 1396a(a)(25)(B), Ct $€Q. coeeececceccceccseeceeeeeeseccc. 23
42 U.S.C. § 1396b(d) ...cseccesceescessssecssessssssssosseeseeceieceeccccccc. 9
42 U.S.C. § 1396k(a)(1)(A). cecececscccssecssesssesseeeeeeeceeccccc. 6,15
Vv
42 U.S.C. § 139GReLa 1 NC), Ot B00, ..ccccccrscssscssesecssscesccscscosess 4
42 U.S.C. § TSSGRED). ccicessscesccssscsensasssscencovsonesesetenestans 2, 4, 21
42 U.S.C. § 1FDSRLE AMO) .ncrrcccscrccesoccessreccecccssscasoosesonsssess 24
42 CBR. § SSS. TSG) ccccscsssccraccesssssshssnsstescumsvenvenssnmniaans 4
42 CER. § 453. TSOEG) ccccccssecececvsssconssscssntacensessnecssansennes 4,23
42 CBR. © 433 AGA vccescccssininceicessesansonsioasssicconennamaan 43
42 CBR. § 433. 1S0G6) ccrcescerecsssccocesecssisestvorststetetsstavanuenseanl 21
42 CBR. § 435.10 vccccscescsrssevinscesinntsnenemaaiamaneaias 4
Mian. Stat. § 25608 $. ...110c0sciescessssicsinsstaqnntensecsenbeemeananmaaanan 6
Mian. Stat. § ZSGB.B1 , GE BOG, wrcceseesccesvineegnvssinentsoccmsannns i
Diem. Stat. & SSG.OF1, GAG, F ccinerecececsssrcsiccsncssssssensiomnenn 7
Mian. Stat. § 25GE.O42, GGT ..csisssciicsserreenessecnsinnsneinessomnens 6
Min. Stat. § 25GB.G42, GUE. 2 vssccccsscoseccossenssrsecososepssausssbenes 7
Mian. Stat. § 25GB.042, Std, $ ..ccccsrcccccssessecsvessesssesonssesees re
Mian. Stat. § 256. BSG, SIDE, © scccccocsatisssioicemmacasebnnionn 15
Mian. Stat. § Z5GBR.3S7, SUE. 1D sececsssstesnnccersninisemenanal 6
Milan. Stat. § 25GS.37, GUNG, 2 cvccsntinisictcccanan 7
Minm. Seat. § 2SGB.S7, GUIG, S osscesserscnrscsoscrenernsssctesnmianin ye
vi
Minn. Stat. § 256D.01, et seq. o..eccccccccccccccscesececececeeeeen.. 3, 5,8
Pts COME, NN Yea cactcicdaccchnosecncercersssee as os a
U.S. Const. ammend. XIV ...........c:c:cscscecesesocececesesecoseeeeee......... ]
Vil
OPINIONS BELOW
The opinion of the Minnesota Court of Appeals is
reported at 617 N.W.2d 421 and reproduced in the Appendix
to this Petition at App. A-2 to A-14.' The Order denying a
petition for further review filed by the Minnesota Supreme
Court is reproduced at App. A-1. The Judgement of the
Hennepin County District Court, State of Minnesota- is
reproduced at App. A-15 to A-37.
JURISDICTION
The Minnesota Court of Appeals issued its opinion on
September 19, 2000. A Petition for Further Review of that
opinion was denied by the Minnesota Supreme Court on
November 21, 2000. This petition was timely filed within
ninety (90) days of the denial of the petition for further
review by the Minnesota Supreme Court. The jurisdiction of
this Court is invoked under 28 U.S.C. § 1257 (a).
CONSTITUTIONAL, STATUTORY AND ORDINANCE
PROVISIONS
1. The due process clause of the Fourteenth Amendment, §
1, U.S. Constitution provides, in part:
Nor shall any state deprive any person of life, liberty,
or property, without due process of law...
2. The takings clause of the Fifth Amendment, U.S.
Constitution provides:
' All further references to the materials set-forth in the Appendix to
this Petition will be made by “App. A-[page no.].”
]
Nor shall private property be taken for public use,
without just compensation.
3. The United States Code, 42 U.S.C. § 1396k(b) provides
in relevant part:
[After the State obtains full recovery] the remainder
of such amount collected shall be paid to such
individual [injured recipient).
4. Code of Federal Regulations, 42 C.F.R. § 433.154,
provides in relevant part:
[The State] 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.... (c) To the recipient, any remaining
amount.
5. The Minnesota Statutes, Minn. Stat. § 256B.37, subd. 4,
provides in relevant part:
Upon any judgment, award, or settlement of a cause
of action, or any part of it, upon which the State
Agency has a subrogation right...reasonable cost of
collection...must be deducted first. The full amount
of medical assistance paid to or on behalf of the
person as a result of the injury must be deducted next
and paid to the State Agency. The rest must be paid
to the medical assistance recipient or other plaintiff.
6. The Minnesota Statutes, Minn. Stat. § 256B.042, subd. 5,
provides in relevant part:
Upon any judgment, award, or settlement of a cause
of action, or any part of it, upon which the State
Agency has filed its lien...reasonable costs of
collection...must be deducted first, the full amount of
medical assistance paid to or on behalf of the person
as a result of their injury must be deducted next, and
paid to the State Agency. The rest must be paid to
the medical assistance recipient or other plaintiff.
STATEMENT OF THE CASE
This case calls into question a state’s right to unilaterally
settle 70,000 Medicaid recipients’ medical damages claims
against the tobacco industry without following federal
statutory mandates to keep no more than the amount paid in
past medical expenses. Petitioners Jesse Lee Brown and
Ronald Bergeron are smokers who suffer from smoking-
related disease. At various times between January 1, 1978
and December 1, 1996, Petitioners received medical treatment
for their smoking-related disease which was paid, in whole or
in part, by the State of Minnesota (the “State’’) pursuant to
programs partially funded through the Federal Medicaid
Program (“Medicaid Program”) established under Title XIX
of the Social Security Act. See 42 U.S.C. § 1396, et_seq.;
Minn. Stat. § 256B.01, et seg.; Minn. Stat. § 256D.01, et seq.
The Medicaid Program allows states to receive federal funds
of up to 60 percent of the money necessary to support the
state programs that pay for medical services provided to low
income and disabled persons. See 42 U.S.C. § 1396-1396v.
A state’s participation in the Medicaid Program is
entirely optional. However, once a state elects to participate
in the Program, it must comply with the requirements of Title
XIX. Harris v. McRae, 448 U.S. 297, 301 (1980). The
participating state is required to submit a plan, backed by a
state statutory scheme, that complies with the program act
itself and all regulations passed by the Secretary of Health
3
and Human Services. See Schweiker v. Gray Panthers, 453
U.S. 34, 36 (1981). The state must take “al] reasonable
measures to ascertain the legal liability of third parties . . . to
pay for care and services available under [Medicaid].” 42
U.S.C. § 1396a(a)(25)(A); see also 42 C.F.R. § 433.138(a). If
the state determines that a third party is legally responsible for
the condition which necessitated the expenditure of Medicaid
Program funds, the state is required to “seek reimbursement
for such assistance to the extent of such legal liability.” 42
U.S.C. § 1396a(a)(25)(B); see also 42 C.F.R. § 433.138(d).
As a condition of eligibility to receive medical assistance
under a state plan, a recipient of medical benefits also has
certain obligations under the Medicaid Program. The
recipient is required to assign to the state any rights to
payment a recipient may have against a third party for the
cost of medical care. The recipient must also cooperate with
and assist the state in identifying and pursuing any third party
who may be liable to pay for the care and services provided
under the Medicaid Program. See 42 U.S.C. §
1396k(a)(1)(C); see also 42 C.F.R. § 435.610.
In the event that a State obtains full recovery from a
liable third party for the amounts paid pursuant to its
Medicaid Program (i.e. an amount which includes the federal
matching funds), Title XIX demands that “the remainder of
such amount collected shall be paid to such individual
[injured Medicaid recipient].” 42 U.S.C. § 1396k(b)
(emphasis added). This equitable distribution formula,
entitling the Medicaid recipient to the difference between the
amount collected from the liable third party and the amount
necessary for the State to achieve full recovery, is
underscored in the regulations passed by the Secretary of
Health and Human Services:
[The State] must distribute collections as follows—(a)
To itself, an amount equal to State Medicaid
expenditures for the individual on whose right the
4
collection was based; (b) To the Federal
Government, the Federal share of the State Medicaid
expenditures....(c) To the recipient, any remaining
amount.
42 C.F.R. § 433.154 (emphasis added).
Minnesota’s state-run Medicaid Programs comply with
federal law and require each recipient, as a condition
precedent to receiving state-paid health care through one of
two state-run Medicaid programs, to assign the State his or
her right to payment from a liable third-party for the cost of
the medical care provided. Depending upon the recipient’s
personal financial circumstances, medical care is provided
and funded through either the State’s general assistance
(“GA”) program or its medical assistance (“MA”) program.
Both programs have been approved by the United States
Department of Health and Human Services, Health Care
Financing Administration (“HCFA”). Both the GA and MA
statutory schemes contain dual provisions which guaranty the
State’s right to receive at least partial reimbursement from
liable third parties for the cost of treating GA and MA
recipients. See Minn. Stat. § 256B.01, et seq. and 256D.01, et
seq.
The first of these two statutory provisions, which
guarantees the State’s right to obtain payment for previously
expended medical costs, automatically subrogates the State to
all causes of action possessed by the recipient regardless of
how the claim is prosecuted or how the allocation of recovery
is characterized by a judgment or settlement:
Upon furnishing medical assistance to any person
who ... has a cause of action arising out of an
occurrence that necessitated the payment of medical
assistance, the state agency or the state agency’s
agent shall be subrogated, to the extent of the cost of
medical care furnished, to any rights the person may
have .. . under the cause of action.
The right of subrogation in this section includes all
portions of the cause of action, notwithstanding any
settlement allocation or a portion that purports to
dispose of portions of the cause of action not subject
to subrogation.
Minn. Stat. § 256B.37, subd. 1 (emphasis added). The State’s
subrogation interests arise automatically as a matter of law.
See Martin v. City of Rochester, 615 N.W.2d 867, 869 (Minn.
Ct. App. 2000), review granted (Minn. Oct. 17, 2000) (citing
42 U.S.C. § 1396k(a)(1)(A) and Minn. Stat. § 256.015).
The second statute automatically creates a lien, running
in favor of the State, on all of the causes of action arising in
favor of the injured recipient, regardless of how the claim is
styled or the manner in which the settlement is apportioned:
When the State agency provides, pays for, or
becomes liable for medical care, it shall have a lien
for the costs of care upon any and all causes of
action or recovery rights . . . which accrue to the
person to whom the care was furnished, or to the
person’s legal representatives as a result of the
illness or injuries which necessitated the medical
care.
Minn. Stat. § 256B.042, subd. 1 (emphasis added). Although
the lien arises as a matter of law, the Minnesota statutes
provide a mechanism by which the State can perfect its lien
* For ease of reference, Petitioners have only cited the GA provisions
creating, respectively, a subrogation and lien interest running in favor of
the State. The same statutory provisions with identical language are found
in the MA provisions, Chapter 256D.
6
interest when a cause of action is prosecuted by an injured
recipient against a liable third party. See Minn. Stat. §
256B.042, subd. 2.
Both the MA and GA statutes specifically contemplate
that either the injured party or the State may prosecute a claim
against a liable third party. No matter who ultimately
commences the lawsuit, however, the State is subrogated and
liened by statute in order to secure its right to payment for
past medical costs incurred on behalf of MA and GA
recipients. See Minn. Stat. § 256B.37, subd. 2 and 256B.041,
subd. 3. According to the State’s Attorney General, the legal
authority allowing either the State or the recipient to
prosecute a claim against liable third parties is the State’s MA
and GA statutes which, he explained, create a “shared right”
to prosecute a claim:
Under the statute, the assignment by MA recipients
to the State of the right to payment for medical care
from liable third parties creates a “shared right” to
bring a cause of action against those third parties.
App. A-38 to A-39.
Most importantly, the MA and GA statutory schemes
provide a formula mandating how settlement or judgment
proceeds are to be shared between the injured recipient and
the State once a determination has been made as to the
liability of a third party. See Minn. Stat. § 256B.37, subd. 4
and 256B.042, subd. 5. The Minnesota distribution formula
first provides for the deduction of reasonable litigation costs
> Minnesota’s MA and GA statutes are distinct from the statutory
schemes utilized in several other states in two important respects. First,
there is not an outright assignment of a claim by the injured recipient to
the State at the time medical care is provided. Second, the State’s lien and
subrogation interests run to the entire cause of action, not just to any
allocation by a judge, jury, or other person of the amount attributable to
past medical care costs.
7
and attorney’s fees from the settlement or judgment. Id.
Following this deduction, the Minnesota formula provides
two alternative methods for allocating the remaining funds.
First, consistent with federal law, the State will retain the full
amount of MA or GA benefits paid (including the federal
matching fund portion), and then the State must pay the
remainder to the injured party. Id. Second, in recognition
that the lien and subrogation interests run to the entire cause
of action, the injured party is guaranteed 33 1/3 percent of the
net recovery remaining after attorney’s fees and costs are
deducted. Id.
Against this statutory backdrop, the State of Minnesota
filed a lawsuit in August 1994 against members of the
tobacco industry captioned The State of Minnesota, et all. v.
Philip Morris Incorporated, et al. which was venued in
Ramsey County District Court, Minnesota (the “Tobacco
Litigation”). In the Tobacco Litigation, the State sought to
recover money it had spent to treat approximately 70,000 MA
and GA recipients for smoking related disease.* In its
Amended Complaint, the State specifically pled the state
statutes (Minn. Stat. §§ 256B.01, et seg. and 256D.01, et seq.)
through which the State had received Medicaid matching
funds from the federal government that had been used to help
pay the medical costs of treating the recipients’ smoking-
* Prior to commencement of the Tobacco Litigation, Petitioners were
putative class members prosecuting claims against the tobacco defendants
in two, separate cases. The first case was being prosecuted in Louisiana
under the caption Castano v. American Tobacco Co., Civ. No. 94-1044S
(E.D. La., Feb. 17, 1995). The District Court’s certification of a national
class, however, was ultimately reversed. The second class action was
being prosecuted in Florida under the caption, Engle v. R.J. Reynolds
Tobacco Co., Civ. No. 94-08273 (11" Cir. Fla.). An element of damages
that was sought in at least one of the class actions was specifically
directed to the costs of treating persons suffering from smoking-related
illnesses. Despite the State’s automatic subrogation and lien interests
against any recovery made by injured MA and GA smokers in the Castano
or Engle class actions, the State chose to file an action of its own.
8
related illnesses. Although its Amended Complaint was
styled as a “direct” action,” it is clear to Petitioners (and the
trial judge so instructed the jury) that the State was seeking a
“sum of money that will fairly compensate the State of
Minnesota .. . for their [sic] payment-of healthcare costs
caused by smoking.” App. A-40 to A-41.
In calculating its damages in the Tobacco Litigation, the
State utilized an econometric model which identified public
assistance recipients who suffered from smoking-related
illnesses, and then used statistical modeling to extrapolate and
calculate the precise sum of its damage claim. App. A-43 to
A-51. An expert for the State testified at trial that the amount
of money spent by the State to treat MA and GA recipients
for smoking-related illnesses during the years 1978 through
1996 totaled $1.31 billion. App. A-50. This $1.31 billion
figure included approximately $746 million (57%) of federal
matching funds.°
During the course of discovery, the State was forced to
disclose the names of 100 persons who had been diagnosed
with smoking-related illnesses, whose treatment for such
illnesses had been paid for by either the State’s MA or GA
program, and who were included in the State’s damages
calculation for past medical costs. Petitioner Jesse Lee
Brown was identified by the State and, over the State's
* Throughout the underlying litigation, the tobacco defendants
challenged the State’s standing to bring an action separate and apart from
the statutes at issue in this action. The Minnesota Supreme Court
elliptically affirmed the State’s standing to prosecute a “direct” action in
State by Humphrey v. Philip Morris, Inc., 551 N.W.2d 490, 496-97 (Minn.
1996).
° After the Tobacco Litigation was resolved through settlement, the
federal government clarified that it would not seek reimbursement from
the states for any federal matching funds that had been recovered by virtue
of a state action against the tobacco defendants. See 42 U.S.C. §
1396b(d).
9
objection, deposed by the tobacco defendants as part of the
State’s Tobacco Litigation. App. A-52 to A-54.’
On May 8, 1998, at the close of evidence, but prior to the
State’s closing arguments, a comprehensive settlement
agreement was entered into between the State and the tobacco
defendants. App. A-55 to A-87. The settlement agreement
expressly released the tobacco defendants from all liability for
any claim seeking to recover MA or GA medical costs,
regardless of whether the claim is prosecuted by the State or
by the recipients:
B. State of Minnesota’s Release and Discharge.
Upon Final Approval, the State of Minnesota
shall release and forever discharge all
Defendants...from any and all manner of civil
claims, demands, actions, suits, and causes of
action, damages whenever incurred, liabilities of
any nature whatsoever, including civil penalties,
as well as costs, expenses, and attorneys’ fees,
known or unknown, suspected or unsuspected,
accrued or unaccrued, whether legal, equitable
or statutory (“Claims”) that the State of
Minnesota . . . whether directly, indirectly,
representatively, derivatively, or in any other
capacity, ever had, now has, or hereafter can,
shall, or may have, as follows:
a. For past conduct, as to any claims
relating to the subject matter of this
action which have been asserted or
’ The prime motivation driving this lawsuit was Petitioner Jesse Lee
Brown's simple question to counsel: “How can the State say that the
tobacco lawsuit had nothing to do with me when I gave a deposition and
the State recovered money because of my injuries?” The Minnesota
Appeals Court never acknowledged the fact that Petitioner Brown was
identified by the State or deposed in the State’s action.
10
could be asserted now or in the future
in this action or a comparable federal
action by the State; and
b. For future conduct, only as to 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
for health care costs allegedly
associated with use of or exposure to
Tobacco Products. . ..
-——
te
[T]he State of Minnesota agrees that this covenant
and agreement shall be a complete defense to any
such civil action or proceeding.
Le T° eer
a tate ti tae bs
App. A-66 to A-68 (emphasis added). The settlement
agreement describes the character of the settlement proceeds
as compensatory in nature, and the State explicitly agreed
“that no part of any payment .. . is made in settlement of an
actual or potential liability for a fine, penalty (civil or
criminal) or enhanced damages.” App. A-61.
Following settlement of the Tobacco Litigation, the State
immediately began touting the windfall that it had received. ;
Press releases compared the money sought ($1.31 billion) |
with the money paid ($6.17 billion) and bragged that the |
“settlement is more than 4 1/2 times the amount sought in
damages.” App. A-88 to A-94.° To date, no payments of
CPE we Neale ats ARE:
Tet ee ee
o> pe —
Dis ft Saat OCS th: Nae eis Aon oer Sema tae iscta C Pacire Lara
* The money the State is to receive is divided into two streams of
payments. The first stream of payments is paid over five years. The total
of this first stream of payments is $1.31 billion-the exact amount of
11 q
Lee Pg ee eee
settlement proceed money have been made to either the
Petitioners or any other Minnesota citizen whose medical
treatment for smoking-related illnesses was paid for, in whole
or in part, through the State’s MA and GA programs.
Moreover, despite the State’s full recovery of all past
smoking-related MA and GA medical costs, the State has yet
to take any steps to ‘vaive, satisfy, or discharge its lien or
subrogation interests that arose automatically as a matter of
law pursuant to Minnesota Statutes § 256B and 256D.
On July 17, 1998, Petitioners filed a declaratory
judgment action against the State of Minnesota seeking a
clarification of Petitioners’ rights under the MA and GA
Statutes, including their entitlement to a portion of the
settlement proceeds that had been, and would be in
perpetuity, collected by the State of Minnesota pursuant to the
Tobacco Litigation settlement agreement. App. A-95 to A-
106. In their Amended Complaint, with general references to
federal law and specific references to state law, Petitioners
argued that the State’s settlement of Petitioners’ medical
expense claims against the tobacco defendants necessarily
implicated the federal and state Statutory schemes entitling
Petitioners and all others similarly situated to a portion of the
settlement proceeds as mandated by the federal and state
Medicaid statutes. App. A-96, A-101 to A-104. In their
prayer for relief, Petitioners specifically requested: (1) at
least one-third of the net recovery if the State’s portion was
more than 66 2/3 percent of the amount collected; (2) if the
State’s full recovery is less than 66 2/3 percent of the net
settlement recovery, then the difference between the full
recovery and the total amount of the settlement mandated by
state and federal law; and (3) a declaration, that the State’s
subrogation and lien interests in Petitioners and the putative
money the State’s expert testified to at trial as the amount the State had
paid in past medical costs.
12
class members’ claims against the tobacco defendants are
waived, satisfied, or discharged. App. A-103 to A-105.
The State condemned Petitioner’s complaint for
declaratory judgment as lacking merit, and argued that it had
settled nothing which belonged to Petitioners and all other
similarly situated MA or GA recipients. App. A-107 to A-
110. In lieu of answering the complaint, the State moved the
trial court to dismiss Petitioners’ complaint on the ground that
it failed to state a claim upon which relief could be granted.
App. A-113 to A-143. The Petitioners filed a cross motion
for partial summary judgment.’ In its briefs to the trial court
in support of its motion to dismiss, the State repeatedly
referenced what it had brought (i.e., a “direct action” against
the tobacco defendants), but the State refrained from drawing
the court’s attention to what it settled (i.e. Petitioners’ past
and future medical expense claims which Petitioners could
have brought against the tobacco defendants on their own
behalf prior to the Tobacco Litigation settlement). App. A-
125.
In its Memorandum and Opinion dismissing Petitioners’
complaint for failing to state a claim, the Hennepin County
District Court trial judge devoted the first nine pages to a
* Petitioners explicitly did not bring a motion on the prayer for
injunctive relief seeking a declaration that the State's lien and subrogation
interests are forever satisfied, waived, or discharged. As of today, no
court has ruled upon this aspect of the claim for relief despite the State's
admissions that it has settled all past and future medical cost claims. See
Note 10, infra.
'° As will be discussed more fully, infra, the State’s position as to
what it settled changed at each level of review. During oral argument
before the Hennepin County District Court trial judge, the State admitted
for the first time that it settled all past medical care cost damages. App.
A-112. A year later, in both briefs and argument to the Minnesota Court
of Appeals, the State admitted that it also had settled all future medical
care cost claims and the Court so found. Brown vy. State, 617 N.W.2d 421,
426 (Minn. Ct. App. 2000) petition for rev. denied (2001)
13
ee
recitation of the various counts contained within the State’s
complaint in the Tobacco Litigation, and to the various
motions brought in that Litigation. App. A-17 to A-25.
Despite the importance of determining whether the past and
future medical expense damage claims owned by Petitioners’
and 70,000 other Minnesota MA and GA recipients were
settled and forever discharged by the State in the Tobacco
Litigation settlement, without notice and without any
compensation whatsoever to the individual recipients
themselves, the trial judge only devoted two paragraphs of his
Memorandum to an analysis of the Tobacco Litigation
settlement agreement — the document pursuant to which all
payments are made and releases are granted between the State
and the tobacco defendants. App. A-26 to A-27. Notably
absent from the Hennepin County District Court trial judge’s
opinion is any citation to the part of the settlement agreement
which describes in clear terms the released and forever
discharged claims, or any mention to the State’s outright
admission to the trial court that it had settled Petitioners’ past
and future medical damage claims.'!
Upon Petitioners’ appeal of the trial court’s dismissal of
their complaint for declaratory judgment, the Minnesota
Court of Appeals made explicit findings based upon the
State’s admission of what it had settled:
[T]he state’s settlement precludes individual
medical- and general-assistance recipients from
pursuing claims for past or future health care costs
covered by the state’s medical- or general-assistance
programs.
'' Moreover, contrary to the very purpose of the Declaratory
Judgement Act, the trial court failed to provide the parties with an express
declaration of their rights, duties, or obligations. This omission was
recognized by the Minnesota Court of Appeals. See Brown vy. State, 617
N.W.2d at 427. (App. A-12.)
14
Brown, 617 N.W.2d at 426. App. A-9. Nevertheless, the
court below confused the assignment mandated by both
federal and state law. The Minnesota Appeal’s Court
explicitly found that the federal and state statutes “require all
recipients of medical assistance to assign to the State any
claim they may have against third parties for the medical
expenses paid by the State.” Id. (emphasis added) (citing 42
U.S.C. § 1396k(a)(1)(A) and Minn. Stat. § 256B.056, subd.
6).'" However, nowhere in the statutes cited by the
Minnesota Appeals Court does it state that the “claim” is
assigned. Rather, the statutory language at both the federal
and state level states that it is only the “right to payment” that
is assigned.
Despite recognizing the State’s admission that both past
and future medical cost claims had been settled, the
Minnesota Court of Appeals never explains who, under either
the state or federal statutory framework, is entitled to those
future medical payments. Both the federal and state statutory
schemes explicitly state that once full recovery for past
medical costs has been obtained, all money remaining
belongs to the injured recipient.’
Petitioners timely filed a petition for further review in the
Minnesota Supreme Court. On November 21, 2000,
'? The Appeal’s Court repeated this error when it stated: “In other
words, subsequent to the assignment, the legal right to recover the medical
expenses paid by the State from third parties belong solely to the State.”
Brown, 617 N.W.2d at 426 (emphasis added) (App. A-10).
'’ Accordingly, the Minnesota Court of Appeals ruling still leaves
unanswered the following questions: (1) what represents full recovery to
the State for past medical expenses to treat smoking-related illnesses? (2)
what amount has been or will be recovered by the State pursuant to its
settlement agreement with the tobacco defendants? and (3) if the State
recovered more by way of settlement than its past medical costs, what
portion of the excess is attributable to the Petitioners’ and putative class
members’ future medical costs?
15
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RPA AON ED hy hing BS 0 sh thidi tetra eK ee bs
Petitioners’ request before the Minnesota Supreme Court was
denied. The federal statutory scheme which, at a minimum,
provides the limits to the powers of the State in administering
its Medicaid programs, was referenced and argued in
Petitioners’ Amended Complaint, briefing before the
Hennepin County District trial court, and the Minnesota Court
of Appeals. Until the State’s admission related to future
damages, and the Minnesota Court of Appeals’ adoption of
that admission, the constitutional issues were neither framed
nor argued.
In their appeal to the Minnesota Court of Appeals, the
Petitioners were arguing that their declaratory judgment
complaint stated a claim upon which relief could be granted, '*
The Minnesota Court of Appeals for the first time in its
opinion, as is its right, made the declaration of the rights,
duties and obligations of the parties in a way that implicates
constitutional issues. Petitioners now seek review of this
Court to address the constitutional issues that are raised by the
Appeals Court’s declaration.
REASONS FOR GRANTING THE PETITION
At the time Petitioners were first injured by the tobacco
companies, a property interest owned solely by the Petitioners
arose in the cause of action. See Logan v. Zimmerman Brush
Co., 455 U.S. 422, 428 (1982); Pritchard v. Norton, 106 U.S.
124, 132 (1882). Unable to pay for the medical costs to treat
their medical-related illnesses, Petitioners entered into a
* The Minnesota court’s holding that plaintiffs’ Complaint failed to
state a claim parallels a case which will be heard by this Court. See Great
West Life & Annuity Ins. Co., et al. v. Janette Knudson, No. 99-1786. In
Knudson, it is the employer in a private contract that is arguing that it has
a claim to funds recovered by an injured party against a liable third party.
This Petition is the mirror image-in the public context it is the injured
party arguing that it has a claim to funds recovered by the State against a
liable third party.
16
contract of assignment with the State thereby creating the
right of the State to a lien and subrogation interest in the right
to payment for past medical costs only. Petitioners have a
property interest in both their contract of assignment with the
State and the applicable limits to the State’s powers as set
forth in the state and federal Medicaid statutes. See Perry v.
Sindermann, 408 U.S. 593, 601 (1972) (a contract with the
State can create a constitutionally protected property interest);
Goldberg v. Kelly, 397 U.S. 254, 262 (1970) (the receipt of
public assistance benefits can create a constitutionally-
protected property interest). If, as the Minnesota Court of
Appeals has found, the State has settled Petitioners’ and
putative class members’ future damages claims, then the
limits set by the federal Medicaid Act have been exceeded
and compensation is due these individuals. If the Minnesota
Court of Appeals ruling is allowed to stand, states would be
permitted to bring a claim against third-party tortfeasors by
defining it as a “direct” action. This “direct” action could
then be unilaterally settled without notice to or participation
by the medical assistance recipient whose injury prompted the
lawsuit, and without regard to the mandate set forth in the
Federal Medicaid Act that once full recovery has been
received, the remainder shall be paid to the injured recipient.
Moreover, the Minnesota Court of Appeals opinion is in
conflict with opinions rendered in other courts across the
country. The United States Court of Appeals for the Seventh
Circuit, in an action prosecuted by a Medicaid recipient
against the State seeking tobacco settlement proceeds, found
that the setthement agreement between the State and the
tobacco defendants could only be interpreted with regard to
what was assigned by the Medicaid recipient to the State —
not by what was brought. Floyd v. Thompson, 227 F.3d
1029, 1037 (7™ Cir. 2000).
A California Appellate Court, on the other hand, has
ruled that the settlement agreement is only interpreted in light
of the type of claim prosecuted by the State. See State of
17
California v. Superior Court, 83 Cal. App. 4” 597, 602, 99
Cal. Rptr. 2d 735, 738 (2000). The varied and conflicting
reasoning employed by the Seventh Circuit, the Minnesota
courts and the California court, will have an impact on the
approximately 20 lawsuits similar in nature to the instant
action that have been or are being prosecuted in the United
States. Substantial and important constitutional issues are
raised in these cases, including: (1) whether the settlement
payments received by a State from the tobacco companies are
to be analyzed with respect to the action prosecuted or by the
terms of the settlement agreement pursuant to which the
payments are made; (2) whether the Federal Medicaid Statute
effectuates an assignment of a “claim” or the “right to
payment”; (3) where a State’s settlement against a liable third
party results in full recovery for past medical costs and
recovery for future medical costs, whether the federal
Medicaid statutes, without regard to what is assigned, require
that the future medical care costs be returned to the injured
Medicaid recipient; and (4) when the State settles a Claim
jointly owned with a Medicaid recipient, is it required to
waive, release, or satisfy its lien and subrogation interests.
The opinions below, and in other courts throughout the
country, have created conflicting standards and, in some
instances, abrogate the constitutional rights of the most needy
citizens in this country. Having a constitutionally-recognized
property right in their claims, the Medicaid recipients traded
the right to payment in all of their claims in exchange for the
payment of their health care costs. At least in the State of
Minnesota, the State’s settlement with the tobacco companies
completely paid for this bargain (i.e., the State was fully
reimbursed for the past medical care cost to treat the
smoking-related illnesses). The State, by virtue of settling
future medical care cost claims and not sharing any of the
proceeds with the injured recipients, has now trampled upon
the rights of the Medicaid recipients by taking future medical
care costs--something that was not contemplated by the
18
contract of assignment or the State or federal statutory
schemes, and is violative of Petitioners’ Fourteenth
Amendment due process rights and Petitioners’ Fifth
Amendment taking rights.
I. THERE HAS BEEN AN IMPERMISSIBLE
TAKING OF PROPERTY WITHOUT JUST
COMPENSATION WHEN THE STATE OF
MINNESOTA UNILATERALLY SETTLED
FUTURE DAMAGES CLAIMS BELONGING TO
MEDICAID RECIPIENTS WITHOUT NOTICE OR
OPPORTUNITY TO BE HEARD AND WHEN IT
RETAINED THE SETTLEMENT PROCEEDS IN
DEROGATION OF FEDERAL AND STATE
STATUTES.
The Taking Clause of the Fifth Amendment to the
Constitution provides that private property may not be taken
for public use without just compensation. Central to the
inquiry here is: (1) did Petitioners have a property interest?
and (2) if so, did a taking occur? Petitioners had a property |
interest in their causes of action as well as in the contract of
assignment mandated by the Medicaid statutes pursuant to
which benefits were granted. A taking did occur in this case
since, contrary to the Medicaid statutes, future medical
damages claims were settled by the State and the money is
now being collected by the State without any compensation to
the Petitioners and others similarly situated.
A. Petitioners Had A Property Interest In Their
Causes Of Action, In the Contract of Assignment
With The State, And In the Administration Of
Medicaid Benefits As Set Forth By Statute
In the early years of this Court’s jurisprudence, property
interests were usually viewed in terms of land and chattels.
19
a eee ee) 7) eS
See, e.g., Pumpelly v. Green Bay Co., 80 U.S. (13 Wall.) 166,
179-80 (1871). In the 20" Century, this Court broadened the
definition of “property” to include intangible property
interests “created and their dimensions...defined by existing
rules or understandings that stem from an independent source
such as state law.” Webb’s Fab. Pharmacies, Inc. v.
Beckwith, 449 U.S. 155, 161 (1980) (quoting Board of
Regents v. Roth, 408 U.S. 564, 577 (1972)). Petitioners’
property interests at issue here are created by common law,
contract, and statute.
At the time of injury, Petitioners had a property interest
in their cause of action against the tobacco defendants. This
Court has held that a “vested right of action is property in the
same sense in which tangible things are property...”
Pritchard, 106 U.S. at 132. Over the course of the past fifty
years, the property interest in a cause of action has been
reaffirmed by this Court. See Logan at 428 (1982); Mullane
vy. Central Hanover Bank & Trust Co., 339 U.S. 306, 313
(1950).
The nature of Petitioners’ property interest was altered at
the time that medical services to treat smoking-related
illnesses became necessary and Petitioners lacked the
financial means to pay for such medical treatment. At that
point in time, pursuant to both federal and state statute,
Petitioners assigned their right to payment for money
collected by way of settlement or judgment in their entire
cause of action, or any part of it, in exchange for receiving
medical assistance paid for by the State’s MA and GA
programs. Contrary to the finding of the Minnesota Court of
Appeals, this assignment did not divest Petitioners of their
cause of action or of their interests in any damages obtained
by the State’s prosecution of an action against the tobacco
companies. Instead, in addition to maintaining a property
interest in the cause of action, two new property interests
were created.
The first new property interest arose when the contract of
assignment was entered into between the Petitioners and the
State. A contract with the State can create a constitutionally
protected property interest. See Perry, 408 U.S. at 601. The
contract of assignment here was limited to the State’s
recoupment of past medical expenses paid up to the point of
judgment or settlement.
The second new property interest owned by Petitioners
arose as a result of Petitioners’ acceptance into the MA or GA
programs. This Court has repeatedly recognized a
constitutionally-protected property interest in welfare
benefits. See Goldberg v. Kelly, 397 U.S. 254, 262 (1970).
The Petitioners’ rights and expectations were shaped and
defined by both federal and state Medicaid statutes.
As set forth in the state and federal Medicaid statutes,
Petitioners’ property interests in their causes of action, their
contracts with the State, and their Medicaid benefits
coalesced around a single principle defined over and over
again in the state and federal Medicaid statutes—once the State
had obtained full recovery for past medical costs, the balance
of any recovery must be paid to the injured recipient. Each
and every statute states this principle in mandatory terms.
See 42 U.S.C. § 1396k(b) and 42 C.F.R. § 433.154(c). State
officials administering the program or attorneys prosecuting
claims on behalf of injured recipients or the State have no
discretion. The formula provides a bright line that is
applicable in each and every situation regardless of what is
assigned or who prosecutes the action.
The Minnesota Court of Appeals recognized the
Petitioners’ right in their cause of action prior to the
assignment. However, the Minnesota Court of Appeals
confused the nature of the property rights following the
assignment and determination of eligibility for the MA and
GA programs. The Minnesota Court of Appeals, interpreting
Minnesota law, incorrectly stated that the assignment was of
the entire cause of action, not just the right to payment to
21
secure the lien and subrogation interests the state enjoyed in
the injured recipients’ causes of action for recovery of money
damages.
The truth of this statement is proven by the Minnesota
Court of Appeals’ opinion. First, it would be impossible for
the State to settle future medical damage claims if it did not
jointly own the entire cause of action with the injured
recipient since, according to both federal and state Medicaid
law, the right to payment for future damages claims is owned
by the injured recipient. Second, when the Court below
interpreted the Minnesota state statutory guaranty of not less
than one-third of the net recovery to be afforded to the injured
recipient as being limited to instances where the injured
recipient is acting as a plaintiff, the Minnesota Court of
Appeals never explained how an injured recipient could ever
prosecute a claim if, as a condition of receiving MA and GA
benefits, an assignment of the entire cause of action took
place.
As set forth in this Court’s prior precedent, Petitioners
enjoy property interests in their causes of action, in their
contract of assignment with the State, and in their Medicaid
benefits. This property interest has not been acknowledged
by the State, the trial court, or the Minnesota Court of
Appeals.
B. Petitioners’ Property Was Taken For Public Use
Without Compensation
Both Petitioners and the State agree on two key points:
(1) prior to the receipt of MA and GA benefits, the Petitioners
had a cause of action against the tobacco companies; and (2)
by virtue of payment of all or part of Petitioners’ medical cost
to treat smoking-related illnesses, the State of Minnesota
obtained a property interest in Petitioners’ right to payment
from the tobacco companies. Beyond these two points,
however, there is no agreement.
22
The State argued, and the Minnesota Court of Appeals
found, that nothing was taken from Petitioners because the
State prosecuted a “direct” action.'° Regardless of the
nomenclature, the State settled the Petitioners’ right to
prosecute and keep for themselves an amount money equal to
the future costs of treating their smoking-related illnesses.
Counsel is unaware of any case from this Court or any other
court across the country that construes a settlement agreement
purporting to settle all claims “known or unknown, brought or
unbrought, accrued or unaccrued, whether direct, indirect, or
derivative” to be limited to what was actually prosecuted.
The Minnesota Court of Appeals’ finding to the contrary
undermines the finality of all settlement agreements that
contractually settle more than what was formally brought in
the underlying claim or action.
The State also argued, and the Minnesota Court of
Appeals alternatively found, that as a result of the Medicaid
assignment, Petitioners never had a right to their past or
future medical cost claims and, accordingly, there was no
“taking.” See Brown, 617 N.W.2d at 426-27. (App. A-9 to
A-12.) Such reasoning is contrary to the federal Medicaid
statues, the State MA and GA statutes, and the common sense
reasoning utilized by the Seventh Circuit Court of Appeals.
Each and every statute speaks only to the recovery of past
Medicaid costs. Whether the case is prosecuted by the
individual or the State, this maxim still applies. To rule
otherwise would render both the federal and state statutory
limits and distribution formulae meaningless. Moreover, such
a holding would wipe the books clean of the federal statutes
that provide for future medical trusts funded by settlements
'S The Minnesota court’s opinion never addresses the fact that the
State, having identified a liable third-party, had an absolute duty under
federal law to collect the Medicaid benefits paid. See 42 U.S.C. §
1396a(a)(25)(B) and 42 C.F.R. § 433.138(d).
23
and judgments against liable third parties. See 42 U.S.C. §
1396p(d)(4)(a).'°
As a matter of logic, the Seventh Circuit Court of
Appeals has analyzed the problem in terms of state power.
See Floyd, 227 F.3d at 1036-38. In Floyd, the State of
Wisconsin only was assigned the right to receive past medical
costs. Id. at 1037. By the terms of the settlement agreement
between the State of Wisconsin and the tobacco defendants,
similar in all relevant respects to the settlement agreement
between Minnesota and the tobacco defendants, the State of
Wisconsin only settled what it could have brought leaving the
rest of the recipients’ claims intact. Id. The Seventh Circuit
found that since Wisconsin did not have any right or
entitlement by the contract of assignment or state statute to
future medical costs, it, as a matter of logic, could not settle
future medical cost claims even when it purported to settle
everything it could have brought. Id. Accordingly, all money
in excess of past medical damages secured by the State must
have been paid as compensation for release of the State’s
direct action claims. Id.'
In stark contrast to the Wisconsin statute, the State of
Minnesota is liened to and subrogated in all causes of action
Or any part thereto. As the State admits, and the Minnesota
Court of Appeals found, the State of Minnesota actually did
settle future damages claims. See Brown, 617 N.W.2d at 426
(App. A-9). Utilizing the logic and precedent of the Seventh
Circuit, it necessarily follows that something of value was
‘© In 1993, Congress amended 42 U.S.C. § 1396p as part of the
Omnibus Budget Reconciliation Act of 1993. The amendments allow for
the creation of a special needs trust, the assets in which will not disqualify
the disabled individual from receiving Medicaid benefits so long as the
trust contains a pay-back provision after the recipient’s death.
" The Seventh Circuit went so far as to suggest that the tobacco
companies may not have settled the Medicaid recipients’ future damages
claims in Wisconsin. See Floyd, 227 F.3d at 1037.
24
taken by the State of Minnesota and not paid to Petitioners
and other injured medical assistance recipients. In short,
there has been a taking for public use without just
compensation.
II. DUE PROCESS IS VIOLATED WHEN A STATE
UNILATERALLY SETTLES FUTURE DAMAGES
CLAIMS BELONGING TO MEDICAID
RECIPIENTS WITHOUT NOTICE OR
OPPORTUNITY TO BE HEARD AND WHEN IT
RETAINS THE SETTLEMENT PROCEEDS IN
DEROGATION OF FEDERAL AND STATE
STATUTES.
The Fifth Amendment to the Constitution is made
applicable to the states through the Fourteenth Amendment to
the U.S. Constitution. The Minnesota Court of Appeals’
finding as to the scope ofthe Tobacco Litigation settlement
demonstrates that due process was not afforded Petitioners
and others similarly situated.
As is set forth in Section I, supra, Petitioners owned a ©
constitutionally-protected property interest. The question
then becomes what process was due before the government
settled and took for itself the right to payment for the
Petitioners’ future medical costs, not yet incurred much less
paid for by the State.
As a general rule, the due process clause requires that
individuals receive notice and a meaningful opportunity to be
heard before the government deprives them of property. See
United States v. James Daniel Good Real Prop., 510 U.S. 43,
48 (1993). Even in an extraordinary situations, the notice and
meaningful opportunity to be heard must take place
immediately after the initial deprivation. See Federal Deposit
Ins. Corp. v. Mallen, 486 U.S. 230, 240 (1988); Board of
Regents, 408 U.S. at 570, n. 7. Here, according to the State’s
own arguments, for years it publicized that it was prosecuting
25
a “direct” action that would be of no consequence to
Petitioners or other MA and GA program participants who
suffer from smoking-related illnesses. At the point of
settlement, however, the State decided to settle more than
what it actually brought. Without notice or opportunity to be
heard, Petitioners and others similarly situated suddenly lost
their right to prosecute and keep for themselves future
medical expenses. Given the size of the potential claims and
- dependent upon the method by which the money was secured,
if this money found its way into Petitioners’ and others’
hands, the asset could be large enough so that they would no
longer be on public assistance (and there would be no future
damages paid by the State) or a medical spending trust could
be established (and the State would be reimbursed for any
expenses actually incurred).
Post-settlement, and through the initial filing of the
Complaint in this action, the State never provided any
opportunity for the injured recipients to be heard and
affirmatively stated that nothing had been settled. It is only
through the course of this litigation that the State has been
forced to admit that it settled both past and future medical
cost claims.
The Petitioners and others similarly situated have
suffered a defined and valuable loss. Petitioners and other
similarly situated are prejudiced in that they may never
prosecute a claim against the tobacco defendants and keep for
themselves amounts equal to the future medical costs to treat
smoking-related disease.
Specific and substantive limits have been placed on the
‘State’s official discretion by virtue of both the federal
Medicaid scheme and the State’s own MA and GA statutes.
See Olim vy. Wakinekona, 461 U.S. 238, 249 (1983). If these
limits are going to be surpassed, then the recipient should be
given notice and a meaningful opportunity to be heard. The
Minnesota Court of Appeals, confused by the State’s
arguments and the nature of the assignment effectuated here,
26
has once again deprived Petitioners and others similarly
situated of such a hearing.
CONCLUSION
The State of Minnesota, along with the 49 other states,
have rightfully labeled their actions against the tobacco
industry as historic. The ramifications of the State’s
settlement with the tobacco defendants is equally historic.
Counsel representing Medicaid recipients across the country
are questioning the scope of a Medicaid assistance recipient’s
assignment, the terms of what was settled between the states
and the tobacco defendants, and what, if anything, the
Medicaid recipients are entitled to by virtue of the settlement.
Specific to the case at bar, neither the State, the trial
court, nor the Minnesota Court of Appeals has answered basic
questions, equally historic in their significance: (1) what
represents full recovery to the State for past medical costs to
treat smoking-related illnesses? (2) what, if anything, over
and above that amount was collected by the State? and (3)
what, if anything, of the excess must be returned to the
Medicaid recipients pursuant to federal and state statute?
Guidance from this Court is necessary to confirm that
even the neediest of our country’s citizens have property
interests in their causes of action, their contracts of
assignment with the states and the Medicaid benefits as
defined by federal and state statutes. The value of these rights
have been graphically illustrated by the historic and
unprecedented value of the settlement the State secured from
the tobacco defendants. The core of the State of Minnesota’s
claim, along with the claims of many other states, was that the
injured smokers were deceived, manipulated, and, ultimately,
addicted necessitating payments from the State to treat
smoking-related illnesses. Without intervention of this Court,
these same individuals whom the State proved were
hopelessly addicted to tobacco must now continue by virtue
27
of their addiction to pay state taxes on each pack of cigarettes
purchased (ostensibly to pay for medical costs) and now pay
for the tobacco companies settlement with the States (none of
which inures to the benefit of Petitioners or others similarly
situated). Similarly, without any declaration that the State’s
lien and subrogation interests are waived, satisfied, or
discharged, Petitioners may have to pay a third time from any
proceeds they may recover from prosecution of their
remaining claims against the tobacco defendants.
Intervention by this Court will clarify the conflicts that
have arisen between the various jurisdictions considering the
scope of the State’s settlement agreements in the tobacco
litigation, will clarify the federal Medicaid scheme and its
limits, and provide Petitioners and others similarly situated
with a declaration of the integrity of their cause of action
when the injuries result in permanent and on-going injury, the
treatment for which has been paid by the State in the past.
Dated: February 20, 2001
Respectfully submitted,
Anthony J. Nemo
Counsel of Record
Ronald I. Meshbesher
MESHBESHER & SPENCE, LTD.
1616 Park Avenue South
Minneapolis, MN 55404
(612) 339-9121
Hugh V. Plunkett III
Robert K. Shelquist)
LOCKRIDGE GRINDAL NAUN
Pkded'.
100 Washington Avenue South,
Suite 2200
Minneapolis, MN 55401-2179
(612) 339-6900
28
John A. Cochrane
COCHRANE & BRESNAHAN
24 East Fourth Street
St. Paul, MN 55101
(612) 298-1950
Attorneys for Petitioners
29
STATE OF MINNESOTA
IN SUPREME COURT
C6-00-587
Jesse Lee Brown and Ronald J. Bergeron
on behalf of themselves and all others
similarly situated, et al.,
Petitioners,
VS.
State of Minnesota,
Respondent.
ORDER
Based upon all the files, records and proceedings herein,
IT IS HEREBY ORDERED that the petition of Jesse Lee
Brown and Ronald J. Bergeron for further review be, and the
same is, denied.
Dated: November 21, 2000
BY THE COURT:
s/
Kathleen A. Blatz
Chief Justice
PAGE, GILBERT, J.J., took no part in the consideration or
decision of this case.
A-]
STATE OF MINNESOTA
IN COURT OF APPEALS
C6-00-587
Jesse Lee Brown and Ronald J. Bergeron
on behalf of themselves and all others
similarly situated, et al.,
Appellants,
VS.
The State of Minnesota,
Respondent.
Filed September 19, 2000
Affirmed in part and reversed in part
Halbrooks, Judge
Hennepin County District Court
File No. 98-11152
John A. Cochrane, Cochrane & Bresnahan, 24 East 4th Street,
St. Paul, MN 55101; and
Hugh V. Plunkett, III, Robert K. Shelquist, Plunkett,
Schwartz, Peterson, P.A., 102nd Street NE, Suite 114,
Minneapolis, MN 55413; and
Ronald I. Meshbesher, Anthony J. Nemo, Meshbesher &
Spence, Ltd., 1616 Park Avenue South, Minneapolis, MN
55404 (for appellants)
Mike Hatch, Attorney General, Patricia A. Sonnenberg,
Assistant Attorney General, 900 NCL Tower, 445 Minnesota
Street, St. Paul, MN 55101; and
A-2
Michael V. Ciresi, Roberta B. Walburn, Gary L. Wilson,
Robins, Kaplan, Miller & Ciresi, L.L.P., 2800 LaSalle Plaza,
800 LaSalle Avenue, Minneapolis, MN 55402-2015 (for
respondent)
Considered and decided by Randall, Presiding Judge,
Harten, Judge, and Halbrooks, Judge. ~
SYLLABUS
1. It is not reversible error if the district court fails to
make an express declaration of the parties’ rights in a
declaratory judgment action so long as the order or judgment
adjudicating the dispute has the effect of declaring the parties’
respective rights.
2. The recovery-allocation formulae in Minn. Stat. §§
256B.042, subd. 5; 256B.37, subd. 4; and 256D.03, subd. 8(f)
(1998), do not provide appellants a basis for obtaining a
portion of the State of Minnesota’s multi-billion dollar
settlement with various entities involved in the manufacture
and marketing of cigarettes.
3. The district court abuses its discretion when it
imposes sanctions against attorneys who bring good faith
claims that are arguably legitimate.
OPINION
HALBROOKS, Judge
Appellants challenge the district court's granting of
respondent’s motion to dismiss their declaratory judgment
class action for failure to state a claim. They also challenge
the district court’s imposition of sanctions in this case.
Because the district court did not err in dismissing the action
A-3
but did abuse its discretion in imposing sanctions, we affirm
the dismissal and reverse the imposition of sanctions.
FACTS
This litigation arises in the aftermath of the State of
Minnesota’s (“state”) multibillion-dollar settlement of its
claims against multiple entities involved in the manufacturing
and marketing of cigarettes (“tobacco defendants”). The state
asserted several causes of action against the tobacco
defendants including various antitrust and consumer fraud
claims. The state and the tobacco defendants settled the case
on May 18, 1998, after all of the evidence had been
introduced at trial but before the case went to the jury. As a
result of the settlement, the tobacco defendants agreed to pay
the state approximately $6.17 billion. The tobacco defendants
agreed to pay $1.31 billion in periodic payments between
September 1998 and January 2003, as well as an estimated
$4.8 billion in future payments.
On July 17, 1998, appellants filed a class-action lawsuit
in Hennepin County District Court seeking a declaratory
judgment and a portion of the settlement proceeds. The
putative class representatives represent approximately 70,000
Minnesota residents who allege to have suffered smoking-
related illnesses for which the state paid medical expenses
under the state’s medical-assistance and general-assistance
programs. Appellants contend that, although they did not pay
for the medical expenses they incurred, the medical-assistance
and general-assistance statutes provide that any third-party
liability claim is “shared” or jointly owned by appellants and
the state. Both parties agree that the settlement precludes
individual medical-assistance and — general-assistance
recipients from asserting claims against the tobacco
defendants for state-paid medical expenses. Appellants
contend, however, that they are entitled to a share of the
settlement proceeds obtained by the state. This claim is based
A-4
on the faci that the medical-assistance and general-assistance
Statutes contain formulae to be used to allocate recoveries
from third parties between the state and individual recipients
for claims brought pursuant to those statutes.
The state filed a motion to dismiss appellants’ complaint
for failure to state a claim upon which relief could be granted
and a motion for sanctions. Appellants opposed these motions
and filed a motion for partial summary judgment. The district
court heard arguments on all of the motions and filed an order
granting the state’s motion to dismiss appellants’ complaint,
granting the state’s motion for sanctions, and denying
appellants’ motion for partial summary judgment. But the
district court requested that the parties provide additional
submissions on the issue of sanctions and held a second
hearing on that issue. On August 17, 1999, the district court
reaffirmed its decision to impose sanctions and ordered each
of the three law firms involved in the litigation to pay $5,000
to the state. This appeal follows.
ISSUES
1. Does appellants’ complaint set forth a legally sufficient
claim for relief?
2. Did the district court abuse its discretion when it imposed
sanctions against appellants’ attorneys?
ANALYSIS
1. Motion to dismiss
When reviewing a dismissal for failure to state a claim on
which relief can be granted, an appellate court must only
determine whether the complaint sets forth a legally sufficient
claim for relief. Geldert v. American Nat’l Bank, 506 N.W.2d
22, 25 (Minn. App. 1993), review denied (Minn. Nov. 16,
A-5
1993). It is immaterial whether the plaintiff can prove the
facts alleged in the complaint. Juster Steel v. Carlson Cos.,
366 N.W.2d 616, 619 (Minn. App. 1985). A complaint
should only be dismissed for failure to state a claim if it
appears to a certainty that no facts consistent with the
pleading exist that support granting the relief demanded.
Brakke v. Hilgers, 374 N.W.2d 553, 555 (Minn. App. 1985).
Although the district court typically may not consider
documents other than the complaint without converting the
motion into one for summary judgment, an exception to this
rule exists if the complaint refers to a document and the
document is central to the claims alleged. Jn re Hennepin
County 1986 Recycling Bond —- 540 N.W.2d 494, 497
(Minn. 1995).
In this case, the district court did rely on one or more
documents that were filed in connection with the tobacco
litigation. The documents, prepared by respondent in the
tobacco litigation, were referenced in appellants’ complaint.
The district court appropriately relied on the documents in
addition to the complaint and appellants do not challenge the
court's consideration of these documents.
A. Express declaration of rights
Appellants contend that the district court’s decision to
analyze this case through the lens of a motion to dismiss
created a procedural defect requiring reversal. Appellants’
complaint seeks a declaratory judgment pursuant to
Minnesota’s version of the Uniform Declaratory Judgments
Act. Minn. Stat. §§ 555.01-.16 (1998). Appellants contend
that they are entitled to an actual declaration of the respective
rights of the putative class members and the state and that any
right to actually receive a portion of the settlement proceeds is
collateral to the declaratory judgment. See Minn. Stat. §
555.01 (providing that the court’s declaration may be either
affirmative or negative in form and effect). The question,
A-6
therefore, is whether the district court’s dismissal of
appellants’ complaint based on the ultimate relief sought, i.e.,
a portion of the tobacco settlement, operates as a declaration
of their rights.
This alleged procedural defect is similar to one of the
issues addressed in Ketterer v. Independent Sch. Dist. No. 1,
248 Minn. 212, 79 N.W.2d 428 (1956). In Ketterer, the
appellant argued “that the court abused its discretion in
dismissing the action instead of making a declaration in his
favor or any declaration at all.” Jd. at 227, 79 N.W.2d at 439.
The supreme court, however, held that:
The judgment dismissed the _ plaintiff’s
complaint. Plainuff argues that the judgment is
defective in that it did not declare the rights of the
parties. The judgment in better form should have
declared the rights of the parties in conformity with
findings and conclusions of law. The declaration
may be either affirmative or negative in form and
effect. However, since the court’s findings of fact,
conclusions of law, and order for judgment resulting
in a dismissal herein operates as an adjudication
upon the merits, the failure to declare the rights of
the parties on the state of the record in this case is,
we think, here without prejudice and not reversible
error.
Id. at 228-29, 79 N.W.2d at 440 (citations omitted).
Like Ketterer, the district court in this case did not
expressly declare the respective rights of the parties, but its
findings, conclusions, and order do operate as an adjudication
of the merits. While an express declaration of the parties’
rights may have been preferable, the district court effectively
declared that the appellants have no right to any portion of the
tobacco settlement by operation of the medical- and general-
assistance statutes discussed below.
A-7
B. Allocation formulae
“(S]ome recovery theory must underlie a declaratory
judgment demand.” Vrieze v. New Century Homes, Inc., 542
N.W.2d 62, 67 (Minn. App. 1996). In this case, appellants’
two-count complaint asserts statutory claims under the
Minnesota medical-assistance and general-assistance
programs as the basis for recovery. See Minn. Stat. §§
256B.042, subd. 5; 256B.37, subd. 4; 256D.03, subd. 8(f)
(1998). Contrary to the appellants’ repeated assertions,
however, the state did not proceed in the tobacco litigation in
a representative capacity or assert claims that were derivative
to those of the medical- and general-assistance recipients.
Rather, the state brought a direct action against the tobacco
defendants for the damages sustained by the state. Those
claims did not implicate the medical- and general-assistance
statutes. In other words, the state’s lawsuit was outside the
scope of these statutes. For this reason alone, we could affirm
the district court dismissal.
Nonetheless, a fair reading of the settlement agreement
does give some weight to the appellants’ arguments. The
settlement agreement releases the tobacco defendants from
liability for state-paid medical expenses, i.e., expenses paid
by the medical- and general-assistance programs. Therefore,
although the state’s complaint in the tobacco litigation did not
seek damages pursuant to these statutes, any claim the state
may have had for these damages was settled at the conclusion
of the litigation. See Minn. Stat. §§ 256B.042, subd. 3
(authorizing the state to take actions to enforce its medical-
assistance lien or pursue an independent action against a third
party “that may be liable” to the recipient); 256B.37, subd. 2
(authorizing the state to join or institute a civil action to
enforce its medical-assistance subrogation rights); 256D.03,
subd. 8(d) (authorizing state to institute or join a civil action
to enforce its general-assistance subrogation rights). But even
A-8
if the pleadings in the tobacco litigation and the instant case
did not support the district court’s dismissal, the medical- and
general-assistance statutes do not provide an avenue for the
appellants to obtain a portion of the state’s settlement.
This court interprets statutes de novo, and we need not
defer to the district court’s interpretation. Sorenson v. St.
Paul Ramsey Med. Ctr., 457 N.W.2d 188, 190 (Minn. 1990).
The three statutes at issue in this case contain nearly identical
language and provide formulae for allocating recoveries
obtained from third parties who are liable for medical- and
general-assistance expenses paid by the state. Under each of
these statutes, attorney fees and costs incurred by the party
who obtained the recovery are paid first. Minn. Stat. §§
256B.042, subd. 5; 256B.37, subd. 4; 256D.03,-subd. 8(f).
Next, the state is reimbursed to the extent of its expenditures
on behalf of the medical- or general-assistance recipient out
of the remaining proceeds. Minn. Stat. §§ 256B.042, subd. 5:
256B.37, subd. 4; 256D.03, subd. 8(f). Finally, the recipient
is entitled to retain any recovery in excess of the state’s
expenditures or, at a minimum, one-third of the recovery.
Minn. Stat. §§ 256B.042, subd. 5; 256B.37, subd. 4; 256D.03,
subd. 8(f).
Both parties agree on several important facts. First, the
State's settlement precludes individual medical- and general-
assistance recipients from pursuing claims for past or future
health care costs covered by the state’s medical- or general-
assistance programs. Second, the state’s settlement does not
preclude individual medical- or general-assistance recipients
from pursuing claims against the tobacco defendants for other
damages, e.g., pain and suffering or lost wages. Finally, had
the state not brought its suit and had the putative class
members made recoveries from the tobacco defendants on
their own, the class members would have been entitled to at
least one-third of the recovery after attorney fees and costs
were paid.
A-9
The central issue in this case is whether any portion of
the state’s recovery “is subject to distribution to individual
smokers pursuant to the allocation formulae contained in the
medical- and general-assistance statutes. The district court
concluded that the statutes do not provide a basis for the
putative class to proceed with its claim. We agree.
Minnesota, as mandated by the federal Medicare act,
requires all recipients of medical assistance to assign to the
state any claim they may have against third parties for the
medical expenses paid by the state. 42 U.S.C. §1396k(a)(1)
(A); Minn. Stat. § 256B.056, subd. 6. General-assistance
recipients are required to make a similar assignment. Minn.
Stat. § 256D.03, subd. 3a. In other words, subsequent to the
assignment, the legal right to recover the medical expenses
paid by the state from third parties belonged solely to the
state.
Appellants contend that as a result of the tobacco
settlement the state divested them of a nght to pursue the
tobacco defendants for past and future medical expense. But
they currently have the same rights they had prior to the
tobacco settlement. They have a right to bring a claim for
damages against the tobacco defendants, but they do not have
a right to retain the damages representing the state-paid
medical expenses. They relinquished their interest in those
expenses when they made the assignment to the state. As a
result of the assignment, it is clear that the recovery-allocation
statutes do not provide appellants with a basis for obtaining a
portion of the state’s tobacco settlement.
The three statutes at issue 1n this case all provide that the
State is to be fully reimbursed for the payments it made on
behalf of the individual recipients. The medical-assistance
statutes provide that “[t]he full amount of medical assistance
paid to or on behalf of the person as a result of the injury must
be * * * paid to the state” before the individual retains any of
the recovery. Minn. Stat. §§ 256B.042, subd. 5; 256B.37,
A-10
" ls inary aah aaa a ata Le aaiad i bade ode ih
sie
subd. 4. The general-assistance statute contains nearly
identical language. Minn. Stat. § 256D.03, subd. 8(f).
Nonetheless, there are instances when the state will not
be fully reimbursed. For example, if the net recovery, i.e., the
recovery less attorney fees and costs, is less than the
payments made by the state, the state will not recoup all of its
payments. Also, if reimbursing the state in full would result
in the individual recipient receiving less than one-third of the
net recovery, the state’s reimbursement is limited.
The provision in each of these three statutes allowing a
minimum of one-third recovery by the individual recipient
who pursues a liable third party serves two purposes. First, it
provides that individual recipient with an incentive to pursue
a claim. If the individual recipient pursues the liable third
party, the state need not expend its limited resources in an
effort to recoup its payments. Second, allowing the
individual recipient to retain a portion of any recovery made
by that individual is recognition that the individual will
typically have claims against the third party for more than just
medical expenses. For example, the individual will likely
have a claim for pain and suffering and possibly one for lost
wages Or earning capacity. The state is entitled to the first
dollar of any recovery regardless of how that recovery is
classified by the parties. See State, Dept of Human Servs. v.
Bengston, 506 N.W.2d 38, 39-40 (Minn. App. 1993)
(providing that state may satisfy its interest out of recipient's
settlement regardless of how that settlement is characterized
by the recipient), review denied (Minn. Nov. 16, 1993). But
the legislature has made a policy decision that the individual
recipient should be permitted to retain a portion of any
recovery that he or she successfully pursues. In this case,
appellants did not pursue the tobacco defendants and have not
lost their causes of action for their own alleged injuries.
Based on our interpretation of the recovery-allocation
Statutes, we agree with the district court’s dismissal of
appellants’ complaint. These statutes do not provide a basis
A-1]
for appellants to obtain a portion of the state’s tobacco
settlement. Although the district court should have provided
the parties with an express deciaration of their rights, its
findings, conclusions and order have this effect. The
recovery-allocation statutes relied on by appellants do not
confer on them any rights that would allow them to obtain a
portion of the state’s tobacco settlement. Appellants’
complaint does not set forth a legally sufficient claim for
relief and it was not error for the district court to order the
dismissal:
2. Sanctions
Appellate courts will not disturb a district court's
decision to impose sanctions under Minn. R. Civ. P. 11 unless
the district court abused its discretion. Uselman v. Uselman,
464 N.W.2d 130, 145 (Minn. 1990). “But courts should
construe rule 11 somewhat narrowly to avoid deterring
legitimate or arguably legitimate claims.” Conant v. Robins,
Kaplan, Miller & Ciresi, L.L.P., 603 N.W.2d 143, 150 (Minn.
App. 1999) (citing Uselman, 464 N.W.2d at 142), review
denied (Minn. Mar. 14, 2000).
In this case,, the district court imposed $5,000 in
sanctions against each of the three law firms representing the
putative class. The district court identified as its bases for
imposing the sanctions that the premise of appellants’ lawsuit
was “monumentally” wrong and there was not a “shred of
evidence to support bringing it.” It also indicated at the
hearing that it hoped to deter additional attempts by others to
obtain a portion of the settlement. Contrary to the district
court’s position, we do not conclude that appellants’ lawsuit
was completely frivolous. The recovery-allocation statutes are
not absolutely clear and there are no Minnesota cases
establishing that these statutes bar medical- and general-
A-12
assistance recipients from pursuing a portion of the state’s
recovery.’
Appellants’ lawsuit did not lack all objective
reasonableness. Although the district court correctly
determined that appellants did not state a claim upon which
relief could be granted, we conclude that appellants’ novel
claims were brought in good faith. See Minn. R. Civ. P. 11
(providing that parties are permitted to submit pleadings that
contain good faith arguments for the extension or
modification of existing law). The state would not have
incurred the medical- and general-assistance expenses for
smoking illnesses without the members of the putative class.
Further, the medical- and general-assistance statutes do
provide for an allocation between the recipient and the state in
at least some situations where a recovery is made from a third
party. In light of this, we hold that the district court abused
its discretion in sanctioning appellants’ attorneys.
DECISION
The state’s settlement in the tobacco litigation is not
subject to the recovery-allocation formulae contained in
Minn. Stat. §§ 256B.042, subd. 5 (1998): 256B.37, subd. 4
(1998); and 256D.03, subd. 8(f) (1998). The district court's
dismissal of appellants’ class-action lawsuit was appropriate,
but the district court’s imposition of sanctions against
appellants in this case was an abuse of discretion. Appellants
did not ultimately prevail on their claim, but it cannot be said
: Subsequent to oral argument on this matter, respondent's counsel
provided the court and appellants’ counsel with a copy-of State of
California v. Superior Court, 2000 WL 1231390, an August 31, 2000
decision from the California Court of Appeals. While the California
court’s Opinion comments specifically on the Minnesota district court’s
order in this case and reaches the same result we do, the California court's
decision is not dispositive and does not serve as a basis for our decision.
A-13
del hie ai
that they failed to assert claims that were, at a minimum,
arguably legitimate at the time they were made.
:
Affirmed in part and reversed in part.
s/ Jill Flaskamp Halbrooks
o September 13, 2000
STATE OF MINNESOTA DISTRICT COURT
COUNTY OF HENNEPIN FOURTH JUDICIAL DISTRICT
Jesse Lee Brown
and Ronald J. Bergeron, ORDER:
on behalf of themselves and GRANTING DEFENDANT’S
all others similarly situated, MOTION TO DISMISS:
GRANTING DEFENDANT’S
Plaintiffs, MOTION FOR SANCTIONS:
DENYING PLAINTIFFS’
V. MOTION FOR PARTIAL
SUMMARY JUDGMENT:
The State of Minnesota, DENYING PLAINTIFFS’
MOTION FOR
Defendant. DECLARATORY
JUDGMENT.
File No. 98-11152
The above-entitled matter came on for hearing before the
undersigned judge of district court on the 16" day of
September 1998, pursuant to defendant’s motion to dismiss,
defendant’s motion for sanctions, plaintiffs’ motion for partial
summary judgment and plaintiffs’ motion for declaratory
judgment.
Ronald I. Meshbesher, Esq., Anthony J. Nemo, Esq.,
Hugh V. Plunkett, Esq., John A. Cochrane, Esq., and Robert
K. Shelquist, Esq., appeared on behalf of plaintiffs; Thomas
F. Pursell, Senior Counsel, and Patricia A. Sonnenberg,
Assistant Attorney General, appeared on behalf of defendant.
Also appearing were Michael V. Ciresi, Esq., and Roberta B.
Walburn, Esq.
A-15
Upon all the files, memoranda, the argument of counsel
and the court being fully advised in the premises,
IT IS HEREBY ORDERED:
1. That defendant’s motion to dismiss is Granted.
2. That defendant's motion for sanctions is Granted.
a. Within 10 days of the date of this Order,
defendant’s counsel shall submit to the court, and to
plainuffs’ counsel, an affidavit setting forth their costs
relating to defending this action.
b. Plaintiffs’ counsel shall have 10 days from
receipt of defendant’s affidavit to submit, in writing, any
memoranda or other documents in opposition to
defendant’s calculation of costs and/or in mitigation of
sanctions.
3. That plaintiffs’ motion for partial summary judgment
is Denied.
4. That plaintiffs’ motion for declaratory judgment is
Denied.
5. That the attached Memorandum be made a part
hereof.
LET JUDGMENT BE ENTERED ACCORDINGLY.
Dated this 15th day of December 1998
BY THE COURT
/s/
Peter Albrecht
District Court Judge
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|
|
4
MEMORANDUM
Statement of Facts
Plaintiffs claim entitlement to a portion of the proceeds
of the monetary settlement of the case entitled State of
Minnesota_and Blue Cross — Blue Shield of Minnesota v.
Philip Morris Incorporated, et al. (hereinafter ‘Tobacco
Litigation”) which was filed in August 1994,
I. The Tobacco Complaint
Minnesota Attorney General, Hubert H. Humphrey, III,
brought the action “on behalf of the State of Minnesota
pursuant to his authority under common law, as well as Minn.
Stat. § § 8.01, 8.31, 325D.09-15, 325D.43-45, 325D.49-66
and 325F.67-70.” Tobacco Complaint at J 7. In addition to
seeking declaratory and equitable relief and civil penalties,
the Attorney General sought to vindicate the “State’s
proprietary interest in enforcing the State’s rights to damages
for economic injuries to the State which were caused by the
unlawful actions of the cigarette industry.” Id. (Emphasis
added). Those damages include increased expenditures
for:
a. Minnesota’s Medicaid plan, Medical Assistance, see
Minn. Stat. § 256B.01 er seg. and 42 U.S.C. 1396 et Seq.
“Under the Medical Assistance Program, the State of
Minnesota pays for medical services provided to program
recipients.” ... . In fulfilling its statutory duties, the State of
' Because defendant submitted as Appendix | the Second Amended
Complaint dated January 6, 1998, and all material allegations are
contained therein, all citations by this court to the “Tobacco Complaint”
correspond to the Second Amended Complaint.
*In the instant action, plaintiff Jesse Lee Brown, a smoker, claims
that he received treatment for smoking-related illness from January 1,
A-17
Minnesota has expended and will expend substantial sums of
money due to the increased cost of providing health care
services for treatment of smoking-related diseases.” Id. at J
7a. (Emphasis added).
b. General Assistance Medical Care, see Minn. Stat. §
256D.03, subd. 3.
General Assistance Medical Care is available to
qualifying persons who are not eligible for
Medical Assistance.’ The State of Minnesota
pays for the entire cost of this care. In fulfilling
its statutory duties, the State of Minnesota has
expended and will expend substantial sums of
money due to the increased cost of providing
health care services for treatment of smoking-
related diseases.
Id. at {| 7b. (Emphasis added).
c. MinnesotaCare, see Minn. Stat. § 256.9351 et seq.,
as amended by 1994 Minn. Laws, Ch. 625.
MinnesotaCare provides subsidized health
coverage for qualifying Minnesotans not
otherwise covered by Medical Assistance. In
fulfilling its statutory duties, the State of
Minnesota has expended and will expend
substantial sums of money due to the increased
cost of providing health care services for
treatment of smoking-caused diseases.
1978, to December 31, 1996. His “treatment was paid for in whole or in
part” by this program. Plaintiffs’ Complaint at J 2.
*In the instant action, plaintiff Ronald J. Bergeron, a smoker,
received treatment paid for in its enurety by this program. Plaintiffs’
Complaint at J 3.
A-18
Id. at { 7c. (Emphasis added).
d. The State Employee Group Insurance Program.
The State of Minnesota, as an employer which
makes available health coverage for _ its
approximately 60,000 employees pursuant to
Statutory and contractual obligations, _ is
mandated by law to offer comprehensive and
major medical health coverage and benefits that
include coverage for smoking-related diseases.
The State of Minnesota has entered into
contractual agreements with certain health care
service providers and plans in order to make
available to its employees health coverage that
includes those mandated benefits. Blue Cross
and Blue Shield of Minnesota Operates and
administers the largest and most widely-used
State employee health care service plan. The
State of Minnesota has paid and will pay
substantial sums of money pursuant to these
Statutory obligations due to the increased cost of
providing health care services for treatment of
smoking-caused diseases.
Id. at { 7d. (Emphasis added).
e. Funding and promoting “wellness and healthy
lifestyle programs in order to reduce health care costs,
including smoking cessation.” Id at 7e.
An additional allegation contained in the Tobacco
Complaint was: “The unlawful actions of the Cigarette
industry threaten and interfere with the Statutory and
contractual duties of the State of Minnesota, as described
A-19
above, and with the public health of the citizens of the State
of Minnesota.” Id. at] 7f.
In the Tobacco Complaint the State of Minnesota sought
to recover for economic injuries enumerated above. The nine
causes of action included a tort count based on _ the
undertaking of a special duty to the public health;* two
antitrust counts; four statutory consumer protection
violations,” and two equitable counts based on the state’s out-
of-pocket losses.’
* Tobacco Complaint at JJ 85-88, Count I (for State of Minnesota
only), alleged “Undertaking of a Special Duty.”
*Tobacco Complaint at 9 90-94, Count II, alleged Minnesota
Anutrust Law: “Conspiracy to Unreasonably Restrain Trade and
Commerce.”
° Tobacco Complaint at JJ 96-100, Count III, alleged Minnesota
Antitrust Law “Monopolization of the Cigarette Market in Minnesota.”
Tobacco Complaint at JJ 102-105, Count IV, alleged “Consumer
Fraud” pursuant to Minn. Stat. § 325F.69, subd. 1, which provides:
The act, use, or employment of any person of any
fraud, false pretense, false promise,
misrepresentation, misleading statement or deceptive
practice, with the intent that others rely thereon in
connection with the sale of any merchandise,
whether or not any person has in fact been misled,
deceived, or damages thereby, [is an unlawful
practice}.
Id.
Tobacco Complaint at 9§ 107-110, Count V, alleged “Unlawful
Trade Practices” pursuant to Minn. Stat. § 325D.13, which provides: “No
person shall, in connection with the sale of merchandise, misrepresent,
directly or indirectly, the true quality, ingredients or origin of such
merchandise.” Id.
Tobacco Complaint at JJ] 112-115, Count VI, alleged “Deceptive
Trade Practices” pursuant to Minn. Stat. § 325D.44, subd. 1, which
provides, in part:
A-20
irmaitemacesnaieiitiiiiinnaiaaiaiii
Id.
Id.
A person engages in a deceptive trade practice when,
in the course of business, vocation, or occupation,
the person:
(5S) represents that goods or services have
characteristics, ingredients, uses, benefits . . . that
they do not have... .
(7) Represents that goods or services are of a
particular standard, quality, or grade, . . . if they are
of another.
(13) Engages in any other conduct which similarly
creates a _ likelihood of confusion or of
misunderstanding.
Tobacco Complaint at §{{ 117-120, Count VII, alleges “False
Advertising” pursuant to Minn. Stat. § 325F.67, which provides, in part:
Any person, form, corporation, or association who,
with intent to sell or in any way dispose of
merchandise . . . directly or indirectly, to the public,
for sale or distribution, or with intent to increase the
consumption thereof, . . . makes, publishes,
disseminates, circulates, or places before the public,
or causes, directly or indirectly, to be made,
published, disseminated, circulated, or placed before
the public, in this state, in a newspaper or other
publication, or in the form of a book, notice,
handbill, poster, bill, label, price tag, circular,
pamphlet, program, or letter, or over any radio or
television station, or in any other way, an
advertisement of any sort regarding merchandise . . .
or anything so offered to the public for use,
consumption, purchase, or sale, which advertising
contains any material assertion, representation, or
Statement of fact which is untrue, deceptive, or
misleading, shall, whether or not pecuniary or other
specific damage to any person occurs as a direct
result thereof . . . be guilty {of an unlawful practice].
” Tobacco Complaint at Jj] 122-124, Count VIII, alleged Restitution:
“Performance of Another's Duty to the Public,” based in part upon the
following:
A-2]
Il. The Nature of the State’s Action Against the
Tobacco Companies
The State brought a direct action against the tobacco
companies. In its Ninth Affirmative Defense in its Answer
dated September 16, 1994, defendant Philip Morris asserted,
among other things, “Plaintiff State of Minnesota lacks
authority and/or standing to bring any claim for medical
expenses paid on behalf of Minnesota residents except to the
extent it sues as the subrogee of those Minnesota residents.”
Id. at { 145.
The State of Minnesota and Blue Cross-Blue Shield
repeatedly stated that they had not brought an action in
subrogation. For example, in the Memorandum in Support of
Plainuffs’ Motion for Judgment on the Pleadings, dated
Plainuffs have been and will be required by
statutory and contractual obligations to expend
large sums of money to pay for the harm caused by
the wrongful conduct of defendants. Plaintiffs have
the intent to charge, and recoup from defendants
these sums of money. Plainuffs’ expenditures are
immediately necessary to protect the public health
and safety.
Tobacco Complaint at J 123. (Emphasis added).
Tobacco Complaint at J 126-129, Count IX, alleged Restitution: “Unyust
Enrichment: Defendants, through their wrongful conduct as described
above, have reaped substantial and unconscionable profits from the sale of
cigarettes in Minnesota. These cigarette sales, in tum, have resulted in
increased health care costs directly attributable to cigarette smoking.
Without justification, defendants have failed to pay for the consequences
of their unlawful conduct.
As a result, plaintiffs have been required to pay for the medical costs
stemming from defendants’ unlawful acts. Plaintiffs have borne a duty
that - in law, equity and fairness — ought to have been borne by
defendants.
Tobacco Complaint at J] 126-128. (Emphasis added).
A-22
January 26, 1995, the State and Blue Cross objected to
defendants’ propensity to transform their action into one of
subrogation by asserting defenses that are applicable solely to ~
subrogation actions:
The State and Blue Cross have not brought this
action as subrogated parties to any underlying tort
claims that individual smokers may have against the
cigarette industry. In a subrogation claim, one party
steps into the shoes of another and asserts the rights
of the other. By contrast, in the present case, the
State and Blue Cross sue in their own right - in a
direct action — to recover the enormous sums of
money each spends to pay for health care for
smoking-attributable diseases and to obtain equitable
relief . . . . This direct action is based upon a breach
of the duties that defendants owe directly to the State
and Blue Cross. This direct action is further based
upon the commitment of the State and Blue Cross to
protect the public health and upon their status as two
of the largest purchasers of health care services in
the state.
Id. at 2-3, Appendix 3.
The distinction was a point of contention throughout the
. 28
trial.
* See, e.g., Plaintiffs Memorandum in Opposition to Defendants’
Motion to Dismiss, dated February 2!, 1995: “[The tobacco case] 1s an
action brought by two of the largest purchasers of health care services in
this state who have been injured in their ‘business or property’ by the
wrongful acts of defendants.” Id. at 3, Appendix 4; Reply Memorandum
in Support of Plaintiffs’ Motion for Judgment on the Pleadings:
The damages incurred by the State and Blue Cross,
in the form of increased expenditures for medical
costs, are distinct and separate from any personal
injury damages individual smokers have suffered,
such as Bodily and mental harm and_loss_ of
A-23
By Order dated May 18, 1995, Judge Kenneth
Fitzpatrick, Ramsey County District Court, denied
defendants’ motions to dismiss and denied as premature the
State’s motion to dismiss certain affirmative defenses.
While the Defendants’ affirmative defenses related
to subrogation may on their face not directly respond
to Plaintiffs’ allegations of independent and direct
harm, such defenses cannot be determined at this
time to be irrelevant. Further discovery is required.
If discovery reveals, for example, that Plaintiffs have
no direct cause of action, the case could be
converted to one involving issues of subrogation.
Id. at 3-4 (Emphasis added).
The court warned that its denial of plaintiffs’ motion
“shall not be construed to sanction conversion of this case
into one of subrogation.” Id. at 4. ;
The tobacco defendants appealed the trial court’s finding
that Blue Cross had standing to the Minnesota Court of
Appeals, which refused to grant discretionary review.
Because it believed that the case presented an important legal
issue, the Minnesota Supreme Court granted review. It
upheld Blue Cross’ standing on all counts, with the exception
of the tort/special undertaking count. State of Minnesota and
Blue Cross-Blue Shield of Minnesota_v. Philip Morris
Incorporated. et al, 551 N. W.2d 490 (Minn. 1996).
By Order dated January 27, 1998, the trial court took up
the issue upon which it had previously deferred ruling; that is
earings. Even defendants admit the distinctiveness
of these two sets of claims. Thus, defendants note
“the possibility of a later suit by smokers for
additional damages such as pain and suffering” — but
not medical costs.
Id. at 28-29 (Emphasis supplied).
A-24
whether defendants could assert as affirmative defenses the
conduct of individual smokers. Plaintiffs’ motion, for partial
summary judgment dismissing defendants’ affirmative
defenses based upon the conduct of individual smokers was
granted, in part, and denied, in part. The court found:
That the conduct of individual smokers [was]
irrelevant to the majority, but not all of the issues in
this case;
That defenses that a party may have against third
parties are not imputed against others; likewise
defenses available against individual smokers cannot
be imputed against Plaintiffs’ equitable claims;
That there [was] no basis for the submission of the
purported fault of individual smokers.
Id. at 2. Appendix 8.
On May 6, 1998, after the close of evidence, the trial
court instructed the jury:
You are instructed that this case is a direct action
brought by the state of Minnesota and Blue Cross
and Blue Shield of Minnesota. No individual smoker
is a party to this action. The actions of individual
smokers do not insulate defendants from liability,
since the actions of individual smokers; for example,
the fact that they smoke, are both foreseeable by
defendants and in accord with defendants’ intention
for use of their product. Any knowledge by smokers
of any health risks of cigarettes or any conduct of the
~ smokers is not a defense as to whether a defendant or
defendants have violated the law in this case.
Trial Transcript at 15643-44, Appendix 9.
A-25
III. The Tobacco Settlement
On May 8, 1998, the case was settled. Two documents
memorialize the terms. The first document is entitled,
“Settlement Agreement and Stipulation for Entry of Consent
Judgment.”
The lawsuit is described as follows:
[T]he State of Minnesota, through its Attorney
General Hubert H. Humphrey III, and Blue Cross
and Blue Shield of Minnesota, commenced this
action on August 17, 1994, asserting various claims
for monetary, equitable and injunctive relief on
behalf of the State of Minnesota and Blue Cross and
Blue Shield of Minnesota against certain tobacco
manufacturers and others as Defendants|.]
Id. at 2, Appendix 10.
Part II A, “Settlement Payments” provides:
A. Settlement Receipts. The payments to be
made by the Settling Defendants under this
Settlement Agreement are in satisfaction of all of the
State of Minnesota's claims for damages incurred by
the State in the year of such payment or earlier years
related to the subject matter of this action, including,
without limitation, claims for equitable and
injunctive relief, claims for health care expenditures
and claims for punitive damages, except that no part
of any payment under this Settlkement Agreement is
made in settlement of an actual or potential liability
for a fine, penalty (civil or cnminal) or enhanced
damages.
A-26
Id. at 7 (Emphasis added).° :
In September 1996 a class action suit, entitled Thompson
vy. American Tobacco, Incorporated, et al., (File No. 3-96-
CV888 (D. Minn.)) on behalf of all addicted smokers (a group
which presumably includes Brown and Bergeron) was filed in
Ramsey County District Court. It was removed to federal
district court and is scheduled for trial in March 2000.
IV. Minnesota’s Medicaid and General Assistance
Medical Care Programs
The program under which plaintiff Jesse Lee Brown
seeks to recover is Medicaid, a federal-state partnership,
under 42 U.S.C. § 1396, et seg. and Minn. Stat. § 256B. The
program under which Ronald J. Bergeron seeks to recover is
the General Assistance Medical Care program, established
pursuant to state law, Minn. Stat. § 256D.03 (1996). Under
these programs, the state pays certain health care costs of
eligible individuals, referred to as “recipients.” Pursuant to
these statutes, the Department has a right to recover its
program costs when one of its recipients has been injured by a
third party. Minn. Stat. § 256B.042 (Medicaid) provides, in
part:
* Defendant's brief explains the face value of the settlement as
follows:
The figure of $6.17 billion commonly assigned as the
settlement’s value is derived by adding the face value of the
payments, without adjustment or discounting, over a period of
25 years. The 25-year period is essentially arbitrary, but
became a convention for valuing tobacco settlements - since
used in all settled state cases - during early discussions over a
potential national settlement.
Defendant's Brief in Support of Motion to Dismiss at 9, fn5.
A-27 7
Third Party Liability.
Subdivision 1. When the state agency provides,
pays for or becomes liable for medical care, it shall
have a lien for the cost of the care, upon any and all
causes of action which accrue to the person to whom
the care was furnished, or to the person’s legal
representatives, as a result of the injuries which
necessitated the medical care.
Subd.3. The attorney general, or _ the
appropriate county attorney acting at the direction
of the attorney general, shall represent the state
agency to enforce the lien created under this section
or, if no action has been brought, may initiate and
prosecute an independent action on behalf of the
State agency against a person, firm, or corporation
that may be liable to the person to whom the care
was furnished.
Subd. 5. Costs deducted. Upon any judgment,
award, or settlement of a cause of action, or any part
of it, upon which the state agency has filed its lien,
including compensation for liquidated, unliquidated,
or other damages, reasonable costs of collection,
including attorney fees, must be deducted first. The
full amount of medical assistance paid to or on
behalf of the person as a result of the injury must be
deducted next, and paid to the state agency. The rest
must be paid to the medical assistance recipient or
other plaintiff. The plaintiff, however, must receive
at least one-third of the net recovery after attorney
fees and other collection costs.
A-28 -
a
Id. (Emphasis added).
Minn. Stat. § 256D.03, subd. 8 (Medical Assistance)
provides, in part:
(c) Upon furnishing general assistance medical
care or general assistance to any person having
private accident or health care coverage, or having a
cause of action arising out of an occurrence that
necessitated the payment of assistance, the state
agency shall be subrogated, to the extent of the cost
of medical care, subsistence, or other payments
furnished, to any rights the person may have under
the terms of the coverage or under the cause of
action.
This right of subrogation includes all portions of
the cause of action, notwithstanding any settlement
allocation or apportionment that purports to dispose
of portions of the cause of action not subject to
subrogation.
(d) To recover under this section, the attorney
general or the appropriate county attorney, acting
upon direction from the attorney general, may
institute or join a civil action to enforce the
subrogation rights established under this section.
Id.
As of this date, the State of Minnesota has not filed any
liens against plaintiffs consistent with the statutory provisions
outlined above.
A-29
Discussion
I. Applicable Standard for a Rule 12 Motion to
Dismiss
Defendant has moved this court to dismiss the
Complaints pursuant to Minn. R. Civ. P. 12.02, which
provides, in part:
Every defense, in law or fact, to a claim for relief in
any pleading, whether a claim, counterclaim, cross-
claim, or third-party claim, shall be asserted in the
responsive pleading thereto if one is required, except
that the following defenses may at the option of the
pleader be made by motion:
(e) failure to state a claim upon which relief can be
granted[.]
Id.
Although the court may ordinarily not go outside of the
pleadings to decide the motion, and must examine only the
claim as stated by the party asserting it, Royal Realty Co. v.
Levin, 243 Minn. 30, 66 N.W.2d 5 (1954), the court may
consider authenticated documents and matters of public
record without converting the motion to dismiss to a motion
for summary judgment pursuant to Rule 56. Henson v. CSC
Credit Services, 29 F.3d 280, 284 (7 Cir. 1994).
The court must determine only that the complaint sets
forth a legally sufficient claim for relief, which is the standard
of review applicable to a dismissal for failure to state a claim
upon which relief may be granted. Geldert v. American Nat’]
Bank, 506 N.W.2d 22, 25 (Minn. Ct. App. 1993), pet. for rev.
denied (Minn. Nov. 16, 1993). In addition, all factual
inferences must be drawn in favor of the party asserting the
claim in the Complaint. Northern States Power Co. v.
A-30
Franklin, 265 Minn. 391, 122 N.W.2d 26 (1963). Only if all
theories of recovery are unavailable to the claimant on the
claim as stated may a court grant a motion to dismiss. It is
immaterial whether or not the court believes that plaintiff can
_prove any of the facts alleged.
II. The Law Mandates This Court To Grant
Defendant’s Motion to Dismiss.
Minnesota statutes and the law of the tobacco case lead
this court to conclude that plaintiffs’ claims are wholly
without support. Tne State of Minnesota and Blue Cross
brought a direct action against the tobacco companies, a
distinction that alone dictates the outcome. It is only through
a tortured and bewildering transformation of the statutes, and
of the pleadings, that plaintiffs can argue entitlement to a
portion of the settlement proceeds. The State brought the
tobacco litigation to recover its own costs for treating
smoking-related disease. Contrary to the only procedural
posture that would validate plaintiffs’ contentions, the State
did not bring the action “in a representative capacity pursuant
to Minn. Stat. § 256B.01, et seg. and Minn. Stat. § 256D.03,
subd. 3.” Complaint at J 6. Fusing the artful and the clumsy,
plaintiffs attempt to recast the Tobacco Complaint into one of
subrogation, effectively transforming a provision that entitles
the state to recover its costs when a recipient recovers from a
third party to a provision that forces the state to disgorge one-
third of the settlement to recipients. The tobacco companies
tried, for naught, to exploit this same turn of phrase
throughout the trial. It is no more compelling when it is
asserted on behalf of those who have been treated by the state,
at little or no cost to themselves.
At the oral argument on these motions, one of plaintiffs’
attorneys argued that the state would be “nowhere” without
70,000 victims of smoking. That is correct in the rudimentary
sense in that if there were no addicted smokers, requiring
~ A-31
treatment and hospitalization paid for by the state, defendant
would not have initiated the suit against the tobacco
companies. Conceding that fact, defendant did not receive
anything that rightfully belongs to plaintiffs as part of the
tobacco settlement.
Minn. Stat. § § 256B.042 (Medicaid) and 256D.03
(General Assistance Medical Care) authorize the Department
to recover costs when a recipient who has been injured by the
conduct of a third party initiates a cause of action to recover
from that party. Neither of the named plaintiffs has initiated
an action to recover from the cigarette companies.
The formula set out in the Medicaid and General
Assistance Medical Care statutes does not apply to this case.
The Medicaid lien statute ensures that when a recipient, who
has received treatment from the state, recovers from a third
party responsible for the injuries, the state also recovers a
portion of those funds. Lundberg v. Jeep Corp., 582 N.W.2d
268 (Minn. Ct. App. 1998). The rationale behind the formula
provision that insures that the injured recipient receive no less
than one-third of the proceeds is to encourage recipients to
bring individual actions against third parties responsible for
their injuries. A recipient would not be encouraged to do so if
all of the lawsuit proceeds were directed to the state, which as
far as the recipient was concerned, was treating him or her
free of charge in the first place. The law protects the interests
of the State - care provider. State Dept. of Human Services
v. Bengston, 506 N.W.2d 38 (Minn. CT. App. 1993).
Even if the statutes cited by plaintiffs in support of
propositions for which they do not stand were not clear on
their face, (which this court believes they are) plaintiffs’
interpretation is ludicrous, and its implementation would lead
to a preposterous result. Minn. Stat. § 645.17 “Presumptions
in Ascertaining Legislative Intent’’’® provides:
' This court did not rely upon this provision, however, as it was
convinced by the statutes, and by the law of the tobacco case, that it was
required to dismiss plaintiffs’ suit in its entirety.
A-32
In ascertaining the intention of the legislature the
courts may be guided by the following presumptions:
(1) The legislature does not intend a result that is
absurd, impossible of execution, or unreasonable;
(2) The legislature intends the entire statute to be
effective and certain[.]
Id.
Plaintiffs’ interpretation flies in the face of anything the
legislature could have intended. Were plaintiffs able to
recover under the statutes that this court believes are clearly
inapplicable, they would be entitled to receive between $2.06
billion and $4.86 billion dollars, as compensation for medical
expenses that they, for the most part, never incurred, an
amount in addition to whatever amount any of the individual
plaintiffs might receive for his or her compensable damages,
such as pain and suffering. Their individual claims are not
foreclosed by the settlement. Certainly that is an absurd
result.
Plaintiffs’ Conduct Does Not Comport With Obligations
Under Rule 11.
This court considered the following additional facts to
decide the merits of defendant’s motion to sanction plaintiffs’
counsel pursuant to Minn. R. Civ. P. 11, which provides that
the pleadings must be signed by at least one attorney, and
[t]he signature of an attorney or party constitutes a
certification that the pleading . . . has been read; that
to the best of the signer’s knowledge, information
and belief formed after reasonable inquiry it is well
groundec« in fact and is warranted by existing law or
A-33
a good faith argument for the extension,
modification, or reversal of existing law, and that it
is not interposed for any improper purpose, such as
to harass or cause unnecessary delay or needless
increase in the cost of litigation... .. If a pleading,
motion or other paper is signed in violation of this
rule, the court, upon motion or upon its own
initiative, shall impose upon the person who signed
it, a represented party, or both, an appropriate
sanction, which may include an order to pay to the
other party or parties the amount of the reasonable
expenses because of the filing . . . including
reasonable attorney fees.
Id. (Emphasis added).
By letter dated July 22, 1998, addressed to plaintiffs’
counsel, Lee E. Sheehy, Chief Deputy Attorney General
wrote, in part:
We have reviewed the class action complaint which 14
you have signed in the above-captioned action. It is
clear that whoever drafted the complaint-took no
reasonable steps to investigate and did _ not
understand the State of Minnesota’s action in the
underlying cigarette litigation, The State of
Minnesota_and Blue Cross and Blue Shield of
Minnesota _v. Philip Morris, Inc. et al., Ramsey
County District Court, C1-94-8565. The basic
factual and legal predicate upon which your :
complaint is based is false and/or erroneous, as even
a cursory review of the public file in this action
would reveal. The state's complaint and prosecution
of the case was always as a direct action by the State |
of Minnesota. The State did not file a subrogation :
action, and the State did not sue to recover damages
_ sustained by smokers.
A-34
The State of Minnesota did not sue, seek or receive
damages on behalf of any individual smokers for any
damages or injuries sustained by smokers or any
element of damages which your clients would be -
entitled to. To the extent that any of your clients or
any putative class members have suffered personal
injury losses, they would certainly be entitled to sue
the tobacco companies since those causes of action
were not litigated in our case.
[YJou have a duty to assure that your claim is
grounded in the law. The class action complaint
which you signed is frivolous. It is clear that no
reasonable inquiry was undertaken prior to the
signing of your complaint. We expect that you will
voluntarily dismiss before the expenditure of
unnecessary attorney time and costs by the State.
lease advise this Office by the close of business on
Monday, July 27, 1998, whether you will discharge
your responsibilities as officers of the court under
applicable statutes and rules of civil procedure and
dismiss your action.
Exhibit | at Tab 12.
The response of plaintiffs’ counsel to Mr. Sheehy was
swift and unequivocal. By letter dated July 27, 1998, John A.
Cochrane wrote:
Your letter of July 22, 1998 has been reviewed by
the addressees. Counsel for Plaintiffs after careful
A-35
review of all the legal aspects underlying the case
see it as a matter to be reso!ved by the Court under
the Declaratory Judgment Act, M.S.A. 555 et seq.
All Plaintiffs’ counsel concur.
Exhibit 2 at Tab 13.
On July 29 and 30, 1998, shortly after the exchange of
the above-quoted correspondence, defendant answered an
inquiry put to it by Dave Taylor on behalf of plaintiffs’
counsel, reaffirming that defendant had not filed any liens
against plaintiffs Brown and Bergeron. Janice Taylor,
supervisor of the Minnesota Department of Human Services’
Benefit Recovery Section, explained the procedure followed
by the department. Ms. Taylor informed Mr. Taylor that
parties to a lawsuit and their attorneys are notified when the
Department files a lien. Ms. Taylor corrected Mr. Taylor’s
perception that the Department had a lien whenever it paid a
recipient's medical expenses. “[T]he Department is required
to file a lien in order for it to be effective and the filing occurs
only when it learns of a recipient’s legal action.” Aff. of
Janice Taylor at JJ 10-11, Appendix 14.
It is neither the contents of Mr. Sheehy’s letter to
plaintiffs’ counsel nor the fact that it was written at all that
causes this court to find that sanctions are appropriate.
Indeed, if all an attorney were required to do to guarantee that
his or her opponent were sanctioned, is to write a tough-
talking letter, case files would be more packed with them than
they already are. It is because the letter was so
straightforward in reporting the state of the law, and so
consistent in the manner in-which it articulated defendant’s
theories of recovery with regard to the tobacco suit that the
court believes plaintiffs were put on notice to reassess the
wisdom of bringing this action.
For purposes of assessing sanctions pursuant to Rule 11,
this court posed two questions. First, it was not sufficient that
it found that plaintiffs’ bringing the action was wrong; it
A-36
required a quantification of how wrong it was, a question this
court believes should be answered with “monumentally.”
The second question was whether there existed any shred of
evidence to support bringing it, a question this court believes
should be answered in the negative. Even the most cursory
examination of the case would have plainly revealed its flaws;
they are inescapable. Relying upon the conclusions above,
this court believes that sanctions are appropriate.
CONCLUSION
For the reasons outlined above, this court grants
defendant’s motion to dismiss and defendant’s motion for
sanctions. Although this court considered plaintiffs’ motion
for partial summary judgment and plaintiffs’ motion for
declaratory judgment, because the court’s ruling on
defendant’s motion to dismiss is dispositive of all issues, it
did not include the analysis in this Order.
H.P.A.
A-37
Excerpt from the State’s Appellate Reply Brief in Lundberg.
medical care and the state receiving the right to sue only for
the cost of the medical care. Under this argument, the
recipient and the state would each have to bring their own
separate actions in order to recover on those portions of the
cause of action they each possessed. Such a course of events
is clearly at odds with the statute’s provision that the state
will bring its own action only when the recipient has brought
no action. Under the statute, the assignment by MA recipients
to the state of the right to payment for medical care from
liable third parties creates a “shared right” to bring a cause of
action against those third parties.
Moreover, this shared ownership of the cause of action
makes practical sense given the primary method the
Legislature has chosen to seek reimbursement when third
party tortfeasor may be liable for the costs of care provided.
From the language of the statute it is clear that the Legislature
intended to obtain recovery of MA by relying primarily on
individual recipients seeking recovery from potentially liable
tortfeasors. This makes sense because individual recipients
and their attorneys are in the best position to identify and
assess the potential liability of third parties and to effectively
advocate for recovery. Furthermore, the injured recipient has
a natural incentive to seek recovery and will generally do so
despite the fact that some portion of the recovery, maybe even
the majority, must go toward satisfying the state’s lien.
Finally, to provide an incentive to the recipient bringing a tort
suit even in a case where the state’s lien would otherwise
eliminate or nearly eliminate the recipient's own recovery, the
A-38
MA lien statute provides that the recipient will be allowed to
retain at least a third of the net recovery.”
’ Mr. Lundberg’s brief inaccurately states that the MA lien Statute
“limits the compensation of the Medical Assistance recipient to a
maximum of 22% of the gross recovery where significant -medical
expenses are involved.” (Resp’t’s Br. at 5 (emphasis added).) In a
situation like Mr. Lundberg’s, where attorney's fees are one-third of the
recovery, the MA lien statute does not limit the recipient's recovery to a
maximum of 22%, but rather assures that the recipient will receive a
minimum of 22%. Indeed, in this case, as noted in DHS’s main brief at
page 19, after satisfying the MA lien, the actual proceeds to Mr. Lundberg
are $325,866.69, or nearly half of the gross recovery. Moreover, Mr.
Lundberg’s comparison of the amount received by the recipient with the
gross recovery is somewhat misleading; comparison is more aptly made
with the net recovery after reasonable costs and attorney fees. In any
personal injury case taken on a contingency, where there is no MA lien the
plaintiff will receive the net recovery. The MA lien
(Footnote Continued On Next Page.)
A-39
Excerpt from the Tobacco Trial Judge's Charge to Jury.
In The Matter Of:
State of Minnesota, et al v.
Philip Morris, et al
Trial Volume Number 77
May 6, 1998
Stirewalt & Associates
P. O. Box 18188
Minneapolis, MN USA 55418
(800) 553-1953
Original File 77.v1, 109 Pages
Min-U-Script® File ID: 0791261082
Word Index included with this Min-U-Script®
A-40
Page 15659
questions regardless of your answers to the other questions in
the special verdict form. You are not to consider the possible
effects of your answers to the other questions when you
determine damages. Your verdict is not complete until these
questions are answered.
The term “damages” means a sum of money that will
fairly compensate the state of Minnesota and Blue Cross and
Blue Shield of Minnesota for their payment of health-care
costs caused by smoking. Now a party seeking damages must
prove the nature, extent, duration, and consequences of its
injury. On the other hand, determination of damages must not
be based on speculation or guess. On the other hand,
difficulty in determining the amount of damages is no reason
for denying damages so long as there is a reasonable basis
upon which to approximate the amount.
There was certain evidence that has been admitted
regarding the taxation of cigarettes. This court has ruled,
however, that defendants mdy not offset any damages they
may owe by reason of the amount of excise taxes on
cigarettes. Accordingly, I instruct you you should — that
should you find that the plaintiffs are entitled to damages, you
may not
A-4]
Excerpt from Petitioners’ Trial Memorandum Below.
* - * * *
Compensation on the foregoing contingency is to be
paid by the State to the special attorneys on the
following basis: twenty-five percent (25%) of the
total recovery to the State, including but not limited
to compensatory or punitive damages, restitution,
civil penalties, interest, and any amounts which may
later be payable to the federal government under the
Medicaid program.
Id. at p. 3, J 3 (emphasis added).
C. The Second Amended Complaint Upon Which
oe eae
The State Went To Trial References The Medical
Assistance And General Assistance Statutes.
In the weeks preceding the trial of the matter against the
tobacco industry, the State served and filed a Second
Amended Complaint (hereinafter “Amended Complaint’).
Shelquist Aff., Exh. 2. One paragraph in the Amended
Complaint specifically references the Federal Medicaid Act
and the Minnesota Medical Assistance Program,
incorporating by reference two of the three statutes at issue in
this litigation. Id. at p. 3, J 7.a (“Such damages include but
are not limited to increased expenditures for...Minnesota’s
Medicaid plan, medical assistance, see Minn. Stat. § 256B.01
et seg. and 42 U.S.C. § 1396 et seqg.”). A second paragraph in
the Amended Complaint specifically references the
Minnesota General Assistance Statute, incorporating by
reference the third of the three statutes at issue in this
litigation. Id. at pp. 2-3, J 7.b. (“Such damages include but
are not limited to increased expenditures for...General
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Assistance Medical Care, see Minn. Stat. § 256D.03, subd.
cs
D. The _ State Specifically Identified The 70,000
People Before This Court As Being Afflicted With
Smoking Attributable Illnesses Which Resulted
In State-Funded Treatment.
It is indisputable that injuries of these class members
provided the basis for the State’s claims. The State has argued
itself that the tobacco action sought to recover health care
costs for treating a group of persons afflicted with smoking-
related illnesses.
Toward that end, the State went to considerable trouble
to develop its model of damages for trial, a process which was
described in great detail over the course of several day’s
testimony by Dr. Timothy S. Wyant:
Q. Are you prepared today to offer an opinion about the
health-care costs paid by the State of Minnesota and Blue
Cross Blue Shield of Minnesota to treat diseases and
conditions caused by smoking, made worse by smoking,
or made more expensive to treat by smoking?
A. Yes.
Q. And is the time period covered by your opinions
from 1978 through 1996?
A. Yes.
Shelquist aff., Exh. 3 at p. 5313,1. 19-p. 5314,1. 3. In order
to collect the information about the plaintiffs now before this
Court, Dr. Wyant, with the help of others, reviewed
confidential patient billing information to identify smoking-
attributable disease:
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Q. Now as part of your responsibilities, did you collect
claims records from the State and Blue Cross Blue Shield
of Minnesota?
A. Yes, I did.
Q. Could you first tell us what you mean by a “claims
records”?
A. Well, a claims record is essentially a -- it’s a
computerized doctor bill. When a doctor or a hospital in
Minnesota sends a bill into Blue Cross or--or to
Medicaid, it gets entered on a computer, or sometimes
these days its already computerized before it gets there,
and that’s the way it gets into the system for review and
for payment of the bill, is getting into that computerized
~ system. So when -- when I say a claims record, that
means going back to that computer system and looking at
whatever was entered into the computer for that doctor or
hospital bill at sometime over this period.
Q. From what programs did you obtain the State claims
records?
A. Well, the State claims records came from two
programs, Minnesota Medicaid and Minnesota General
Assistance Medical Care, GAMC.
Id. at p. 5315,1. 19-p. 5316,1. 16. This task was monumental,
requiring Dr. Wyant and others to search hundreds of millions
of records:
Q. Dr. Wyant, could you first of all tell us that title of
that exhibit?
A. This exhibit is called “Billing Records Analyzed in
the Statistical Model.” ;
Q. And could you tell us what is on that exhibit?
A. This is just a count of the number of records in the
computer files that we assembled to work with in
building our statistical model. Again, these are basically
computerized doctors’ bills over this time period of
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1978-1996. And for the State of Minnesota we assembled
~ 224 million records, and for Blue Cross Blue Shield of
Minnesota we looked through 60 million records, and in
these records we found more than 90,000 people who
were being treated for one of the major smoking-
attributable diseases.
Q. And how did you determine the 90,000 Minnesotans
who were treated for major smoking-attributable diseases
in these records?
A. We used ICD-9 codes and some rules that were
developed by Dr. Samet.
Id. at p. 5322,1. 10-p: 5323,1. 7.
The damages sought by the State were built on the
aggregated records of the class members’ medical treatment--
claims in which the same class members have a “joint
interest” and for which they would seek compensation from
the tobacco companies--if the State had not settled those
claims. During trial, Dr. Wyant testified as to how the
aggregation or grouping of the individual claims worked.
Q. If we could have on the Elmo Trial Exhibit 30153,
which has been previously admitted. Is that the list
provided to you by Dr. Samet--
A. Yes, it is.
Q. --of the diseases caused by smoking and their ICD-9
code numbers?
A. Yes.
Q. And can you identify those for the record, please.
A. These are the major smoking-attributable diseases,
and after each disease or set of diseases are ICD-9 codes.
So it starts with atherosclerosis, the ICD-9 codes 440 or
441, and 444; bladder cancer is code 188:
cerebrovascular disease or stroke, 342 and 430 to 438:
chronic obstructive pulmonary disease or COPD is 491 to
492 and 496; coronary heart disease, 410 to 414, 425.
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hi bbeline hs
427 to 428; esophageal cancer, 150; kidney cancer, 189;
laryngeal cancer, 161; lung cancer, 162; oral cancer, 140
to 141 and 143 to 14°. pancreatic cancer, 157; peptic
ulcer disease, 531 to 533; and diminished health
Status/respiratory morbidity and mortality, including
respiratory infections, 460, 464 to 466 and 480 to 486.
Q. Now are those code numbers found in the manual
that you just identified?
A. Yes.
Q. And in fact that’s where those numbers were taken
from, is that right?
A. That’s correct.
Q. Dr. Wyant, could you give us an example of what a
claims record looks like for an individual on GAMC.
And with the court’s permission, come down and use the
flip chart.
A. Well, this is just an example of the--the kind of
information you see in a claims record and the kinds of
things we look at when we do printouts to check and
make sure we have a good understanding of this
information.
I'll give an example from the GAMC program, a man 51
years old. Against, this is the kind of information we get
off the system.
We've taken out any I.D. information, but we do know
what their gender is and how old they are, although we
did take off the actual birth date.
The date in these claims records, they do come in the
form of these ICD-9 codes, and one you may see in these
claims is like a 786.5.
The codes you see up on the Elmo are all to three digits.
The classification system can really go finer than that,
and so when you see the actual codes on the computer,
they'll actually have another digit attached to them. And
this is a code for chest pain. And this is not a real person
I'm writing up here, but these are generally the kinds of
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dollars and diseases that--that we would typically see in
our work.
You know that is chest pain by either looking it up in that
manual, if you’re doing it by hand, or you use versions--
what we did was use versions of that manual that are on
the computer, so when we saw 786.5, that was translated
into chest pain for us so we could see what was
happening. 2
Then the next things you might see is 162.9 in the kinds
of claims we’re looking at, which is a lung cancer.
Again, this is one of the 162 codes that you see up in the
Elmo. Lung cancer is 162, and point one, point two,
point three they use for different sites of lung cancer in
the lung. And this cost, we see substantial dollars
associated with that code.
And another thing we see in these records is what’s
happening. In this case the person went to the hospital.
And to give you--as I go through these with Dr. Samet, |
try to get, and any biostatistician tries to get, kind of a
general, common-sense understanding of what's going on
here, and the kind of understanding that I developed,
what typically goes on in these records is that here’s a
person that comes in with chest pain, and then it turns out
the diagnosis, what was causing that chest pain, is lung
cancer. As the person gets out of the hospital, you're
likely to see a different kind of code, one Starting with a
V, a V72.5, and that would be a code for a routine X-ray
exam. Might only cost fifty doilars. Then something
you see not uncommonly is these records might be 998.5,
Post operative complication, which against might cause
the person to have to go back into the hospital for
treatment. Could easily cost a couple thousand dollars.
And another thing you see a lot in the records is
prescription drugs, and particularly you see a lot of
prescription drugs where there’s serious illnesses like
this, and that might be five hundred dollars. Not be
A-47
unusual for several months for person like this. Now
there is no ICD-9 code for prescription drugs. The
reason for that is generally people go to their pharmacist
to get prescription drugs and the pharmacist doesn’t fill
in ICD-9 codes for diagnoses, so you don’t typically see
any codes for prescription drugs in the system.
And then another code you might typically see in a
sequence like this for a person is something like a V58.0,
that’s for radiation therapy, or a V58.1, which is
chemotherapy. Generally those sessions are a little more
expensive. And you might see a V70.8, which is a
general medical exam for a hundred dollars. All of these
things, again, just speaking of my general understanding
from--from talking with Dr. Samet and getting a
common-sense picture of what goes on in these records
and how to deal with them in a statistical model.
Of course this is very common-sensical. You have an
operation, may have complications, you got prescription
drugs, couple of other problems, and of course the cancer
radiation and chemotherapy are standard courses of
treatment. And then as time goes on, might see
something like this, 844.9, this is just a leg and knee
sprain, maybe a doctor’s visit for a hundred bucks, and
then you might see something like this,-724.5 for a
backache, and then you might see 198.5, secondary bond
cancer. See a lot of these with the lung cancer claims just
going through the data. It costs a lot to treat. And again
this could be just as when_a person comes in, they have
chest pain and then it’s diagnosed as lung cancer--some
of these orthopedic problems like backache could be the
first signs of the secondary bone cancer. And then after
this you can sometimes see a code like this 733.1. That’s
a code for pathological fracture, and that’s where the
cancer invades the bone, the bones become weak and the
bones start breaking. And then you see another thing
that’s contained in claims data: person typically dies, for
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a patient like this. And there are a couple aspects of this
that are important for understanding the statistical
analysis. This one is oversimplified, because there are
dates on these and--and usually you wouldn’t see just this
many services. You can kind of think that every time I
wrote a line here, you're going to see several illness in
the computer record with different dates. For example,
you wouldn't typically have just one chemotherapy
session. You see in these records a person like this
would be going in for visits and hospital stays just over
and over and over against over many weeks. But I’ve
just given one line a piece here.
Another aspect of this that’s -- that’s important for
Statistical modeling is that only one of these codes
appears on the chart up there, just that one.
Q. Which one is that, doctor?
A. That is 162.9, lung cancer. Now as you look through
all the things that are happening to this person, and if you
sit down as I did with Dr. Samet, it’s pretty clear that if
you walked into this just as a statistician and say, well, I
know how to get all the lung cancers out of the
Minnesota claims data, I'll just look for codes 162, and if
you did that in this person, for example, well you’d miss
the chest pain, which may be the first sign of the lung
cancer, you'd miss the follow-up x-ray exam because that
doesn’t have a 162, you’d miss the post-op complications
and you'd miss any of the prescription drugs that are
related to the lung cancer and what's going on, because
over in this ICD-9 code you're not seeing a 162 code.
And then you'd miss the radio-therapy, which is the V58,
you'd miss the chemotherapy, and you'd miss the general
follow-up medical exam.
Now the knee and leg sprain we'll talk about a little later
when we talk about the third reduction. Maybe that one’s
Okay in this. Backache, well no. It could be related to
the secondary bone cancer, but we missed that. We
A-49
certainly missed the secondary bone cancer, that’s a
198.5 and that’s not a 162. And we’d miss the
pathological fracture. So part of doing the statistical
modeling and using this data in a in a common-sensical
way is to make sure that we don’t go into it and miss all
these things when we’re trying to look, for example, at
smoking-attributable expenditures due to lung cancer.
The other aspect of this that’s fairly typical for a GAMC
claim is that we’re basically not seeing the person until |
they have lung cancer, and the majority of the GAMC
claims for lung cancer are like that. , And again, my
understanding talking from administrators in the program
as -- as well as looking at the claims data, that a typical
situation is there will be someone who doesn’t have
much financial resources but is getting along okay, and
then all of a sudden they’re hit with all this stuff. And if
they didn’t--if their resources were low enough to begin
with, once they start having these bills, it’s likely that
they can qualify for General Assistance Medicare--
Medical Care in order to pay for this sequence of
treatments.
Id. at p. 5340,1. 2-p. 5348,1. 1.
Based upon the sworn testimony identifying and
analyzing the treatment of the plaintiffs now before this Court
the State of Minnesota demanded damages of $1.3 billion:
Q. [What is the estimate for the smoking-attributable
expenditure for the State of Minnesota during the period
1978-1996?
A. That estimate is $1.31 billion, or as is stated here,
$1,310 million dollars.
Id. at p. 5428,1. 13-17.
During discovery, the tobacco litigation trial court
ordered the State to identify, by name, a list of persons the
State claimed were current or former smokers, who had
A-50
smoking attributable illnesses requiring medical care paid for
by the State and produce some of them for depositions.
* * * * *
A-51
Excerpt from Petitioner Brown’s Tobacco Trial Deposition
Transcript.
STATE OF MINNESOTA DISTRICT COURT
COUNTY OF RAMSEY SECOND JUDICIAL DISTRICT
THE STATE OF MINNESOTA,
BY HUBERT H. HUMPHREY, III
ITS ATTORNEY GENERAL,
PLAINTIFFS,
VS. FILE NO. C1-94-8565
PHILIP MORRIS INCORPORATED, R.J. REYNOLDS
TOBACCO COMPANY, BROWN & WILLIAMSON
TOBACCO CORPORATION, B.A.T. INDUSTRIES P.L.C.,
LORILLARD TOBACCO COMPANY, THE AMERICAN
TOBACCO COMPANY, LIGGETT GROUP, INC., THE
COUNCIL FOR TOBACCO RESEARCH-U.S.A., INC.,
AND THE TOBACCO INSTITUTE, INC.,
DEFENDANTS.
DEPOSITION OF
JESSE BROWN
March 11, 1997
9:43 a.m.
REPORTED BY:
JENNIFER S. SATI, RPR, CRR
RAY J. LERSCHEN & ASSOCIATES
620 PLYMOUTH BUILDING
MINNEAPOLIS, MINNESOTA 55402
A-52
DEPOSITION OF JESSE BROWN, taken at the Law
Offices of Dorsey & Whitney, Pillsbury Center South, 220
South Sixth Street, Minneapolis, Minnesota, on the 11" day
of March, 1997, commencing at 9:43 a.m., before Jennifer S.
Sati, Notary Public, Registered Professional Reporter and
Certified Realtime Reporter.
* * * *
APPEARANCES
On Behalf of the Plaintiffs:
Robins, Kaplan, Miller & Ciresi
2800 LaSalle Plaza
800 LaSalle Avenue
Minneapolis, Minnesota 55402
BY: Kathleen Flynn Peterson
On Behalf of Lorillard Tobacco Company:
Shook, Hardy & Bacoa
One Kansas City Place
1200 Main Street
Kansas City, Missouri 64105-2118
BY: Jeffrey S. Nelson
Doherty, Rumble & Butler
2800 Minnesota World Trade Center
30 East Seventh Street
St. Paul, Minnesota 55101-4999
BY: Howard Roston
A-53
INDEX
EXAMINATION BY: PAGES
MR. NELSON 4
MS. FLYNN PETERSON 112
FURTHER EXAMINATION BY: 130
* * * * *
EXHIBIT INDEX
EXHIBIT NUMBER PAGE MARKED
1 A Frank Statement to Cigarette Smokers 73
~ * * * *
A-54
— a
STATE OF MINNESOTA DISTRICT COURT
COUNTY OF RAMSEYSECOND JUDICIAL DISTRICT
THE STATE OF MINNESOTA, Case Type: Other Civil
BY HUBERT H. HUMPHREY III, Court File No.
ITS ATTORNEY GENERAL, C1-94-8565
and
BLUE CROSS AND BLUE SHIELD
OF MINNESOTA,
Plaintiffs,
VS.
PHILIP MORRIS INCORPORATED,
R.J. REYNOLDS TOBACCO COMPANY,
BROWN & WILLIAMSON TOBACCO
CORPORATION, B.A.T. INDUSTRIES
P.L.C., BRITISH-AMERICAN TOBACCO
COMPANY LIMITED, BAT (U.K. &
EXPORT) LIMITED, LORILLARD
TOBACCO COMPANY, THE AMERICAN
TOBACCO COMPANY, LIGGETT GROUP.
INC., THE COUNCIL FOR TOBACCO
RESEARCH-U.S.A., INC., and THE
TOBACCO INSTITUTE, INC.,
_
Defendants.
A-55
SETTLEMENT AGREEMENT AND STIPULATION
FOR ENTRY OF CONSENT JUDGMENT
THIS SETTLEMENT AGREEMENT AND RELEASE
(“Setthement Agreement’) is made as of the date hereof by
and among the parties hereto, as indicated by their signatures
below, to settle and resolve with finality all claims of the
State of Minnesota relating to the subject matter of this action
which have been or could have been asserted by the State of
Minnesota.
WHEREAS, the State of Minnesota, through its Attorney
General Hubert H. Humphrey III, and Blue Cross and Blue
Shield of Minnesota, commenced this action on August 17,
1994, asserting various claims for monetary, equitable and
injunctive relief on behalf of the State of Minnesota and Blue
Cross and Blue Shield of Minnesota against certain tobacco
manufacturers and others as Defendants;
WHEREAS, the Defendants have denied each and every
one of Plaintiffs’ allegations of unlawful conduct or
wrongdoing and have asserted a number of defenses to
Plaintiffs’ claims, which defenses have been contested by
Plaintiffs;
WHEREAS, the parties hereto wish to avoid the further
expense, delay, inconvenience, burden and uncertainty of
continued litigation of this matter (including appeals from any
verdict), the State of Minnesota and the Settling Defendants
have agreed to settle this litigation pursuant to terms which
will-achieve for the State of Minnesota (and thus for the
people of the State of Minnesota) significant funding for the
advancement of public health, the implementation § of
important tobacco-related public health measures in
Minnesota, as well as funding for national research dedicated
to studying and significantly reducing the use of Tobacco
Products by youth;
WHEREAS, the State of Minnesota and Settling
Defendants have agreed to settle this lawsuit on terms set
A-56
forth in this Settlement Agreement and Stipulation for Entry
of Consent Judgment and the attached Consent Judgment;
WHEREAS, the parties have further agreed to jointly
petition the Court for approval of the Consent Judgment, on
the grounds that settlement would be in the public interest;
NOW, THEREFORE, BE IT KNOWN THAT, in
consideration of the payments to be made by the Settling
Defendants, the dismissal and release of claims by the State
of Minnesota and such other consideration as described
herein, the sufficiency of which is hereby acknowledged, the
parties hereto, acting by and through their authorized agents,
memorialize and agree as follows:
I. GENERAL PROVISIONS
A. Jurisdiction. The State and the Settling Defendants
acknowledge that this Court has jurisdiction over the subject
matter of this action and over each of the parties to this
Settlement Agreement, and that this Court shall retain
jurisdiction for the purposes of implementing and enforcing
this Settlement Agreement. The parties hereto 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. The Court may, upon the State's application, enter a
Consent Judgment in the form attached hereto as Exhibit A.
The cumulative terms of this Settkement Agreement and
Supulation for Entry of Consent Judgment, and the attached
Consent Judgment, may be referred to for convenience as this
“Agreement” or “Settlement Agreement.”
B. Voluntary Agreement of the Parties. The State and
the Settling Defendants acknowledge and agree that this
Settlement Agreement is voluntarily entered into by all parties
hereto as the result of arm’s-length negotiations during which
all such parties were represented by counsel. The State and
Settling Defendants understand that Congress may enact
A-S7
legislation dealing with some of the issues addressed in this
Agreement. Settling Defendants and their assigns, affiliates,
“agents, and successors hereby waive any right to challenge
this Agreement or the Consent Judgment, directly or through
third parties, on the ground that any term hereof is
unconstitutional, outside the power or jurisdiction of the
Court, preempted by or in conflict with any current or future
federal legislation (except where non-economic terms of
future federal legislation arc irreconcilable).
C. Definitions.
For the purposes of this Settlement Agreement and
attached Consent Judgment, the following terms shall have
the meanings set forth below:
1. “State” or “State of Minnesota” means the
State of Minnesota acting by and through its Attorney
General;
2. “Blue Cross” means BCBSM, Inc., d/b/a Blue
Cross and Blue Shield of Minnesota, and all of its
administrators, representatives, employees, directors,
officers, agents, attorneys, parents and divisions;
3. “Settling Defendants” means those Defendants
in this action that are signatories hereto;
4. “Defendants” means Philip Mortis
Incorporated, R.J. Reynolds Tobacco Company, Brown
& Williamson Tobacco Corporation, B.A.T Industries
P.L.C., British-American Tobacco Company Limited,
BAT (UK and Export) Limited, Lorillard Tobacco
Company, The American Tobacco Company, The
Council for Tobacco Research-U.S.A, Inc., and the
Tobacco Institute, Inc. and their successors and assigns;
5. “Consumer Price Index” shall mean _ the
Consumer Price Index for All Urban Consumers, for the
most recent twelve-month period for which such
A-58
percentage information is available as published by the
Bureau of Labor Statistics of the U.S. Department of
Labor.
6. “Court” means the District Court of the State of
Minnesota, County of Ramsey, Second Judicial District;
7. “Market Share” means a Settling Defendant's
respective share of sales of cigarettes by unit for
consumption in the United States during (i) with respect
to payments made pursuant to Paragraph IID. of this
Settlement Agreement, the calendar year ending on the
date on which the payment at issue is due, regardless of
when such payment is made, and (ii) with respect to all
ether payments made pursuant to this Settlement
Agreement, the calendar year immediately preceding the
year in which the payment at issue is due, regardless of
when such payment is made;
8. “Cigarettes” means any product which contains
nicotine, is intended to be burned or heated under
ordinary conditions of use, and consists of or contains (i)
any roll of tobacco wrapped in paper or in any substance
not containing tobacco; or (ii) tobacco, in any form, that
is functional in the product, which, because of its
appearance, the type of tobacco used in the filler, or its
packaging and labeling, is likely to be offered to, or
purchased by, consumers as a cigarette; or (iii) any roll of
tobacco wrapped in any substance containing tobacco
which, because of its appearance, the type of tobacco
used in the filler, or its packaging and labeling, is likely
to be offered to, or purchased by, consumers as a
cigarette described in subparagraph (i) of this paragraph;
9. “Smokeless Tobacco” means any powder that
consists of cut, ground, powdered, or leaf tobacco that
contains nicotine and that is intended to be placed in the
oral cavity;
10. “Tobacco Products” means Cigarettes and
Smokeless Tobacco;
A-59
11. “Billboards” includes billboards, as well as all
signs and placards in arenas and stadiums, whether open-
air or enclosed. “Billboards” does not include (1) any
advertisements placed on or outside the premises of retail
establishments which sell tobacco products, or any retail
point-of-sale; and (2) billboards or advertisements in
connection with the sponsorship by the Defendants of
any entertainment, sporting or similar event, such as
NASCAR, that appears in the State of Minnesota as part
of a national or multi-state tour;
12. “Children” or “youth” means persons under the
age of 18;
13. “Depository,” unless otherwise _ specified,
means the Minnesota document depository established by
the Court’s Order dated June 16, 1995. “Depositories”
includes both the Minnesota depository and _ the
Guildford, U.K. document depository established by the
Court’s Order dated September 6, 1995;
14. “Transit Advertisements” means advertising on
private or public vehicles and all advertisements placed
at, on or within any bus stop, taxi stand, waiting area,
train station, airport or any similar location. “Transit
Advertisements” does not include any advertisements
placed on or outside the premises of retail establishments
licensed to sell Tobacco Products or any retail point-of-
sale;
15. “Special State Counsel” means Robins, Kaplan,
Miller & Ciresi L.L.P. or a successor, if any; and
16. “Final Approval” means the date on which this
Settlement Agreement and the form of State Escrow
Agreement are approved by the Court. At the time of
such approval, the settlement between the parties is final.
A-60
Il. SETTLEMENT PAYMENTS
A. Settlement Receipts. The payments to be made by
the Settling Defendants under this Settlement Agreement are
in satisfaction of all of the State of Minnesota’s claims for
damages incurred by the State in the year of such payment or
earlier years related to the subject matter of this action,
including, without limitation, claims for equitable and
injunctive relief, claims for health care expenditures and
claims for punitive damages, except that no part of any
payment under this Settlement Agreement is made in
settlement of an actual or potential liability for a fine, penalty
(civil or criminal) or enhanced damages.
B. Settlement Payments to the State of Minnesota. Each
Settling Defendant severally shall cause to be paid to an
account designated in writing by the State of Minnesota in
accordance with and subject to paragraph II.E. of this
Settlement Agreement, the following amounts: the amount
listed for it in Schedule A hereto, such amount representing
its share of $240,000,000, to be paid on or before September
5, 1998; pro rata in proportion to its Market Share, its share of
$220,800,000, to be paid on or before January 4, 1999; pro
rata in proportion to its Market Share, its share of
$242,550,000, to be paid on or before January 3, 2000; pro
rata in proportion to its Market Share, its share of
$242,550,000, to be paid on or before January 2, 2001; pro
fata in proportion to its Market Share, its share of
$242,550,000, to be paid on or before January 2, 2002; and
pro rata in proportion to its Market Share, its share of
$121,550,000, to be paid on or before January 2, 2003. The
payments made by the Settling Defendants pursuant to this
Paragraph shall be adjusted upward by the greater of 3% or
the Consumer Price Index applied each year on the previous
year, beginning with the payment due to be made on or before
January 3, 2000. The payments due to be made by the
Settling Defendants pursuant to this Paragraph on or before
A-61
January 3, 2000, on or before January 2, 2001, on or before
January 2, 2002, and on or before January 2, 2003, will also
be decreased or increased, as the case may be, in accordance
with the formula for adjustments of payments as set forth in
Appendix A. The payments due to be made by the Settling
Defendants pursuant to this Paragraph on or before September
5, 1998, and on or before January 4, 1999, shall not be subject
to inflation escalation and volume adjustments described in
the preceding sentences.
In the event that any of the Settling Defendants fails to
make any payment required of it pursuant to this Paragraph (a
“Defaulting Defendant”) by the applicable date set forth in
this paragraph II.B. (a “Missed Payment’), the State of
Minnesota shall provide notice to each of the Settling
Defendants of such non-payment. The Defaulting Defendant
shall have 15 days after receipt of such notice to pay the
Missed Payment, together with interest accrued from the
original applicable due date at the prime rate as published in
the Wall Street Journal on the latest publication date on or
before the date of default plus 3%. If the Defaulting
Defendant does not make such payment within such 15-day
period, the State of Minnesota shall provide notice to each of
the Settling Defendants of such continued non-payment. Any
or all of the Settling Defendants (other than the Defaulting
Defendant) shall thereafter have 15 days after receipt of such
notice to elect (in such Settling Defendant's or such Settling
Defendants’ sole and absolute discretion) to pay the Missed
Payment, together with interest accrued from the original
applicable due date at the prime rate as published in the Wall
Street Journal on the latest publication date on or before the
date of default plus 3%. In the event that the State of
Minnesota does not receive the Missed Payment, together
with such accrued interest, within such additional 15-day
period, all payments required to be made by each of the
respective Settling Defendants pursuant to this Paragraph
shall at the end of such additional 15-day period be
A-62
accelerated and shall immediately become due and owing to
the State of Minnesota from each Settling Defendant pro rata
in proportion to its Market Share; provided, however, that any
such accelerated payments (a) shall all be adjusted upward by
the greater of (i) the rate of 3% per annum or (11) the actual
total percent change in the CPI, in either instance for the
period between January 1 of the year in which the
acceleration of payments pursuant to this Paragraph occurs
and the date on which such accelerated payments are due
pursuant to this subsection, and (b) shall all immediately be
- adjusted in accordance with the formula for adjustments of
payments set forth in Appendix A.
Nothing in this Paragraph shall be deemed under any
circumstance to create any obligation on the part of any
Settling Defendant to pay any amount owed or payable to the
State of Minnesota by any other Settling Defendant. All
obligations of the Settling Defendants pursuant to this
Paragraph are intended to be and shall remain several, and not
joint.
C. Public Health Foundation. The Attorney General will
propose, and the Settling Defendants have agreed not to
oppose, that the Legislature appropriate to a foundation one-
half the payments due in September 1998, and in January of
the years 1999 through 2003, to be used for such activities as
the directors of the foundation may determine will diminish
the human and economic consequences of tobacco use. It is
contemplated that the directors of the foundation will include
public representatives, and representatives of such groups as
the American Lung Association, Minnesota Chapter, the
University of Minnesota School of Public Health; the
Minnesota SmokeFree 2000 Coalition; the American Cancer
Society, Minnesota Division; the American Heart
Association, Minnesota Chapter, the Association for Non-
Smokers’ Rights--Minnesota; and the Mayo Clinic Nicotine
Dependence Center.
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D. Annual Payments. Each of the Settling Defendants
agrees that, beginning on December 31, 1998, and annually
thereafter on December 31st of each year after 1998 (subject
to final adjustment within 30 days), it shall severally cause to
be paid to an account designated in writing by the State of
Minnesota in accordance with and subject to paragraph 17.E.
of this Setthement Agreement, pro rata in proportion to its
respective Market Share, its share of 2.55% of the following
amounts (in billions):
there-
Year 1998 1999 2000 2001 2002 2003 ter
a ee
Amount $4B $4.5B $5B $6.5B $6.5B $8B $8B
The payments made by Settling Defendants pursuant to this
Paragraph shall be adjusted upward by the greater of 3% or
the Consumer Price Index applied each year on the previous
year, beginning with the annual payment due on December
31, 1999. Such payments will also be decreased or increased,
as the case may be, beginning with the annual payment due
on December 31, 1999, in accordance with the formula for
adjustments of payments set forth in Appendix A.
E. Payment of Settlement Proceeds. Any payment made
pursuant to this Settlement Agreement shall be made to an
account designated in writing by the State of Minnesota or the
Court, as applicable; provided that after Final Approval, if the
Court’s approval is challenged by any third party, payments
due to be made shall be paid into a special escrow account
(the “State Escrow Account’), and held in escrow pursuant to
this Section V.B. and the State Escrow Agreement.
F. Adjustments in Event of Federal Legislation. The
enactment of federal tobacco-related legislation shall not
affect the payments required by this Agreement except as
follows:
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1. If federal tobacco-related legislation providing
for the resolution or other disposition of State Attorney
General actions brought against tobacco companies is
enacted on or before November 30, 2000. and if such
legislation provides for payments) by tobacco companies
(whether by settlement payment, tax or any other means),
all or part of which is made available to States, the State
of Minnesota shall elect to receive any funds that are (i)
unrestricted as to their use, or (ii) are restricted to any
form of health care or to any use related to tobacco
(collectively “Federal Settlement Funds”), and Settling
Defendants shall receive a dollar-for-dollar offset up to
the full amount of payments required under Section II.D
of this Agreement for any and all Settlement Funds
received by the State of Minnesota, until all Federal
Settlement Funds provided however:
a. There shall be no offset to payments
required by this Agreement on account of any
federal program, subsidies, payments, credits or
other aid to the State which are not conditioned or
tied to the settlement of a state tobacco-related suit
or the relinquishment of state tobacco-related claims;
b. The State relinquishes no rights or benefits
under this Agreement except for payments subject to
the offset;
c. There are no_ federally imposed
preconditions to the receipt of Federal Settlement
Funds other than (i) the settlement of any state
tobacco-related lawsuit or the relinquishment of state
tobacco-related claims, (ii) actions or expenditures
related to tobac
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