To be Argued by: HENRY M. GREENBERG, ESQ. (Time Requested: 20 Minutes) APL-2017-00150 Appellate Division Case No. 523308 Court of Appeals of the State of New York In the Matter of the Application of LEADINGAGE NEW YORK, INC., NEW YORK STATE HEALTH FACILITIES ASSOCIATION, INC., et al., Appellants-Respondents, - against - NIRAV SHAH, in his official capacity as Commissioner of the New York State Department of Health and ANDREW CUOMO, as Governor of the State of New York, Respondents-Appellants. For a Hybrid Action pursuant to CPLR Article 78 and for a Declaratory Judgment. (For a continuation of caption, see inside covers.) BRIEF FOR APPELLANTS-RESPONDENTS COALITION OF NEW YORK STATE PUBLIC HEALTH PLANS, ET AL. GREENBERG TRAURIG LLP HENRY M. GREENBERG, ESQ. HAROLD N. ISELIN, ESQ. 54 State Street, 6th Floor Albany, New York 12207 Tel.: (518) 689-1400 Fax: (518) 689-1499 Attorneys for Appellants-Respondents Coalition of New York State Public Health Plans, et al. Dated: December 18, 2017 MANNATT, PHELPS & PHILLIPS, LLP JAMES W. LYTLE, ESQ. 136 State Street, Suite 300 Albany, New York 12207 Tel.: (518) 431-6700 Fax: (518) 431-6767 O’MELVENY & MYERS LLP ANDREW J. FRACKMAN, ESQ. ABBY F. RUDZIN, ESQ. Times Square Tower 7 Times Square New York, New York 10036 Tel.: (212) 326-2600 Fax: (212) 326-2061 _________________________________________________________________________ In the Matter of the Application of COALITION OF NEW YORK STATE PUBLIC HEALTH PLANS, NEW YORK STATE COALITION OF MANAGED LONG TERM CARE/PACE PLANS and NEW YORK HEALTH PLAN ASSOCIATION, INC., Appellants-Respondents, - against - NEW YORK STATE DEPARTMENT OF HEALTH and NIRAV R. SHAH, M.D., M.P.H., as Commissioner of The New York State Department of Health, Respondents-Appellants. _____________________________________________ In the Matter of the Application of LEADINGAGE NEW YORK, INC., NEW YORK STATE HEALTH FACILITIES ASSOCIATION, INC., SOUTHERN NEW YORK ASSOCIATION, INC., GREATER NEW YORK HEALTH CARE FACILITIES ASSOCIATION, INC., EMPIRE STATE ASSOCIATION OF ASSISTED LIVING, INC., HOME CARE ASSOCIATION OF NEW YORK STATE, A. HOLLY PATTERSON EXTENDED CARE FACILITY, AARON MANOR REHABILITATION AND CONTINUING CARE CENTER, ABSOLUT CENTER FOR NURSING AND REHABILITATION AT ALLEGANY LLC, ABSOLUT CENTER FOR NURSING AND REHABILITATION AT AURORA PARK LLC, ABSOLUT CENTER FOR NURSING AND REHABILITATION AT DUNKIRK LLC, ABSOLUT CENTER FOR NURSING AND REHABILITATION AT EDEN LLC, ABSOLUT CENTER FOR NURSING AND REHABILITATION AT ENDICOTT LLC, ABSOLUT CENTER FOR NURSING AND REHABILITATION AT GASPORT LLC, ABSOLUT CENTER FOR NURSING AND REHABILITATION AT HOUGHTON LLC, ABSOLUT CENTER FOR NURSING AND REHABILITATION AT SALAMANCA LLC, ABSOLUT CENTER FOR NURSING AND REHABILITATION AT THREE RIVERS LLC, ABSOLUT CENTER FOR NURSING AND REHABILITATION AT WESTFIELD LLC, ACHIEVE REHABILITATION AND NURSING FACILITY, ADIRONDACK MANOR HOME FOR ADULTS, AUBURN NURSING HOME, AVALON ASSISTED LIVING AND WELLNESS CENTER, AVON NURSING HOME LLC, BAINBRIDGE NURSING AND REHABILITATION CENTER, BARNWELL NURSING AND REHABILITATION CENTER, BAYBERRY CARE CENTER, BEECH TREE CARE CENTER, BELAIR CARE CENTER, BLOSSOM HEALTH CARE CENTER INC., BLOSSOM VIEW NURSING HOME, BORO PARK CENTER FOR REHABILITATION AND HEALTH CARE, BRIARWOOD MANOR INC., BRIDGEWATER CENTER FOR REHABILITATION AND NURSING, THE BRIGHTONIAN, BRIODY HEALTH CARE FACILITY, BRONX CENTER FOR REHABILITATION AND HEALTHCARE, BROOKLYN - QUEENS NURSING HOME, BROOKLYN ADULT CARE CENTER, BROOKLYN CENTER FOR REHABILITATION AND HEALTH CARE, BUSHWICK CENTER FOR REHABILITATION AND HEALTH CARE, CAMILLUS RIDGE TERRACE, CAPITAL LIVING NURSING AND REHABILITATION CENTRE, CAPSTONE CENTER FOR REHABILITATION AND NURSING, CARILLON NURSING AND REHABILITATION CENTER, CEDAR MANOR NURSING AND REHABILITATION CENTER, CENTRAL ASSISTED LIVING, LLC, CENTRAL PARK REHABILITATION AND NURSING CENTER, CHESTNUT PARK REHABILITATION AND NURSING CENTER, CHITTENANGO CENTER FOR REHABILITATION AND HEALTH CARE, CLIFFSIDE REHABILITATION AND RESIDENTIAL HEALTH CARE CENTER, CLOVE LAKES HEALTH CARE AND REHABILITATION CENTER INC., COLD SPRING HILLS CENTER FOR NURSING AND REHABILITATION, COLONIAL PARK REHABILITATION AND NURSING CENTER, CONESUS LAKE NURSING HOME, CORNING CENTER FOR REHABILITATION AND HEALTH CARE, CORTLAND PARK REHABILITATION AND NURSING CENTER, CORTLANDT HEALTHCARE, COUNTRY MANOR NURSING AND REHABILITATION CENTRE, CRESTVIEW MANOR ALP, THE CROSSINGS NURSING AND REHABILITATION CENTRE, CROWN NURSING AND REHABILITATION CENTER, DAUGHTERS OF JACOB NURSING HOME COMPANY INC., DR. WILLIAM O. BENENSON REHABILITATION PAVILLION, DUTCHESS CARE, DUTCHESS CENTER FOR REHABILITATION AND HEALTHCARE, EAST HAVEN NURSING AND REHABILITATION CENTER, EAST NECK NURSING AND REHABILITATION CENTER, ELANT, INC., ELCOR NURSING AND REHABILITATION CENTER, THE ELIOT AT ERIE STATION, ELM MANOR NURSING HOME, ELMHURST CARE CENTER, ELM YORK, LLC, EPISCOPAL SENIORLIFE COMMUNITIES, EVERGREEN COMMONS, FAWN RIDGE ASSISTED LIVING, FLUSHING MANOR CARE CENTER INC., FLUSHING MANOR NURSING AND REHABILITATION INC., FOREST VIEW CENTER FOR REHABILITATION AND NURSING, FOUR SEASONS NURSING AND REHABILITATION CENTER, FRIEDWALD CENTER FOR REHABILITATION AND NURSING, FULTON CENTER FOR REHABILITATION AND HEALTH CARE, GLEN COVE CENTER FOR NURSING AND REHABILITATION, GOLD CREST CARE CENTER, GOWANDA REHABILITATION AND NURSING CENTER, GRAND MANOR NURSING AND REHABILITATION CENTER, HARBOR TERRACE ASSISTED LIVING PROGRAM, HEDGEWOOD HOME FOR ADULTS, HIGHLAND NURSING HOME INC., HIGHLAND PARK REHABILITATION AND NURSING CENTER, HILAIRE REHABILITATION AND NURSING, HILLSIDE MANOR REHABILITATION AND EXTENDED CARE CENTER LLC, HOLLIS PARK MANOR NURSING HOME INC., HOLLISWOOD CARE CENTER, HORIZON CARE CENTER, HORNELL GARDENS, HUDSON PARK REHABILITATION AND NURSING CENTER, HUDSON POINTE AT RIVERDALE CENTER FOR NURSING AND REHABILITATION, HUDSON VALLEY REHABILITATION AND EXTENDED CARE CENTER, HUNTINGTON HILLS CENTER FOR HEALTH AND REHABILITATION, THE HURLBUT, INDIAN RIVER REHABILITATION AND NURSING CENTER, KINGS HARBOR MULTICARE CENTER, KINGSBRIDGE HEIGHTS REHABILITATION AND CARE CENTER, KINGSWAY ARMS NURSING CENTER INC., LAKEVIEW REHABILITATION AND CARE CENTER, L’DOR ADULT HOME, LUTHERAN CARE CENTER AT CONCORD VILLAGE, LUTHERAN SOCIAL SERVICES GROUP, INC., MADISON YORK REGO PARK, LLC, MADISON YORK ASSISTED LIVING COMMUNITY, LLC, THE MAPLEWOOD NURSING AND REHABILITATION, MARQUIS REHABILITATION AND NURSING CENTER, MEADOWBROOK HEALTHCARE, MIDDLETOWN PARK REHABILITATION AND HEALTH CARE CENTER, MILLS POND NURSING AND REHABILITATION CENTER, MOHEGAN PARK HOME FOR ADULTS, MONTGOMERY NURSING AND REHABILITATION CENTER, MORNINGSIDE HOUSE NURSING HOME COMPANY, INC., MORRIS PARK NURSING HOME, MOSHOLU PARKWAY NURSING AND REHABILITATION CENTER, MOUNTAIN VIEW NURSING AND REHABILITATION CENTRE, NESCONSET CENTER FOR NURSING AND REHABILITATION, NEW MONSEY PARK HOME FOR ADULTS, NEW ROCHELLE HOME FOR ADULTS, NEW VANDERBILT REHABILITATION AND CARE CENTER, NEWARK MANOR NURSING HOME, NIAGARA REHABILITATION AND NURSING CENTER, OAK HILL MANOR NURSING HOME, OAK HOLLOW NURSING CENTER, OCEANVIEW MANOR HOME FOR ADULTS, THE ORCHARD NURSING AND REHABILITATION CENTRE, PALATINE NURSING HOME, PALISADE GARDENS HOME FOR ADULTS, PARKER JEWISH INSTITUTE FOR HEALTH CARE AND REHABILITATION, PARKVIEW HOME FOR ADULTS, PENFIELD PLACE LLC, PETITE FLEUR NURSING HOME, PINE VALLEY CENTER FOR REHABILITATION AND NURSING, THE PINES AT GLENS FALLS CENTER, THE PINES AT POUGHKEEPSIE CENTER, THE PINES AT UTICA CENTER, PINEVIEW COMMONS ALP LLC, PONTIAC CARE AND REHABILITATION CENTER, PORT JEFFERSON REHABILITATION AND NURSING, PUTNAM RIDGE, QUEENS ADULT CARE CENTER, QUEENS CENTER FOR REHABILITATION AND HEALTH CARE, RAMAPO MANOR CENTER FOR REHABILITATION AND NURSING, REGAL HEIGHTS REHABILITATION AND HEALTH CARE CENTER, REGEIS CARE CENTER, RENAISSANCE REHABILITATION AND NURSING CARE CENTER D/B/A HYDE PARK NURSING HOME, RICHMOND CENTER FOR REHABILITATION AND HEALTH CARE, RIVER RIDGE LIVING CENTER, RIVERSIDE CENTER FOR REHABILITATION AND NURSING, RIVERVIEW MANOR HEALTH CARE CENTER, ROME CENTER FOR REHABILITATION AND HEALTH CARE, ROSS HEALTH CARE CENTER, SANS SOUCI REHABILITATION AND NURSING CENTER, SEA CREST HEALTH CARE CENTER, SENECA NURSING AND REHABILITATION CENTER, SHORE VIEW NURSING HOME, SHORE WINDS, SOMERS MANOR NURSING HOME INC., SOUTH SHORE HEALTHCARE, THE SPRINGS NURSING AND REHABILITATION CENTRE, ST. JOHNSVILLE REHABILITATION AND NURSING CENTER INC., ST. MARY’S EPISCOPAL CENTER INC., ST. REGIS NURSING HOME INC., THE STANTON NURSING AND REHABILITATION CENTRE, SUFFOLK CENTER FOR REHABILITATION AND NURSING, TEN BROECK COMMONS, TERRACE HEALTHCARE CENTER INC., UNITED HELPERS MANAGEMENT COMPANY INC., UNIVERSITY NURSING HOME, VESTAL PARK REHABILITATION AND NURSING CENTER, THE WARTBURG HOME OF THE EVANGELICAL LUTHERAN CHURCH, WATERFRONT HEALTH CARE CENTER, WAVECREST HOME FOR ADULTS, WAYNE CENTER FOR NURSING AND REHABILITATION, WEDGEWOOD NURSING HOME, WESTGATE NURSING HOME, INC., WILLIAMSBRIDGE MANOR NURSING HOME, WINGATE AT DUTCHESS, WINGATE AT ULSTER, WOODCREST REHABILITATION AND RESIDENTIAL HEALTHCARE, AND WOODSIDE MANOR INC. and WORKMEN’S CIRCLE MULTICARE, Appellants-Respondents. - against - NIRAV SHAH, in his official capacity as Commissioner of the New York State Department of Health and ANDREW CUOMO, as Governor of the State of New York, Respondents-Appellants. For a Hybrid Action pursuant to CPLR Article 78 and for a Declaratory Judgment. _____________________________________________ In the Matter of the Application of COALITION OF NEW YORK STATE PUBLIC HEALTH PLANS, NEW YORK STATE COALITION OF MANAGED LONG TERM CARE/PACE PLANS and NEW YORK HEALTH PLAN ASSOCIATION, INC., Appellants-Respondents, - against - NEW YORK STATE DEPARTMENT OF HEALTH and NIRAV R. SHAH, M.D., M.P.H., as Commissioner of The New York State Department of Health, Respondents-Appellants. CORPORATE DISCLOSURE STATEMENT Pursuant to Rules of Practice of the New York Court of Appeals (22 N.Y.C.R.R.) § 500.1(f), New York Health Plan Association, Inc. states that it is a not-for-profit corporation with no parents or subsidiaries, and has an affiliate called New York Health Plan Association Council, Inc. Coalition of New York State Public Health Plans (“PHP Coalition”) and New York State Coalition of Managed Long Term Care/PACE Plans (“MLTC Coalition”) state that they are not corporations or business entities, but rather unincorporated coalitions. The members of the PHP Coalition are non-profit health plans. The members of the MLTC Coalition are non-profit, provider-sponsored managed long-term care and PACE (Program of All-Inclusive Care for the Elderly) plans. i TABLE OF CONTENTS PRELIMINARY STATEMENT ......................................................................................... 1 QUESTIONS PRESENTED ............................................................................................. 6 STATEMENT OF THE CASE .......................................................................................... 7 A. Executive Order 38 ............................................................................... 7 B. The Legislature’s Multi-Year Consideration of Limits on Executive Compensation ...................................................................... 8 C. Implementation of EO38 .................................................................... 10 D. 10 N.Y.C.R.R. Part 1002 .................................................................... 11 1. Executive Compensation ............................................................ 12 a. Hard Cap ........................................................................ 13 b. Soft Cap ......................................................................... 13 2. Administrative Expenses Cap ..................................................... 14 3. Waivers, Penalties and Reporting............................................... 14 E. Proceedings Below ............................................................................. 15 1. Supreme Court ............................................................................ 15 2. Appellate Division ...................................................................... 17 JURISDICTION OF THIS COURT .................................................................................. 21 ARGUMENT .............................................................................................................. 22 I. DOH LACKED STATUTORY AUTHORITY TO ADOPT THE HARD AND SOFT CAPS .............................................................................................................. 22 A. Statutory Authority is Necessary to Adopt Regulations .................... 22 B. DOH Lacked Statutory Authority to Enact the Hard Cap ................. 25 II. THE HARD AND SOFT CAPS VIOLATE FUNDAMENTAL SEPARATION OF POWERS PRINCIPLES THAT RESERVE CRITICAL POLICY DECISIONS TO THE LEGISLATURE .......................................................................................... 35 A. Part 1002’s Purported Enabling Acts Violate the Nondelegation Doctrine .............................................................................................. 36 ii B. The Hard Cap Violates the Separation of Powers under Boreali v. Axelrod’s Four-Factor Analysis ..................................................... 40 1. DOH Made Choices Between Policy Goals ............................... 42 2. The Hard Cap Goes Well Beyond Merely Filling-In the Details of Broad Legislation ....................................................... 45 3. DOH Intruded Upon an Area of Ongoing Legislative Debate ......................................................................................... 47 4. No Special Expertise Was Necessary to Promulgate the Hard Cap ..................................................................................... 49 III. THE COMPENSATION LIMITS IN PART 1002 ARE ARBITRARY AND CAPRICIOUS ................................................................................................... 51 A. The Hard and Soft Caps Lack an Evidentiary Basis .......................... 51 B. The Hard and Soft Caps Use Arbitrary Standards ............................. 53 CONCLUSION ............................................................................................................ 57 iii TABLE OF AUTHORITIES Page(s) Cases Matter of Acevedo v. N.Y. State Dep’t of Motor Vehicles, 29 N.Y.3d 202 (2017) ......................................................................................... 22 Agencies for Children’s Therapy Servs., Inc. v. N.Y. State Dep’t of Health, 136 A.D.3d 122 (2d Dep’t 2015), app. dismissed, 26 N.Y.3d 1132, lv. denied, 27 N.Y.3d 907 (2016) ................................................................. 18, 42 Matter of Bates v. Toia, 45 N.Y.2d 460 (1978) ......................................................................................... 23 Boreali v. Axelrod, 71 N.Y.2d 1 (1987) ......................................................................................passim Bourquin v. Cuomo, 85 N.Y.2d 781 (1995) ......................................................................................... 30 Matter of Broidrick v. Lindsay, 39 N.Y.2d 641 (1976) ............................................................................. 24, 32, 35 Campagna v. Shaffer, 73 N.Y.2d 237 (1989) ............................................................................. 23, 42, 45 Matter of Cherry v. Bd. of Regents of Univ. of State of N.Y., 289 N. Y. 148 (1942) .......................................................................................... 38 Matter of Citizens For An Orderly Energy Policy v. Cuomo, 78 N.Y.2d 398 (1991) ......................................................................................... 30 Matter of City of Utica v. Water Pollution Control Bd., 5 N.Y.2d 164 (1959) ........................................................................................... 39 Matter of Concordia Coll. Inst. v. Miller, 301 N.Y. 189 (1950) ........................................................................................... 38 Cruz v. TD Bank, N.A., 22 N.Y.3d 61 (2013) ........................................................................................... 28 Darweger v. Staats, 267 N.Y. 290 (1935) ........................................................................................... 36 FDA v. Brown & Williamson Tobacco Corp., 529 U.S. 120 (2000) ............................................................................................ 32 iv Fink v. Cole, 302 N.Y. 216 (1951) ........................................................................................... 38 Matter of Fullilove v. Beame, 48 N.Y.2d 376 (1979) ......................................................................................... 35 Matter of Fullilove v. Carey, 48 N.Y.2d 826 (1979) ......................................................................................... 35 Good Humor Corp. v. McGoldrick, 289 N.Y. 452 (1943) ........................................................................................... 38 Goodwin v. Perales, 88 N.Y.2d 383 (1996) ......................................................................................... 31 Greater N.Y. Taxi Ass’n v. N.Y.C. Taxi & Limousine Comm’n, 25 N.Y.3d 600 (2015) ............................................................................. 31, 37, 41 Matter of Health Ins. Ass’n of Am. v. Corcoran, 76 N.Y.2d 995 (1990) ....................................................................... 41, 44, 46, 48 Matter of Jewish Mem’l Hosp. v. Whalen, 47 N.Y.2d 331 (1979) ......................................................................................... 51 Matter of Levine v. O’Connell, 275 App. Div. 217 (1st Dep’t 1949), aff’d no opn., 300 N. Y. 658 (1950) .................................................................................................................. 38 Matter of Levine v. Whalen, 39 N.Y.2d 510 (1976) ................................................................................... 37, 38 MCI Telecomms. Corp. v. Am. Tele. & Tele. Co., 512 U.S. 218 (1994) ............................................................................................ 32 Matter of Med. Soc’y of State of N.Y. v. Serio, 100 N.Y.2d 854 (2003) ....................................................................................... 31 N.Y. State Ass’n of Ctys. v. Axelrod, 78 N.Y.2d 158 (1991) ................................................................................... 51, 52 N.Y. State Health Facilities Ass’n v. Axelrod, 77 N.Y.2d 340 (1991) ......................................................................................... 35 Matter of N.Y. Statewide Coalition of Hispanic Chambers of Commerce v. N.Y.C. Dep’t of Health & Mental Hygiene, 23 N.Y.3d 681 (2014) ..................................................................................passim v Matter of N.Y.C. C.L.A.S.H., Inc. v. N.Y. State Off. of Parks, Recreation & Historic Preserv., 27 N.Y.3d 174 (2016) ......................................................................................... 41 Nicholas v. Kahn, 47 N.Y.2d 24 (1979) ..................................................................................... 22, 23 Matter of Owner Occupied Hous., Inc. v. Abrams, 72 N.Y.2d 553 (1988) ................................................................................... 23, 29 Packer Coll. Inst. v. Univ. of State of N.Y., 298 N.Y. 184 (1948) ........................................................................................... 38 People v. Garson, 6 N.Y.3d 604 (2006) ........................................................................................... 36 Rapp v. Carey, 44 N.Y.2d 157 (1978) ......................................................................... 2, 24, 36, 45 Matter of Redfield v. Melton, 57 A.D.2d 491 (3d Dep’t 1977) .......................................................................... 38 Rent Stabilization Ass’n v. Higgins, 83 N.Y.2d 156 (1993) ......................................................................................... 42 Rotunno v. City of Rochester, 120 A.D.2d 160 (4th Dep’t 1986), aff’d for reasons stated below, 71 N.Y.2d 995 (1988) ......................................................................................... 23 Rudder v. Pataki, 246 A.D.2d 183 (3d Dep’t 1998), aff’d, 93 N.Y.2d 273 (1999)......................... 24 Saratoga Cty. Chamber of Commerce v. Pataki, 100 N.Y.2d 801 (2003) ................................................................................. 25, 36 Seignious v. Rice, 273 N.Y. 44 (1936) ............................................................................................. 38 Subcontractors Trade Ass’n v. Koch, 62 N.Y.2d 442 (1984) ....................................................................... 24, 32, 34, 45 Sullivan Cty. Harness Racing Ass’n v. Glasser, 30 N.Y.2d 269 (1972) ......................................................................................... 37 Timber Point Homes, Inc. v. Cty. of Suffolk, 548 N.Y.2d 250 (2d Dep’t 1989) ........................................................................ 38 Matter of Tze Chun Liao v. N.Y. State Banking Dep’t, 74 N.Y.2d 505 (1989) ......................................................................................... 23 vi Under 21, Catholic Home Bureau for Dependent Children v. City of N.Y., 65 N.Y.2d 344 (1985) ......................................................................................... 34 Welcher v. Sobol, 222 A.D.2d 1001 (3d Dep’t 1995) ...................................................................... 37 Whitman v. Am. Trucking Ass’ns, Inc., 531 U.S. 457 (2001) ...................................................................................... 28, 32 Statutes N.Y. CPLR 5601(b)(l) ....................................................................................... 20, 21 N.Y. Not-for-Profit Corp. Law § 508 .......................................................... 11, 26, 28 N.Y. Pub. Health Law § 32(6) ..................................................................... 17, 26, 27 N.Y. Pub. Health Law § 201 .............................................................................. 26, 27 N.Y. Pub. Health Law § 201(1)(v) .................................................................... 26, 27 N.Y. Pub. Health Law § 201(1)(o) .............................................................. 11, 26, 27 N.Y. Pub. Health Law § 201(1)(p) .............................................................. 11, 26, 27 N.Y. Pub. Health Law § 206(3) ................................................................... 11, 26, 27 N.Y. Pub. Health Law § 206(6) ................................................................... 11, 26, 27 N.Y. Soc. Serv. Law § 363 .......................................................................... 17, 26, 27 N.Y. Soc. Serv. Law § 363-a ....................................................................... 17, 26, 27 N.Y. Soc. Serv. Law § 363-a(2) ......................................................................... 11, 26 N.Y. Soc. Serv. Law § 363-c(1)(a) .............................................................. 17, 26, 27 N.Y. Soc. Serv. Law § 364(1)(b) ................................................................. 17, 26, 27 N.Y. State Fin. Law § 163(1)(c) .................................................................. 17, 26, 27 N.Y. State Fin. Law § 163(9)(f) ................................................................... 17, 26, 27 Regulations 8 N.Y.C.R.R. § 8.38 ........................................................................................... 52, 53 9 N.Y.C.R.R. § 8.38(1) .............................................................................................. 7 9 N.Y.C.R.R. § 8.38(2)(a) .......................................................................................... 8 9 N.Y.C.R.R. § 8.38(2)(b) ......................................................................................... 8 vii 9 N.Y.C.R.R. § 8.38(3) .............................................................................................. 8 9 N.Y.C.R.R. § 8.43 ................................................................................................. 10 10 N.Y.C.R.R. § 1002 .............................................................................................. 11 10 N.Y.C.R.R. § 1002.1(a) ...................................................................................... 14 10 N.Y.C.R.R. § 1002.1(a)(1)(i) .............................................................................. 33 10 N.Y.C.R.R. § 1002.1(b) ................................................................................ 12, 43 10 N.Y.C.R.R. § 1002.1(d) ................................................................................ 44, 55 10 N.Y.C.R.R. § 1002.1(d)(1) ........................................................................... 12, 43 10 N.Y.C.R.R. § 1002.1(d)(2) ........................................................................... 12, 43 10 N.Y.C.R.R. § 1002.1(d)(3) ................................................................................. 12 10 N.Y.C.R.R. § 1002.2(a) ...................................................................................... 14 10 N.Y.C.R.R. § 1002.3(a) ................................................................................ 13, 54 10 N.Y.C.R.R. § 1002.3(b) .......................................................................... 13, 14, 54 10 N.Y.C.R.R. § 1002.4(a) ...................................................................................... 14 10 N.Y.C.R.R. § 1002.4(a)(2)(i) .............................................................................. 56 10 N.Y.C.R.R. § 1002.4(a)(2)(iii) ............................................................................ 56 10 N.Y.C.R.R. § 1002.4(a)(2)(iv) ............................................................................ 56 10 N.Y.C.R.R. § 1002.4(a)(2)(vi) ............................................................................ 56 10 N.Y.C.R.R. § 1002.4(b) ...................................................................................... 43 10 N.Y.C.R.R. § 1002.5 ........................................................................................... 15 10 N.Y.C.R.R. § 1002.6(a) ...................................................................................... 15 10 N.Y.C.R.R. § 1002.6(d) ...................................................................................... 15 Constitutional Provisions N.Y. CONST., art. III, § 1 .......................................................................................... 36 Other Authorities 34 N.Y. Reg., issue 22 (May 30, 2012), https://docs.dos.ny.gov/info/register/2012/may30/pdfs/rules.pdf ...................... 10 34 N.Y. Reg., issue 44 (Oct. 31, 2012), https://docs.dos.ny.gov/info/register/2012/oct31/pdf/rulemaking.pdf ............... 11 viii 35 N.Y. Reg., issue 11 (Mar. 13, 2013), https://docs.dos.ny.gov/info/register/2013/march13/pdf/rulemaking.pdf .......... 11 35 N.Y. Reg., issue 15 (Apr. 10, 2013), https://docs.dos.ny.gov/info/register/2013/april10/pdf/rulemaking.pdf ............. 11 35 N.Y. Reg., issue 22 (May 29, 2013), https://docs.dos.ny.gov/info/register/2013/may29/pdf/rulemaking.pdf ....... 11, 52 Aaron S.J. Zelinsky, Comment, Taxing Unreasonable Compensation: § 162(a)(1) and Managerial Power, 119 YALE L.J. 637 (Dec. 2009) ................... 29 Gary J. Greco, Standards or Safeguards: A Survey of the Delegation Doctrine in the States, 8 ADMIN. L.J. AM. U. 567 (Fall 1994) ........................... 37 Health, Early Intervention Service Rates 2011, http://www.health.ny.gov/community/infants_children/early_interv ention/service_rates.htm ..................................................................................... 55 Jennifer S. Martin, The House of Mouse and Beyond: Assessing the SEC’s Efforts to Regulate Executive Compensation, 32 DEL. J. CORP. L. 481 (2007) ............................................................................................ 29 Jim Rossi, Institutional Design and the Lingering Legacy of Antifederalist Separation of Powers Ideals in the States, 52 VAND. L. REV. 1167 (Oct. 1999) .................................................................................... 37 Joseph G. Casion & Joshua E. Gewold, New York Limits Executive Compensation and Administrative Expenses at State-Funded Service Providers, LexisNexis Emerging Issues Analysis, at 2 (Jul. 2013), 2013 Emerging Issues 7020 .............................................................. 29, 47 Lawton W. Hawkins, Compensation Representatives: A Prudent Solution to Excessive CEO Pay, 72 BROOK. L. REV. 449 (Winter 2007) ................................................................................................................... 29 Press Release, Governor’s Press Off., Governor Cuomo Announces Proposed Regulations to Ensure That State-Funded Providers Do Not Pay Excessive Executive Compensation or Administrative Costs (May 16, 2012), https://www.governor.ny.gov/news/governor-cuomo-announces- proposed-regulations-ensure-state-funded-providers-do-not-pay ...................... 10 Robert E. Wagner, Mission Impossible: A Legislative Solution for Excessive Executive Compensation, 45 CONN. L. REV. 549 (Dec. 2012) ................................................................................................................... 29 ix Stephen Breyer, Judicial Review of Questions of Law and Policy, 38 ADMIN. L. REV. 363 (1986) ................................................................................. 31 Stuart Lazar, The Unreasonable Case for a Reasonable Compensation Standard in the Public Company Context: Why It Is Unreasonable to Insist on Reasonableness, 59 BUFFALO L. REV. 937 (Aug. 2011) ................. 29 PRELIMINARY STATEMENT This case is about the allocation of governmental power in New York State. The separation of powers doctrine recognizes the fundamental principle that the powers of government must be assigned to their coordinate branches. The power to enact new policy into law is vested in the Legislature. The executive branch, including its administrative agencies, enforces the law, but may not usurp the Legislature’s authority to create new law. The purpose of these principles is not to promote efficiency, but to preclude any one branch from seeking to maximize power. This ensures that ours is a government of law - not unelected agencies left to adopt regulations without a valid delegation of legislative power. In violation of the separation of powers doctrine, the New York State Department of Health (“DOH”) has promulgated an unprecedented regulation limiting executive compensation, known as the “Hard Cap.” It prohibits private companies that provide services for DOH from paying executives more than $199,000 per year, if State funds or State-authorized payments are used. The Hard Cap applies notwithstanding that executive compensation has no impact on the quality or cost of services provided to DOH. The history surrounding the Hard Cap’s adoption reveals the gravity of the threat it poses to the separation of powers doctrine. On January 17, 2012, Governor Andrew Cuomo asked the Legislature to enact a Hard Cap, in response 2 to isolated reports that certain private companies doing business with the State paid their executives excessive compensation. The very next day, the Governor circumvented the Legislature and issued Executive Order 38 (“EO38”) to achieve the same result. EO38 required DOH, along with twelve other agencies, to promulgate regulations that established the exact same Hard Cap the Governor requested from the Legislature the day before. It is rare for an executive order to serve as a template for a complex and burdensome regulatory scheme to be promulgated by multiple agencies. Not since Rapp v. Carey, 44 N.Y.2d 157 (1978) - where this Court struck down Governor Carey’s edict requiring State employees to file financial disclosure statements and refrain from certain activities - has a gubernatorial executive order intruded so deeply into legislative territory. Nevertheless, the 13 agencies subject to EO38 dutifully complied with its directives and issued implementing regulations that included Hard Caps. The appellants-respondents on this appeal are a trade association and managed care plans (hereafter, “the Managed Care Petitioners”). In 2013, they filed an Article 78 and declaratory judgment action, seeking to invalidate DOH’s “Hard Cap” because it violated core separation of powers concerns. Supreme Court and a divided Appellate Division upheld the Hard Cap, essentially treating it as nothing more than “run-of-the-mill,” interstitial rulemaking within the bounds of DOH’s traditional delegated authority. Nothing could be further from the truth. 3 The Hard Cap should be struck down by this Court for four reasons:1 First, DOH lacked statutory authority to promulgate the Hard Cap. DOH and the courts below embarked on a scavenger hunt for a statute - any statute - authorizing the Hard Cap’s adoption. This resulted in three different laundry lists of decades-old enabling laws. But none even mentions executive compensation, let alone authorizes DOH to invade the inner-workings of private companies and cap their executive compensation. This Court has made clear that agencies cannot undertake significant, politically-charged regulatory initiatives without specific legislative authorization. Here there was none. By promulgating the Hard Cap, DOH exceeded the bounds of its enabling legislation and engaged in an unauthorized exercise of legislative power. Second, even if DOH possessed statutory authority to promulgate the Hard Cap, the Legislature unconstitutionally delegated its power to make critical policy decisions, without statutory standards or guidelines. Under the separation of powers doctrine, the Legislature cannot pass on its law-making functions to other bodies. While the Legislature may delegate power to an agency to administer laws, a statute delegating such power must limit the field in which discretion is to operate and provide standards to govern its exercise. Here, the hodgepodge of 1 The Hard Cap is contained in regulations that also include a “Soft Cap,” which was struck down by the courts below and will be the subject of a separate appeal taken by DOH and its co- respondent-appellants. 4 statutes cited by DOH and the courts below provide absolutely no safeguards, standards, guidelines, limits or outer bounds. Third, by promulgating the Hard Cap, DOH engaged in legislative activity and, thus, exceeded the scope of its constitutional authority. This is confirmed by application of this Court’s four-factor analysis in Boreali v. Axelrod, 71 N.Y.2d 1 (1987). If DOH were permitted to regulate beyond the scope of its purported enabling statutes simply because service providers accept public money, then no principle would limit the executive branch’s power. The separation of powers would be meaningless. Fourth, the Hard Cap is arbitrary and capricious. The record is devoid of any rational, documented, empirical basis that the Hard Cap will further its stated purpose of ensuring the efficient use of State funds. The Hard Cap does not cap, or even reduce, the amount of money the State pays or receives for healthcare services. It may cause service providers to lose talented executives and in turn provide less value to the State. No facts or logic justify the $199,000 cap, the class of employers subject to it, or the process for obtaining a waiver. In short, the Hard Cap represents a blatant attempt by DOH to usurp legislative power based solely on an executive order. In enacting the Hard Cap, DOH made precisely the kind of policy choices that are reserved to the legislative 5 branch. DOH’s claim that the Hard Cap was intended to flesh out legislative policy is a fiction; an elaborate post hoc rationalization. This Court has steadfastly rebuffed administrative agencies that have promulgated rules based on broad-based public policy determinations. The Hard Cap takes that concern to new heights. If the Hard Cap is allowed to stand, future executives at the State and local levels will exercise unlimited power to impose complex and intrusive regulatory schemes without needing to obtain legislative guidance or authority. Such undermining of the checks and balances at the heart of the separation of powers doctrine is what is at stake in this case. Accordingly, the Appellate Division’s decision as to the Hard Cap should be reversed. 6 QUESTIONS PRESENTED 1. Whether DOH was authorized to enact regulations capping at $199,000 per year the compensation certain healthcare providers may pay to their executives from State funds (hereafter, the “Hard Cap”), when no statute delegates such authority, either expressly or by necessary implication? (The Appellate Division incorrectly answered “Yes.”) 2. Whether, assuming DOH’s enabling statutes authorized promulgation of the Hard Cap, the Legislature unconstitutionally delegated such authority to DOH without providing any statutory standards or guidelines? (The Appellate Division incorrectly answered “No.”) 3. Whether the Hard Cap is impermissibly legislative and thus beyond DOH’s rulemaking power under Boreali v. Axelrod? (The Appellate Division incorrectly answered “No.”) 4. Whether the Hard Cap is arbitrary and capricious? (The Appellate Division incorrectly answered “No.”) 7 STATEMENT OF THE CASE A. Executive Order 38 On January 17, 2012, Governor Andrew Cuomo submitted his 2012-2013 Executive Budget to the two Houses of the New York State Legislature. (R. 178- 79.)2 As part of his budget submission, the Governor introduced legislation limiting executive compensation and administrative expenses among private entities that derive revenue from the State, including both for-profit and not-for- profit entities. (Id.) In particular, the Governor proposed that administrative agencies be required to promulgate regulations generally prohibiting such entities from using State funds or State-authorized payments to pay their executives more than $199,000 per year. (Id.) The very next day (January 18, 2012), the Governor issued EO38 to his appointees in 13 State agencies,3 including DOH, ordering them to promulgate regulations containing the identical limitations on executive compensation and administrative expenses proposed in the Executive budget. (Exec. Order [Cuomo] No. 38, 9 N.Y.C.R.R. § 8.38(1); R. 69-71.) Specifically, EO38 ordered the agencies, within 90 days, to promulgate regulations prohibiting service providers 2 References to “RA. __” or “R. __” refer to pages in the Record on Appeal. 3 The 12 other State agencies are: Office for the Aging; Department of Agriculture & Markets; Office of Alcoholism and Substance Abuse Services; Office of Children and Family Services; Department of Corrections and Community Supervision; Division of Criminal Justice Services; Division of Housing and Community Renewal; Office of Mental Health; Office for People with Developmental Disabilities; Department of State; Office of Temporary and Disability Assistance; Office of Victim Services. (9 N.Y.C.R.R. § 8.38(1); R. 967.) 8 that received State funds or State-authorized payments from using such funds or payments “for compensation paid or given to any executive . . . in an amount greater than $199,000 per annum . . . .” 9 N.Y.C.R.R. § 8.38(2)(b). Also, EO38 ordered that the agencies adopt regulations requiring no less than 75% of the State financial assistance or State-authorized payments to a provider for operating expenses be directed to provide direct care or services rather than to support administrative costs. Id. § 8.38(2)(a). This percentage was to increase by 5% each year so that, as of April 2015, 85% of State-authorized payments to providers would be directed “to provide direct care or services rather than to support administrative costs.” Id. Finally, EO38 allowed, “under appropriate circumstances and upon a showing of good cause,” a waiver from compliance for certain service providers. Id. § 8.38(3). B. The Legislature’s Multi-Year Consideration of Limits on Executive Compensation Notwithstanding the issuance of EO38, the Legislature continued debating how to address executive compensation within for-profit and not-for-profit entities. On February 6, 2012, the Senate Standing Committee on Investigations and Government Operations held a public hearing to (1) “investigate the compensation levels of executives at not-for-profit organizations,” (2) “examine if these pay levels are appropriate,” and (3) “solicit suggestions for changes necessary to ensure that taxpayer funds are not wasted on excessive salaries.” (R. 182-83.) Ten days 9 later, the Committee issued a report with recommendations substantially different from those proposed by the Governor. (R. 185-246.) On March 30, 2012, the Legislature passed the 2012-2013 State Budget, which did not include the Governor’s proposed caps on executive compensation and administrative expenses. (R. 63.) Nevertheless, the Legislature continued to consider these issues. On April 12, 2013, legislation was introduced with an executive compensation cap nearly identical to the Governor’s Executive Budget proposal. (See A-6616, § 3(b), introduced Apr. 12, 2013 (Tenney); R. 733-34.) Again, the Legislature refused to pass a cap. The same year, the Legislature considered several other bills addressing executive compensation.4 All together, during the three legislative sessions preceding DOH’s adoption of the Hard Cap, the Legislature considered more than two dozen bills that would have limited executive compensation but did not pass any of them.5 4 See S 5845, introduced Jun. 18, 2013 (Ranzenhofer); S 5837, introduced Jun. 17, 2013 (Ranzenhofer); S 5198, introduced May 14, 2013 (Ranzenhofer); S 5197, introduced May 14, 2013 (Marcellino); S 5115, introduced May 10, 2013 (Marcellino); S 4783, introduced Apr. 23, 2013 (Marcellino); S 3755, introduced Feb. 13, 2013 (Ranzenhofer); A 8072, introduced Jun. 17, 2013 (Brennan); A 7772, introduced Jun. 4, 2013 (Brennan); A 7338, introduced May 10, 2013 (Englebright); A 7337, introduced May 10, 2013 (Brennan); A 6616, introduced Apr. 12, 2013 (Tenney); A 5422, introduced Feb. 26, 2013 (Brennan); A 3590, introduced Jan. 28, 2013 (Glick); A 2120, introduced Jan. 9, 2013 (Paulin); A 2118, introduced Jan. 9, 2013 (Paulin). (See also R. 253-317.) 5 See supra note 4 and S 7565, introduced Jun. 5, 2012 (Marcellino); S 7431, introduced May 15, 2012 (Marcellino); S 6930, introduced Apr. 13, 2012 (Marcellino); S 4611, introduced Apr. 13, 2011 (Ranzenhofer); A 10733, introduced Jun. 18, 2012 (Paulin); A 10508, introduced May 29, 2012 (Paulin); A 9830, introduced Apr. 13, 2012 (Tenney); A 5727, introduced Feb. 25, 10 C. Implementation of EO38 The 13 agencies subject to EO38 were unable to comply with the 90-day time-frame established by the Governor. As a result, on April 13, 2012, the Governor issued another executive order continuing EO38, and ordering “that the date by which the Executive State agencies shall promulgate proposed regulations to implement the requirements of Executive Order Number 38 is extended up to May 16, 2012.” (Exec. Order [Cuomo] No. 43, 9 N.Y.C.R.R. § 8.43).) On May 16, 2012, the Governor announced in a press release that the 13 agencies posted on their websites regulations “designed to implement Executive Order 38.” Press Release, Governor’s Press Off., Governor Cuomo Announces Proposed Regulations to Ensure That State-Funded Providers Do Not Pay Excessive Executive Compensation or Administrative Costs (May 16, 2012), https://www.governor.ny.gov/news/governor-cuomo-announces-proposed- regulations-ensure-state-funded-providers-do-not-pay. The press released stated that the proposed regulations would be “available for public comment beginning on May 30 for 45 days before being finalized.” Id. On May 30, 2012, the 13 agencies published notices in the New York State Register, proposing regulations implementing EO38. 34 N.Y. Reg., issue 22, at 1- 8, 32-43, 45-46 (May 30, 2012), https://docs.dos.ny.gov/info/register/2012/may30 2011 (Brennan); S 3678, introduced Mar. 27, 2009 (Flanagan); A 5855, introduced Feb. 20, 2009 (Brodsky); A 4803B, introduced Feb. 6, 2009 (Rivera). 11 /pdfs/rules.pdf. In response to public comments, the 13 agencies published a second notice of revised rulemaking on October 31, 20126 and a third notice of revised rulemaking on March 13, 2013.7 The rule-making process culminated on May 29, 2013, when the 13 agencies adopted parallel sets of regulations, all of which became effective on the same day (July 1, 2013), limiting executive compensation and administrative expenses of State-funded providers. See 35 N.Y. Reg., issue 22, at 1-6, 8-10, 12-25 (May 29, 2013), https://docs.dos.ny.gov/info/register/2013/may29/pdf/rulemaking.pdf. D. 10 N.Y.C.R.R. Part 1002 DOH’s regulations implementing EO38 are codified at 10 N.Y.C.R.R. part 1002. (R. 677-84.) In its Notice of Adoption, DOH stated that the purpose of part 1002 was to “[e]nsure State funds and State authorized payments are expended in the most efficient manner and appropriate use of funds.” (R. 405-407.) The Notice also stated that DOH’s authority to promulgate the regulations was derived from the following six statutes: N.Y. Pub. Health Law §§ 201(1)(o), 201(1)(p), 206(3) and 206(6); N.Y. Soc. Serv. Law § 363-a(2); and Not-for-Profit Corp. Law § 508. (R. 405-407; 35 N.Y. Reg., issue 22, at 12.) 6 34 N.Y. Reg., issue 44, at 1-12, 17-19, 42-45, 48-50, 52-54, 58-63 (Oct. 31, 2012), https://docs.dos.ny.gov/info/register/2012/oct31/pdf/rulemaking.pdf. 7 35 N.Y. Reg., issue 11, at 1-9, 12-14, 36-41, 48-50, 55-58 (Mar. 13, 2013), https://docs.dos.ny.gov/info/register/2013/march13/pdf/rulemaking.pdf. On April 10, 2013, DOH, by itself, issued another notice of revised rule-making. See 35 N.Y. Reg., issue 15, at 16- 17, https://docs.dos.ny.gov/info/register/2013/april10/pdf/rulemaking.pdf. 12 Part 1002 sets limits on executive compensation and administrative expenses applicable to certain “covered providers,” and addresses waivers, penalties for non- compliance, and reporting requirements. (R. 677-84.) “Covered providers” include hospitals, residential health care facilities, home health agencies, health maintenance organizations and certain other health insurers, long-term and AIDS care programs, hospices, assisted living residencies, and emergency service entities. (R. 679; 10 N.Y.C.R.R. § 1002.1(d)(3).). An entity is “covered” if it (a) enters into an agreement to provide DOH program services paid for with public dollars; (b) receives State funds or State-authorized payments averaging in a two- year period more than $500,000 annually, and (c) receives more than 30% of its total in-State revenues from State funds or State-authorized payments. (R. 679; 10 N.Y.C.R.R. §§ 1002.1(d)(1), (2).) 1. Executive Compensation Part 1002 contains two caps on compensation paid to “covered executives” that are referred to herein as the “Hard Cap” and “Soft Cap.” A “covered executive” is any “director, trustee, managing partner, or officer,” who does not engage solely in the provision of program services and “whose executive compensation . . . exceed[s] $199,000.” (R. 678; 10 N.Y.C.R.R. § 1002.1(b).) 13 a. Hard Cap The Hard Cap prohibits providers from using “State funds or State- authorized payments for executive compensation given directly or indirectly to a covered executive in an amount greater than $199,000 per annum.” (R. 687; 10 N.Y.C.R.R. § 1002.3(a).) DOH must review that Hard Cap amount annually and adjust it as necessary, subject to the approval of the State Division of the Budget. (Id.) The Hard Cap applies only to the use of State funds or State-authorized payments for executive compensation. (Id.) b. Soft Cap The Soft Cap goes beyond EO38 by imposing limitations on executive compensation paid “not only [from] State funds and State-authorized payments but also any other sources of funding.” (R. 687; 10 N.Y.C.R.R. § 1002.3(b).) When executive compensation exceeds $199,000 per year from any source of funding (i.e., State or non-State), the provider will be subject to penalties if the compensation either (1) is “greater than the 75th percentile of that compensation provided to comparable executives in other providers of the same size and within the same program service sector and the same or comparable geographic area” based on a compensation survey recognized by the Division of the Budget; or (2) was not reviewed and approved by the covered provider’s board of directors or 14 equivalent governing body after taking into consideration “appropriate comparability data.” (R. 687; 10 N.Y.C.R.R. §§ 1002.3(b).) 2. Administrative Expenses Cap Part 1002 sets limits on the amount of administrative expenses that may be paid to providers using State funds or State-authorized payments. “Administrative expenses” are expenses that “cannot be attributed directly to the provision of program services.” (R. 677-78; 10 N.Y.C.R.R. § 1002.1(a).) From 2015 onward, a provider is prohibited from using more than 15% for administrative expenses from State funds or State-authorized payments. (R. 685; 10 N.Y.C.R.R. § 1002.2(a).) 3. Waivers, Penalties and Reporting A provider may seek a waiver from part 1002’s requirements based on a showing of good cause. (R. 690-91; 10 N.Y.C.R.R. § 1002.4(a).) Factors for determining whether a waiver may be granted include: (1) the compensation for comparable executives at comparable service providers, (2) the extent to which the provider would be unable to provide the same quality and availability of services without a waiver, (3) the nature, size, and complexity of the provider’s operations, (4) the provider’s review and approval process for executive compensation, (5) the qualifications and experience of the executives or positions, and (6) the provider’s efforts in securing executives at a lower compensation. (Id.) 15 If a provider has not obtained a waiver and fails to comply with part 1002’s requirements, the provider is subject to suspension, modification or termination of its service contract or its license to deliver DOH program services or the redirection of State funds or State-authorized payments. (See R. 142-44; 10 N.Y.C.R.R. §§ 1002.6(a), (d).) To ensure compliance with part 1002, providers must file an annual disclosure form with DOH regarding their allocation of State funds. (R. 694; 10 N.Y.C.R.R. § 1002.5.) E. Proceedings Below 1. Supreme Court On September 26, 2013, the Managed Care Petitioners commenced a hybrid Article 78 and declaratory judgment action, seeking to invalidate the Hard and Soft Caps. The Managed Care Petitioners argued that (1) DOH exceeded its authority by promulgating the Hard and Soft Caps without an enabling statute passed by the Legislature, (2) even if the Legislature delegated to DOH the statutory authority to regulate executive compensation, that delegation was unconstitutional because it (a) did not provide adequate legislative standards and guidelines and (b) usurped the Legislature’s authority under Boreali v. Axelord; and (3) the Hard and Soft Caps are arbitrary and capricious. (R. 639-70.) A similar hybrid proceeding was commenced by a group of health care providers, adult living facilities, and trade 16 associations representing them (hereafter, “the LeadingAge Petitioners”; the parties bringing the two proceedings are referred to collectively as “Petitioners”). The two proceedings were consolidated and, after joinder of issue, Supreme Court, Albany County (Denise A. Hartman, A.J.S.C.), issued a Decision and Judgment, dated November 13, 2015, that (1) denied the petitions to the extent they challenged the Hard Cap and administrative expenses limits; and (2) granted the petitions to the extent they challenged the Soft Cap, declaring that it “was promulgated in excess of Department of Health’s authority and therefore violated the separation of powers doctrine.” (R. 3-29.) After applying the four-part approach for certain separation of powers challenges established by Boreali v. Axelrod, Supreme Court concluded that the Hard Cap and administrative expenses limits “did not usurp the Legislature’s prerogative . . . . ,” but that DOH “overstepped its statutory authority by setting a ‘soft cap’ on executive salaries paid from all sources and defining the criteria and decision-making processes that must be applied before corporate entities may exceed the ‘soft cap.’” (R. 15.) Supreme Court rejected Petitioners’ argument that DOH did not have statutory authority to adopt part 1002, notwithstanding that “there may be no specific statutory delegation of authority directing [DOH] to establish caps on reimbursement for administrative costs and executive compensation.” (R. 17.) Supreme Court explained that “the Legislature is not required in its enactments to 17 supply agencies with rigid marching orders” (id. (internal quotation marks & citations omitted)), and the Legislature made the “basic policy decisions underlying the regulations . . . .” (id. at 53-54 (internal quotation marks & citations omitted).) In arriving at this conclusion, Supreme Court cited four of the statutes that DOH invoked when it enacted part 1002, and two new statutes: N.Y. Pub. Health Law § 201(v) and N.Y. Soc. Serv. Law § 363-a. (R. 13.) Finally, Supreme Court rejected Petitioners’ contention that part 1002 was arbitrary and capricious. (R. 25-28.) 2. Appellate Division The Managed Care Petitioners appealed to the Appellate Division, Third Department, Supreme Court’s ruling upholding the Hard Cap; the LeadingAge Petitioners appealed the ruling with regard to both the Hard Cap and administrative expenses limitations; and DOH and the other State Respondents cross-appealed the ruling striking down the Soft Cap. (R. 32-36.) By a 4-1 vote, the Appellate Division affirmed. (RA. 11-28.) The majority rejected Petitioners’ contention that part 1002 lacked a statutory basis, citing 14 statutes including eight that were not previously invoked either during the rule- making process or by Supreme Court: N.Y. Pub. Health Law §§ 32(6), 201 and 206; N.Y. Soc. Serv. Law § 363, 363-c(1)(a) and 364(1)(b); and State Fin. Law §§ 163(9)(f) and 163(1)(c). (RA. 18-19.) The majority found that the underlying 18 purpose of the 14 cited statutes was to “obtain high-quality services with limited available funds,” and that DOH was authorized to “regulate what it pays for and how it spends money on the public health.” (RA. 19 (internal quotations marks & citations omitted).) Further, quoting a prior decision by the Second Department, the majority said that DOH could enact regulations that went beyond the text of enabling legislation, provided they are “‘not inconsistent with the [cited] . . . statutory language or their underlying purposes.’” (RA. 19-20 (quoting Agencies for Children’s Therapy Servs., Inc. v. N.Y. State Dep’t of Health, 136 A.D.3d 122, 130 (2d Dep’t 2015), app. dismissed, 26 N.Y.3d 1132, lv. denied, 27 N.Y.3d 907 (2016)).) Thus, because the Hard Cap and Soft Cap were not inconsistent with the cited statutes or their underlying purpose, and furthered such purpose “by ensuring that . . . DOH awards service contracts to agencies that will use most of the tax dollars they receive directly on the provision of services rather than upon administrative overhead and executive compensation,” DOH was authorized to promulgate part 1002, the Majority reasoned. (RA. 19-20.) Next, after applying a Boreali analysis, the majority concluded that the Hard Cap and administrative expenses limitations did not violate the separation of powers doctrine. (RA. 25.) However, the majority concluded that “the Soft Cap provision cannot pass constitutional muster and, therefore was properly invalidated by Supreme Court.” (RA. 26.) 19 In the course of its Boreali analysis, the majority rejected Petitioners’ argument that part 1002’s purported enabling statutes constituted an unconstitutional delegation of legislative authority because they failed to provide adequate standards to guide DOH’s discretion. “[I]t cannot be said that DOH had not been given any legislative guidelines at all for determining how the competing concerns of public health and economic cost are to be weighed,” the majority reasoned, “in view of DOH’s broad authority to regulate the use of public health funds and the underlying purpose of its enabling statutes to ensure that such funds will be used primarily on direct care and services to those in need . . . .” (RA. 21 (internal quotation marks & citations omitted).) Finally, the majority rejected Petitioners’ contention that the Hard Cap should be invalidated as arbitrary and capricious, holding that part 1002’s promulgation was supported by “[b]oth empirical evidence and sound agency judgment.” The dissent argued that part 1002 was unconstitutional in its entirety “as a violation of the separation of powers doctrine,” emphasizing that DOH did not have statutory authority “to control the fiscal operations of private entities.” (RA. 30.) Additionally, the dissent argued that part 1002 was “voidable as arbitrary and capricious, since DOH has furnished no evidence to establish any linkage between 20 the costs paid by these providers for executive compensation and administration and the problem identified by the Governor in Executive Order.” (RA. 33.) The Managed Care Petitioners appealed to this Court as of right, seeking to overturn the Appellate Division’s decision to uphold the Hard Cap. (CPLR 5601(b)(1); RA. 4-5.) 21 JURISDICTION OF THIS COURT This Court has jurisdiction to hear this appeal from the Appellate Division’s Opinion and Order, pursuant to CPLR 5601(b)(l), which provides that “[a]n appeal may be taken to the court of appeals as of right . . . from an order of the appellate division which finally determines an action where there is directly involved the construction of the constitution of the state or of the United States.” By letter dated August 25, 2017 to the Deputy Clerk of the Court, the Managed Care Petitioners explained in detail reasons why this appeal meets the jurisdictional predicate for an appeal as of right on constitutional grounds. 22 ARGUMENT I. DOH LACKED STATUTORY AUTHORITY TO ADOPT THE HARD AND SOFT CAPS The constitutional separation of powers doctrine prohibits an administrative agency from adopting regulations that exceed the bounds of its enabling legislation. The New York State Legislature has never enacted a statute authorizing DOH to limit compensation paid by service providers to its executives. Nor is there any legislative history suggesting an intention to grant DOH the power to regulate executive compensation. It is inconceivable that the Legislature could have intended to implicitly delegate to DOH such an extraordinary power. Thus, by promulgating the Hard and Soft Caps, DOH exceeded the bounds of its enabling legislation and engaged in an unauthorized exercise of legislative power. A. Statutory Authority is Necessary to Adopt Regulations Core separation-of-power principles dictate that an administrative agency can act only within the scope of its legislatively delegated authority. See Nicholas v. Kahn, 47 N.Y.2d 24, 30 (1979) (separation of powers doctrine prohibits administrative action absent legislative delegation of power to so act). As a creature of statute, an agency possesses only “those powers expressly conferred by its authorizing statute, as well as those required by necessary implication.” Matter of Acevedo v. N.Y. State Dep’t of Motor Vehicles, 29 N.Y.3d 202, 221 (2017) (internal quotation marks & citations omitted). Only the Legislature, therefore, can 23 authorize an agency to promulgate regulations. See Rotunno v. City of Rochester, 120 A.D.2d 160, 163 (4th Dep’t 1986) (“[A]n administrative agency has no authority to create rules and regulations without statutory predicate, express or implied.”), aff’d for reasons stated below, 71 N.Y.2d 995 (1988). A corollary of this principle is that “[a]n agency cannot create rules, through its own interstitial declaration, that were not contemplated or authorized by the Legislature . . . .” Matter of Tze Chun Liao v. N.Y. State Banking Dep’t, 74 N.Y.2d 505, 510 (1989). “Such action would be tantamount to legislation by administrative fiat,” Matter of Bates v. Toia, 45 N.Y.2d 460, 464 (1978) (citations omitted), and “in contravention of the separation of powers doctrine,” Nicholas v. Kahn, 47 N.Y.2d at 30 (citations omitted). Applying these bedrock principles, this Court has repeatedly rejected attempts by administrative agencies to take major regulatory action without clear legislative authorization or guidance. See, e.g., Campagna v. Shaffer, 73 N.Y.2d 237, 243 (1989) (invalidating rule issued by Secretary of State restricting real estate brokers from soliciting listings of residential properties for sale, because such rule “leap[t] well beyond” its enabling act); Matter of Owner Occupied Hous., Inc. v. Abrams, 72 N.Y.2d 553, 558 (1988) (invalidating regulations because they went well beyond their enabling act and “would extend the statutory language to situations not intended to be embraced by the Legislature”) (internal citations 24 omitted); see also Matter of N.Y. Statewide Coalition of Hispanic Chambers of Commerce v. N.Y.C. Dep’t of Health & Mental Hygiene, 23 N.Y.3d 681, 690 (2014) (invalidating New York Board of Health’s limits on sale of “sugary drinks,” noting that Board acted “without any legislative delegation or guidance”). Similarly, this Court has “routinely” invalidated “executive orders imposing a substantial burden or restraint and lacking sufficient legislative authority . . . .” Rudder v. Pataki, 246 A.D.2d 183, 192 (3d Dep’t 1998) (Mercure, J., dissenting), aff’d, 93 N.Y.2d 273 (1999). See, e.g., Subcontractors Trade Ass’n, 62 N.Y.2d 442, 425, 429-430 (1989) (invalidating executive order issued by New York City Mayor that mandated 10% of all construction contracts be given to “locally based enterprises,” because “no . . . specific legislative authority” authorized the Mayor to “unilaterally initiate this type of program or the means for effectuating it . . . . ”); Rapp v. Carey, 44 N.Y.2d 157, 160 (1978) (invalidating executive order requiring State employees within executive branch to file financial disclosure statements and abstain from various political and business activities; the Governor reached beyond statutory authority and unlawfully “assume[d] the power of the Legislature to set State policy in an area of concededly increasing public concern”); Matter of Broidrick v. Lindsay, 39 N.Y.2d 641, 646-47 (1976) (invalidating New York City Mayor’s executive order prohibiting discrimination in hiring practices in the construction industry and conditioning award of City contracts to bidders who 25 submitted an affirmative action plan, because no statute “prescribed affirmative action to redress the effects of discrimination”); see also Saratoga Cty. Chamber of Commerce v. Pataki, 100 N.Y.2d 801, 823 (2003) (Governor usurped Legislature’s authority by entering into a compact between the St. Regis Mohawk Tribe and the State to allow the tribe to provide gambling services, given that such compacts “necessarily make fundamental policy choices that epitomize ‘legislative power’” and “[t]here is no legislative authorization for state agencies to promulgate regulations for the oversight of casino gambling”). The lesson from these cases is clear. If an agency wants to enact a significant and complex regulatory regime, a broad or ambiguous grant of statutory authority will not suffice. Nor will an executive order unsupported by statutory authority. The Legislature must clearly authorize the agency to take such action. B. DOH Lacked Statutory Authority to Enact the Hard Cap Here, no statute exists that conferred on DOH the authority to promulgate the Hard and Soft Caps. In a desperate attempt to escape this conclusion, DOH and the courts below looked high and low for any statute authorizing salary controls on executives. The result was three different lists of long-extant enabling statutes, as shown by the following chart: 26 Statute DOH Rulemaking Supreme Court Appellate Division Pub. Health Law § 32(6) √ Pub. Health Law § 201 √ Pub. Health Law § 201(1)(o) √ √ √ Pub. Health Law § 201(1)(p) √ √ √ Pub. Health Law § 201(1)(v) √ √ Pub. Health Law § 206 √ Pub. Health Law § 206(3) √ √ √ Pub. Health Law § 206(6) √ √ Soc. Serv. Law § 363 √ Soc. Serv. Law § 363-a √ √ Soc. Serv. Law § 363-a(2) √ √ Soc. Serv. Law § 363-c(1)(a) √ Soc. Serv. Law § 364(1)(b) √ State Fin. Law § 163(1)(c) √ State Fin. Law § 163(9)(f) √ Not-for-Profit Corp. Law § 508 √ Whether read individually or in conjunction, these statutes fail to delegate to DOH regulatory authority over the levels of compensation paid to executives - or even remotely relate to the topic. Two of the statutes enumerate the general 27 “[f]unctions, powers and duties” of DOH,8 and “powers and duties” of its Commissioner.9 Two of the statutes authorize DOH to “regulate the financial assistance granted by the state in connection with all public health activities,” N.Y. Pub. Health Law § 201(1)(o), and “receive and expend funds made available for public health purposes pursuant to law,” id. § 201(1)(p). Seven statutes apply to the State’s Medicaid program, and charge DOH with responsibility to administer it.10 Another four statutes authorize DOH to enter into contracts with service providers,11 and, in that connection, determine whether a potential contractor is responsible.12 And one statute provides that not-for-profit corporations may make 8 See N.Y. Pub. Health Law § 201 (entitled, “Functions, powers and duties of the department”). 9 See N.Y. Pub. Health Law § 206 (entitled, “Commissioner; general powers and duties”). 10 See N.Y. Pub. Health Law §§ 32(6) (authorizing the Medicaid Inspector General to pursue civil and administrative enforcement actions against individuals or entities engaging in fraud, abuse or illegal or improper acts or unacceptable practices perpetrated within the Medicaid program), 201(1)(v) (authorizing DOH to administer Medicaid program and adopt regulations to implement same); N.Y. Soc. Serv. Law §§ 363 (declaring purposes of Medicaid program), 363-a (consisting of four subsections that set forth certain responsibilities delegated to DOH in connection with the federal Medicaid program), 363-c (1)(a) (directing the social services commissioner to convene meetings regarding Medicaid management, including containing the growth of Medicaid spending), 364(1)(b) (requiring that the department of social services audit payments to providers under Medicaid). 11 See N.Y. Pub. Health Law §§ 206(3) (authorizing DOH Commissioner to enter into contracts with third parties as “necessary and advisable to carry out the general intent and purposes of the public health law and the sanitary code”), 206(6) (stating that DOH Commissioner “may enter into contracts” with various entities for various purposes). 12 See N.Y. State Fin. Law §§ 163(9)(f) (directing agencies, prior to making an award of a contract, to determine responsibility of proposed contractor); 163(1)(c) (defines the terms ”responsible” or “responsibility” as “financial ability, legal capacity, integrity, and past performance of a business entity . . . .”). 28 incidental profits, but cannot divide or distribute them to members, directors or officers.13 But none of these statutes address the subject of executive compensation, either expressly or by necessary implication. In fact, they say nothing about DOH’s ability to control payments to private parties, much less to control what those private parties do with the payments after receiving them from the State. The lack of legislation on this subject has not been the result of legislative inattention. On the contrary, the Legislature has considered a variety of bills relating to executive compensation, but none have passed, and the Governor’s proposal to enact this very scheme through legislation was never enacted. See supra notes 4 and 5, and accompanying text. It is highly unlikely the Legislature would have silently, or at best obscurely, delegated the power to DOH to set limits on executive compensation without explicit discussion. As this Court has observed, the Legislature generally does not “‘hide elephants in mouseholes.’” Cruz v. TD Bank, N.A., 22 N.Y.3d 61, 72 (2013) (quoting Whitman v. Am. Trucking Ass’ns, Inc., 531 U.S. 457, 468 (2001)). The Hard and Soft caps raise “intensely divisive” and complex public policy questions, over which debate rages between policymakers and commentators alike. Joseph G. 13 See N.Y. Not-for-Profit Corp. Law § 508 (corporations may receive, and make incidental profit from, charging of fees or prices for services or products, but, in no case, shall such incidental profits be divided or distributed among members, directors, or officers). 29 Casion & Joshua E. Gewold, New York Limits Executive Compensation and Administrative Expenses at State-Funded Service Providers, LexisNexis Emerging Issues Analysis, at 2 (Jul. 2013), 2013 Emerging Issues 7020.14 Had the Legislature wanted to assign this issue to DOH, it would have done so expressly. It is especially unlikely that the Legislature would have delegated rulemaking authority to DOH, given that it has no expertise or competence regarding executive compensation or corporate governance. (RA. 26.) In enacting the Hard and Soft Caps, DOH leapt well beyond its enabling statutes, and, under color of regulatory authority, addressed “situations not intended to be embraced by the Legislature.” Matter of Owner Occupied Hous., Inc., 72 N.Y.2d at 558. Although “[t]he Legislature is not required in its enactments to supply agencies with rigid marching orders” and the legislative branch may, while declaring “its policy in general terms by statute, endow administrative agencies with the power and flexibility to fill in details and interstices and to make subsidiary policy choices consistent with the enabling 14 A significant (and growing) body of commentary exists which debates measures that could be taken to address excessive executive compensation. See, e.g., Robert E. Wagner, Mission Impossible: A Legislative Solution for Excessive Executive Compensation, 45 CONN. L. REV. 549 (Dec. 2012); Stuart Lazar, The Unreasonable Case for a Reasonable Compensation Standard in the Public Company Context: Why It Is Unreasonable to Insist on Reasonableness, 59 BUFFALO L. REV. 937 (Aug. 2011); Aaron S.J. Zelinsky, Comment, Taxing Unreasonable Compensation: § 162(a)(1) and Managerial Power, 119 YALE L.J. 637 (Dec. 2009); Jennifer S. Martin, The House of Mouse and Beyond: Assessing the SEC’s Efforts to Regulate Executive Compensation, 32 DEL. J. CORP. L. 481 (2007); Lawton W. Hawkins, Compensation Representatives: A Prudent Solution to Excessive CEO Pay, 72 BROOK. L. REV. 449, 450 (Winter 2007). 30 legislation,” the policy choices underlying the Hard and Soft Caps were anything but “subsidiary.” Matter of Citizens For An Orderly Energy Policy v. Cuomo, 78 N.Y.2d 398, 410 (1991). These choices were not even made by DOH, but rather, the Governor in EO38. In short, this is not a case in which “the basic policy decisions underlying the [challenged] regulations have been made and articulated by the Legislature.” Bourquin v. Cuomo, 85 N.Y.2d 781, 785 (1995). The Legislature has empowered DOH to administer healthcare programs and pay healthcare service providers, and ensure that it is done in an appropriate, efficient, and legal way. But none of that authorizes DOH to codify the Governor’s policy choices in EO38 regarding executive compensation. As the Appellate Division dissenter observed, “DOH’s authority to control its own expenditures cannot be reasonably interpreted as authority to control how providers spend earned revenues for past services.” (RA. 31.) The Appellate Division majority acknowledged that no statute “authorizes the creation of the administrative cost and executive compensation limits,” but claimed to have found statutory authorization where none exists because the Hard and Soft Caps were “not inconsistent” with 14 enabling statutes and their underlying purpose. (RA. 19 (internal citation & quotation marks omitted).) The majority was mistaken. Legislative authorization cannot be said to exist merely 31 because the Hard and Soft Caps do not conflict with a statute. The phrase “not inconsistent” seized on by the majority appear in cases involving challenges to regulations that resolve interstitial matters. See Greater N.Y. Taxi Ass’n v. N.Y.C. Taxi & Limousine Comm’n, 25 N.Y.3d 600, 608 (2015) (upholding rules promulgated by the New York City Taxi and Limousine Commission rules that established a particular make and model of vehicle as the City’s official taxicab); accord Matter of Med. Soc’y of State of N.Y. v. Serio, 100 N.Y.2d 854, 866 (2003) (upholding insurance regulations setting time limits for no-fault claims in light of 25-year record of the Superintendent of Insurance filling in such “interstices” in the statutory scheme). In such cases, a broad or ambiguous authorizing act constitutes an implicit delegation from the Legislature to fill in statutory gaps, and a regulation that fills such a gap passes muster if it is “consistent with legislative intent.” Goodwin v. Perales, 88 N.Y.2d 383, 395 (1996). By contrast, where, as here, regulations resolve a significant policy question by imposing substantial burdens or restrictions, statutory breadth or ambiguity cannot be the source of the agency’s authority because the Legislature is more likely to have focused upon, and answered, the question. See Stephen Breyer, Judicial Review of Questions of Law and Policy, 38 ADMIN. L. REV. 363, 370 (1986) (“A court may also ask whether the legal question is an important one. Congress is more likely to have focused upon, and answered, major questions, while leaving interstitial matters to 32 answer themselves in the course of the statute’s daily administration.”). This Court demands specific legislative authorization for such rule-makings. See, e.g., Subcontractors Trade Ass’n, 62 N.Y.2d at 429 (“In order for the executive to lawfully mandate the award of construction contracts to a particular group or category of business enterprise, the legislature must specifically delegate that power to him and must provide adequate guidelines and standards for the implementation of that policy.”) (emphasis in original); Matter of Broidrick, 39 N.Y.2d at 644, 646-47 (specific legislative authorization necessary for City to prohibit discrimination in hiring practices in the construction industry and condition the award of contracts to bidders who submitted an affirmative action plan, notwithstanding the existence of “a strong public policy, expressed in both State and local law, against minority discrimination”).15 The Hard and Soft Caps address no mere interstitial matter. Rather, they make fundamental policy choices that epitomize legislative power. This is indisputable, in light of the Legislature’s ongoing debate over whether and how to 15 In this respect, this Court’s jurisprudence resembles the federal “major questions” doctrine, under which federal courts presume non-delegation of statutory authority in the face of statutory ambiguity over major policy questions or questions of major political or economic significance, on the theory that Congress “does not . . . hide elephants in mouseholes.” Whitman, 531 U.S. at 468 (2001); see also FDA v. Brown & Williamson Tobacco Corp., 529 U.S. 120, 160 (2000) (authorizing an agency to regulate on a matter of “such economic and political significance” would not occur “in so cryptic a fashion”); MCI Telecomms. Corp. v. Am. Tele. & Tele. Co., 512 U.S. 218, 231 (1994) (“It is highly unlikely that Congress would leave the determination of whether an industry will be entirely, or even substantially, rate-regulated to agency discretion - and even more unlikely that it would achieve that through such a subtle device as permission to ‘modify’ rate-filing requirements.”). 33 impose limitations on executive compensation. The Governor attempted to foreclose that debate by ordering his appointees at 13 State agencies to enact EO38 implementing regulations. But the Governor’s intervention only underscores the enormous significance of the Hard and Soft Caps. Such a transformative expansion of DOH’s regulatory authority requires clear legislative authorization. Here there is none. Accordingly, the statutes cited by DOH and the courts below cannot reasonably be interpreted as an implied delegation of authority for DOH to limit compensation paid by private entities to their employees. Unable to tether part 1002’s compensation limits to the text of any statute, the Appellate Division asserted that the Hard and Soft Caps “directly” further the supposed “purpose” underlying 14 statutes - namely, “ensuring that . . . DOH awards service contracts to agencies that will use most of the tax dollars they receive directly on the provision of services . . . .” (RA. 20.) But, in actuality, the Hard and Soft Caps further no such purpose. So long as a provider complies with the 15% administrative expenses cap imposed by part 1002 - which the Managed Care Petitioners do not challenge - the level of compensation it pays to executives (which, by definition, is an administrative expense to the extent that the compensation is unrelated to that individual providing program services) will have no impact on the amount of State dollars spent on the provision of program services. (R. 677; 10 N.Y.C.R.R. § 1002.1(a)(1)(i).) In other words, because part 34 1002 requires a provider to attribute 85% of the funds or payments it receives from the State to provide DOH program services, DOH will receive no more or less such services if the provider chooses to use any portion of the remaining 15% allotted for administrative expenses to pay executives in excess of $199,000. Moreover, neither the Hard nor Soft Cap speaks to the price DOH pays for services, the quality of those services, nor the value DOH (or any New York resident) receives for the State’s money. Instead, the caps merely govern how a Covered Provider may allocate money internally after the payments are received from DOH. Likewise unavailing is the Appellate Division’s invocation of “DOH’s broad power . . . to enter into contracts for the provision of services and care.” (RA. 20.) This Court has rejected the notion that an agency’s power to contract includes the power to regulate through those contracts. See, e.g., Subcontractors Trade Ass’n, 62 N.Y.2d at 428 (invalidating executive order issued by New York City Mayor that required at least 10% of all construction contracts awarded by the City be given to “locally-based enterprises,” holding that “the general power to enter into contracts which is bestowed upon the executive branch of government ordinarily cannot serve as a basis for creating a remedial plan for which the executive never received a grant of legislative power”).16 In a footnote, the Appellate Division 16 See also, e.g., Under 21, Catholic Home Bureau for Dependent Children v. City of N.Y., 65 N.Y.2d 344, 353, 358-59 (1985) (invalidating regulations that forbid City contractors from engaging in employment discrimination based on sexual orientation, because the power to 35 asserted that DOH is only prohibited from using its contracting power to promote nonfiscal “social goals,” such as affirmative action, citing N.Y. State Health Facilities Ass’n v. Axelrod, 77 N.Y.2d 340 (1991). (RA. 21.) However, there is no principled basis for drawing such a line and this Court did not do so in New York State Health Facilities Association, where no mention was made of an agency’s contracting authority or its scope. II. THE HARD AND SOFT CAPS VIOLATE FUNDAMENTAL SEPARATION OF POWERS PRINCIPLES THAT RESERVE CRITICAL POLICY DECISIONS TO THE LEGISLATURE Even if DOH possessed statutory authority to promulgate the Hard and Soft Caps, they violate the separation of powers doctrine for two additional reasons. First, the Legislature unconstitutionally delegated to DOH its power to make critical policy decisions, without statutory standards or guidelines. Second, by promulgating the Hard and Soft Caps, DOH engaged in inherently legislative activity and, thus, exceeded the scope of its constitutional authority. contract does not include the power to establish a policy not set by the Legislature through a statute); Matter of Fullilove v. Beame, 48 N.Y.2d 376, 379 (1979) (“the desirability of adopting a policy of affirmative action in hiring practices, and mandating the same, is not a prerogative of the executive, but rather of the legislative branch”); Matter of Fullilove v. Carey, 48 N.Y.2d 826 (1979) (invalidating affirmative action requirement for state contractors); Matter of Broidrick, 39 N.Y.2d at 647 (invalidating regulations mandating minority hiring percentages for construction contractors because they went “far beyond merely implementing existing State and local law to effectuate equal employment opportunity”). 36 A. Part 1002’s Purported Enabling Acts Violate the Nondelegation Doctrine The State Constitution provides that “[t]he legislative power of this state shall be vested in the senate and assembly.” N.Y. CONST., art. III, § 1. From this language, this Court has derived the nondelegation doctrine, which prohibits the Legislature from constitutionally delegating its legislative power to executive branch agencies. See People v. Garson, 6 N.Y.3d 604, 624 (2006) (“‘Th[e] legislative power cannot be passed on to others.”) (quoting Darweger v. Staats, 267 N.Y. 290, 305 (1935)). The nondelegation doctrine is rooted in the principle of separation of powers that underlies our tripartite system of Government. See Boreali, 71 N.Y.2d at 9 (noting that “the principle that the legislative branch may not delegate all of its lawmaking powers to the executive branch” was “[d]erived from the separation of powers doctrine”). An unconstitutional delegation of legislative power occurs when the Legislature confers upon an agency unrestricted authority to make broad policy decisions. See Rapp, 44 N.Y.2d at 162 (“[T]he Legislature is powerless to delegate the legislative function unless it provides adequate standards.”) (citation omitted). This doctrine rests upon the premise that the Legislature itself must resolve controversial and important issues; it cannot pass on law-making responsibility by delegating that function to others or by failing to establish an effective mechanism to assure the proper implementation of its policy decisions. See Saratoga Cty. Chamber of Commerce, 100 N.Y.2d at 37 821-22 (“separation of powers ‘requires that the Legislature make the critical policy decisions . . . .”); Matter of Levine v. Whalen, 39 N.Y.2d 510, 515 (1976) (“the Legislature cannot pass on its law-making functions to other bodies”). To prevent an unlawful delegation of power, the Legislature must circumscribe the agency’s discretion by limiting the field in which it operates and providing “reasonable safeguards and standards” to govern its exercise. Greater N.Y. Taxi Ass’n, 25 N.Y.3d at 608; see also Matter of Levine, 39 N.Y.2d at 515 (“The Legislature may constitutionally confer discretion upon an administrative agency only if it limits the field in which that discretion is to operate and provides standards to govern its exercise.”); Sullivan Cty. Harness Racing Ass’n v. Glasser, 30 N.Y.2d 269, 276 (1972) (“It is a well-established principle of administrative law that to prevent an unlawful delegation of power, it is incumbent upon the legislative authority to set forth standards to indicate to the agency the limits of its power . . . .”). Under New York’s “strong nondelegation approach,” Jim Rossi, Institutional Design and the Lingering Legacy of Antifederalist Separation of Powers Ideals in the States, 52 VAND. L. REV. 1167, 1197 (Oct. 1999), regulations promulgated pursuant to an enabling act without “strict” standards and safeguards have been held unconstitutional, Gary J. Greco, Standards or Safeguards: A Survey of the Delegation Doctrine in the States, 8 ADMIN. L.J. AM. U. 567, 580-603 (Fall 1994); see Welcher v. Sobol, 222 A.D.2d 1001, 1003 (3d Dep’t 1995) (“Where 38 there has been no direction given to the administrative body, the legislation has been held to be unconstitutional.”) (citations omitted). See, e.g., Packer Coll. Inst. v. Univ. of State of N.Y., 298 N.Y. 184, 189 (1948) (invalidating statute attempting to empower an administrative official to issue licenses without “standards or tests”); Matter of Redfield v. Melton, 57 A.D.2d 491, 495 (3d Dep’t 1977) (invalidating statute and regulations promulgated thereunder that delegated to DMV commissioner “unfettered discretion” to fix license fees without “rules and principles”).17 Here, DOH enacted the Hard and Soft Caps in the absence of any statutory constraints. The hodgepodge of enabling statutes cited by DOH and the courts below provide no statutory safeguards or standards. Accordingly, DOH was powerless to create the compensation limits in part 1002. 17 See also, e.g., Fink v. Cole, 302 N.Y. 216, 225 (1951) (invalidating statute delegating licensing authority to private corporation, stating: “Even if the Legislature’s power to license had been delegated to a governmental agency, the statute now challenged would have to be stricken down for lack of guides and proper standards”); Matter of Concordia Coll. Inst. v. Miller, 301 N.Y. 189, 196 (1950) (invalidating village ordinance because it lacked “standards or guides”); Good Humor Corp. v. McGoldrick, 289 N.Y. 452, 455 (1943) (invalidating tax exemption established under a local ordinance because taxation is a legislative function); Matter of Cherry v. Bd. of Regents of Univ. of State of N.Y., 289 N. Y. 148, 154 (1942) (holding that Legislature cannot delegate to Board of Regents authority “to define, in accordance with an unfettered discretion, the acts or conduct which, in the opinion of the Board, would justify disciplinary action against a dentist”); Seignious v. Rice, 273 N.Y. 44, 49 (1936) (invalidating legislative delegation to New York City Health Commissioner where “Legislature ha[d] not drawn any line of cleavage, nor indicated a standard or measure by which the Commissioner might draw such line”); Timber Point Homes, Inc. v. Cty. of Suffolk, 548 N.Y.2d 250, 253 (2d Dep’t 1989) (invalidating vague enabling statute permitting Commissioner of the Department of Health Services to grant variances); Matter of Levine v. O’Connell, 275 App. Div. 217, 220, 224 (1st Dep’t 1949), aff’d no opn., 300 N. Y. 658 (1950) (invalidating statute authorizing State Liquor Authority, “in its discretion,” to prohibit the sale of any or all alcoholic beverages). 39 The Appellate Division erred by holding that the “underlying purpose” of the cited statutes (as opposed to their texts) established “guidelines” that public health funds should “be used primarily on direct care and services to those in need . . . .” (RA. 21.) In a similar vein, Supreme Court concluded that the statutes upon which it relied collectively articulated a policy that DOH should “get the biggest bang for the buck in the delivery of healthcare and services.” (RA. 22.) These ambiguous articulations of presumed statutory purpose - unsupported by citation to any legislative history - cannot serve as a substitute for text-based statutory safeguards or standards. Compare Matter of Levine, 39 N.Y.2d at 517 (citing examples of “statutory standards” that were held to be “sufficiently specific”). Moreover, the supposed purpose of the statutes does not provide an intelligible principle to guide and confine administrative rule-making or otherwise limit the scope or extent of DOH’s delegated authority. See Matter of City of Utica v. Water Pollution Control Bd., 5 N.Y.2d 164, 169 (1959) (Legislature must at least lay down “‘an intelligible principle,’ specifying the standards or guides in as detailed a fashion as is reasonably practicable in the light of the complexities of the particular area to be regulated.”) (citations omitted). Such license contravenes the nondelegation doctrine essential to the separation of powers embedded in the State Constitution. 40 B. The Hard Cap Violates the Separation of Powers under Boreali v. Axelrod’s Four-Factor Analysis The Hard Cap must also be struck down because its promulgation constituted legislative activity beyond DOH’s rulemaking power. The seminal decision addressing when agency action is “legislative” and therefore ultra vires is Boreali v. Axelrod. There, this Court held that the Public Health Council (“PHC”) overstepped the boundaries of its lawfully delegated authority when it promulgated “a comprehensive code to govern tobacco smoking in areas that are open to the public.” 71 N.Y.2d at 6. Boreali identified four “coalescing circumstances” that, taken together, demonstrated the PHC crossed the line between “administrative rule-making and legislative policy-making.” Id. at 11. The first factor was that the PHC’s anti-smoking regulation was “laden with exceptions,” such as for bars and convention centers, which had “no foundation in considerations of public health,” but rather, reflected economic and social concerns. Id. at 11-12. The second factor was that the PHC “wrote on a clean slate, creating its own comprehensive set of rules without benefit of legislative guidance.” Id. at 13. The third factor was that the PHC had acted in an area in which the Legislature had repeatedly tried - and failed - to reach agreement in the face of substantial public debate and vigorous lobbying. Id. And, the final factor was that “no special expertise or technical competence in the field of health was involved in the development of the antismoking regulations.” Id. at 14; see 41 also Matter of N.Y.C. C.L.A.S.H., Inc. v. N.Y. State Off. of Parks, Recreation & Historic Preserv., 27 N.Y.3d 174, 179-180 (2016) (discussing holding of Boreali and its four-factor analysis). These four factors “are not mandatory, need not be weighed evenly, and are essentially guidelines for conducting analysis of an agency’s exercise of power.” Greater N.Y. Taxi Ass’n, 25 N.Y.3d at 612. The analysis distills to whether, in light of the separation of powers, the agency has acted in a legislative capacity and thus exceeded its regulatory authority. See Matter of N.Y. Statewide Coalition of Hispanic Chambers of Commerce, 23 N.Y.3d at 697 (“Any Boreali analysis should center on the theme that ‘it is the province of the people’s elected representatives, rather than appointed administrators, to resolve difficult social problems by making choices among competing ends.’”) (internal quotation marks & citation omitted); see also, e.g., id. at 690, 697-701 (invalidating New York City Board of Health’s limit on sale of “sugary drinks” to containers no larger than 16 ounces); Matter of Health Ins. Ass’n of Am. v. Corcoran, 76 N.Y.2d 995 (1990), aff’g for the reasons stated by then-Justice Howard A. Levine at 154 A.D.2d 61 (3d Dep’t 1990) (invalidating regulations prohibiting use of HIV-test results to set insurance rates on Boreali and other grounds). Here, every judge who heard this case below concluded under a Boreali analysis that DOH’s Soft Cap exceeded the scope of existing legislative policy and 42 violated the separation of powers doctrine. (RA. 26; R. 15); but cf., Agencies for Children’s Therapy Servs., Inc., 136 A.D.3d at 130 (rejecting challenge to Hard Cap). ) As will be demonstrated, application of Boreali’s four factors compels the conclusion that the Hard Cap should be struck down too. 1. DOH Made Choices Between Policy Goals The first Boreali factor militates heavily against the Hard Cap. In Boreali, the Court found that the PHC had impermissibly acted on its own idea of sound public policy. See Boreali, 71 N.Y.2d at 9 (“Even under the broadest and most open-ended of statutory mandates, an administrative agency may not use its authority as a license to correct whatever societal evils it perceives.”). Such is the case here, too, because the Hard Cap was based on the “policy considerations originating with . . . [EO38] and not the legislature.” Rent Stabilization Ass’n of N.Y.C., 83 N.Y.2d 156, 169 (1993) (construing Boreali). As noted, the Legislature has never established a policy regarding executive compensation. See Campagna, 73 N.Y.2d at 243 (“A key feature of [Boreali] . . . was that the Legislature had never articulated a policy regarding the public smoking controversy.”). The Hard Cap filled that vacuum, by channeling the broad-based policy judgments made in EO38 that entailed complex choices between political, economic and social concerns. Indeed, the Hard Cap codified the balance struck in EO38 between the efficient uses of public funds allocated to 43 program services against the interests of private businesses in administering their internal fiscal affairs. (See RA. 30 (Mulvey, J., dissenting).) That the Hard Cap is based on political, economic and social concerns - as opposed to legislative policy - is underscored by the fact that the Hard Cap is even more laden with exceptions than the smoking ban in Boreali. An entire section of part 1002 (§ 1002.4) is dedicated to waivers. The factors for considering a waiver are not tethered to any legislative standards or guidelines; they relate instead to economic concerns, and include such things as the Covered Provider’s efforts to secure executives at a lower compensation. (R. 691-92; 10 N.Y.C.R.R. § 1002.4(b).) Certain executives with clinical responsibilities are exempted entirely from the Hard Cap’s scope. (R. 678; 10 N.Y.C.R.R. § 1002.1(b) (excluding from definition of “covered executive” certain clinical and program personnel in a hospital or other entities).) The Hard Cap also exempts service providers that received $500,000 or less annually in State funds or State-authorized payments in the previous two years. (R. 679; 10 N.Y.C.R.R. §§ 1002.1(d)(1-2).) Only political, economic or social concerns could justify treating differently two different healthcare executives based on their job descriptions or two different healthcare entities providing state-funded services based on a threshold of State funds they receive. 44 The Hard Cap also excludes categories of healthcare providers, including (1) state, county, and local governments and Native American tribal governments, (2) individuals or entities that receive subsidies in order to provide childcare services, (3) entities where at least 75% of the services paid for by State funds are provided by the individual owners rather than employees or contractors, and (4) entities that provide primarily products rather than services. (R. 678-80; 10 N.Y.C.R.R. § 1002.1(d).) Once again, political, economic and social concerns - rather than established legislative policy - underlie the exclusion of these categories of service providers. Such policymaking “transgressed the line that separates administrative rule making from legislating and thereby exceeded its statutory power.” Boreali, 71 N.Y.2d at 16; see Matter of N.Y. Statewide Coalition of Hispanic Chambers of Commerce, 23 N.Y.3d at 699; Matter of Health Ins. Ass’n of Am., 154 A.D.2d at 73-74. The Appellate Division erroneously suggested that DOH did not impermissibly balance concerns, citing its authority to establish reimbursement rates for certain care and services and contract for health services. (RA. 21.) The Hard Cap has nothing to do with reimbursement rates, and does not govern the price DOH pays for any service. Also, this Court has foreclosed any suggestion that DOH’s contracting power includes the power to regulate the executive 45 compensation of the contracting parties. See Subcontractors Trade Ass’n, 62 N.Y.2d at 428. Likewise unpersuasive is the Appellate Division’s assertion that the “waiver provisions, rather than constituting legislative compromises, further . . . DOH’s purpose of ensuring the efficient provision of quality services with the limited funds it has to disburse.” (RA. 22 (internal quotation marks & citations omitted).) Boreali holds that striking the proper balance among competing concerns “is a uniquely legislative function,” yet it may nevertheless be proper if the agency has been given statutory standards or guidelines. Boreali, 71 N.Y.2d at 12. But no such standards or guidelines apply here. The Appellate Division’s reliance on the presumed penumbral “purpose” of 14 different statutes, unsupported by citation to any legislative history, is unprecedented and dangerous. See Rapp, 44 N.Y.2d at 162 (without “standards there is no government of law, but only government by men left to set their own standards, with resultant authoritarian possibilities”). 2. The Hard Cap Goes Well Beyond Merely Filling-In the Details of Broad Legislation DOH also ran afoul of the second Boreali factor, which asks whether an agency merely filled in the details of a legislatively expressed policy or created its own “comprehensive set of rules without benefit of legislative guidance.” Boreali, 71 N.Y.2d. at 13 (citations omitted); see also Campagna, 73 N.Y.2d at 243 (noting that a “key feature of [the Boreali] case . . . was that the Legislature had never 46 articulated a policy regarding the public smoking controversy”). Here, DOH wrote “on a clean slate” when it promulgated the Hard Cap, creating an entirely new rule that significantly changes the manner in which Covered Providers compensate their executives. Boreali, 71 N.Y.2d at 13. DOH has not - and cannot - cite to any statute or legislative history addressing the policy choices involved in the Hard Cap, or providing guidance with respect to an appropriate executive compensation policy. See Matter of N.Y. Statewide Coalition of Hispanic Chambers of Commerce, 23 N.Y.3d at 699-700 (City Board of Health impermissibly chose ends and engaged in policymaking in adopting portion cap rule for sugary drinks, without “legislative guidance” or “legislative articulation of health policy goals associated with consumption of sugary beverages . . . .”); Matter of Health Ins. Ass’n of Am., 154 A.D.2d at 73-74 (invalidating regulation banning insurers from considering results of AIDS tests, noting that the regulation was written without benefit of legislative guidance). The Hard Cap’s enactment, therefore, was “not an auxiliary selection of means to an end; it reflects a new policy choice” made by the Governor in EO38 - not the Legislature. Matter of N.Y. Statewide Coalition of Hispanic Chambers of Commerce, 23 N.Y.3d at 700. The Appellate Division was mistaken that the Hard and Soft Caps merely flesh out DOH’s authority to determine the services for which it pays. There is not a scintilla of legislative history suggesting that the Legislature intended for DOH to 47 regulate the compensation practices of for-profit and not-for-profit businesses. As the Appellate Division dissenter observed: The Legislature’s signals on this issue are to the contrary and were evident when neither house adopted the caps proposed in the Governor’s 2012-2013 budget bill. Separate bills introduced on behalf of the Governor during the 2012 session proposed compensation caps and were not reported out of committee. (RA. 31 (Mulvey, J., dissenting).) Simply put, the Hard Cap’s promulgation was anything but a run-of-the mill “‘interstitial’ rule making that typifies administrative regulatory activity.” Boreali, 71 N.Y.2d at 13. It was an unprecedented gambit to seize legislative power based on a unique executive order. See Casion & Gewold, New York Limits Executive Compensation and Administrative Expenses at State-Funded Service Providers, LexisNexis Emerging Issues Analysis, at 8 (“Gov. Cuomo’s executive order is unique because it is rare for an executive order to serve as the basis for a complex regulatory scheme, and other states have largely failed in their attempts to limit executive compensation in the nonprofit sector.”). 3. DOH Intruded Upon an Area of Ongoing Legislative Debate The third Boreali factor - whether the agency acted in an area where the Legislature tried and failed to reach an agreement on a policy - also cuts against DOH’s adoption of the Hard Cap. 71 N.Y.2d at 13. One day before the Governor issued EO38, he submitted his Executive Budget to the Legislature, which included 48 proposed legislation that was almost a verbatim recitation of the language of EO38. The Legislature considered the Governor’s proposal, a hearing was held on the necessity of capping executive compensation and administrative expenses, and the New York Senate’s Standing Committee on Investigations and Government Operations issued recommendations substantially different from the Governor’s proposal. (R. 181-246.) The Legislature ultimately rejected the Governor’s proposal, leaving it out of the final budget. Following rejection of the Governor’s budget, the Legislature also failed to pass bills introduced during the 2012 and 2013 legislative sessions regulating executive compensation. (R. 248-52, 315- 317.) Likewise, in the three legislative sessions preceding the effective date of the Hard Cap, the Legislature considered scores of bills that would have created a policy for executive compensation, but failed to pass any of them. See supra notes 4 and 5, and accompanying text. This negative legislative history evidences the Legislature’s inability to agree on “the goals and methods that should govern” any policy limiting executive compensation. Boreali, 71 N.Y.2d at 13. It follows that the policies reflected in the Hard Cap should be resolved by “the people’s elected representatives, rather than appointed administrators . . . .” Id.; see also Matter of Health Ins. Ass’n of Am. v. Corcoran, 154 A.D.2d at 74 (invalidating regulation that touched on issue 49 considered and not adopted in legislative proposals “[o]n three occasions,” which evidenced “legislative indecisiveness on the policy issue”). The Appellate Division misapplied the third Boreali factor, by dismissing as irrelevant the Legislature’s consideration of executive compensation, given that the bills addressing this subject differed from the Hard Cap and only one such bill made it past a legislative committee. (RA. 23.) This Court has never held that a bill identical to the challenged regulation must be voted down by the Legislature to be considered in the third factor. See Boreali, 71 N.Y.2d at 7. To the contrary, in Matter of N.Y. Statewide Coalition Hispanic Chambers of Commerce v. N.Y.C. Dep’t of Health & Mental Hygiene, this Court recognized, with respect to the third factor, that mere “inaction on the part of the state legislature . . . , in the face of plentiful opportunity to act if so desired, . . . constitutes additional evidence that [the regulation in question] amounted to making new policy, rather than carrying out preexisting legislative policy.” 23 N.Y.3d at 700. In any event, the bill introduced at the Governor’s request proposing a Hard Cap the day before EO38’s issuance is virtually identical to DOH’s Hard Cap, which was promulgated pursuant to EO38. (R. 733-34.) 4. No Special Expertise Was Necessary to Promulgate the Hard Cap The fourth and final Boreali factor also cries out for the Hard Cap’s invalidation. In Boreali, the Court concluded that no expertise in health was 50 required to promulgate regulations banning smoking in certain indoor areas, even though “indoor smoking is unquestionably a health issue,” because the regulations just described areas where smoking was prohibited and provided exemptions for various special interest groups. 71 N.Y.2d at 14. Here, the Hard Cap, which addresses how a Covered Provider spends its own money, is even further removed from health considerations that might fall within the ambit of DOH expertise. As even the Appellate Division acknowledged, DOH “has no special expertise in administering regulations governing . . . overall executive compensation or competence in regulating corporate governance.” (RA. 26.) Nor is expertise in health required for salary setting. It was the Governor who commanded the Hard Cap be promulgated in EO38, and it applies equally to thirteen executive agencies in varying fields. It is, therefore, beyond dispute that the Hard Cap was not developed through the special expertise of DOH. The Appellate Division missed the mark by suggesting that DOH’s experience approving contracts and reimbursing providers of health services can serve as a substitute for its lack of expertise regarding executive compensation. (See RA 26.) As noted, the Hard Cap has nothing to do with the approval of contracts or reimbursing providers. 51 In sum, then, a Boreali analysis demonstrates that the Hard Cap was promulgated in excess of DOH’s authority and, thus, violated the separation of powers doctrine. III. THE COMPENSATION LIMITS IN PART 1002 ARE ARBITRARY AND CAPRICIOUS In addition to their constitutional infirmity, the Hard and Soft Caps should be struck down because they are arbitrary and capricious. An administrative regulation cannot stand if it lacks a rational basis, or is unreasonable, arbitrary and capricious. N.Y. State Ass’n of Ctys. v. Axelrod, 78 N.Y.2d 158, 168 (1991). “Administrative rules are not judicially reviewed pro forma in a vacuum, but are scrutinized for genuine reasonableness and rationality in the specific context.” Id. at 166 (citations omitted). Regulations based on speculation and erroneous assumption, or lack an evidentiary basis, are arbitrary and capricious as a matter of law. See, e.g., Matter of Jewish Mem’l Hosp. v. Whalen, 47 N.Y.2d 331, 343 (1979) (invalidating 10% reduction in the amount hospitals were reimbursed for the services of interns and residents because DOH had conducted no studies and there was “no evidentiary basis in the present record” for such a reduction). A. The Hard and Soft Caps Lack an Evidentiary Basis Here, the record is devoid of any “rational, documented, empirical” basis that the Hard and Soft Caps will further their stated purpose of ensuring State 52 funds and State-authorized payments are expended in the most efficient and appropriate manner. N.Y. State Ass’n of Ctys., 78 N.Y.2d at 168. (R. 672-75; Notice of Adoption, 35 N.Y. Reg., issue 22, at 12.) Moreover, DOH has failed to establish a linkage between the Hard and Soft Caps and the problem identified in EO38 that certain entities had used State funds “to pay for excessive administrative costs and outsized compensation for . . . senior executives, rather than devoting a greater proportion of such funds to providing direct care and services to their clients.” Exec. Order No. 38, 8 N.Y.C.R.R. § 8.38. (R. 726.) Indeed, DOH has provided no evidence showing that lower executive compensation paid to Covered Providers will promote greater efficiency or lower prices for healthcare services and plans. Logically, the opposite is true because executives are compensated highly for their ability to bring value to customers. Covered Providers’ ability to recruit qualified individuals will be crippled even at junior levels because of the compensation ceiling those talented individuals would hit as they rise through the organization. Thus, the Hard and Soft Caps are likely to hinder, rather than accomplish, DOH’s goal of efficient use of State funds. The Appellate Division mistakenly concluded that “empirical evidence and sound agency judgment support the promulgation” of part 1002. The data cited by the Appellate Division merely documents increasing health care costs and Medicaid spending generally. (RA. 27.) But DOH has failed to show how 53 lowering executive compensation will impact rising costs and spending. Nor did DOH exercise any judgment - sound or otherwise - in establishing a $199,000 compensation limit. Like 12 other State agencies, DOH simply followed the Governor’s orders in EO38. So, too, the courts below erred by suggesting that the Hard and Soft Caps finds support in a report by a gubernatorial task force that documented isolated instances of State-funded not-for-profit entities paying high compensation to executives. (RA. 27.) The $199,000 limit was drawn from the U.S. Government’s Rates of Basic Pay for the Executive Schedule - not any task force report. See Exec. Order No. 38, 9 N.Y.C.R.R. § 8.38. Further, the Hard and Soft Caps apply to for-profit entities, whereas the task force studied only not-for-profit corporations. (See R. 169-212).) To the extent DOH relies on the task force findings, part 1002 is overbroad and without support. B. The Hard and Soft Caps Use Arbitrary Standards Part 1002 is also laden with arbitrary loopholes, exceptions and standards. Take, for example, the $199,000 compensation limit. DOH has not offered a justification for this figure, nor can it. The figure is not the product of any study of compensation in the healthcare industry, but rather, a federal pay scale for public employees. (See R. 105-07; Exec. Order No. 38, 9 N.Y.C.R.R. § 8.38.) The arbitrary nature of the $199,000 limit is highlighted by the fact that EO38 requires 54 each of thirteen agencies to promulgate regulations with the same limit, with no consideration given to the different industries served by the agencies. See Matter of N.Y. Statewide Coalition of Hispanic Chambers of Commerce v. N.Y.C. Dep’t of Health & Mental Hygiene, No. 653584/12, 2013 N.Y. Misc. LEXIS 1216, at *54 (Sup. Ct., N.Y. Cty., 2013) (Board of Health’s portion cap rule for sugary drinks was “arbitrary and capricious because it applies to some but not all food establishments in the City, it excludes other beverages that have significantly higher concentrations of sugar sweeteners and/or calories on suspect grounds, and the loopholes inherent in the Rule, including but not limited to no limitations on re- fills, defeat and/or serve to gut the purpose of the Rule”), 110 A.D.3d 1 (1st Dep’t 2013), aff’d, 23 N.Y.3d 681 (2014). Also, part 1002 arbitrarily applies the Hard and Soft Caps to Covered Providers of varying sizes. (R. 687; 10 N.Y.C.R.R. § 1002.3(a-b).) Healthcare service providers and health plans include multi-billion dollar companies. Market pay for many executive positions in such companies exceeds $199,000. DOH cannot justify the same pay limit for the CEO of a large public corporation as for the executive of a sole proprietorship or small not-for-profit organization. Likewise, the Hard and Soft Caps arbitrarily fail to allow for any adjustment in the level of permissible executive compensation based on the amount of State funds or State-authorized payments received by a Covered Provider. Thus, a 55 health plan that received $500,000 in State funds or State-authorized payments for each of the preceding two years may pay its executives an unlimited amount but a plan that received just $1 more each year may pay no more than $199,000. Nor can DOH justify the same $199,000 compensation limit regardless of where the executive is located geographically. The cost of living varies tremendously throughout the State - a fact DOH has acknowledged by providing greater reimbursement rates for some services in New York City than other parts of the State.18 Moreover, the Hard and Soft Caps apply to out-of-State entities that meet the criteria for a Covered Provider. (See R. 679; 10 N.Y.C.R.R. § 1002.1(d).) The cost of living in New York is higher than most other parts of the country, yet the same limit applies everywhere. The Appellate Division erroneously found that the waiver provisions in part 1002 serve as a magic cure-all for the manifest irrationality of executive compensation limits that, on their face, apply across the board, without consideration of the size and complexity of the organization, geographic location or the type of service provider. (RA. 22.) But the waiver process requires DOH to evaluate factors about which it has no expertise (e.g., market compensation for comparable executives at comparable providers; the nature, size and complexity of the providers’ operations) as well as factors that have no clear relationship to 18 See Department of Health, Early Intervention Service Rates 2011, http://www.health.ny.gov/community/infants_children/early_intervention/service_rates.htm. 56 ensuring efficient delivery of health services (e.g., a provider’s internal review process for settling executive compensation, or the provider’s efforts to secure comparable executives lower compensation level). (See R. 690-91; 10 N.Y.C.R.R. § 1002.4(a)(2)(i), (iii), (iv), (vi).) Accordingly, as found by the Appellate Division dissenter, the Hard and Soft Caps are voidable as arbitrary and capricious. CONCLUSION This Court should reverse the Appellate Division’s opinion and order to the extent that it declared 10 N.Y.C.R.R. § 1002.3(a) to be valid, and should otherwise affirm. Respectfully submitted, GREENBERG TRAURIG, LLP December 18, 2017 Albany, New York Date: A Henry ISÿGreenberg, Esq. Harold N. Iselin, Esq. 54 State Street, 6th Floor Albany, New York 12207 Tel: (518)689-1492 Fax: (518) 689-1499 Email: greenbergh@gtlaw.com iselinh@gtlaw.com MANATT, PHELPS & PHILLIPS, LLP James W. Lytle, Esq. 136 State Street, Suite 300 Albany, New York 12207 Tel: (528)431-6700 Fax: (212) 431-6767 Email: jlytle@manatt.com 57 58 O’MELVENY & MYERS, LLP Andrew J. Frackman, Esq. Abby F. Rudzin, Esq. 7 Times Square New York, NY 10036 Tel: (212) 326-200 Fax: (212) 326-2061 Email: afrackman@omm.com arudzin@omm.com Attorneys for Appellants-Respondents Coalition of New York State Public Health Plans, New York State Coalition of Managed Long Term Care/Pace Plans, and New York Health Plan Association, Inc. CERTIFICATE OF COMPLIANCE Pursuant to Rules of Practice of the New York Court of Appeals (22 N.Y.C.R.R.) § 500.13(a)(1), I hereby certify that the total word count for all printed text in the body of the brief is 12,610, excluding parts identified as common requirements by § 500.13(c)(3). GREENBERG TRAURIG, LLP i Attorney for Appellants-Respmdents Coalition of New York State Public Health Plans, New York State Coalition of Managed Long Term Care/Pace Plans, and New York Health Plan Association, Inc.