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.)
REPLY 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: May 21, 2018
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.
i
TABLE OF CONTENTS
TABLE OF AUTHORITIES .................................................................................... ii
PRELIMINARY STATEMENT ............................................................................... 1
I. DOH LACKED STATUTORY AUTHORIZATION TO ADOPT
THE HARD AND SOFT CAPS ...................................................................... 3
A. DOH’s Purported Enabling Acts Do Not Authorize the Hard
and Soft Caps ......................................................................................... 7
B. DOH’s Characterization of the Hard and Soft Caps is
Contradicted by Part 1002’s Text .......................................................11
II. THE HARD AND SOFT CAPS ARE NULL AND VOID UNDER
THE NONDELEGATION DOCTRINE .......................................................13
III. DOH’S ACTION IN LIMITING EXECUTIVE COMPENSATION,
WITHOUT STATUTORY AUTHORITY, REPRESENTS AGENCY
LAWMAKING RATHER THAN PERMISSIBLE INTERSTITIAL
RULEMAKING ............................................................................................15
A. Boreali’s Multi-Factor Analysis is Applicable Here ..........................15
B. Boreali’s Four-Factor Test Confirms that DOH Exceeded its
Authority by Promulgating the Hard Cap ...........................................18
C. The Appellate Division Correctly Invalidated the Soft Cap
Under Boreali ......................................................................................21
IV. The Hard and Soft Caps Are Arbitrary and Capricious ................................24
CONCLUSION ........................................................................................................28
ii
TABLE OF AUTHORITIES
Federal Cases
Chrysler Corp. v. Brown,
441 U.S. 281 (1979) ........................................................................................ 9, 10
Gonzalez v. Oregon,
546 U.S. 243 (2006) .............................................................................................. 7
King v. Burwell,
135 S. Ct. 2480 (2015) ...................................................................................... 3, 6
Liberty Mut. Ins. Co. v. Friedman,
639 F.2d 164 (4th Cir. 1981) .............................................................................. 10
Perkins v. Lukens Steel Co.,
310 U.S. 113 (1940) ............................................................................................ 10
Util. Air Regulatory Grp. v. EPA,
134 S. Ct. 2427 (2014) .......................................................................................... 3
State Cases
Matter of Acevedo v. N.Y. State Dep’t of Motor Vehicles,
29 N.Y.3d 202 (2017) ..................................................................................... 9, 23
Adirondack Health-Uihlein Living Ctr. v. Shah,
125 A.D.3d 1366 (4th Dep’t 2015) ..................................................................... 25
Boreali v. Axelrod,
71 N.Y.2d 9 (1987) ....................................................................... 2, 15, 16, 17, 20
Matter of Broidrick v. Lindsay,
39 N.Y.2d 641 (1976) ....................................................................................... 5, 8
Campagna v. Shaffer,
73 N.Y.2d 237 (1989) ....................................................................................... 4, 5
Matter of City of N.Y. v. State of N.Y. Comm’n on Cable Television,
47 N.Y.2d 89, 92 (1979) ....................................................................................... 9
Matter of Consolidated Edison Co. of N.Y. v. Dep’t of Envtl.
Conservation,
71 N.Y.2d 186 (1988) ......................................................................................... 16
Cruz v. TD Bank, N.A.,
22 N.Y.3d 61 (2013) ............................................................................................. 7
iii
Matter of Fullilove v. Beame,
48 N.Y.2d 376 (1979) ........................................................................................... 8
Matter of Fullilove v. Carey,
48 N.Y.2d 826 (1979) ........................................................................................... 8
Matter of Gen. Elec. Capital Corp. v. N.Y. State Div. of Tax Appeals,
2 N.Y.3d 249 (2004) ............................................................................................. 7
Greater N.Y. Taxi Ass’n v. N.Y.C. Taxi and Limousine Comm’n,
25 N.Y.3d 600 (2015) ............................................................................. 14, 15, 18
Matter of Health Ins. Ass’n of Am. v. Corcoran,
76 N.Y.2d 995 (1990) ......................................................................................... 17
Matter of Koch v. Sheehan,
21 N.Y.3d 697 (2013) ........................................................................................... 9
Matter of Med. Soc’y of State of N.Y. v. Serio,
100 N.Y.2d 854 (2003) ................................................................................... 4, 15
Matter of Medicon Diagnostic Labs. v. Perales,
74 N.Y.2d 539 (1989) ........................................................................................... 9
Matter of N.Y. State Health Facilities Ass’n v. Axelrod,
77 N.Y.2d 340 (1991) ......................................................................................... 25
Matter of N.Y. State Chapter, Inc. v. N.Y. State Thruway Auth.,
88 N.Y.2d 56 (1996) ..................................................................................... 10, 11
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) ..................................................................................... 4, 20
Matter of N.Y.C. C.L.A.S.H., Inc. v. N.Y. State Office of Parks,
Recreation & Historic Preserv.,
27 N.Y.3d 174 (2016) ......................................................................................... 20
Nicholas v. Kahn,
47 N.Y.2d 24 (1979) ......................................................................................... 3, 7
Matter of Owner Occupied Hous., Inc. v. Abrams,
72 N.Y.2d 553 (1988) ........................................................................................... 5
Rapp v. Carey,
44 N.Y.2d 157 (1978) ....................................................................................... 3, 5
Subcontractors Trade Ass’n v. Koch,
62 N.Y.2d 442 (1984) ........................................................................................... 8
iv
Matter of Tze Chun Liao v. N.Y. State Banking Dep’t,
74 N.Y.2d 505 (1989) ........................................................................................... 4
Under 21, Catholic Home Bureau for Dependent Children v. City of
N.Y.,
65 N.Y.2d 344 (1985) ........................................................................................... 8
United Car & Limousine Found., Inc. v. N.Y.C. Tax and Limousine
Com’n,
178 Misc. 2d 734 (Sup. Ct. 1995) ....................................................................... 25
Statutes
N.Y Pub. Health Law § 12 ....................................................................................... 12
N.Y Pub. Health Law §§ 201(1)(o)-(p) ..................................................................... 8
N.Y Pub. Health Law § 225(5)(a) ............................................................................ 16
Other Authorities
10 N.Y.C.R.R. § 1002.1(a) ...................................................................................... 21
10 N.Y.C.R.R. § 1002.3(a) ................................................................................ 12, 27
10 N.Y.C.R.R. §§ 1002.3(b)(1)-(2) ......................................................................... 23
10 N.Y.C.R.R. § 1002.4 ........................................................................................... 27
10 N.Y.C.R.R. § 1002.4(a)(2)(i) .............................................................................. 28
10 N.Y.C.R.R. § 1002.4(a)(2)(iii) ............................................................................ 28
10 N.Y.C.R.R. § 1002.4(a)(2)(iv) ............................................................................ 28
10 N.Y.C.R.R. § 1002.4(a)(2)(vi) ............................................................................ 28
10 N.Y.C.R.R. §§ 1002.6(d)(2)(ii)-(iii) ................................................................... 12
10 N.Y.C.R.R § 1002.6(d)(2)(iv) ............................................................................. 12
18 N.Y.C.R.R. § 504.2(c) ........................................................................................ 23
18 N.Y.C.R.R. § 505.5(a)(2) .................................................................................... 23
34 N.Y. St. Reg., issue 22, at 32 (May 30, 2012) ................................................ 5, 27
Alex Edmans & Xavier Gabaix, Executive Compensation: A Modern
Primer, 54 J. Econ. Lit. 1232 (Dec. 2016) ........................................................... 6
Ira T. Kmy & Steven Van Putten, Myths and Realities of Executive
Pay 47-51 (2007) .................................................................................................. 6
v
New York Court of Appeals Affirms Invalidation of Soda Portion Cap:
New York Statewide Coalition of Hispanic Chambers of Commerce
v. New York City Department of Health and Mental Hygiene, 16
N.E.3d 538 (N.Y. 2014), 128 Harv. L. Rev. 1508 (March 2015) ........................ 5
1
PRELIMINARY STATEMENT1
The separation of powers doctrine provides a system of checks and balances
so that no one branch of government is capable of arrogating power at the expense
of another. This Court has established three principles to maintain the delicate
balance of power between the executive and legislative branches: (1) an
administrative agency may only promulgate regulations that are contemplated or
authorized by the Legislature; (2) a delegation of rulemaking authority must be
accompanied by statutory safeguards and standards; and (3) an agency cannot, in
the exercise of rulemaking authority, engage in inherently legislative activity. In
its answering brief, DOH seeks to sidestep these fundamental principles.
The Managed Care Petitioners demonstrated in their opening brief that the
Hard and Soft Caps should be struck down because the Legislature did not grant
DOH authority to promulgate them. No statute authorizes DOH to regulate the
compensation decisions of private businesses. In response, DOH argues that no
such statute is necessary. But this Court’s jurisprudence is to the contrary. Time
and again, the Court has required specific legislative authorization before allowing
the executive branch to undertake intrusive, politically-charged regulatory
initiatives.
1 In this Reply Brief, the Managed Care Petitioners use the same defined terms used in
their opening brief, which is referred to as the “opening brief” and cited as “MCP Br.” DOH’s
Brief is cited as “DOH Br.”
2
DOH takes a similar tack responding to the Managed Care Petitioners’
argument that the Hard and Soft Caps are invalid because no statutory safeguards
or standards are set forth in the regulations’ purported enabling acts. DOH argues
that statutory safeguards and standards are not necessary. But a mountain of case
law from this Court holds otherwise.
DOH’s cavalier treatment of this Court’s decisions is also reflected in its
attempt to distinguish Boreali v. Axelrod and its progeny into oblivion. In their
opening briefs, Petitioners demonstrated that the Hard Cap’s adoption was not a
proper exercise of DOH’s interstitial powers and intruded on the Legislature’s
prerogatives to make policy choices. Also, the courts below struck down the Soft
Cap as contrary to Boreali. In response, DOH argues that Boreali is inapplicable
because the Hard and Soft Caps are not social regulations concerning matters of
personal autonomy. But DOH ignores this Court’s decisions applying a Boreali
analysis to economic regulations challenged on separation of powers grounds.
Thus, DOH has raised the stakes in this case. If the Hard and Soft Caps are
upheld, the balance of power will be tilted in favor of the Executive Branch at the
Legislature’s expense. Executive orders directing State agencies to make sweeping
regulatory changes, without legislative authorization, will become an accepted
practice. This Court should resist DOH’s power grab by applying the fundamental
principles it long ago established.
3
I. DOH LACKED STATUTORY AUTHORIZATION TO ADOPT
THE HARD AND SOFT CAPS
As demonstrated by the chart on page 26 of the Managed Care Petitioners’
opening brief, DOH has been on a scavenger hunt to find a statute — any statute
— authorizing the Hard and Soft Caps’ adoption. The hunt continues in this Court,
with DOH citing 15 statutes and devoting 23 pages in its answering brief to create
the illusion of statutory authority where none exists. (DOH Br. at 25-48.) Unable
to tether the regulations to the text of a statute or legislative history — and lacking
expertise in executive compensation — DOH says it can place limits on what
private businesses may pay their executives, even when no State funds are used. In
the process, DOH ignores controlling authority, claims powers the Legislature
never gave it, and seeks to reinvent the nature and purpose of Part 1002. The Hard
and Soft Caps raise questions “of deep ‘economic and political significance.’”
King v. Burwell, 135 S. Ct. 2480, 2489 (2015)) (quoting Util. Air Regulatory Grp.
v. EPA, 134 S. Ct. 2427, 2444 (2014)). By promulgating them, DOH intruded in
the Legislature’s domain, “in contravention of the separation of powers doctrine.”
Nicholas v. Kahn, 47 N.Y.2d 24, 30 (1979) (citations omitted).
This Court has long made clear that the executive branch cannot undertake
intrusive, politically-charged regulatory initiatives without specific legislative
authorization. See Rapp v. Carey, 44 N.Y.2d 157, 160 (1978) (Breitel, Ch. J.)
(invalidating executive order establishing ethics rules). While an agency can enact
4
regulations that fill gaps in enabling acts, it can do so only interstitially. See
Matter of Med. Soc’y of State of N.Y. v. Serio, 100 N.Y.2d 854, 865 (2003) (agency
can “fill in the interstices in the legislative product”) (internal citations & quotation
marks omitted). Some self-proclaimed “gaps” are, in fact, chasms too wide to be
filled by agency rulemaking. See Matter of Tze Chun Liao v. N.Y. State Banking
Dep’t, 74 N.Y.2d 505, 510 (1989) (“[a]n agency cannot create rules, through its
own interstitial declaration, that were not contemplated or authorized by the
Legislature . . . .”) (emphasis added). These wider gaps, involving far-reaching
economic and political issues, are reserved exclusively to the Legislature. See
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, 698-99 (2014) (emphasizing
absence of “legislative guidance” in invalidating significant rulemaking). An
agency that leaps across these chasms ignores the crucial distinction between
principled rulemaking and illegitimate usurpation of the legislative role. See, e.g.,
Campagna v. Shaffer, 73 N.Y.2d 237, 243 (1989) (invalidating rule issued by
Secretary of State that “leap[t] well beyond” its enabling act). That is the critical
line DOH crossed with the Hard and Soft Caps.
DOH fails to cite, let alone distinguish, this Court’s seminal decisions
requiring a clear statement from the Legislature to bring issues “of concededly
5
increasing public concern” within the scope of an agency’s rulemaking authority,2
as well as decisions of the U.S. Supreme Court that take a similar approach to
federal regulations which raise major questions.3 Instead, DOH assumes the
conclusion that the Hard and Soft Caps merely fill a gap in the interstices of
statutes conferring general authority on DOH to supervise public-health programs
and ensure the proper expenditure of public funds. (DOH Br. at 1-2, 42-43.)
DOH’s position is unsupported and unsupportable.
The Hard and Soft Caps are not examples of interstitial rulemaking. Quite
the opposite. Rather than being the product of an organic rule-making process that
draws on agency expertise, the Hard and Soft Caps were promulgated at the
Governor’s behest and in lock step with 12 other agencies that adopted parallel sets
of regulations, all of which became effective on the same day. See 34 N.Y. St.
Reg., issue 22, at 32 (May 30, 2012) (“The Department proposes regulations to
implement Governor Cuomo’s Executive Order 38, which sets forth standards for
executive compensation paid by . . . covered providers . . . .”). Moreover, the Hard
2 Rapp, 44 N.Y.2d at 160; see, e.g., Campagna, 73 N.Y.2d at 243 (1989); Matter of
Owner Occupied Hous., Inc. v. Abrams, 72 N.Y.2d 553 (1988); Matter of Broidrick v. Lindsay,
39 N.Y.2d 641, 646-47 (1976).
3 See MCP Br. at 32 n. 15 (citing cases applying the federal “major questions” doctrine);
Case Comment, New York Court of Appeals Affirms Invalidation of Soda Portion Cap: New York
Statewide Coalition of Hispanic Chambers of Commerce v. New York City Department of Health
and Mental Hygiene, 16 N.E.3d 538 (N.Y. 2014), 128 Harv. L. Rev. 1508, 1508 (March 2015)
(New York Court of Appeals’ approach “resembles the federal ‘major questions’ doctrine . . . .”)
(citations omitted).
6
and Soft Cap’s limitations on executive compensation resemble landmark
legislation resolving a major public policy question — not a “routine . . . quality
control” exercise in DOH’s “choice of providers . . . .” (DOH Br. at 44.) Indeed,
executive compensation is among the most controversial and intensely divisive
areas in all of corporate governance. See Ira T. Kmy & Steven Van Putten, Myths
and Realities of Executive Pay 47-51 (2007) (describing historical controversy and
criticism). A fierce debate now rages “on executive compensation in both the
public arena and academia,” spanning economic and political topics, such as
income inequality, corporate finance, and labor economics. Alex Edmans &
Xavier Gabaix, Executive Compensation: A Modern Primer, 54 J. Econ. Lit. 1232,
1232 (Dec. 2016); see also R. 22 (Supreme Court notes that “need to control the
compensation of executives in various types of corporations, particularly not-for-
profit corporations, is increasingly the subject of debate”).) At the same time, the
Legislature has been engaged in a multi-year consideration of limits on executive
compensation. (See MCP Br. at 8-9 (citing proposed bills).)
Thus, had the Legislature wanted to assign rulemaking power over executive
compensation to DOH, “it surely would have done so expressly.” King, 135 S. Ct.
at 2489. It is “especially unlikely” the Legislature would have delegated such
authority, given that corporate governance and executive compensation are
subjects over which DOH has no special expertise or relevant insight. Id. (citing
7
Gonzalez v. Oregon, 546 U.S. 243, 266-67 (2006)); see also RA. 26 (Appellate
Division finds “DOH has no special expertise in administering regulations
governing the overall executive compensation or competence in regulating
corporate governance as such”); R. 24 (Supreme Court finds DOH “has no special
expertise or competence in administering regulations governing the overall
compensation of corporate executives, nor has it special expertise or competence in
regulating the procedural aspects of corporate governance”).) 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) (internal quotation marks and citation
omitted). If ever there was an elephant in a mousehole, the Hard and Soft Caps are
it — and an unconstitutional elephant to boot.4
A. DOH’s Purported Enabling Acts Do Not Authorize the
Hard and Soft Caps
Notwithstanding the absence of an enabling act addressing executive
compensation, DOH claims to find authorization for the Hard and Soft Caps in a
hodgepodge of statutes that confer general spending, contract and program
authority. (See DOH Br. at 26-36.) But DOH does not cite a single case holding
4 The Hard and Soft Caps do not resemble the types of interstitial regulations that this
Court has sanctioned. See, e.g., Matter of Gen. Elec. Capital Corp. v. N.Y. State Div. of Tax
Appeals, 2 N.Y.3d 249, 254-55 (2004) (tax regulation precluding third-party assignees from
applying for refund of sales taxes arising from bad debts); Kahn, 47 N.Y.2d at 32-33 (conflict of
interest rules governing agency employees).
8
that any one of these statutes empowers it to promulgate regulations as intrusive as
the Hard and Soft Caps. In fact, this Court’s jurisprudence cuts the other way.
For example, this Court has repeatedly held that agencies may not use their
contracting power as a source of regulatory authority.5 Undaunted, DOH asserts
that the Court’s limitation on contracting power applies only to regulations that
promote “social” issues, and that “spending” regulations, such as the Hard and Soft
Caps, may be promulgated pursuant to statutes that authorize DOH to enter into
contracts or agreements with responsible parties. (DOH Br. at 29-30.) But it is
simply illogical to conclude that the naked delegation of authority to contract
evidences the Legislature’s intent to also empower DOH to promulgate regulations
of any type — social or economic. DOH fails to cite a single court decision
holding that the power to contract carries with it unrestricted power to promulgate
regulations.
Similarly, citing nothing, DOH argues that the Hard and Soft Caps pass
muster merely because they are not inconsistent with statutes authorizing DOH to
“receive and expend funds” for public health purposes and “regulate the financial
assistance granted by the state in connection with all public health activities.”
Public Health Law §§ 201(1)(o)-(p). (DOH Br. at 27-28.) But to credit the Hard
5 See, e.g., Under 21, Catholic Home Bureau for Dependent Children v. City of N.Y., 65
N.Y.2d 344, 353, 358-59 (1985); Subcontractors Trade Ass’n v. Koch, 62 N.Y.2d 442, 448
(1984); Matter of Fullilove v. Beame, 48 N.Y.2d 376, 379 (1979); Matter of Fullilove v. Carey,
48 N.Y.2d 826 (1979); Matter of Broidrick, 39 N.Y.2d at 647.
9
and Soft caps with the binding effect of law, where there is so strained a thread
between regulation and statute, does violence to established principles of
separation of powers. See Chrysler Corp. v. Brown, 441 U.S. 281, 307-08 (1979)
(invalidating procurement regulations because “thread” between regulations and
enabling act was “so strained” and contrary conclusion would do violence to the
separations of powers doctrine).
Likewise unavailing is DOH’s contention that the power to enact the Hard
and Soft Caps is derived from DOH’s purported “inherent authority” to regulate
the quality and value of services rendered by providers in the Medicaid program.
(DOH Br. at 32-33, 42-43.) As a “creature of the Legislature,” DOH has no
inherent authority, but only those powers conferred upon it by statute. Matter of
City of N.Y. v. State of N.Y. Comm’n on Cable Television, 47 N.Y.2d 89, 92 (1979).
This Court has instructed agencies that they are powerless to act unless and until
the Legislature confers power upon them. See Matter of Acevedo v. N.Y. State
Dep’t of Motor Vehicles, 29 N.Y.3d 202, 221 (2017) (agency possesses only “those
powers expressly conferred by its authorizing statute, as well as those required by
necessary implication”) (internal quotation marks & citations omitted).6
6 Not to the contrary are the two cases cited by DOH that speak to its authority to prevent
providers in the Medicaid program from engaging in fraud or unprofessional conduct. See
Matter of Koch v. Sheehan, 21 N.Y.3d 697, 700 (2013) (upholding Medicaid Inspector General’s
authority to remove unprofessional provider from Medicaid program); Matter of Medicon
Diagnostic Labs. v. Perales, 74 N.Y.2d 539, 545 (1989) (Department of Social Services
authorized to prevent fraudulent diversion of State funds to “untrustworthy provider”). Neither
10
DOH also misplaces reliance on Perkins v. Lukens Steel Co., 310 U.S. 113
(1940), which involved government steel contracts awarded through a competitive
bidding process. DOH’s administration of vast public health programs, such as
Medicaid, cannot fairly be likened to the purchase of goods pursuant to a
procurement contract. Moreover, since Perkins was handed down over 70 years
ago, federal courts have rebuffed efforts by administrative agencies to leverage
procurement spending to promulgate regulations for which there is no nexus to
legislative authority. See Chrysler Corp., 441 U.S. at 307-08 (invalidating
regulation compelling contractors to disclose certain information); Liberty Mut.
Ins. Co. v. Friedman, 639 F.2d 164, 167-69 (4th Cir. 1981) (invalidating regulation
implementing executive order that defined which subcontractors were subject to
affirmative action requirements).
Undoubtedly mindful of case law striking down intrusive regulations based
on ambiguous statutes, DOH pretends that the texts of “multiple statutes”
“expressly” and “unambiguously” direct it to:
● “‘assure prudent use of public moneys and facilitate the acquisition of
high quality goods and services at the lowest possible cost’”;7
● “ensure that . . . spending is directed to program services”;8
decision can be read to confer on DOH carte blanche to adopt any regulation it wishes that
addresses, however tangentially, the “quality and value of services.”
7 DOH Br. at 26, 28 (quoting Matter of N.Y. State Chapter, Inc. v. N.Y. State Thruway
Auth., 88 N.Y.2d 56, 67 (1996)).).
11
● “oversee the . . . fiscal responsibility of private providers”;9 and,
● “ensu[re] that DOH will offer public-health services only to providers
that pay reasonable costs rather than unreasonable executive
compensation and administrative expenses . . . .”10
Contrary to DOH’s assertions, no statute in the Public Health Law or
elsewhere provides any such “express” or “unambiguous” directives. In fact,
DOH’s assertion that it is “unambiguously directed ‘to assure prudent use of public
moneys and to facilitate the acquisition of high quality goods and services at the
lowest possible cost,’” is based not on a statute, but rather, a decision of this Court
describing inapposite competitive bidding laws, none of which are invoked by
DOH to justify the Hard and Soft Caps. (DOH Br. 25-26 (quoting Matter of N.Y.
State Chapter, 88 N.Y. 2d at 67).)
B. DOH’s Characterization of the Hard and Soft Caps is
Contradicted by Part 1002’s Text
There is no substance to DOH’s claim that Petitioners have “fundamentally
mischaracterize[d] the nature and purpose of Part 1002.” (DOH Br. at 3; see also
id. at 36-37.) DOH would have this Court believe that Part 1002 merely guides
8 DOH Br. at 36-37; see also id. at 6. Citing nothing, DOH similarly asserts that the
“core rationale behind Part 1002 is that public funding for health-care services should be used
predominantly for the direct provision of services to needy New Yorkers, rather than for
overhead expenses.” (DOH Br. at 1-2.) The record of Part 1002’s rulemaking does not indicate
that this was the “core rationale” for the Hard and Soft Caps.
9 DOH Br. at 42; see also id. at 28-29.
10 DOH Br. at 33-34.
12
DOH’s decision-making and does not interfere with the internal affairs of private
companies. (DOH Br. at 37.) But this is a post hoc rationalization rather than
Part’s 1002 original intent.
Nor can DOH’s belated litigation spin be squared with Part 1002’s text. By
their terms, the Hard and Soft Caps expressly regulate the conduct of Covered
Providers — not DOH — on pain of sanctions. See e.g., 10 N.Y.C.R.R. §
1002.3(a) (“a covered provider . . . shall not use 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 . . . .”). A Covered
Provider who violates the Hard and Soft Caps may not only find its contract with
DOH terminated, but also its “license” to deliver program services revoked. 10
N.Y.C.R.R. §§ 1002.6(d)(2)(ii)-(iii). In addition, DOH is authorized to seek an
injunction against a Covered Provider and impose penalties, including fines. Id. §
1002.6(d)(2)(iv); Pub. Health Law § 12 (entitled, “Violations of health laws or
regulations; penalties and injunctions”). Thus, DOH’s characterization of Part
1002 as a mere “guide” for the exercise of its discretion is disingenuous.
Finally, DOH seeks to drag this Court down a semantic rabbit hole by
asserting that the terms “Hard Cap” and “Soft Cap” are “misnomers”; that these
regulations merely establish “default benchmarks” that are “adjustable according to
similar flexible standards” under Part 1002’s waiver process. (DOH Br. at 13 n. 7;
13
see also id at 39-41.) The terms Hard Cap and Soft Cap were appropriately used
by the courts below as shorthand descriptions. (RA. 14-16, 20, 25, 26-28; R. 5-6,
9-10, 15, 20, 22-23, 24-26.) Nothing in the record supports DOH’s belated attempt
to recast these regulations as mere “benchmarks,” with no practical effect on
Covered Providers. Indisputably, the Hard and Soft Caps place Covered Providers
at a disadvantage in the highly competitive market for top-notch talent. When
negotiating an employment agreement for an executive position that warrants a
salary in excess of $199,000, the Covered Provider must condition any job offer as
being subject to obtaining a waiver from DOH. In the real world, this can result in
the Covered Provider losing out on the opportunity to recruit or retain an individual
who is unwilling to accept the uncertainty of waiting for a waiver.
II. THE HARD AND SOFT CAPS ARE NULL AND VOID UNDER
THE NONDELEGATION DOCTRINE
In a footnote, DOH buries its response to the Managed Care Petitioners’
argument that the Hard and Soft Caps are invalid under the nondelegation doctrine.
(See DOH Br. at 52 n. 14.) Here again, DOH fails to acknowledge the mountain of
case law from this Court requiring the Legislature to circumscribe an agency’s
rulemaking power by providing statutory safeguards and guidelines. (See MCP
Opening Br. at 37-39 (citing cases).) Instead, DOH suggests that the non-
delegation doctrine no longer has an independent existence except as part of
Boreali’s multi-factor test, and urges this Court to hold that the Legislature need
14
not provide any guidelines for an agency to consider when it “is merely
administering a program it has long regulated.” (DOH Br. at 52 n. 14.). In support
of this radical position, DOH cites a single case: Greater New York Taxi
Association v. New York City Taxi and Limousine Commission, 25 N.Y.3d 600
(2015).
Greater N.Y. Taxi, if anything, demonstrates why the instant case presents a
clear violation of the non-delegation doctrine. First, the Court restated the bedrock
principle of administrative law that the Legislature may only delegate rulemaking
power to an administrative agency if it also provides statutory safeguards and
guidelines. See id. at 608 (“[a] legislature may enact a general statutory provision
and delegate power to an agency to fill in the details, as long as reasonable
safeguards and guidelines are provided to the agency”) (citation omitted). Second,
in rejecting a challenge to regulations promulgated by the New York City Taxi and
Limousine Commission (“TLC”) that established a particular vehicle as the City’s
official taxicab, the Court repeatedly stressed that TLC’s enabling act “enumerated
safeguards and guidelines” for the agency to consider. Id. at 613; see also id. at
609 (“City Charter includes guidelines for the TLC to consider, such as ‘safety,
and design, comfort, convenience, noise and air pollution control and efficiency in
the operation of vehicles’”). Here, by contrast, DOH promulgated the Hard and
Soft Caps, without the benefit of any statutory safeguards and guidelines. Finally,
15
while the “issues of delegation of power and separation of powers overlap and are
often considered together,” the Court did not suggest that that is invariably the case
or otherwise signal the nondelegation doctrine’s demise. Id. at 608 (citation
omitted). In appropriate cases, the Court has observed, an analytical distinction
should be maintained “between the threshold question whether the Legislature has
unconstitutionally delegated its authority to an administrative agency in an
enabling statute, and the related question whether, assuming the Legislature has
not, the agency has exceeded the scope of its constitutionally conferred mandate
‘by using it as a basis for engaging in inherently legislative activities.’” Matter of
Med. Socy. of State of N.Y., 100 N.Y.2d at 864 (quoting Boreali, 71 N.Y.2d at 9).
This is a case where the two issues should be considered separately.
III. DOH’S ACTION IN LIMITING EXECUTIVE
COMPENSATION, WITHOUT STATUTORY AUTHORITY,
REPRESENTS AGENCY LAWMAKING RATHER THAN
PERMISSIBLE INTERSTITIAL RULEMAKING
A. Boreali’s Multi-Factor Analysis is Applicable Here
In response to the Medicaid Managed Care Petitioners’ argument that the
Hard Cap’s adoption constituted impermissible legislative activity under Boreali v.
Axelrod, DOH argues that, as a threshold matter, Boreali is inapt for two reasons:
first, DOH’s enabling acts authorized the adoption of Part 1002 (DOH Br. at 2-3,
49); and second, Boreali does not apply where an agency supervises a program it
16
has been delegated authority to administer (DOH Br. at 61-63). Both arguments
are meritless.
As shown above, DOH has failed to establish legislative authorization for
the Hard and Soft Caps. But even if there were a nexus between these regulations
and a DOH enabling act — which there is not — that does not end the inquiry
under Boreali. As this Court has observed, “[t]here are limits . . . on what an
agency may do even when it operates under a valid grant of authority from the
Legislature.” Matter of Consolidated Edison Co. of N.Y. v. Dep’t of Envtl.
Conservation, 71 N.Y.2d 186, 191 (1988); see also 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.”) (citations omitted). In Boreali, the Court struck down regulations
promulgated by the State Public Health Council (“PHC”) that prohibited smoking
in areas open to the public. The regulations were promulgated pursuant to a broad
grant of statutory authority to “deal with any matters affecting the security of life
or health or the preservation and improvement of public health in the state of New
York.” Pub. Health Law § 225(5)(a); Boreali, 71 N.Y.2d at 8-9. It was undisputed
that exposure to tobacco smoke was a serious health hazard to the nonsmoking
public. However, notwithstanding the express statutory authorization to
promulgate regulations to protect and foster public health, the Court held that the
17
PHC’s smoking ban raised “difficult social problems,” requiring “choices among
competing ends,” which were unsuited for determination by an administrative,
rather than a legislative, body. Boreali, 71 N.Y.2d at 13; see also id. at 9 (“we . . .
conclude that the agency stretched that statute beyond its constitutionally valid
reach when it used the statute as a basis for drafting a code embodying its own
assessment of what public policy ought to be”).
Also, DOH is just wrong that “this Court has never relied on Boreali to
invalidate an agency’s regulation of a program that it has been delegated
comprehensive authority to supervise.” (DOH Br. at 3, 61.) In Matter of Health
Insurance Association of America v. Corcoran, this Court struck down an
Insurance Superintendent’s regulation prohibiting the use of HIV tests as an
underwriting factor in setting health insurance rates. 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). The Superintendent was vested with broad authority to prescribe
regulations to supervise the insurance industry, establish minimum standards for
health insurance policies, and prohibit unfair discrimination in the terms and
conditions of such policies. See id. at 67-68 (citations omitted). Nevertheless,
relying on a Boreali analysis, among other grounds, the Court annulled the
Superintendent’s ban on the use of HIV testing for insurability. 154 A.D.2d at 72-
73 (following Boreali).
18
Further, contrary to DOH’s assertions, Boreali is not limited to social
regulations concerning matters of personal autonomy. (DOH Br. at 61-62.) This
Court has applied a Boreali analysis to administrative rulemakings raising
separation of powers concerns, without regard to the subject matter addressed by
the regulations. See e.g., Greater N.Y. Taxi Ass’n v. N.Y.C. Taxi and Limousine
Comm’n, 25 N.Y.3d 600, 610-12 (2015) (applying Boreali analysis in deciding
separation of powers challenge to taxi regulations).
B. Boreali’s Four-Factor Test Confirms that DOH Exceeded
its Authority by Promulgating the Hard Cap
Nothing in DOH’s brief belies the fact that Supreme Court misapplied
Boreali’s four factors in analyzing the Hard Cap. Regarding the first Boreali
factor — whether the agency considered concerns unrelated to public health —
DOH clearly took into account economic and political considerations. There is no
basis for DOH’s conclusory assertion that the $199,000 cap reflects only health
concerns because it is “reasonable to believe” that a salary in excess of that figure
may “divert[] resources from public-health purposes.” (DOH Br. at 52.) DOH
does not say why such belief is reasonable or adduce an empirical basis for it. The
closest DOH comes to a justification for Part 1002’s compensation limits is an
assertion that they reflect “the common sense judgment that companies that spend
less on executive compensation . . . will spend more on providing health care.”
(DOH Br. at 2; see also id. at 34.) But this expression of supposed “common
19
sense” gives new meaning to the old adage, “Do as I say, not as I do.” For, the
State routinely pays its executives at State-operated health care facilities salaries
that dwarf $199,000 a year.11
Nor is there record support for DOH’s assertion that Part 1002’s exemptions
and waiver provisions reflect only health concerns because they promote Part
1002’s core purpose of “[e]nsur[ing] State funds and State-authorized payments
are expended in the most efficient manner.” (Notice of Adoption, 35 N.Y. Reg. 12
(May 30, 2012) (R. 741); DOH Br. at 52-53.) Again, DOH fails to produce an
empirical basis for its claim that the exemptions or waivers lead to more efficient
use of State funds.
The second Boreali factor also cuts against the Hard Cap, because DOH
wrote this regulation on a clean slate. As demonstrated above and in the Managed
Care Petitioners’ opening brief, none of the statutes DOH relies on even mentions
executive compensation, much less provides legislative guidance with respect to
this subject.
The third Boreali factor also applies here because DOH acted in an area
where the Legislature tried and failed to act. DOH misstates the law when it
11 The salaries of persons employed by State-operated health care facilities are matters of
public record, and can be found on the Empire Center for Public Policy, Inc.’s website. See
Through New York, http://seethroughny.net/payrolls. As shown on this website, the State pays
salaries well in excess of $199,000 to State employees working in State-operated health care
facilities, including to individuals who do not appear to engage solely in the provision of
program services.
20
argues that “Boreali’s third factor is present only when there has been prolonged
legislative deadlock on precisely the same subject where the agency has chosen to
regulate . . . .” (DOH Br. at 56.) Such a narrow reading of the third factor was
rejected in Matter of N.Y. Statewide Coalition Hispanic Chambers of Commerce,
23 N.Y.3d at 700 (holding that mere legislative “inaction on the part of the state
legislature . . . , in the face of plentiful opportunity to act if so desired simply
constitutes additional evidence that [a regulation in question] amounted to making
new policy, rather than carrying out preexisting legislative policy”). Similarly,
DOH misconstrues Boreali by suggesting that bills which die in committee cannot
support a legislative rejection. (DOH Br. at 57.) Boreali never indicated that a bill
must be voted down by the Legislature to be considered in the analysis of the third
factor. See 71 N.Y.2d at 7. Here, where the Legislature considered numerous bills
that would have set a policy on executive compensation but declined to adopt any
of them, DOH was not permitted to enact the Hard Cap. Boreali, 71 N.Y.2d at
13.12
12 Matter of N.Y.C. C.L.A.S.H., Inc. v. N.Y. State Office of Parks, Recreation & Historic
Preserv., 27 N.Y.3d 174 (2016), on which DOH relies, does not mandate a contrary conclusion.
(DOH Br. at 57.) That case involved outdoor smoking regulations adopted by the Office of
Parks, Recreation and Historic Preservation (“OPRHP”). OPRHP had previously been granted
authority to “[p]rovide for the health, safety and welfare of the public using facilities under its
jurisdiction,” and this Court found that legislative inaction could have been due to this prior
delegation of authority to regulate non-smoking areas. Id. at 177, 184. The instant case is
distinguishable, because unlike the direct connection between public health and smoking, DOH
has failed to demonstrate any connection between public health and executive compensation.
21
The fourth Boreali factor also counts against the Hard Cap because DOH did
not draw on any special expertise or competence. DOH’s past experience
“administering the limited funds available for public health-care purposes” — or
even “evaluating the fiscal responsibility of service providers” — perhaps was of
use in developing Part 1002’s administrative expenses cap. (DOH Br. at 58-59; 10
N.Y.C.R.R. § 1002.1(a).) But that experience is irrelevant to the establishment of
limits on executive compensation. And, as found by the courts below, DOH has no
special expertise or competence in this area. (RA. 26; R. 24.)
C. The Appellate Division Correctly Invalidated the Soft Cap
Under Boreali
Applying a Boreali analysis, the courts below correctly struck down the Soft
Cap because its adoption intruded on the Legislature’s prerogative to make policy
choices about overall executive compensation from sources beyond taxpayer
funds. (R. 20-24; RA. 26.) In the last few pages of its brief, DOH mounts a half-
hearted defense of the Soft Cap, not even bothering to apply the four Boreali
factors. (See DOH Br. 72-76.) The reason for this is obvious — the Soft Cap is
indefensible.
As to the first Boreali factor, the Appellate Division correctly held that, “by
attempting to regulate executive compensation from all sources, DOH was acting
on its own ideas of sound public policy.” (RA. 26.) Supreme Court reached the
same conclusion, adding that the connection between efficiently using taxpayer
22
funds is remote from regulating compensation from non-State funds. (R. 21.)
DOH asserts that the Soft Cap is needed to protect against the “indirect use of state
funds,” in circumstances where a substantial portion (but still less than $199,000)
of an executive’s salary comes from State funding and a Covered Provider certifies
to DOH that no State funds above $199,000 were used to pay such salary. (DOH
Br. At 75-76.) As Supreme Court observed, however, this argument proves too
much — it would allow DOH “to reach unduly into corporations’ prerogative to
allocate assets and income from non-governmental sources.” (R. 22.) By DOH’s
logic, in taking State funds, corporations’ internal decision-making on any subject
could be placed under State control, just because there was some indirect
possibility that doing so could lead to more efficient use of State funds.
Likewise baseless are DOH’s conclusory assertions that an executive salary
in excess of $199,000 from “any” sources of funding is “facially excessive,” raises
a “red flag” and “warrants scrutiny” (DOH Br. 72-74), except if it meets two
conditions: (1) the amount of compensation is less 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, and (2) the amount has been reviewed and approved by the Covered
Provider’s board of directors or equivalent governing body, and such review
23
“incude[s] an assessment of appropriate comparability data,” 10 N.Y.C.R.R. §§
1002.3(b)(1)-(2). DOH offers no empirical basis for either the $199,000 cap or
75th percentile exception. Further, it is impossible for a Covered Provider to
satisfy the Soft Cap’s exception, because whether an executive salary exceeds the
75th percentile of compensation for comparable executives at comparable
providers requires a compensation survey recognized by DOH, and DOH has not
identified any such study.
The second Boreali factor — whether the agency wrote on a clean slate —
also demonstrates the Soft Cap’s unconstitutionality. By seeking to regulate
executive salaries paid for from non-State funds, “the soft cap provision ventures
outside DOH’s legislative mandate to manage the efficient and effective use of
taxpayer money for health care and related services . . . .” (RA. 26; R. 22.)
Contrary to DOH’s assertions, the Legislature has never authorized DOH to
regulate the use of non-State funds by a private business. (DOH Br. 75-76.)
Unable to identify any statute authorizing such regulation DOH cites two of its
own regulations. (DOH Br. 74 (citing 18 N.Y.C.R.R. §§ 504.2(c), 505.5(a)(2)).)
However, DOH cannot derive power it doesn’t have from a regulation; the
Legislature must delegate the power in the first instance. Matter of Acevedo, 29
N.Y.3d at 221.
24
The third Boreali factor also cuts against the Soft Cap, because the
Legislature has tried and failed to pass statutes addressing executive compensation.
As Supreme Court found, too, the Legislature has already enacted a
“comprehensive statutory scheme” for regulating corporations’ discretion to set
compensation, which the Soft Cap provision would undermine. (R. 22-23 (citing
statutes).)
Finally, in striking down the Soft Cap, the courts below placed great weight
on DOH’s lack of special expertise in overall executive compensation and
competence in regulating corporate governance. They both also stressed that the
Soft Cap “meddles significantly in the decision-making processes of corporations’
governing bodies, both substantively by setting the ‘75 percentile’ rule and
procedurally by defining the approval processes themselves.” (RA. 24; R. 26; R
24.)
In sum, then, a Boreali analysis demonstrates that the Soft Cap was
promulgated in excess of DOH authority and, thus, violated the separation of
powers doctrine.
IV. The Hard and Soft Caps Are Arbitrary and Capricious
There is no merit to DOH’s contention that it is premature for this Court to
entertain a facial challenge to the Hard and Soft Caps on the ground that they are
arbitrary and capricious. Contrary to DOH’s assertion, the courts below did not
25
hold that such a facial challenge was premature, but rather, that any concerns
Petitioners may have with whether DOH will arbitrarily administer Part 1002,
particularly its waiver provisions, were ill-suited to a declaratory judgment action.
(RA. 28; R. 27.); see also Matter of N.Y. State Health Facilities Ass’n v. Axelrod,
77 N.Y.2d 340, 350 n.3 (1991) (stating in dicta that if agency acts in arbitrary,
capricious, or irrational manner in considering whether provider may deviate from
the regulations, provider may challenge such action in Article 78 proceeding).
Here, the Managed Care Petitioners challenge the Hard and Soft Caps on
their face — not how DOH may seek to apply them or the waiver provisions in the
future. DOH has not cited any authority that requires the Managed Care
Petitioners to bring such a challenge on an as-applied basis. Covered Providers
should not be forced to wait to bring a challenge until harm has already befallen
them and the public. See, e.g., United Car & Limousine Found., Inc. v. N.Y.C. Tax
and Limousine Com’n, 178 Misc. 2d 734 (Sup. Ct. 1995) (permitting facial
challenge to regulations that sought to require increased liability insurance for taxi
cabs); see also Adirondack Health-Uihlein Living Ctr. v. Shah, 125 A.D.3d 1366
(4th Dep’t 2015) (hybrid Article 78/declaratory judgment action proper proceeding
to challenge facial constitutionality of a regulation).
Turning to the merits, DOH claims that Part 1002 is supported by “empirical
evidence and sound agency judgment,” but this is nothing more than empty words.
26
(DOH Br. at 69.) A few isolated reports of State-funded entities paying high
compensation to executives do not justify interfering with the internal decisions of
all Covered Providers merely because those providers receive State funding. In
fact, the task force, on whose findings DOH relies, confirms the arbitrariness of
Part 1002 because the task force only evaluated not-for-profits, but Part 1002 also
cover for-profit entities. (See R. 169-176.) Thus, even if the task force’s findings
provide support for Part 1002 as applied to non-profit entities, it cannot do so for
application to for-profit companies. To the extent DOH relies on the task force
findings, Part 1002 is overbroad and without support.
So, too, rising healthcare costs do not justify the Hard and Soft Caps. DOH
has not shown how lowering executive compensation will have any impact on
rising costs. And a general desire for lower healthcare costs cannot be read to
authorize DOH to promulgate any regulation it wants.
Simply put, the $199,000 cap is arbitrary because DOH has not explained
why that particular number is justified. DOH acknowledges that the compensation
limit is based on the federal employee pay scale, not on any evaluation of
compensation in the healthcare industry in New York. (DOH Br. 12-13.) And
DOH offers no explanation for why the same limit should apply across all 13
agencies covered by EO38. DOH also erroneously argues that the $199,000
compensation limit and the Soft Cap’s 75th percentile exception represent a
27
“flexible system of benchmarks” that DOH was not required to calculate with
mathematical precision. (DOH Br. at 71.) This misconstrues the Hard and Soft
Caps, which are not “benchmarks,” but an upper ceiling on compensation, subject
to limited waiver provisions. See N.Y.C.R.R. § 1002.3(a).
Additionally, DOH has not demonstrated that the $199,000 cap furthers Part
1002’s stated purpose of “[e]nsur[ing] state funds and state authorized payments
are expended in the most efficient manner.” Notice of Adoption 34 N.Y. St. Reg.,
issue 22, at 32 (May 30, 2012) (R. 741). There is no record support for such
speculation, and the cap is just as likely, if not more likely, to hinder this avowed
goal. The Hard and Soft Caps will have a disruptive effect on the provision of
healthcare services because Covered Providers will be less able to recruit and
retain top talent, or may be unable to participate in the Medicaid program,
curtailing New Yorkers’ choice of providers.
Finally, the potential for a Covered Provider to obtain a waiver does not
provide a rational basis for the Hard and Soft Caps. See 10 N.Y.C.R.R. § 1002.4.
DOH claims that the waivers will allow it to “ensure that when state funds are used
to pay a high level of compensation, it is because a provider has a demonstrated
need to pay that salary to deliver the services it has agreed to provide.” (DOH Br.
at 71.) But the waivers require 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 ensuring efficient delivery of health
services (e.g., a provider’s internal review process for setting executive
compensation, or the provider’s efforts to secure comparable executives at lower
compensation levels). See N.Y.C.R.R. §§ 1002.4(a)(2)(i), (iii), (iv), (vi). These
factors are just as arbitrary as the $199,000 cap and the 75th percentile exception.
CONCLUSION
For the foregoing reasons, and the reason set forth in the Managed Care
Petitioners’ opening brief, this Court should reverse the Appellate Division’s
decision on the Hard Cap, and should otherwise affirm.
Date: May 21, 2018
Albany, New York
Respectfully submitted,
GREENBERG TRAURIG, LLP
HenryÿM. Greenberg
Hardfa N. Iselin
54 State Street, 6th Floor
Albany, New York 12207
Tel: (518)689-1492
Fax: (518) 689-1499
Email: greenbergh@gtlaw.com
iselinh@gtlaw.com
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MANATT, PHELPS & PHILLIPS, LLP
James W. Lytle
136 State Street, Suite 300
Albany, New York 12207
Tel: (518) 431-6700
Fax: (518) 431-6767
Email: jlytle@manatt.com
O’MELVENY & MYERS, LLP
Andrew J. Frackman, Esq.
Abby F. Rudzin, Esq.
7 Times Square
New York, NY 10036
Tel: (212) 326-2000
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.
ALB 2118722v3
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 6,935, excluding parts identified as
common requirements by § 500.13(c)(3).
GREENBERG TRAURIG, LLP
:
Henry M?Greenberg