American Assn. of Bioanalysts v New York State Dept. of Health

[*1] American Assn. of Bioanalysts v New York State Dept. of Health 2005 NY Slip Op 52357(U) [18 Misc 3d 1145(A)] Decided on September 9, 2005 Supreme Court, Albany County Tomlinson, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on September 9, 2005
Supreme Court, Albany County

American Association of Bioanalysts, on behalf of itself and its members, et al., Plaintiffs,

against

The New York State Department of Health, et al., Defendants.



6225-99



APPEARANCES:

O'CONNELL AND ARONOWITZ

Attorneys for Plaintiffs

(Jeffrey J. Sherrin, Esq. )

100 State Street

Albany, New York 12207-1885

HON. ELIOT SPITZER, ATTORNEY GENERAL

(David L. Fruchter, A.A.G)

Attorney for Defendants

NYS Department of Law - The Capitol

Albany, New York 12224

Guy P. Tomlinson, J.

Plaintiffs commenced the instant declaratory judgment action challenging the annual fees charged to permitted laboratories pursuant to Public Health Law §576(4) for the laboratory inspection and reference program. Plaintiffs contend that defendants have improperly included numerous costs of general governmental functions not directly incurred in running the laboratory inspection and reference program. Following discovery, plaintiffs have again moved for summary judgment seeking a determination that the clinical laboratories have been overcharged by several million dollars per year. Defendants have cross-moved for summary judgment [*2]declaring that plaintiffs have not been overcharged.

Plaintiffs' first and second causes of actions seek a declaration that the fees imposed pursuant to Public Health Law §576(4) constitute an illegal tax rather than an assessment and that Public Health Law §576(4) is unconstitutional, on its face and as applied. Plaintiffs' third cause of action challenges the laboratory inspection and reference system fees assessed from 1998 to the present on the ground that the fees are excessive and contrary to law. The fourth , fifth and sixth causes of action were dismissed on the prior motions for summary judgment.

Summary judgment is a drastic remedy which should only be granted when there clearly are no triable issues of fact (see Andre v Pomeroy, 35 NY2d 361, 364 [1974]). "[T]he proponent of a summary judgment motion must make a prima facie showing of entitlement to judgment as a matter of law, tendering sufficient evidence to demonstrate the absence of any material issues of fact" (Alvarez v Prospect Hosp., 68 NY2d 320, 324 [1986]).In order to succeed when seeking dismissal of a cause of action on a motion for summary judgment, a party must submit evidence which negates any meritorious cause of action encompassed by the pleadings (see Franceschi v Consolidated Rail Corp., 142 AD2d 915 [1988]; see also Hirsh v Bert's Bikes and Sports, 227 AD2d 956 [1996]; Wilder v Rensselaer Polytechnic Inst., 175 AD2d 534 [1991]). Once the movant has established a right to judgment as a matter of law, the burden shifts to the opponent of the motion to establish, by admissible proof, the existence of genuine issues of material fact (see Zuckerman v City of New York, 49 NY2d 557 [1980]). The Court will view the evidence in the light most favorable to the party opposing the motion, giving that party the benefit of every reasonable inference (see Boyce v Vazquez, 249 AD2d 724, 726 [1998]; Simpson v Simpson, 222 AD2d 984, 986 [1995]).

With respect to the first cause of action challenging the statute on its face, Public Health Law §576(4) provides for the assessment of fees against clinical laboratories to cover the costs of the New York State Department of Health's laboratory inspection and reference system. Specifically, Public Health Law §576(4) states, in relevant part: "4. (a) The department may adopt and amend rules and regulations to effectuate the provisions and purposes of this title. Such rules and regulations shall establish inspection and reference fees for clinical laboratories and blood banks in amounts not exceeding the cost of the inspection and reference program for clinical laboratories and blood banks and shall be subject to the approval of the director of the budget.

The laboratory reference system is defined in Public Health Law §571(3) as follows: " Reference system' means a system of periodic testing of methods, procedures and materials of clinical laboratories and blood banks, including, but not limited to, the distribution of manuals of approved methods, inspection of facilities, cooperative research, and periodic submission of test specimens for examination."

The statute expressly limits the amount of the fees to the costs of running the inspection and reference program.

Pursuant to Public Health Law §574, clinical laboratories are issued permits based upon the qualifications of their directors and staff and whether they are adequately equipped. It is [*3]permissible for a permit fee to recover the actual costs of issuance, inspection and enforcement of permit requirements (New York Tel. Co. v City of Amsterdam, 200 AD2d 315, 317 [1994]; Matter of Torsoe Bros. Const. Corp. v Board of Trustees, 49 AD2d 461, 465 [1975]; Nitkin v Administrator of Health Servs. Admin. of City of NY, 91 Misc 2d 478, 479 [1975], affd 55 AD2d 566 [1976] on opinion below, affd 43 NY2d 673 [1977] on opinion of special term).

As such, all expenses directly related to the inspection and permit system are clearly appropriate. In addition, the Public Health Law requires the Department of Health to maintain a laboratory reference system which tests the clinical laboratory methods, procedures and materials. The reference system requires laboratories to analyze test samples to maintain proficiency and is also available to provide assistance to laboratories with respect to general testing questions or when they are experiencing difficulties with particular tests. Such special services clearly provide a significant benefit to clinical laboratories. As such, they may be assessed fees to cover the costs of the reference system (see Matter of Phillips v Town of Clifton Park Water Auth., 286 AD2d 834 [2001]; Matter of Joslin v Regan, 63 AD2d 466, 470 [1978]).Moreover, in American Assn. of Bioanalysts v Axelrod, (106 AD2d 53 [1985]), the Appellate Division upheld the constitutionality of Public Health Law §576 noting that the "purpose of the subject statute [was] to recover the cost of regulating clinical laboratories, not to raise revenue for the support of government generally" (id. at 56). While there have been intervening amendments to the statute, they have been limited to changes in the method of determining the amount of the fees. None of the changes have broadened the scope of the use of the fees to include general governmental expenses. Accordingly it is determined and declared that Public Health Law §576 is constitutional on its face.

The second cause of action, which seeks a declaration that the statute is unconstitutional as applied, and the third cause of action, which alleges that the fees are contrary to law, are based upon claims that the defendants have consistently utilized fee receipts for purposes not directly related to the inspection and reference program and have included improper costs. Plaintiffs contend that the statute requires the defendants to compute the actual costs of performing the duties required by Public Health Law, article 5, title 5, and further, that this does not include indirect costs. Plaintiffs have not cited any cases which directly hold that indirect costs may not be recovered under a fee system. While Nitkin v Administrator of Health Servs. Admin. of City of NY, (91 Misc 2d 478, 479 [1975], supra), did state that the municipality was attempting to recover indirect costs, including overhead expenses, the decision only indicated that expenses could only be recovered if they were directly related to the costs of issuance, inspection and enforcement. It did not prohibit recovery of related indirect costs.

Plaintiffs also argue that because the statute authorizes recovery of actual costs, indirect costs may not be recovered. While indirect costs may not always be able to be determined with absolute mathematical precision, this does not mean that they are not actual costs. Indeed, the Courts referred to "actual direct and indirect costs" shortly after the statute was amended to require the computation of actual costs (see e.g. Arnot-Ogden Mem. Hosp. v Axelrod, 129 AD2d 103, 111 [1987]; see also Matter of Joslin v Regan, 63 AD2d at 471). Clearly, the laboratory inspection and reference program, which employs in excess of 100 people, incurs actual expenses for buildings, including maintenance, heating and cooling, laboratories, and administrative overhead. Such costs are not merely general governmental expenses. It thus appears that nothing [*4]in the statute prohibits the inclusion of indirect costs as actual costs.

Furthermore, plaintiffs entered into a stipulation of settlement of a prior action challenging similar fees in 1988 in which plaintiffs agreed "not to challenge for all future rate periods the use of the Federal grant indirect cost percentage for purposes of computing the costs of the inspection and reference system program ..." Defendants have used the Federal grant indirect cost percentage for each of the years in question. Plaintiffs contend that they are not bound by such stipulation on the ground that the statute was amended after the stipulation was executed. It does not appear that the amendment, which required the use of actual costs rather than estimated costs, would directly impact the stipulation. In any event, the statute was amended in 1984, well before the stipulation of settlement was executed. The litigation involved fiscal years from 1983-84 through 1988-89, the majority of which were after the amendment. The Court therefore finds that plaintiffs may not challenge the use of the Federal grant percentage of 40% for indirect costs in this action, and further, that inclusion of indirect costs which are directly related to the inspection and reference program is appropriate.

It further appears that plaintiffs have improperly equated the current departmental unit entitled the Clinical Laboratory Evaluation Program with the language of 10 NYCRR §58-3.1 (c), which bases the annual fees upon the total operating expenses of the "clinical laboratory evaluation program." Defendants have shown that at the time the regulation was promulgated, the unit was entitled the Clinical Laboratory Evaluation Unit. Such unit provided the administrative functions for the inspection, permit and certificate of qualification programs. The unit was renamed the Clinical Laboratory Evaluation Program in 1991 without any change in functions or duties. Such unit does not provide proficiency testing services nor does it operate the reference system. As such, the fees which may be charged are not limited to recovery of the expenses of the Clinical Laboratory Evaluation Program as a departmental unit.

Plaintiffs have, however, offered proof that the defendants have included numerous cost items for cooperative research which are not directly related to the reference system, as defined in the statute. As stated above, Public Health Law §571(3) defines the reference system to include

the periodic testing of methods, procedures and materials of clinical laboratories and blood banks. It includes, but is not limited to, inspection of facilities, cooperative research, and periodic submission of test specimens for examination. It is clear from the statutory language that in order for cooperative research to be considered a proper cost of the reference system, it must directly involve the testing of methods, procedures and materials used by clinical laboratories. This may include testing of new methods, procedures and materials, but does not include general biomedical research which might rely upon or result in the need for some form of laboratory testing.

Plaintiffs have submitted proof that defendants have included the costs of research into the effects of PCB's upon nervous system function on the ground that such research might give meaning to already tried and true methods of testing for the presence of PCB's in the body. They have included costs of research into the prevention of rabies, asthma and allergies caused by the invasion of living spaces by bats, mice, other rodents and various insects because laboratory tests were used to identify disease causing materials. Such research is not directly related to testing of methods, procedures and materials of clinical laboratories, and is therefore not properly chargeable to plaintiffs. [*5]

To use the example provided by defendants, research into the presence of genetic markers indicating the presence or future likelihood of macular degeneration would not be properly chargeable to clinical laboratories. Rather, such research involves general health issues. However, once the underlying medical research establishes the existence of some testable phenomenon and the need for testing, the costs of approval of tests for the presence of the condition would be chargeable. Thus, method validation, or research into the issue of whether a certain testing methodology is effective and accurate in determining the existence of some chemical, condition or other phenomenon, would be properly included in the inspection and reference program. However, validation involving underlying research to determine whether a particular test results in medically useful information is not directly related to testing methods, procedures or materials.

Defendants have also funded non-blood tissue banking services, research animal welfare programs, regulated medical waste, physician office laboratory evaluations, environmental laboratory assessments and maternal and child health services from the fees paid by plaintiffs. While each of these might include some component which is directly related to the reference system or the inspection of clinical laboratories, plaintiffs have made a prima facie showing that the funding included numerous items not directly related to the inspection and reference program.

Plaintiffs have also made a prima facie showing that defendants charged numerous items of equipment, supplies and travel which had nothing to do with the inspection and reference program, as well as salaries of persons not involved in the inspection and reference program, to the plaintiffs. Funds earmarked for such program, and restricted to such program by State Finance Law §43, were utilized based upon their availability, rather than the nature of the expenditure. The Court therefore finds that plaintiffs have made a prima facie showing that defendants have included improper charges in the fees charged to clinical laboratories.

Plaintiffs contend that the only appropriate remedy is a refund of the entire amount of the fees they have paid over several years. The cases they cite in support of such relief all involve instances in which the fee, assessment or tax was invalidated in its entirety (see e.g. American Assn. of Bioanalysts v Axelrod, 130 AD2d 889 [1987] [entire fee invalidated as it was not incorporated in the regulations as required by the then wording of the statute]). However, when a portion of a fee is determined to be excessive as not related to the costs and expenses of the regulated program, the Courts have required a refund of only that portion of the fee which is excessive (see Five Boro Elec. Contrs. Assn. v City of New York, 12 NY2d 146, 148 [1962]; Nitkin v Administrator of Health Servs. Admin. of City of NY, 91 Misc 2d at 481). It is therefore determined that plaintiffs are only entitled to a refund of that portion of the fees, if any, which is excessive and exceeds the actual costs of the laboratory inspection and reference program.

Defendants, in opposition to the motion for summary judgment and in support of their cross-motion for summary judgment, have submitted affidavits arguing that all of the cooperative research was properly charged to the inspection and reference program. As indicated above, such contentions are based upon an improper construction of the statute to include items not directly related to the testing of methods, procedures and materials of clinical laboratories. However, the affidavits also allege that many employees of the Department of Health worked on the inspection and reference program, even though they were paid and funded through other sources. Defendants' expenditures and accounting methods were not in strict compliance with State [*6]Finance Law §43, which provides that money appropriated for a specific purpose may not be used for any other purpose. Moreover, defendants clearly failed to comply with Public Health Law § 576(4) (e), which requires a recomputation or accounting of the actual costs and expenses of the program each year (see American Assn. of Bioanalysts v New York State Dept. of Health, 12 AD3d 868 [2004]). However, such defects do not preclude charging expenses actually incurred in operating the inspection and reference program to the plaintiffs, even if such expenditures came from a different budget account.

In addition, defendants rely upon the results of certain surveys conducted of various employees of the Department of Health's research facility. The surveys were created for this litigation, constitute hearsay, are not sworn to and, as determined above, are based upon an improper construction of the law with respect to what activities are actually chargeable to the subject program. While hearsay may be used to defeat a motion for summary judgment, so long as it is not the only evidence submitted, (see Bond v Giebel, 14 AD3d 849, 850 [2005]; Murray v North Country Ins. Co., 277 AD2d 847, 850 [2000]), a less flexible rule is applicable where a party is seeking the affirmative relief of summary judgment (see Zuckerman v City of New York, 49 NY2d at 562). Under such circumstances, hearsay will not meet the movant's burden of submitting admissible evidence conclusively establishing the right to judgment as a matter of law (see Scaccia v Degener, 207 AD2d 599, 599 [1994]; Bodin v Kinne, 128 AD2d 931, 932 [1987]).

The survey results allegedly indicate that the expenses of the inspection and reference program for most years exceeded the amounts charged to plaintiffs, even if the costs of all cooperative research was eliminated. Such proof is sufficient to create a triable issue of fact with respect to the amount, if any, by which plaintiffs were overcharged. It is, however, insufficient to warrant granting summary judgment to defendants.

Accordingly the motion and cross-motion for summary judgment shall be granted to the extent that it is hereby determined and declared that defendants may include the costs of cooperative research which is directly related to the testing of methods, procedures and materials of clinical laboratories in the fees charged to plaintiffs. They may not include the costs of general biomedical research which may utilize or rely upon laboratory testing or which may lead to a need for such testing. It is further determined and declared that the subject statute is constitutional on its face. The motions are otherwise denied.

This memorandum shall constitute both the decision and the order of the Court. All papers, including this Decision and Order, are being returned to the attorneys for defendants. The signing of this Decision and Order shall not constitute entry or filing under CPLR 2220. Counsel are not relieved from the applicable provisions of that section, respecting filing, entry and notice of entry.

IT IS SO ORDERED!

DATED: September 9, 2005________________________________

Albany, New YorkGUY P. TOMLINSON,

Acting Justice of the Supreme Court

[*7]