| American Assn. of Bioanalysts v New York State Dept. ofHealth |
| 2010 NY Slip Op 06195 [75 AD3d 939] |
| July 22, 2010 |
| Appellate Division, Third Department |
| American Association of Bioanalysts et al.,Respondents-Appellants, v New York State Department of Health et al.,Appellants-Respondents. |
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Rose, J. Appeals (1) from a judgment of the Supreme Court (Sheridan, J.H.O.), enteredSeptember 30, 2008 in Albany County, which, among other things, declared the costs includablein certain annual inspection and reference fees assessed by defendant Department of Health, and(2) from an order of said court, entered June 22, 2009 in Albany County, which denied plaintiffs'motion to amend the judgment.
Plaintiffs are a trade association and a number of its clinical laboratory members that wererequired to pay inspection and reference fees to defendant Department of Health because theywere located in or accepting specimens from New York State (see Public Health Law, art5, tit V). The Department is authorized to impose these annual fees in an amount not exceedingthe actual cost of operating and administering the clinical laboratory inspection and referencesystem program mandated by Public Health Law § 576 and further defined in PublicHealth Law § 571 (3) (hereinafter the program). The program is operated and administeredby the Department's Wadsworth Center, which also performs routine examinations and analyses,as well as original investigations and research in fulfillment of the Department's numerous other[*2]responsibilities regarding public health (see PublicHealth Law § 500). Program work was dispersed throughout the Wadsworth Center's sixdivisions and more than 30 laboratories, with none of them exclusively dedicated to it. Plaintiffscommenced this action to obtain a declaration that the fees imposed for fiscal years 1998-1999through 2005-2006 exceeded the Department's actual costs of operating the program in violationof Public Health Law § 576 (4), and to annul and recover them.
When plaintiffs' action first came before us, it was revealed that the Department had not keptcontemporaneous records of the actual costs of operating the program as required by PublicHealth Law § 576 (4) (b) and (e), and defendants argued that it would be undulyburdensome to require them to disclose the expenditures of the various divisions and laboratoriesof the Wadsworth Center that had been charged to plaintiffs. We required them to disclose thesecosts, however, and held that the burden of doing so was "solely due to defendants' failure toabide by statutory mandate for the years in question" and that "their laxity fueled the complexityof this litigation" (12 AD3d 868, 869 [2004]). Later, when the parties appealed the denial of theircross motions for summary judgment, we treated this matter as a hybrid action/specialproceeding with the application to annul the fees being the CPLR article 78 portion. We thenheld that the words "actual costs" are used in Public Health Law § 576 (4) (b) and (e) todistinguish them from estimated costs and to refer to the costs necessarily incurred by theDepartment in operating the program during a particular fiscal year (33 AD3d 1138 [2006]).Inasmuch as there was no dispute that the Department had failed to keep the records necessary tocompute the actual costs of the program and had used program funds to pay nonprogramexpenses of the Wadsworth Center, we determined that the fee assessments were arbitrary andcapricious as a matter of law (id. at 1140-1141). Nonetheless, because the Departmentclaimed to have reconstructed the costs of the program by surveying the Wadsworth Center'sstaff and compiling their estimates of the attributable personnel time, equipment and materials,we affirmed the finding of Supreme Court (Tomlinson, J.) that those surveys were sufficient toraise questions of fact as to the amount of any refund of overcharges. Thus, we left it to SupremeCourt to determine, as a matter of fact after trial, what costs were properly chargeable to theclinical laboratories for the years in question here (id. at 1141).
At trial, Supreme Court (Sheridan, J.H.O.) placed the burden upon defendants to presentcompetent, legally sufficient evidence in support of their claimed actual costs, but maintainedplaintiffs' ultimate burden of persuasion as to any overcharge. Defendants then presented theresults of a second cost survey that was conducted after we rendered our decision and had notbeen previously disclosed to plaintiffs. Supreme Court discounted the results of that survey,however, because they were based on "bald estimates" having little probative value, and thecourt found that defendants had included costs that were not reliably established or proven to bereasonably necessary for the operation of the program. The court then remanded the matter to theDepartment for recalculation of the inspection and reference fees using only the costs found tobe adequately proven as necessary for the program's operation. Defendants now appeal from thatjudgment, and plaintiffs appeal from a subsequent order denying their application to recoverprejudgment interest upon the amount of any refunds owed to them.
Following our determination in the CPLR article 78 portion of this matter that defendants'assessment of fees was arbitrary and capricious for failure to comply with the statutory mandate,the remaining issue to be determined in the declaratory judgment portion was which costs areproperly includable. That factual determination depended upon whether the costs claimed bydefendants were shown to be for activities, equipment and materials reasonably [*3]necessary for the program's operation, and whether the amounts ofthe properly includable costs were sufficiently proven. Defendants now challenge SupremeCourt's delineation of the program's components as well as its determination that the costamounts of those components were largely unproven.
Defendants first argue that Supreme Court should have determined only whether or not theDepartment's recalculation of the program's costs was arbitrary and capricious, and that sincetheir survey method for reconstructing those costs was rational despite its mathematicalimprecision, Supreme Court could not reject it as unreliable. We disagree. The arbitrariness ofthe fees imposed by the Department was previously demonstrated and affirmed by this Court.What remained to be done thereafter was not a CPLR article 78 review of the rationality of theDepartment's methodology, but a declaration of what costs of the program were sufficientlyproven as a setoff against the full refund of fees claimed by plaintiffs. Nor was the court requiredto merely defer to defendants' methodology because, in reconstructing the program costs, theDepartment was not "acting pursuant to its authority and within its area of expertise" (Matter of Riverkeeper, Inc. v Johnson,52 AD3d 1072, 1074 [2008], lv denied 11 NY3d 716 [2009]). The Department hadstatutory authority only to keep contemporaneous records of actual costs and none of itsregulations contemplates or permits basing the program's fees upon retrospective reconstructionof its costs (see 10 NYCRR 58-3.1—58-3.6). Unlike here, the governmentalagencies in the cases cited by defendants in arguing for deference for their methodology wereinterpreting and implementing their own regulations in article 78 proceedings (see e.g.Matter of New York Assn. of Homes & Servs. for Aging v Commissioner of N.Y. State Dept. ofHealth, 87 NY2d 978, 982 [1996], revg on dissenting ops of Crew III and Casey,JJ., 212 AD2d 163, 170-172 [1995]). In addition to being unsupported by any regulation,reconstruction of the program's cost was not an exercise of the Department's expertise in publichealth matters and was performed only for purposes of this litigation (see Parker v Office ofPersonnel Mgt., 974 F2d 164, 166 [Fed Cir 1992]).
Accordingly, Supreme Court applied the appropriate standard here and properly assessedwhether the costs alleged were necessary for the statutorily mandated program and whetherreliable factual evidence supported their assessment (see Jewish ReconstructionistSynagogue of N. Shore v Incorporated Vil. of Roslyn Harbor, 40 NY2d 158, 163 [1976];Matter of Phillips v Town of Clifton Park Water Auth., 286 AD2d 834, 835 n [2001]).Following such a nonjury trial and taking into account "that the trial judge had the advantage ofseeing the witnesses" (Northern Westchester Professional Park Assoc. v Town ofBedford, 60 NY2d 492, 499 [1983] [internal quotation marks and citation omitted]), "weindependently review the weight of the evidence and may grant the judgment warranted by therecord, while according due deference to the trial judge's factual findings" (Charles T. Driscoll Masonry RestorationCo., Inc. v County of Ulster, 40 AD3d 1289, 1291 [2007] [internal quotation marks andcitation omitted]; see Brown v State ofNew York, 45 AD3d 15, 20-21 [2007]). Further, we will not disturb the trial court'sdecision "unless it is obvious that the court's conclusions could not be reached under any fairinterpretation of the evidence" (Thoreson v Penthouse Intl., 80 NY2d 490, 495 [1992][internal quotation marks and citation omitted]; see Mazza v Fleet Bank, 16 AD3d 761, 762 [2005]; FederatedConservationists of Westchester County v County of Westchester, 304 AD2d 787, 788[2003], lv denied 1 NY3d 502 [2003]).
Here, Supreme Court had several reasons to question the reliability of the cost estimatesmade by defendants' witnesses and give them little weight. First, defendants refused to disclosethe documents used to compile the summary of the second survey's estimates of costs even after[*4]the court advised that the lack of documentation would affectthe weight given to them. Second, the estimates followed no uniform or appropriate standards,were subject to no oversight or quality control to assure consistency, and were founded upondiscredited and overbroad definitions of what constitutes activities attributable to the program.Third, there was evidence that defendants had persisted in including improper costs in the secondsurveys. Fourth, the Department offered no contemporary records of actual costs to at leastpartially confirm the accuracy and reliability of the method used to reconstruct those costs.Finally, this litigation gave defendants a strong motive to include as many costs as possible inorder to justify the fees imposed. The Director of the Wadsworth Center conceded that, beforethe survey reconstruction of costs, most of its staff had not realized that they were performingactivities for the program. The Deputy Director who revised the first survey's definitions ofcooperative research and other components of the program acknowledged that those definitionswere prepared in response to this litigation and that it was up to individual staff members todecide what activities to include in each category. There also was testimony by the Director andother witnesses indicating that the Department's assessments had been computed to include allpossible costs of the Wadsworth Center, even if only remotely related to the program. Forexample, the Director testified that, in his view, all of the Wadsworth Center's research isincludable as a cost of the program as long as it somehow relates to standards or development oflaboratory methods without regard to whether such methods are ever used by the clinicallaboratories. In addition, the Department's redefinition of cooperative research, a majorcomponent of the program, stated that such research is not limited to the Wadsworth Center'slaboratories that "conduct proficiency testing, laboratory inspection, review permit applications,or currently conduct clinical laboratory analyses." The Department's intention to shift as manycosts as possible onto the clinical laboratories was further revealed in the testimony that theDirector had once boasted that he had been able to transfer 17% of the Wadsworth Center'sbudget to the clinical laboratories. Thus, we conclude that Supreme Court's finding that the costamounts based upon the second survey were unreliable was reached upon a fair and reasonableinterpretation of the evidence (see e.g.Chase Manhattan Bank v Douglas, 61 AD3d 1135, 1137 [2009]).
We next consider Supreme Court's determinations of the properly includable costcomponents of the program for the years at issue here. Beginning with the component ofcooperative research, defendants assert that they complied with the definition approved by thisCourt as to what research is properly includable and they argue that, at trial, they proved thattheir claimed costs came within that definition. Cooperative research is one of several activitiesincluded in the statutory definition of the program's reference system, but it is not itself definedby statute.[FN1]On the last appeal, we held that Supreme Court had sufficiently deferred to the Department'sexpertise in defining cooperative research as that which directly involves the testing of methods,procedures and materials used by clinical laboratories, and in stating that while this may includenew methods, procedures and materials, it does not include general biomedical research whichmight show a need for laboratory testing. We accepted this definition because it assured that thechargeable costs for research would include only those necessarily incurred in [*5]operating the program. Because this definition and its underlyingrationale are controlling here, we conclude that Supreme Court's determination to disallow theresearch costs claimed by defendants was reached upon a fair interpretation of the evidence.
As we have noted with respect to the surveys, the testimony of the Department's scientistsrevealed that they could not meaningfully distinguish research reasonably necessary for theprogram from general biomedical research undertaken at their discretion in fulfillment of theDepartment's numerous other research responsibilities. Not only was the redefinition ofcooperative research used by the scientists in completing the second survey overbroad, but theyread it to include the costs of detecting new disorders and emerging diseases, assessingenvironmental and other health risks, and investigating the role of genetic factors in a variety ofdiseases. Research projects were selected not based upon their usefulness in regulating thequality of clinical laboratories, but to obtain federal grants and provide greater understanding ofdiseases and other health hazards. Moreover, there was no evidence of any oversight to assurethat the research projects chosen were necessitated by, or appropriate for, the activities ofclinical laboratories. Although there was testimony about research into developing new testingmethods, defendants' witnesses conceded that none of the methods developed were ever used byclinical laboratories. The record also supports Supreme Court's observation that although theDepartment's scientists had obtained federal grants and commercially viable patents for many ofthe research projects, defendants failed to sufficiently support their claim that those funds wereactually credited against the research costs attributable to the program. We agree with SupremeCourt that a fair interpretation of this evidence is that none of the activities claimed forcooperative research were supported by reliable evidence or shown to be necessary for theprogram's operation.
We are similarly unpersuaded by defendants' related argument that Supreme Court erred inrestricting the way in which includable cooperative research can be conducted by defining"cooperative" as working in association with a nongovernmental laboratory, such as a clinicallaboratory. Defendants assert that the Department's reading of "cooperative" to include allresearch—even if it is conducted without collaboration with other institutions orentities—was reasonable and entitled to deference. Supreme Court, however, was requiredto defer to this expansive interpretation only if it was not irrational or unreasonable (see Matter of Lighthouse Pointe Prop.Assoc. LLC v New York State Dept. of Envtl. Conservation, 14 NY3d 161, 176 [2010];Seittelman v Sabol, 91 NY2d 618, 625-626 [1998]; Matter of Emigrant Bancorp, Inc. v Commissioner of Taxation & Fin.,59 AD3d 30, 32-33 [2008]). Here, it was precisely because defendants' witnesses wereshown to have used this expansive definition of "cooperative" that Supreme Court properlydeclined to defer to the Department's view. In this regard, the Director testified that virtually allresearch is cooperative in the sense of building upon the work of others and, thus, theDepartment's working definition failed to give any significance to the statutory term"cooperative." By contrast, Supreme Court's view of cooperative research is reasonable andappropriate because it is consistent with the plain meaning of the word, and because it recognizesthe well-accepted understanding that government-supported cooperative research is that whichinvolves collaboration with an outside entity (see e.g. 6 USC § 189 [d]; 7 USC§§ 450a, 3222 [a] [4]; 10 USC § 2350a [i] [1]; 15 USC § 638 [e] [7];§§ 4301-4306; 16 USC § 753a; 21 CFR 56.114; 45 CFR 46.114). Inasmuchas the evidence showed that none of the research claimed by defendants was conducted inassociation with any outside entity, it was not cooperative as required by the statute, andSupreme Court properly disallowed all of the Department's research costs on this basis as well.[*6]
Regarding the related component of method validation,we affirmed Supreme Court's earlier holding that, as a matter of law, the costs of approving orvalidating testing methods are includable if the methods are used by the clinical laboratories.Defendants argue, however, that Supreme Court erred in failing to defer to the Department'sbroader view of method validation, which included validation of testing methods not used by theclinical laboratories. In our view, however, Supreme Court properly declined to defer to theDepartment in this regard because the relevant holding was established as law of the case, anddefendants' contrary interpretation is irrational for including validation activities whollyunrelated to the testing methods used by clinical laboratories. Since defendants' proof establishedonly the costs of validating methods developed and used internally by the Department, we agreewith Supreme Court's conclusion that "the reviewer of this record will search in vain for anyassay or method discussed or investigated that was actually used or proposed to be used by theregulated laboratories." Thus, all costs for method validation were properly disallowed.
As for defendants' claim for personal and nonpersonal costs for laboratory inspections andproficiency testing, Supreme Court found there to be sufficient evidence that this component wasreasonable and necessary for the operation of the program. The court, however, also found that,due to the previously discussed lack of standards and consistency in defendants' survey methodof allocating costs between the program and the Wadsworth Center's numerous other laboratoryactivities, the evidence failed to show that those costs were estimated with sufficient accuracyand reliability except where such activities involved 100% of a scientist's time and at least 90%of the use of equipment and materials. Thus, Supreme Court's decision to eliminate the marginalallocations based upon those estimates was reasonable and supported by the evidence.
Defendants next contend that Supreme Court improperly limited the category of indirectcosts. In settling an earlier action against the Department, plaintiffs stipulated that, for all futurerate periods, they would not challenge the Department's use of indirect cost percentages set forthin its agreements with federal agencies regarding the percentages to be used in applying forfederal grants. The Department's agreed-upon federal rates for the fiscal years in question rangedfrom 40% to 45%. Supreme Court concluded that defendants were bound by those percentagesbecause defendants had contended for them in the earlier stages of this action. We agree. Thedoctrine of judicial estoppel precludes a party "from inequitably adopting a position directlycontrary to or inconsistent with an earlier assumed position in the same proceeding" (Maas vCornell Univ., 253 AD2d 1, 5 [1999], affd 94 NY2d 87 [1999]; see Matter of Hartsdale Fire Dist. vEastland Constr., Inc., 65 AD3d 1345, 1346 [2009], lv denied 14 NY3d 701[2010]). Here, defendants added 40% for indirect costs in their original calculations and, whenplaintiffs argued for a lower percentage, they asserted that the federal percentages werecontrolling. Although defendants' brief on the last appeal stated that the Department's formula forcalculating "actual" indirect costs would produce percentages ranging from 66.13% to 74.82%, itcan be fairly read as adhering to the lower rate because it acknowledged that the Department hadagreed to use 40% in its original assessment and asserted that this benefitted plaintiffs. Thisposture reasonably led Supreme Court to conclude that the agreed-upon percentages werebinding on both plaintiffs and defendants. Defendants' apparent reliance upon the federalpercentages also led plaintiffs to reasonably believe that it was not necessary to challenge thehigher percentages cited in opposition to plaintiffs' motion. As a result, we will not disturbSupreme Court's decision to preclude defendants from taking an inconsistent position at trial.
In the category of miscellaneous costs, Supreme Court allowed some and disallowed [*7]others, but defendants take issue only with the disallowance of thefees incurred by the Department in obtaining an exemption from the requirements of the ClinicalLaboratory Improvement Act of 1988 (see 42 USC § 263a).[FN2]Payment of this fee exempts clinical laboratories located within New York State from alsohaving to comply with federal laboratory regulations that otherwise would apply to themindividually (see 42 USC § 263a [d], [e]). Although the record does not clearlyindicate how many of the regulated clinical laboratories are located outside New York State, itdoes show that only laboratories within New York State are benefitted by the exemption whileall laboratories are apportioned a share of the exemption fee. At trial, defendants argued that theDepartment's payment of this fee was beneficial to all clinical laboratories because theirindividual fees would be substantially greater without the exemption, but Supreme Courtdisagreed. Upon our review of the record, we conclude that—as plaintiffsargue—the relevant issue is not whether the exemption was beneficial to the laboratories,but whether it was a cost necessarily incurred in the operation of the program. Here, there is noevidence that the exemption was in any way necessary for the program's operation. Thus, it wasproperly disallowed.
Finally, we find no merit in plaintiffs' argument on its appeal that Supreme Court erred indenying their application for prejudgment interest upon the refund that they expect to recoverfrom the Department. Since the court remanded the matter for recalculation of fees and made nodetermination as to the amount of the refund to be made by the Department, there has notbeen—nor will there be—a judicial award upon which prejudgment interest couldbe granted (see CPLR 5001 [a]; Manufacturer's & Traders Trust Co. v Reliance Ins. Co., 8 NY3d583, 588-589 [2007]). Accordingly, plaintiffs' application was properly denied.
Peters, J.P., Lahtinen, McCarthy and Egan Jr., JJ., concur. Ordered that the judgment andorder are affirmed, without costs.
Footnote 1: Public Health Law § 571(3) defines the "reference system" as "a system of periodic testing of methods, procedures andmaterials of clinical laboratories and blood banks, including, but not limited to, the distributionof manuals of approved methods, inspection of facilities, cooperative research, and periodicsubmission of test specimens for examination."
Footnote 2: Defendants have abandoned anyclaim that the remaining miscellaneous items were improperly disallowed by failing to addressthose issues in their brief (see Matter ofHargett v Town of Ticonderoga, 25 AD3d 981, 981 n [2006]).