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Walton v. New York State Dep't of Correctional Services

November 23, 2009

IN THE MATTER OF IVEY WALTON, ET AL., APPELLANTS,
v.
NEW YORK STATE DEPARTMENT OF CORRECTIONAL SERVICES, RESPONDENT, ET AL., RESPONDENT.



The opinion of the court was delivered by: Graffeo, J.

This opinion is uncorrected and subject to revision before publication in the New York Reports.

Between 1996 and 2007, the Department of Correctional Services (DOCS) contracted with MCI Worldcom Communications Inc. (MCI) for the provision of telephone services in state prisons. Under the agreement, MCI charged the recipients of inmate collect calls a certain rate and paid a percentage of the revenues generated on each call to DOCS as a commission. The payment of these commissions was later restricted by statute. But this proceeding was commenced by petitioners -- family members and legal services providers of inmates incarcerated in DOCS facilities -- before such legislative action. Their verified petition and complaint alleges that the portion of the telephone charge allocated as a DOCS commission constituted an illegal tax or fee, amounted to a government taking without just compensation and violated petitioners' equal protection and free speech and association rights. We agree with the Appellate Division that petitioners' allegations fail to assert cognizable claims under the New York Constitution and we therefore affirm.

As detailed in our prior decision (see Walton v New York State Dept. of Correctional Servs., 8 NY3d 186 [2007]["Walton I"]), this controversy arises from DOCS' implementation of a telephone calling system that allowed inmates to contact family, friends and legal services providers using coinless pay telephones without operator assistance. To establish the system, DOCS issued requests for proposals to prospective providers in 1996 and again in 2001 detailing the appropriate security features needed in the prison setting, including technology permitting DOCS to monitor and record calls indefinitely, providing DOCS the capability to restrict access to particular telephone numbers and bar certain users from calling specified numbers, limiting the length of calls and preventing inmate calls from being forwarded by call recipients. As a result of the competitive bidding process, MCI won the contract in both 1996 and 2001. In exchange for receiving exclusive access to inmates and their call recipients, MCI agreed to pay DOCS a commission on each call. During the relevant time frame, the payment of commissions in return for acquiring access to a customer base was common in inmate calling plans in other states as well as in telephone services contracts outside the prison context. DOCS used the commission revenues to fund a variety of different programs supported by its Family Benefit Fund, such as health care services for inmates, bus services for family visitation programs, free inmate postage and expenses at its visitor centers. Only a small portion of the commission represented the actual costs DOCS incurred in administering the inmate calling program.

Because MCI is a telephone services provider, the rates or tariffs it charges customers require approval from the Federal Communication Commission (interstate calls) and the New York Public Service Commission (PSC) (intrastate calls). In 1998, the PSC approved in their entirety the variable rates that DOCS and MCI had agreed to in their 1996 contract, including a 60% per-call commission payment.*fn1 DOCS and MCI subsequently entered into a similar contract in 2001 that continued the prior tariff schedule but reduced the DOCS commission to 57.5%.

In 2003, DOCS concluded that the existing variable rate structure was unfair to most families receiving calls and, as a result, DOCS and MCI amended their contract to provide for a flat rate (a $3.00 surcharge per call plus $0.16 per minute) but continued the DOCS commission at 57.5%. MCI submitted a revised tariff filing with the PSC and a rate review proceeding ensued in which petitioners challenged the total rate as unjust and unreasonable, particularly the portion attributable to the DOCS commission. The PSC approved MCI's rate change in October 2003 but, because DOCS is a government agency and not a telephone services provider, the PSC concluded that it lacked jurisdiction to assess the propriety of the DOCS commission. Thus, it reviewed only the "jurisdictional portion" of the rate -- i.e., the 42.5% retained by MCI -- and determined that it was just and reasonable. In doing so, the PSC referenced the fact that, outside the prison context, AT&T assessed a $2.25 surcharge plus a flat rate of $0.30 per minute for station-to-station collect calls -- a rate resulting in substantially greater call costs than the MCI "jurisdictional rate." The PSC therefore directed that MCI file the new rate in a bifurcated form that made clear to customers which part of the rate would be retained by MCI and which would be forwarded to DOCS.*fn2

In this action, petitioners are two legal services providers who represent prisoners and three individuals who have accepted collect-calls from family members incarcerated in DOCS facilities and paid the total rate charged by MCI under the inmate calling plan, including the DOCS commission.*fn3 They commenced this combined declaratory judgment and article 78 proceeding against DOCS and MCI within four months of the PSC determination. In the verified petition and complaint, petitioners challenged DOCS' collection of the commission on a variety of legal theories, including four state constitutional rationales.

First, petitioners alleged that, by collecting a commission, DOCS was taxing them to pay for Family Benefit Fund services without legislative authorization to impose such a tax. Second, they characterized the DOCS commission as a governmental taking of property (money) without just compensation. Third, they argued that the inclusion of the commission in the rates charged for telephone services violated their right to the equal protection of the law. Finally, they claimed that the call system impeded their freedom to associate with and speak to their loved ones and clients. Based on these causes of action, petitioners sought an injunction precluding MCI from charging more than the 42.5% "jurisdictional rate" reviewed by the PSC; a declaration that DOCS' actions were illegal; and refunds from DOCS for the commissions that had been collected by MCI and forwarded to DOCS.

Respondents DOCS and MCI moved to dismiss the verified petition and complaint as untimely and asserted that the causes of action failed to state cognizable claims for relief. As a separate ground for dismissal, respondents contended that petitioners' challenge to the rate collected by MCI was barred by the Filed Rate Doctrine, which constituted a total defense even if petitioners allegations would otherwise be actionable. Supreme Court and the Appellate Division dismissed petitioners' constitutional causes of action as time-barred*fn4 but, in Walton I, this Court reinstated those claims as timely.

While Walton I was pending in this Court, Governor Eliot Spitzer announced a change in executive policy and required DOCS to discontinue the practice of collecting commissions on inmate calls. The Legislature also acted, adopting Correction Law § 623 which, effective April 1, 2008, made it unlawful for DOCS to accept or receive revenue in excess of its reasonable operating costs for administering an inmate calling system (see L 2007, ch 240). The parties agree that these executive and legislative actions render petitioners' claims for injunctive relief academic and that any decision in this case will affect the rights and liabilities of these parties only to the extent of determining petitioners' entitlement to refunds.

After we decided Walton I, this matter was remitted to Supreme Court to address the arguments raised in the motions to dismiss that had not been reached due to the dismissal on the threshold statute of limitations issue. Supreme Court reviewed each of petitioners' state constitutional arguments -- the assertion that the DOCS commission constituted an unlawful tax, that it amounted to a governmental taking without just compensation, that it violated petitioners' equal protection and free speech/association rights -- but concluded that petitioners failed to state cognizable claims for relief, warranting dismissal of the verified petition and complaint. The Appellate Division unanimously agreed with Supreme Court's treatment of the constitutional claims and also addressed DOCS' alternative argument that the refund claims would, in any event, be barred by the Filed Rate Doctrine, rejecting that defense. The case proceeded to this Court as of right.*fn5

We begin by clarifying what issues are not before us. Petitioners and the amicus curiae urge that DOCS' decision to seek a commission on calls made by inmates was, to say the least, ill-advised. They contend that the inclusion of a commission inflated the cost of inmate telephone calls to such an extent that it limited the ability of inmates to maintain family and community ties, with significant public safety and policy consequences since it is well-established that recidivism rates are higher for incarcerated individuals who lack those ties. They claim that DOCS -- the agency charged with the care and rehabilitation of inmates -- should have adopted an inmate calling system that maximized call affordability to encourage greater communication between inmates and the outside world.

With the caveat that, by its nature, incarceration restricts the ability of a prisoner to associate with family and friends, petitioners' public policy arguments are clearly substantial. But the expedience of the contract design by this executive agency is not before us for review; our task is limited to determining whether our State Constitution precluded DOCS from entering into a telephone services arrangement that included a commission. Petitioners and the amici appropriately presented their concerns to the other branches of government and successfully influenced a change in state policy, first by gubernatorial directive and then by statute. Petitioners were therefore able to achieve the primary relief they sought in this litigation -- a change in the inmate calling system, resulting in a significant reduction in costs incurred by call recipients.

The issue that remains for us to decide is whether the now-defunct DOCS policy violated the New York Constitution, a determination that is necessary because petitioners continue to seek refunds for the commission portion of the telephone charges they paid while the former plan was in effect. In reviewing a motion to dismiss, "the court will accept the facts as alleged in the complaint as true, accord plaintiffs the benefit of every possible favorable inference, and determine only whether the facts as alleged fit within any cognizable legal theory" (Nonnon v City of New York, 9 NY3d 825, 827 [2007]). Applying this standard, we address each cause of action in turn.

I. The Illegal Tax or Fee Claim

Petitioners begin with the premise that the DOCS commission is a tax and, since taxes can be levied only by legislative bodies, DOCS' contractual decision to collect a commission was illegal as it violated the Separation of Powers Doctrine embedded in the New York Constitution (see generally, NY Const, art III, § 1; art XVI, § 1). In the same vein, petitioners assert that, even if not a tax, the commission charges were unlawful because they amounted to fees imposed by a regulatory body that bore no reasonable relationship to the cost of regulation.

A tax is a charge that a government exacts from a citizen to defray the general costs of government unrelated to any particular benefit received by that citizen (see generally, American Ins. Assn. v Lewis, 50 NY2d 617, 623 [1980]). Only legislative bodies have the power to impose taxes (see NY Const, art III, § 1). Municipalities and administrative agencies engaged in regulatory activity can assess fees that need not be legislatively authorized as long as "the fees charged [are] reasonably necessary to the accomplishment of the regulatory program" (Suffolk County Bldrs. Assn. v County of Suffolk, 46 NY2d 613, 619 [1979]). In the regulatory arena, fees must bear at least "a rough correlation to the expense to which the State is put in administering its licensing procedures or to the benefits those who make the payments receive" (see American Ins. Assn., 50 NY2d at 622; see generally, National Cable Television Assn. v United States, 415 US 336 [1974]). Typically, fees are paid to obtain access to a government service or benefit, such as the fees paid to obtain licenses to practice professions in particular jurisdictions.

Beyond imposing taxes and engaging in regulatory activities that generate fees, governmental entities can and do participate in other economic activities through voluntary contractual arrangements with the private sector. For instance, they buy, sell and lease real property, they purchase furniture, computers and other commodities, they sell surplus goods, they operate hospitals and colleges, and they enter into agreements with consultants, contractors and service providers. Although petitioners contend that the DOCS commission constituted exaction of a tax or fee, we conclude that MCI's contractual obligation fell into this other permissible category of governmental activity.

For security reasons, DOCS chose to implement an inmate calling plan facilitated by the installation of coinless payphones used by inmates to place station-to-station collect calls.*fn6 Under the plan, the call recipient was advised that the inmate was calling and then was given the option of accepting or declining the call. If the call was declined, no charges were incurred by the call recipient. If the person agreed to accept the call, the recipient was charged the total telephone services rate, which included the commission MCI was obligated to pay DOCS.

In the telephone services industry, a per-call commission is a standard method of compensating the owner of the property where a payphone is located. These commissions have been deemed "business expenses paid to compensate for the rental and maintenance of the space occupied by the payphone and for access to the telephone user" (Matter of AT&T's Private Payphone Commn. Plan, 3 FCCR 5834, 5836 [1988]). Whether the payphone is positioned in a public airport or a private shopping mall, the owner of the property is entitled to reasonable compensation for allowing the telephone services provider access to its property. And, although other ways of calculating the value of the rent or access charge could certainly be devised, per-call commissions have apparently become the industry standard.

Even though this per-call calculation methodology invites the argument that the commission is an additional rate that the provider will undoubtedly pass along to the consumer, commissions have not been viewed by regulatory bodies as a separate tariff. Rather, they are expenses incurred by the telephone service provider, comparable to other types of operating costs, that are encompassed within the tariff ultimately filed with the regulatory agencies and charged to customers (see e.g. id.). Not only were such commissions common in the payphone industry but, during the period relevant to this lawsuit, they were often included in other state inmate calling plans where the commission typically ranged from 20% to 63% (Matter of Implementation of the Pay Telephone Reclassification and Compensation Provisions of the Telecom. Act of 1996, 17 FCCR 3248, 3253 n 34 [2002]).*fn7

Under the contract at issue in this case, the obligation to pay DOCS the commission is imposed on MCI -- not call recipients. Although MCI intended to collect the total rate from call recipients (including the portion covering the commission), it owed the commission to DOCS regardless of whether it actually received payment from these consumers. Despite MCI's contractual obligation to forward the access charge to DOCS, the per-call commission was not a "tax" imposed on the telephone services provider. Of course, having voluntarily participated in the bidding process and entered into an agreement with DOCS, MCI could not, in any event, complain that government compulsion was involved.*fn8

Given that no tax or fee has been imposed on MCI -- the company that is actually obligated to pay the commission -- we are not persuaded that the commission was transformed into a tax or fee just because MCI passed this cost on to call recipients along with its other reasonable operating expenses. If the state leased public property that it owned to a commercial retail business at a profitable rent, would customers be able to complain that they had been "taxed" when the business tenant passed on its rental costs by charging higher prices for its goods? This Court has never held that the government is precluded under the constitution from charging market rents for its properties, nor have we suggested that, when it does so, its revenues can be no greater than the amount necessary to cover the actual costs associated with ownership or maintenance. Moreover, it is significant that DOCS had no "enforcement" authority vis-avis the call recipient and could not attempt to collect the commission from that consumer if MCI failed to do so, another fact that distinguishes this scenario from a tax (see e.g. Tax Law §§ 1133[b], [c] [allowing state to recover unpaid sales and use taxes from consumers]). Petitioners were given the choice of accepting or rejecting the calls and were charged only if they decided to receive telephone services from MCI.

Certainly, the contractual arrangement relates to DOCS' performance of a governmental function -- the administration of the prison system -- but it lacks the hallmarks of a tax or fee because DOCS has not compelled petitioners to purchase services from MCI, nor are telephone services a government benefit (see generally, Valdez v State of New Mexico, 132 NM 667, 673 [2002] [where call recipients voluntarily accepted inmate calls, rate charged for telephone service was not a tax but was "a price at which and for which the public utility service or product is sold"]).*fn9 There was nothing unusual or unique about the commission authorized under the contract between DOCS and MCI because payphone commissions of this type are common within the telephone services industry. DOCS was under no obligation to negotiate a commission -- it could have allowed MCI to retain all the profits generated by the calls and, if it had, no colorable claim could have been made that call recipients were being taxed. Yet, it also was not constitutionally required to provide MCI or any other telephone company free access to its facilities, when landowners typically receive compensation for granting such access.*fn10 In ...


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