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Analytical Diagnostic Labs, Inc. v. Kusel

October 4, 2010

ANALYTICAL DIAGNOSTIC LABS, INC., PLAINTIFF-APPELLANT,
v.
BETTY KUSEL, RICHARD F. DAINES, M.D., WENDY E. SAUNDERS, RICHARD W. JENNY, PH.D., STEPHANIE H. SHULMAN, M.S., DEIRDRE ASTIN, DEFENDANTS-APPELLEES.



SYLLABUS BY THE COURT

Appeal from the September 11, 2008, memorandum decision and order of the United States District Court for the Eastern District of New York (Brian Cogan, J.) granting defendants summary judgment. The district court held that Engquist v. Oregon Dep't of Agriculture, 553 U.S. 591 (2008), barred all class-of-one claims based on discretionary state actions. We disagree and hold Engquist does not bar the claims at issue here. We also reverse the district court's finding that the record contained sufficient admissible evidence to raise a question of material fact. We therefore affirm the grant of summary judgment to defendants, albeit on different grounds than below.

Affirmed.

The opinion of the court was delivered by: Pooler, Circuit Judge

Argued: June 14, 2010

Before: CALABRESI, POOLER, and CHIN, Circuit Judges.

This case presents a class-of-one equal protection claim by plaintiff Analytical Diagnostic Labs, Inc. ("ADL"). ADL alleges that defendants - employees of the New York State Department of Health ("DOH") - intentionally and maliciously subjected ADL to an intense and unwarranted degree of regulatory scrutiny. ADL appeals from the September 11, 2008 memorandum decision and order of the United States District Court for the Eastern District of New York (Cogan, J.). The district court, relying on the Supreme Court's decision in Engquist v. Oregon Dep't of Agriculture, 553 U.S. 591 (2008), found ADL's claims barred because ADL could not show the alleged differential treatment resulted from non-discretionary state action. We find the district court's reading of Engquist overbroad and reverse that part of the opinion. We also disagree with the district court's conclusion that ADL presented sufficient evidence to demonstrate it was treated differently from other similarly situated entities. We therefore affirm the grant of summary judgment, albeit on different grounds.

BACKGROUND

ADL is a privately owned clinical testing laboratory that serves nursing homes and similar facilities in the New York City area. It is regulated by DOH, and New York state law requires that all clinical laboratories obtain permits annually to continue operating. N.Y. Pub. Health §§ 574-75. Permits are issued only upon a DOH finding that the laboratory is "competently staffed and properly equipped, and will be operated in the manner" required by law. N.Y. Pub. Health § 575(2). Permits cannot issue until "the laboratory has been inspected and has corrected any deficiencies found." 10 N.Y. Comp. Codes R. & Regs. § 58-1.1(a)(2). In addition, a lab may hold a permit to perform a given category of testing only if the laboratory director holds a certificate of qualification ("CQ") in that category of testing. N.Y. Pub. Health §§ 572, 575(2). CQs are granted for initial terms of two years, and may be renwed for subsequent two-year terms.

ADL began operating approximately 20 years ago, and until 2000, ADL passed its DOH inspections without major deficiencies being noted. In July 2000, the DOH began conducting far more frequent surveys of ADL, as often as every six months, which DOH asserted was necessary because of the number of deficiencies found at the laboratory and ADL's failure to implement a plan of correction.

In late 2003, DOH began investigating allegations that ADL was illegally performing forensic toxicology. ADL did perform some toxicology testing for at least one of its clients, but its laboratory reports clearly stated that specimen analysis was performed without any chain-of-custody handling, and thus test results were not to be used for legal or evaluation purposes. ADL alleges other laboratories, including Quest Diagnostics and LabCorp, used nearly identical disclaimers on similar toxicology testing. DOH brought charges against ADL for improper forensic testing in 2005. Those charges were settled, with ADL admitting no wrongdoing but paying a $3,000 civil penalty.

DOH's in-depth scrutiny of ADL continued from 2004 through 2007. Defendant Betty Kusel, director of regulatory affairs at DOH, scheduled numerous surveys and investigations of ADL. Kusel deliberately scheduled at least two of these investigations to fall on Jewish holidays, when she knew ADL's principals, observant Jews, would be out of the office. Kusel told defendant Stephanie Shulman that the absence of ADL's principals would give DOH an opportunity to search for specific paperwork.

On August 2, 2006 -- the eve of a Jewish holiday -- DOH employees arrived at ADL unannounced and stationed an investigator at a side entrance with a video camera, "in hopes of capturing any fleeing personnel." DOH investigators also questioned Pakistani-born ADL employees about their citizenship and immigration status, and whether their families were legally in the United States.

During the same time period, DOH refused to renew ADL's operating permit, instead issuing a series of letters under the State Administrative Procedure Act ("SAPA"). These letters functioned in lieu of an operating permit. ADL's lab directors also began experiencing problems with renewals of their CQs.

In August, 2004, Dr. Kumaranayagam Balakrishnan, ADL's longtime lab director, submitted a renewal application for his CQ. Kusel advised him that his CQ renewal was being delayed because of the ongoing forensic investigation. In March 2006, DOH threatened to charge Dr. Balakrishnan personally for illegal forensic testing, even though ADL already had settled those charges. Dr. Balakrishnan resigned from ADL in April 2006. Even after his resignation, he faced trouble renewing his CQ. An August 22, 2006 email from Kusel to a DOH staffer stated that Dr. Balakrishnan had two choices: "admit to not fulfilling duties as a director because he is incompetent or unwilling to comply... [or] he can fall on our mercies that the owners of ADL did not allow him to fulfill his duties - at which point we may be willing to show some leniency." On December 4, 2006, Kusel ...


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