Jurisdictional Statement — Blue Cross & Blue Shield v. Milliken

Supreme Court brief1985

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85 on 1 4 gl Office-Supreme Court, US

FILED

a. JUL 26 1985

ALEXANDER L STEVAS,

CLERK

_—

IN THE

Supreme Court of the United States

OCTOBER TERM, 1985

BLUE CROSS and BLUE SHIELD OF MICHIGAN,

a nonprofit Michigan corporation,

Appellant,

—against—

WILLIAM G. MILLIKEN, Governor of the State of Michigan,

FRANK J. KELLEY, Attorney General of the State of

Michigan, and NANCY A. BAERWALDT, Commissioner of

Insurance of the State of Michigan,

Appellees.

ON APPEAL FROM THE SUPREME COURT OF MICHIGAN

JURISDICTIONAL STATEMENT

STANLEY D. ROBINSON

Of Counsel: Kaye, Scholer, Fierman,

RANDOLPH S. SHERMAN Hays & Handler

JOEL KATCOFF 425 Park Avenue

Of Counsel: sip sige York 10022

WILLIAM M. SAXTON

KEEFE A. BROOKS Attorney for Appellant

Butzel Long Gust Klein

& Van Zile

1881 First National Building

Detroit, Michigan 48226

(313) 963-8142

QUESTION PRESENTED

Did the State of Michigan violate the Fifth and Fourteenth

Amendments of the Constitution of the United States by

taking control of a private, nonprofit health care corporation

from its corporate membership without paying just compensa-

tion?

TABLE OF CONTENTS

QUESTION PRESENTE » s:0:i5scnieeceseaneersens ce

TABLE OF AUT HOORE ES «05:4 «0:0 05303005 oon ke ess

OPINIONS BELOW 04 .csise cece POLE re ree ce rere

JURISDICTION . os 0005 te cudeune staan seeseeeere es

CONSTITUTIONAL PROVISIONS AND STATUTES

INVOLVED ... onc sccddens pues tea eenaeeeeeere els

THE QUESTION PRESENTED IS SUBSTANTIAL...

By Taking The Corporate Membership’s Control

Over BCBSM, Michigan Has Divested Private

“Property” ..ssvssc ccc weesen eee

PA 350’s Divestiture Of The Corporate Member-

ship’s Control Over BCBSM Is An Unconstitu-

tional “Tukina” ...ss.sdceeedseaueee eels

. Since Michigan Has Not Provided For Just Com-

pensation, BCBSM Is Entitled To An Injunction .

CONCLUSION ... .scssenshnneey eee ees

PAGE

iil

APPENDIX (separately bound):

Opinion of the Michigan Supreme Court, April 16, 1985

(reported at 422 Mich. 1; 367 N.W.2d 1) ...........

Ingham County Circuit Court Order of Preliminary

I i a van chk baw evecee ss

Ingham County Circuit Court Order of Preliminary

OO OL, nak ves baw Caves

Michigan Supreme Court Order Directing Circuit Court

to Certify Controlling Questions of Public Law,

sas cd a oie p WW ase Ree &

Ingham County Circuit Court Certification of Control-

ling Questions of Public Law and Statement of Need

to Conduct Evidentiary Hearings, April 15, 1982....

Ingham County Circuit Court Findings of Relevant

ee ck ve eeeecbesduvesewes

Ingham County Circuit Court Supplement to Findings

of Relevant Facts, November 9, 1982..............

Michigan Supreme Court Judgment, April 16, 1985....

Michigan Supreme Court Order Denying Motion for

re UNE i OD dee cv nee secu ccvcsuswe

peeeee are umes, July 10, 1965... 5 ccc cece ees

Michigan Nonprofit Health Care Corporation Reform

Act, 1980 PA 350, MCL 550.1101 et seqg.; MSA 24.660

eee he eae Le ye ye Ww eek ek oae at

PAGE

134a

TABLE OF AUTHORITIES

Cases: PAGE

Andrus v. Allard, 444 U.S. 51 (1979) ................. 22n.

Baltimore County Hospital v. Maryland Hospital Ser-

vice, Inc., 234 Md. 427, 200 A.2d 39 (1964) ........ 18n.

Borman v. Parker, 346 U.S. 26 (ISSA)... ccc ccvcvcess 20

Blue Cross and Blue Shield of Michigan v. Demlow, 403

Mich. 399, 270 N.W.2d 845 (1978).............. 6n., 9, 24

Blue Cross of lowa v. Foudree, Civ. Action No. 84-597-

Fe Ss Se ie Sa vc Ped eeuk Canadekeu's 16

Board of Regents v. Trustees of Endowment Fund, 206

Md. 559, 112 A.2d 678, cert. denied, 350 U.S. 836

Ps 66 ote ie Rees ae iors eae epee ewe es 19

Fein v. Lansten Monotype Machine, 196 Va. 753, 85

De SE a5 oa chee eeve wee keneenkaneke 17n.

Hawaii Housing Authority v. Midkiff, 104 S. Ct. 2321

REC Sey Peer ee Pee Tee ee Pore ee ee ee 20

Kaiser Aetna v. United States, 444 U.S. 164 (1979) .... 21

Klaus v. Hi-Shear Corp., 528 F.2d 225 (9th Cir. 1975). -17n.

Loretto v. Teleprompter Manhattan CATV Corp., 458

fe 2 ere ek ey ee eee re 16, 21, 22

Minnesota Baptist Convention v. Pillsbury Academy,

246 Minn. 46, 74 N.W.2d 286 (1955)............... 18

Ohio v. Neff, 52 Ohio St. 375, 40 N.E. 720 (1895). .... 19

Opinion of the Justices, 373 So. 2d 293 (Ala. 1979).... 19

Opinion of the Justices, 333 So. 2d i25 (Ala. 1976).... 17n.

Penn Central Transportation Co. v. New York City, 438

We eT]. rs pe eae a 16, 21, 22n.

PAGE

Rassner v. Federal Collateral Society, 299 Mich. 206, 300

PE. We, ae Cea ass 6 hoe ne eee ese eeeees 17

Ruckelshaus v. Monsanto Co., 104 S. Ct. 2862 (1984) 17, 19,

20, 21, 23

State v. North Star Research and Development Institute,

294 Minn. 56, 200 N.W.2d 410 (1972).............. 18

State ex rel. Waring v. Georgia Medical Society, 38 Ga.

Ge Co kc hk so 0b ebb ks Mauer eee eee 19

United States v. General Motors Corp., 323 U.S. 373

CRIED oko i 50 ence bewee sc ecen ade s euaeeeneceenens 17

Weiner v. Hospital Service Plan of Lehigh Valley, 187

Pa. Super. 244, 064 A.28 F7S CISCO oo bn cc ces ceees 18n.

Westland Convalescent Center v. Blue Cross & Blue

Shield of Michigan, 414 Mich. 247, 324 N.W.2d 851

CPUS obs hee caceechtenteseprene eis 18n.

Constitutional Provisions:

U.S. 4, I. Wisk oes ccc cndewenceseoncenewe passim

3, Comet, MOR. FAI © Bas sc vcs chases eee passim

Statutes:

oe ULB. © TESTE 0 nec ctcnvcessvcisoussr meee 2

Michigan Nonprofit Health Care Corporation Reform

Act, 1980 PA 350, MCL 550.1101 et seg.; MSA 24.660

COED OF OI ohoc cakes e ti accweetdad ees casa passim

Oe yi vad 68 SRE he ewe eee eee 3, 11, 24

FU Serer ere ee oe re re 12

DEE «cae ke bcwedes 65a00e can eer 3, 10

PAGE

SS re re erie hr ares |e ANS 3, 10

OD SONA vk-vksew db de ceca e¥ensteel eee 3, 10

D SN soc kas code advan +beeeheeaek eee 3, 11

Bt: ry rere Fe Pe. 4, 11, 24

OS PED < kccuceeteceeeceaywarean aa 4, 11, 24

OS See ons sb d co baw ve wetaeetr eee 4, 11, 24

| PPT rerereer ye rt Pee ee 20

Oe PES <i eee sb de ek deeaeeessdanesetee 10

Leaner mer Ne hy ere 5

Nii Act 060 OF IGG. oo kc ice ds dekkas vane 6, 10

Wepcaen Act S00 OF TGSP : cic cc ccc cedcvadtssueae 6, 10

Other authorities:

2 W. Blackstone, Commentaries, *405................ 23

14 Fletcher, Cyclopedia of the Law of Private Corpora-

Hons GFES (9ES OD ook cacti eae 17n.

J. Locke, The Second Treatise of Civil Government, Ch.

5 G@. Gow oh. TO oca cikvcdadie sia 23

18 Am. Jur. 2d Corporations § 477 (1965) ............ 19

IN THE

Supreme Court of the United States

OCTOBER TERM, 1985

BLUE CROSS and BLUE SHIELD OF MICHIGAN,

a nonprofit Michigan corporation,’

Appellant,

—against—

WILLIAM G. MILLIKEN, Governor of the State of Michigan,

FRANK J. KELLEY, Attorney General of the State of

Michigan, and NANCY A. BAERWALDT, Commissioner of

Insurance of the State of Michigan,

Appellees.

ON APPEAL FROM THE SUPREME COURT OF MICHIGAN

JURISDICTIONAL STATEMENT

OPINIONS BELOW

The opinion of the Supreme Court of Michigan is reported

at 422 Mich. 1, 367 N.W.2d 1 (1985) and is included in the

appendix at pp. la-129a. The dissenting opinion of Justice

Levin begins at 422 Mich. at 97; 367 N.W.2d at 48 (Appendix

at 89a).”

l Blue Cross and Blue Shield of Michigan is a non-stock corporation

which has no subsidiary or affiliated corporations except those that are

wholly owned.

2 Page references herein to the opinions below will be to the appropri-

ate page in Michigan Reports. The Michigan Reports pagination is

reproduced in the appendix.

JURISDICTION

This is an appeal by Blue Cross and Blue Shield of Michigan

(“BCBSM”), a nonprofit health care corporation, from a

decision of the Michigan Supreme Court dated April 16, 1985

upholding certain provisions of Michigan’s Nonprofit Health

Care Corporation Reform Act, 1980 PA 350 (“PA 350”), MCL

550.1101 et seq.; MSA 24.660(101) et seg., against a challenge

under the Taking Clause of the Fifth Amendment, made

applicable to the States by the Due Process Clause of the

Fourteenth Amendment.’ The Supreme Court of Michigan

denied a timely petition for rehearing on June 24, 1985. A

notice of appeal to this Court was duly filed in the Supreme

Court of Michigan on July 10, 1985. This Court has jurisdic-

tion pursuant to 28 U.S.C. § 1257(2).

CONSTITUTIONAL PROVISIONS AND

STATUTES INVOLVED

The Fifth Amendment to the Constitution of the United

States provides in pertinent part:

“nor shall private property be taken for public use,

without just compensation.”

The Fourteenth Amendment to the Constitution of the

United States provides in pertinent part:

“nor shall any State deprive any person of life, liberty, or

property, without due process of law.”

The Michigan Nonprofit Health Care Corporation Reform

Act, 1980 PA 350, MCL 550.1101 et seqg.; MSA 24.660 (101) e¢

seq. provides in pertinent part:

3 The Michigan Supreme Court also resolved a number of other

constitutional challenges to PA 350. Only the majority’s rejection of

the Taking Clause challenge is raised on this appeal.

“By action of its board of directors, a health care

corporation may integrate into a single instrument the

provisions of its articles of incorporation . . . . If the

restated articles restate and integrate and also further

amend the articles, they shall also be adopted by the

board of directors.” § 203.

“The property and lawful business of a health care

corporation shall be held and managed by a board of

directors to consist of not more than 35 members.”

§ 301(1).

“Four voting members of the board shall be representa-

tives of the public appointed by the governor by and with

the advice and consent of the senate.” § 301(2).

“The board of directors shall consist of not more than

25% provider directors.” § 301(3).

“The bylaws of a health care corporation may author-

ize not more than | officer or employee of the corpora-

tion to serve as a voting or nonvoting director.” § 301(4).

“The remaining members of the board of directors shall

include representatives of large subscriber groups, me-

dium subscriber groups, small subscriber groups, and

nongroup subscribers, in proportions which fairly repre-

sent the total subscriber population of the health care

corporation. However, at least 3 directors shall represent

nongroup subscribers, . . . and at least 3 directors shall

represent small subscriber groups. Large and medium

subscriber groups shall be represented, to the greatest

extent possible, by an equal number of labor and manage-

ment representatives and shall be categorized as labor

subscriber representatives Or management subscriber rep-

resentatives.” § 301(5).

“The method of selection of the directors, other than

the directors who are representatives of the public. . .

shall be specified in the bylaws.” § 301(6).

“The method of selection of each category of sub-

scribers entitled to representation on the board under

subsection (5) shall maximize subscriber participation to

the extent reasonably practicable. This subsection shall

permit, but not require, the statewide election of a direc-

tor or member of the corporate body. The method of

selection shall neither permit nor require nomination,

endorsement, approval, or confirmation of a candidate or

director by the corporate body, the board of directors, or

the management of the health. care corporation, or any

member or members of any of these. This subsection shall

not apply to the selection of an officer or employee as a

director pursuant to subsection (4). This subsection shall

not limit the rights of any director, member of the

corporate body, or employee or officer of the health care

corporation to participate in the selection process in his or

her capacity as a subscriber, to the same extent as any

other subscriber may participate.” § 301(7).

“The board of directors shall adopt initial bylaws and

may amend or repeal those bylaws or adopt new bylaws,

subject to the prior approval or certification by the

attorney general. The bylaws may contain any provision

for the regulation and management of the affairs of the

health care corporation not inconsistent with the articles

of incorporation, this act, or any other applicable provi-

sion of law.” § 302(1).

“A health care corporation may establish a corporate

body. The corporate body shall consist of individuals

selected in the same manner as individuals are selected to

serve as nonpublic members on the board of directors.

The size of the corporate body shall be such that, for each

nonrublic voting director on the board of directors of the

corporation, there are 2 members of the corporate body.”

§ 305(1).

“Each health care corporation on the effective date of

this act shall be subject to this act without formal reor-

ganization under this act, and shall be considered to exist

under this act. However, within 120 days following the

effective date of this act, the health care corporation shall

do all of the following:

(a) Amend its articles of incorporation and bylaws to

conform to the requirements of this act, subject to the

certification of the attorney general. . ..

(b) Restructure its board of directors to conform with

the requirements of this act... .

tain from the commissioner a new certificate of author-

ity.” § 701(1).

PA 350 is included in its entirety in the appendix at 25la-353a.

STATEMENT OF THE CASE

1. Blue Cross and Blue Shield of Michigan

BCBSM is a private, nonprofit membership corporation

providing prepaid health care coverage to approximately half

of Michigan’s population. It has no shareholders. Instead,

BCBSM is comprised of 93 corporate members. The corporate

membership’s control over BCBSM derives from its articles of

incorporation and bylaws, pursuant to which the membership

has sole authority to elect BCBSM’s board of directors.

BCBSM’s membership is also self-perpetuating: it has sole

authority to select its own members.

BCBSM had its genesis as a result of the Great Depression in

the 1930’s when “pervasive poverty among the people caused

them to forgo needed health care services which, in turn,

resulted in financial uncertainty for hospitals and physicians.”

422 Mich. at 13. To alleviate this problem, hospitals and

physicians formed BCBSM’s two corporate predecessors, the

Michigan Society for Group Hospitalization (“MSGH”) and

the Michigan Medical Service (“MMS”).

MSGH was incorporated on October 3, 1938 under the

general nonprofit corporation law by several community hospi-

tals in Michigan. The incorporators contributed $10,000 to

MSGH’s initial working capital and they, together with others

chosen by them, formed the original corporate membership. In

December 1939, MSGH amended its articles of incorporation

to come under Michigan’s health care corporation enabling

legislation, Act 109 of 1939 (“PA 109”).

In July 1939, pursuant to Michigan’s companion health care

statute, Act 108 of 1939 (“PA 108”), doctors under the aus-

pices of the Michigan State Medical Society incorporated MMS

with a cash contribution of $16,000. The original corporate

membership consisted of the incorporators.

PA 108 and 109 declared health care corporations to be

charitable and benevolent institutions, exempt from taxation.

The statutes provided for the regulation of health care corpo-

rations by the Commissioner of Insurance in certain limited

respects,* but the legislature did not interfere with corporate

governance and control. Indeed, PA 108 and 109 touched upon

corporate governance only in the following respects: (1) the

initial bylaws of MSGH and MMS were to be reviewed by the

Commissioner of Insurance for compliance with the statutes;

(2) MSGH’s board of directors was required to have not less

than nine persons, with representation of participating hospi-

tals, physicians and the public; (3) the board of directors of

MMS was required to have “representation from the public

and the medical profession”; (4) directors of both corporations

were to be elected for a term of one year unless the articles or

bylaws prescribed a longer term or staggered terms; and (5) a

majority of directors was to constitute a quorum for the

transaction of business. Corporate governance and control

were otherwise left to the corporate memberships. In particu-

4 The Commissioner was authorized to review and approve health care

contracts to assure that they did not “work a fraud” on subscribers,

that the rates charged and the benefits provided were fair and reason-

able and that adequate reserves were maintained. Blue Cross and Blue

Shield of Michigan v. Demlow, 403 Mich. 399, 270 N.W.2d 845 (1978).

lar, the corporate memberships of MSGH and MMS were free

to control the selection of their respective boards of directors

and the selection of their respective members.

Over the next several decades, MSGH (which became known

as Blue Cross) and MMS (which became Blue Shield) voluntar-

ily increased consumer (or “subscriber”) representation on

their respective boards of directors to a point where subscribers

eventually constituted a majority.° The authority to elect all of

the directors, however, remained vested in the corporate mem-

berships.

Similarly, Blue Cross and Blue Shield voluntarily invited

representatives of corporate groups, labor unions and other

subscribers of health care plans to join their respective cor-

porate memberships. The method of selecting members re-

mained unchanged: nominees were elected by the membership

as a whole.

Effective January |, 1975, Blue Cross and Blue Shield were

consolidated to create a new corporation, BCBSM. Under the

Plan of Consolidation, BCBSM’s corporate membership was

comprised initially of the boards of directors of Blue Cross and

Blue Shield, which had previously been chosen by the respec-

tive corporate memberships.

Today, BCBSM’s corporate membership is comprised of 93

persons, as follows:

a. Consumers-groups: 28 representatives of substan-

tial group purchasers of

BCBSM coverage, such as

Ford, General Motors and

Chrysler.

b. Consumers-labor: 10 representatives of unions

which have substantial mem-

berships enrolled in BCBSM

health care plans.

5 In 1971, MMS also decided to allow two of its directors to be

nominated by the Commissioner of Insurance.

c. Consumers-at- 12 consumers who shall be

large: subscribers to BCBSM, in-

fluential in the community

and not representative of

another component.

d. Consumers- 4 consumers named by the In-

appointed: surance Commissioner who

do not hold elective office,

are not government employ-

ees and are not affiliated with

the insurance industry.

e. Doctors of

medicine: 14

f. Doctors of

osteopathy: 4

g. Hospital

representatives: 18

h. Pharmacists:

i. President of BCBSM

The 47 members of BCBSM’s board of directors are drawn

from the corporate membership. Each of the constituent

groups comprising BCBSM’s corporate membership is propor-

tionately represented on its board.°®

6 Consumer-group representatives on the board of directors come

from groups of over 500 subscribers in the Detroit area and over 250

subscribers outside of that area. Past practice has been to include

representatives of the five largest groups on the board of directors.

These groups are Ford Motor Company, General Motors Corporation,

Chrysler Corporation, Michigan Bell and the Michigan Farm Bureau.

The current consumer representatives include such persons as: Charles

Chomet, project manager for Citizens for Better Care, Inc.; Beverley

C. McDonald, deputy director of Michigan Legal Services, Inc.;

Robert E. Braden, administrative director of the Michigan Farm

Bureau; Ellsworth G. Reynolds, president of Detroit College of Law;

and five representatives of the UAW and AFL-CIO. The current

chairman of the board is James W. Woodruff, who was originally

nominated to the board by the Insurance Commissioner.

The members of BCBSM all have a vital economic stake in

BCBSM. The corporate subscriber members and labor unions

engage in collective bargaining negotiations over the level and

type of health care benefits and are therefore acutely interested

in BCBSM’s ability to offer, at a reasonable price, what they

deem to be appropriate prepaid coverage. The individual

subscribers of BCBSM likewise have an obvious economic

interest in the cost of prepaid medical care and the benefits

offered. Finally, the providers of health care have the same

economic interest which caused them to form BCBSM’s prede-

cessors in the first place: alleviating the financial uncertainty

resulting from the inability of the public to pay for health

services.

Thus, the members of BCBSM have a community of interest

in the successful operation of BCBSM. This collective -

economic interest served as a powerful incentive for the mem-

bership—through its chosen board of directors—to build

BCBSM into the valuable enterprise that it is today. As recog-

nized by the Michigan Supreme Court, the preeminent position

that BCBSM occupies in the health care market today is

attributable at least in part to “the expertise and aggressiveness

of its management.” 422 Mich. at 15. That management, since

BCBSM’s inception, has always been under the sole control of

its corporate membership.

2. PA 350

In Blue Cross and Blue Shield of Michigan v. Demlow, 403

Mich. 399, 270 N.W.2d 845 (1978), the Michigan Supreme

Court held that under BCBSM’s enabling legislation, PA 108

and 109, the Commissioner of Insurance had no power to

regulate the rates of payment to physicians, and no power to

order BCBSM to implement hospital cost containment pro-

grams. 270 N.W.2d at 847. The court explained that

“[mjanagement of the corporation has been specifically en-

trusted to the board of directors, not to the Commissioner.”

Id. at 855.

In the wake of Demlow, and in response to a perception that

BCBSM had not succeeded in containing the rapid escalation

of health care costs, PA 350, which repealed PA 108 and 109,

was enacted on December 29, 1980. As explained below, the

new law utilizes two fundamentally different approaches to the

problem of rising costs.

First, the act seeks to address the problem by regulation. It

broadens the Commissioner’s power so as to include for the

first time regulation of BCBSM’s rates of payment to physi-

cians, and it sets forth specific criteria to be followed by the

Commissioner in exercising that power with respect to both

physician and hospital services. PA 350 §§ 505(2), 506-13, 516.

Moreover, the act requires BCBSM to enter into provider class

plans which must conform to specific statutory cost contain-

ment goals. PA 350 § 504(1). And, finally, it gives the Commis-

sioner power to correct deficiencies in those plans if the

prescribed goals are not met. PA 350 §§ 510-13.

Second, the act seeks to curb escalating health care costs by

transferring corporate control. Through a series of related

provisions, control of BCBSM is taken from the corporate

membership and delivered to persons who, the legislature

believes, will be more responsive to consumer needs. The act

strips the corporate membership of a// of its rights: the right to

elect the board of directors, the right to amend the articles of

incorporation and bylaws, and the right to determine its own

membership.

Section 301 of the statute limits BCBSM’s board of directors

to 35 persons, and stipulates that four of them must be

“representatives of the public” appointed by the governor. PA

350 §§ 301(1), 301(2). Not more than 25% (i.e., eight mem-

bers) of the board may consist of health care provider repre-

sentatives, and not more than one director may be a BCBSM

officer or employee. PA 350 §§ 301(3), 301(4). The remaining

22 members of the board of directors must include representa-

tives of large, medium and small subscriber groups and non-

group subscribers. PA 350 § 301(5).

But the legislature did far more than merely change the

composition of the board of directors. The corporate member-

ship is expressly divested of its right to exercise any control or

even influence over the selection of BCBSM’s board:

“The method of selection shall neither permit nor require

nomination, endorsement, approval, or confirmation of a

candidate or director by the corporate body, . . . or any

member %r members. . . .” PA 350 § 301(7).

Rather, the act requires a method of selection of the directors,

which is to be specified in the bylaws, that must “maximize

subscriber participation to the extent reasonably practicable.”

PA 350 §§ 301(6), 301(7). Toward that end, a statewide election

is authorized, although not mandated. PA 350 § 301(7).’

BCBSM’s membership is deprived not only of its right to

elect the board of directors, but also of its right to determine

its own members. Section 305(1) of the act permits a health

care corporation to establish a corporate body, but it must be

no larger than twice the size of the 35-person board of

directors. This provision automatically reduces the member-

ship to 70, thereby ousting 23 members. What is more, the act

decrees that “[t]he corporate body shall consist of individuals

selected in the same manner as individuals are selected to serve

as nonpublic members of the board of directors.” PA 350

§ 305(1). BCBSM’s membership is thus denied the right to

select its own members and thereby determine its own succes-

sion.

The act also strips the corporate membership of its power to

amend BCBSM’s articles of incorporation and bylaws and

gives that power to the newly-elected board of directors. PA

350 §§ 203, 302(1). Corporate members are allowed only a

7 Only to the extent that corporate members are also subscribers are

they even permitted to participate in the election of the board:

“This subsection shall not limit the rights of any. . . member of

the corporate body. . . to participate in the selection process in his

or her capacity as a subscriber, to the same extent as any other

subscriber may participate.” PA 350 § 301(7).

token role in BCBSM’s governance: they “may serve on

committees of the board of directors.” PA 350 § 305(2).

Whether they will be accorded even this limited opportunity to

participate in the affairs of BCBSM is thus subject to the

absolute control of the new board of directors.

The corporate membership’s loss of its right to select the

board of directors is highly significant in light of the board’s

extensive managerial powers. Although subject to the regula-

tory authority of the Insurance Commissioner, management of

the corporation remains vested in its board of directors, which

retains broad authority to establish its lines of business, devise

health care plans, establish rates, enter into contracts, invest

funds, borrow money, guarantee loans, dispose of property

and even dissolve the corporation. 422 Mich. at 48; PA 350

§ 207(1). Under PA 350, this broad managerial authority is to

be exercised by a board of directors neither selected by the

corporate membership nor accountable to it.

3. The Proceedings Below

PA 350 was scheduled to go into effect on April 3, 1981. On

March 20, 1981, BCBSM filed a complaint against Michigan’s

Governor, Attorney General and Commissioner of Insurance

in the Ingham County Circuit Court seeking a declaratory

judgment that PA 350 violated the United States and Michigan

Constitutions in a multiplicity of respects. At the same time, it

sought preliminary injunctive relief against enforcement and

operation of the statute. On April 2, 1981, the Circuit Court

granted BCBSM’s motion for a preliminary injunction.

Almost a year later, on March 15, 1982, Governor Milliken,

pursuant to Michigan law, asked the Michigan Supreme Court

to determine controlling questions of public law concerning the

constitutionality of PA 350. The Michigan Supreme Court, in

turn, entered an order requesting the Circuit Court to certify

the pertinent controlling questions involved in this action and

provide a statement of relevant facts. On November 1, 1982,

after evidentiary hearings, the Circuit Court filed its certified

questions of law and findings of fact.

More than two years later, on April 16, 1985, the Michigan

Supreme Court issued its decision in this case—a case which it

described as presenting “important [constitutional] questions

of first impression.” 422 Mich. at 9. Although the Court

invalidated certain provisions of PA 350 and declined to

address others because of the lack of an actual controversy, it

upheld the key sections of the act against BCBSM’s constitu-

tional challenges. In particular, the Court held, over Justice

Levin’s vigorous dissent, that in divesting the corporate mem-

bership of control of BCBSM, PA 350 did not unconstitu-

tionally “take” private property without payment of just

compensation.

The Michigan Supreme Court acknowledged that BCBSM’s

board of directors has historically “been nominated from the

corporate members and elected by the same body with the

exception of two public appointees of the Insurance Commis-

sioner.” 422 Mich. at 15. Moreover, the Court conceded that

PA 350 effectively “divest[s] the members of the sole authority

they previously possessed to determine the method of selection

of BCBSM’s corporate management” (422 Mich. at 32);

“dispossesse[s] the members of the sole authority they pre-

viously held to determine the method of selection of BCBSM’s

corporate membership” (422 Mich. at 65); and “divest[s]” the

corporate membership “of the direct power they formerly held

to alter the articles and bylaws”—which the Court described as

a “considerable impairment” since “the power to elect the

corporate body and board is derived from” those corporate

documents (422 Mich. at 61-62). Nevertheless, the Court swept

aside BCBSM’s contention that such a divestiture and dispos-

session of the right to control the corporation was an unconsti-

tutional taking of private property without just compensation.

422 Mich. at 46-47.

The Court’s treatment of the “taking” issue rested on two

premises. First, notwithstanding the repeated holdings of this

Court that a taking pursuant to a valid exercise of the police

power must nevertheless be compensated, the state court

thought that “losses incident to the lawful exercise of the police

power are noncompensable.” 422 Mich. at 46. Second, the

Michigan court opined that the members of BCBSM, a regu-

lated, nonprofit corporation, had no “investment-backed ex-

pectations” which could give rise to a compensable property

interest. 422 Mich. at 47.

In his dissenting opinion, Justice Levin reasoned that the

power to use, control and dispose of property is the core

attribute of property ownership (422 Mich. at 99, 102); that

“Iw]hen the state redistributes control, it has gone beyond

mere regulation and has taken both control and the assets,

properties and business subject to control” (422 Mich. at 102);

that the property interest represented by corporate control may

not constitutionally be appropriated by the state without just

compensation merely because BCBSM is a nonprofit corpora-

tion (422 Mich. at 113-19); that the incorporators—the direct

predecessors of BCBSM’s present members—established

BCBSM with contributions of cash, labor and initiative, so

that the corporate membership had an investment-backed ex-

pectation in the right to govern BCBSM, subject to the regula-

tory authority of the Commissioner of Insurance (422 Mich. at

115-19); and that nothing in the regulatory history of

BCBSM—PA 350 having been enacted in the wake of Demlow

precisely because the Commissioner lacked sufficient statutory

authority to regulate BCBSM (422 Mich. at 119-21)—gave “the

organizers of the BCBSM constituent corporations and of

BCBSM and the members thereof” any reason to anticipate

“that the Legislature might seek to so transform the govern-

ance of BCBSM” (422 Mich. at 122).

BCBSM moved the Michigan Supreme Court for rehearing

on May 7, 1985. That motion was denied on June 24, 1985. On

the same date, BCBSM applied to this Court (Hon. Sandra

Day O’Connor) for an order partially staying the judgment of

the Michigan Supreme Court pending final disposition of this

appeal. That application was denied on July 1, 1985.°

8 In opposing BCBSM’s stay application, appellees made the astound-

ing assertion that the taking issue presented on this appeal was neither

THE QUESTION PRESENTED IS SUBSTANTIAL

The holding below that a state may constitutionally strip the

corporate membership of a nonprofit health care corporation

of its right to control the corporation was based on grave

misapprehensions of law. The ruling undermines the funda-

mental constitutional safeguard against the uncompensated

governmental taking of private property for public use.

As Justice Levin noted, “[a]ll agree that a purpose of PA 350

is to eliminate control of BCBSM, and hence of its business

and properties, by the persons presently in control and to

transfer control to others, persons appointed by the Governor

and elected by the providers and subscribers.” 422 Mich. at 99.

By transferring control of one of the state’s major corpora-

tions, Michigan has vastly overstepped the bounds of regula-

tion. It has utterly extinguished the proprietary rights of

BCBSM’s corporate membership, albeit for a perceived public

purpose, without paying just compensation as required by the

Fifth and Fourteenth Amendments.

Significantly, the Michigan Supreme Court did not question

the property rights of the corporate membership. Indeed, as we

raised below nor resolved by the Michigan Supreme Court. They

sought to create the impression that BCBSM’s challenge to the cor-

porate control provisions of PA 350 was based solely on the contract

clause. But that contention is squarely refuted by the majority and

dissenting opinions themselves. It could not be clearer that the Michi-

gan Supreme Court flatly rejected BCBSM’s “alleg[ation] that 1980 PA

350 has effectively removed from BCBSM control over its corporate

direction” and thus effected “a taking of BCBSM’s property without

due process of law.” 422 Mich. at 46. It is noteworthy that Justice

Levin’s lengthy dissent was devoted principally to the taking issue and

never even reached the contract clause question.

The fact that BCBSM also attacked PA 350’s corporate control

provisions on other constitutional grounds—not raised on this ap-

peal—is hardly an indication that those same provisions were not

challenged under the taking clause. Indeed, the Michigan Supreme

Court expressly noted that BCBSM had attacked essentially the same

provisions on impairment-of-contract, due process and taking

grounds. 422 Mich. at 43 n.34.

. i

shall demonstrate, such property rights are well recognized

under state law. Rather, the court below held that the extin-

guishment of those rights did not constitute a compensable

“taking.” In so holding, the court committed plain error at the

very threshold of its analysis. “[I]t is clear,” the court stated,

“that losses incident to the lawful exercise of the police power

are noncompensable.” 422 Mich. at 46. However, as demon-

strated below, a// compensable governmental takings presup-

pose a “public use,” /.e., a lawful exercise of the police power.

It is a “separate question . . . whether an otherwise valid

regulation so frustrates property rights that compensation must

be paid.” Loretto v. Teleprompter Manhattan CATV Corp.,

458 U.S. 419, 425 (1982).

The court below committed further error in purporting to

apply the standards of Penn Central Transportation Co. v.

New York City, 438 U.S. 104 (1978), when it ruled that

BCBSM’s membership had no “investment-backed expecta.

tions” because the membership had no “discernible monetary

or other equitable interest” in BCBSM. 422 Mich. at 47. As we

will show, the court’s holding not only disregarded the cor-

porate membership’s substantial economic interest in the cor-

poration, but also misapplied Penn Central.

The significance of the erroneous ruling below transcends

the’interests of the parties to this litigation; it is of profound

importance for the continued stability and vitality of the

nation’s health care and other nonprofit corporations. A

federal district court has already relied on the decision below in

rejecting a “taking” challenge to similar legislation disenfran-

chising the membership of a health care corporation. Blue

Cross of lowa v. Foudree, Civ. Action No. 84-597-A (S.D.

lowa, May 2, 1985). Indeed, if the decision below is permitted

to stand, no nonprofit corporation will be secure against

uncompensated governmental appropriation. Because, as the

Michigan Supreme Court acknowledged, this case involves

“important [constitutional] questions of first impression” (422

Mich. at 9), and because that court misapprehended and

misapplied this Court’s precedents, the issue presented on this

appeal is plainly substantial and calls for this Court’s plenary

consideration.

1. By Taking The Corporate Membership’s Control Over

BCBSM, Michigan Has Divested Private “Property”

The court below did not dispute the fact that the right of

BCBSM’s corporate membership to control the affairs of the

corporation constitutes private “property.” For it is well-es-

tablished that the term “property” in the Taking Clause en-

compasses not only legal title, but also the right to control the

use Of property. United States v. General Motors Corp., 323

U.S. 373, 377-78 (1945); Ruckelshaus v. Monsanto Co., 104 S.

Ct. 2862, 2873-74 (1984). As the Michigan Supreme Court

itself pointed out on another occasion:

“The term ‘property’, as used in the various guarantees

against the taking of property without due process of law,

is used in its most basic general sense. . . It includes not

only title and possession, but also the right of acquisition

and control, the right to make any legitimate use or

disposal of the thing owned. . . .” Rassner v. Federal

Collateral Society, 299 Mich. 206, 213-14, 300 N.W. 45

(1941).

For that reason, it is equally well-settled that the stock-

holders or members of a corporation—those who contro/ the

corporation’s assets, properties and business through a board

of directors of their selection—have a property interest in that

control.’ Neither government regulation of BCBSM nor its

9 Opinion of the Justices, 333 So.2d 125, 126-27 (Ala. 1976) (holding

that giving a vote in the management of a corporation to lessees of the

corporation’s property “would deprive the members of their property

rights in the management of the corporation without due process of

law”); Fein v. Lansten Monotype Machine, 196 Va. 753, 85 S.E.2d

353, 361 (1955) (“[t]o deprive a stockholder of his right to vote is to

deprive him of an essential attribute of his property”); Klaus v.

Hi-Shear Corp., 528 F.2d 225, 234 (9th Cir. 1975) (under California

law, “the right to vote a share of stock is a property right”); see also,

14 Fletcher, Cyclopedia of the Law of Private Corporations § 6708

(1980 Rev.) (“[t]he due process clause is violated by a regulation taking

away the management and control of the corporation”).

status as a nonprofit corporation negates the existence of that

interest.

Private corporations subject to government regulation are

nonetheless private. No one would contend that stockholders

of commercial insurance companies or utilities have no private

property interest in controlling the direction of those compa-

nies merely because they are regulated by the state. It is clear,

therefore, that government regulation does not mean that

BCBSM’s membership lacks a property interest in controlling

the corporation.

Similarly, although BCBSM is a nonprofit corporation serv-

ing certain public goals, it remains a private corporation."® Its

members are its owners. State v. North Star Research and

Development Institute, 294 Minn. 56, 200 N.W.2d 410, 414

(1972). Although they do not have an expectation of direct

monetary gain from the operations of the corporation, their

ownership interest is nonetheless valuable and important.

Thus, referring to membership in a nonprofit corporation, the

Minnesota Supreme Court has noted:

“It is doubtful if any membership . . . right is any

more important than the right to vote for the election of

the directors . . . of a corporation who carry on and

conduct the business of the corporation, elect or appoint

its officers and agents, and in large measure, determine

the manner in which the corporation overates.” Minne-

10 It has been held that Blue Cross health care companies are private

entities. Baltimore County Hospital v. Maryland Hospital Service,

Inc., 234 Md. 427, 200 A.2d 39, 41 (1964); Weiner v. Hospital Service

Plan of Lehigh Valley, 187 Pa. Super. 244, 144 A.2d 575, 578 (1958).

Westland Convalescent Center v. Blue Cross & Blue Shield of Michi-

gan, 414 Mich. 247, 324 N.W.2d 851 (1982), is not to the contrary: the

dictum characterization in that case of BCBSM as a “quasi-public”

‘entity was joined in by only two of seven members of the Michigan

Supreme Court. Nor did the court below determine in this case

whether BCBSM was a private or quasi-public corporation. In its view,

there was no unconstitutional “taking”—not because BCBSM’s cor-

porate membership lacked a private property interest, but because the

court believed deprivation of that interest did not constitute a com-

pensable “taking.”

sota Baptist Convention v. Pillsbury Academy, 246 Minn.

46, 61, 74 N.W.2d 286, 296 (1955).

Accord, Opinion of the Justices, 373 So. 2d 293 (Ala. 1979);

Board of Regents v. Trustees of Endowment Fund, 206 Md.

559, 112 A.2d 678, cert. denied, 350 U.S. 836 (1955); Ohio v. |

Neff, 52 Ohio St. 375, 40 N.E. 720 (1895); State ex rel. Waring

v. Georgia Medical Society, 38 Ga. 608, 626 (1869); 18 Am.

Jur. 2d Corporations § 477 (1965).

In sum, the right of BCBSM’s corporate membership to

select the board of directors and its own membership succes-

sion, with the resulting control of the corporation’s destiny, is

a recognized property right. As we shall now demonstrate, the

Court below erred in holding that Michigan could extinguish

that right without the payment of just compensation.

2. PA 350’s Divestiture Of The Corporate Membership’s

Control Over BCBSM Is An Unconstitutional “Taking”

The critical issue under the Taking Clause is whether the

governmental action has gone beyond “regulation” so as to

become a “taking.” Ruckelshaus v. Monsanto Co., 104 S. Ct.

2862, 2875 (1984). Michigan’s attempt to wrest control of

BCBSM from its corporate membership clearly transcends

“regulation”; it differs from “regulation” not only in degree

but in kind.

A look at PA 350 itself reveals the vast qualitative difference

in this case between “regulation” and “taking.” It was regula-

tion when the legislature set standards and authorized the

Commissioner of Insurance to regulate BCBSM’s rates for

health care services. It was regulation when the legislature

established definite cost containment goals governing provider

reimbursement and procedures—including possible Commis-

sioner intervention—to assure that BCBSM would achieve

those goals. It was arguably regulation even when the legisla-

ture mandated that subscriber and public representation be

increased on BCBSM’s board of directors. However, it consti-

tuted a taking when the legislature stripped the corporate

membership of its right to elect those directors and control

BCBSM’s operations, and gave that property right to others.

Lest it be thought that the degree of government regulation

in this case renders private control unimportant, the fact of the

matter is that BCBSM retains broad discretionary authority to

run the business. The Michigan Supreme Court squarely held:

“Under our interpretation of the act, BCBSM’s manage-

rial power over its lines of business, subscriber certifi-

cates, and provider reimbursement contracts has not been

preempted by the Insurance Commissioner. BCBSM still

has the power to establish its lines of business, § 205(4),

to establish and set rates for subscriber certificates,

§ 607(1), to enter into provider class plans, § 502(1), and

to formulate its methods of provider reimbursement in

accordance with the ‘access,’ ‘quality,’ and ‘cost’ goals of

the act, § 504(1).” 422 Mich. at 48.

The short of the matter is that under the new statutory scheme

of things, BCBSM’s corporate membership will be disenfran-

chised and will lose control over vitally important discretionary

decisionmaking.

The court below missed the mark completely when it de-

clared that “losses incident to the lawful exercise of the police

power are noncompensable,” 422 Mich. at 46. Plainly, a valid

regulatory purpose does not immunize governmental action

against a Taking Clause challenge.

The Taking Clause itself states that privaie property may not

be taken “for public use, without just compensation.” And

since the scope of “public use” is “coterminous with the scope

of a sovereign’s police powers,” every compensable taking

presupposes a lawful exercise of the police power. Hawaii

Housing Authority v. Midkiff, 104 S. Ct. 2321, 2329 (1984).

Accord, Ruckelshaus v. Monsanto Co., 104 S. Ct. 2862, 2879

(1984); Berman v. Parker, 348 U.S. 26, 33 (1954). As this

Court recently explained, “[iJt is a separate question ...

whether an otherwise valid regulation so frustrates property

rights that compensation must be paid.” Loretto v. Telepromp-

ter Manhattan CATV Corp., 458 U.S. 419, 425 (1982) (empha-

sis added). Accord, Ruckelshaus v. Monsanto Co., 104 S. Ct.

2862, 2880 (1984).

The key question in this case, therefore, is not whether there

has been a valid exercise of the police power, as the Michigan

Supreme Court erroneously assumed, but whether the legisla-

ture, in its zeal to regulate, has overstepped the bounds of

regulation and has taken property—albeit for public use—

without just compensation.

To be sure, there is no “set formula” to apply in answering

that question; the inquiry is essentially ad hoc. Ruckelshaus v.

Monsanto Co., 104 S. Ct. 2862, 2874 (1984); Kaiser Aetna v.

United States, 444 U.S. 164, 175 (1979). But in making that

inquiry, this Court has focused “both on the character of the

[governmental] action and on the nature and extent of the

interference” with the property interests involved. Penn Cen-

tral Transportation Co. v. New York City, 438 U.S. 104, 130

(1978). Here, Michigan is depriving BCBSM’s corporate mem-

bership of its entire property interest, not just one strand in its

bundle of rights. All of its rights of governance are being taken

away: its right to choose the board of directors, to amend the

articles of incorporation and bylaws, and to determine its own

composition and succession. Under PA 350, the corporate

membership becomes a vestigial body with no authority what-

soever.

But PA 350 does not stop there. It creates a new corporate

membership, to be selected in the same manner as the board of

directors. The current membership is not permitted to have any

role in selecting its successors. Thus, members of BCBSM are

not only being stripped of all of the rights they now enjoy, but

are losing their very membership.

This is not a case, therefore, where a private party retains

some measure of dominion over the property which was

allegedly taken. Rather, PA 350 “chops through the bundle” of

property rights, extinguishing the fundamental rights of

BCBSM’s corporate membership “to possess, use and dis-

pose.” See Loretto v. Teleprompter Manhattan CATV Corp.,

458 U.S. 419, 435 (1982). The corporate membership has been

utterly deprived of its property; it has retained nothing."

The court below nevertheless thought that there was no

taking under Penn Central because, according to the majority,

BCBSM’s corporate membership had no “investment-backed

expectations” in controlling the affairs of BCBSM.'? However,

nonprofit corporations, by definition, do not make “invest-

ments” in a profit-making sense. It cannot be the law that the

property of a nonprofit corporation is therefore not entitled to

any constitutional protection. Rather, governmental appropria-

tion of property which is privately held for nonprofit purposes

must be subject to the same standards that are applicable to all

takings.

Unless the government is free to seize the assets of nonprofit

corporations at will without payment of compensation, one

may not give the phrase “investment-backed expectation” the

wooden reading given by the court below. Neither a corpora-

tion nor its membership needs to have a direct pecuniary

interest in profits to have an “investment-backed expecta-

tion.” '?

As Justice Levin pointed out, BCBSM’s membership did

make substantial investments in the corporation. The initial

working capital of BCBSM’s corporate predecessors was con-

tributed by the founding hospitals and physicians. Those who

made the investment had a right to expect that control of the

11‘ This critical fact distinguishes such cases as Andrus v. Allard, 444

U.S. 51 (1979), and Penn Central Transportation Co. v. New York

City, 438 U.S. 104 (1978).

12 Penn Central identified several factors for determining whether a

governmental action constitutes a “taking,” including its interference

with “investment-backed expectations.” 438 U.S. at 124.

13 Indeed, “the interest in anticipated gains has traditionally been

viewed as less compelling than other property-related interests.” An-

drus v. Allard, 444 U.S. 51, 66 (1979).

corporation would remain in the hands of their chosen succes-

sors.

Moreover, “investment” encompasses more than investment

of money. As this Court has recently observed, property

“includes the products of an individual’s ‘labour and inven-

tion.’ ” Ruckelshaus v. Monsanto Co., 104 S. Ct. 2862, 2873

(1984), citing 2 W. Blackstone, Commentaries, *405 and J.

Locke, The Second Treatise of Civil Government, ch. 5 (J.

Gough ed. 1947). BCBSM’s growth and success has been due

in no small measure to years of labor, innovation and initiative

contributed by BCBSM’s members. Indeed, the court below

recognized that BCBSM’s success is partially attributable to

“the expertise and aggressiveness of its management” (422

Mich. at 15)—management which was chosen by BCBSM’s

directors who, in turn, were elected by and accountable to the

corporate membership.

It is quite evident, moreover, that BCBSM’s members ex-

pected tangible benefits from their investment of time, money

and effort in BCBSM’s future. All constituent groups which

comprise BCBSM’s membership have an intense economic

interest in BCBSM’s destiny. The group subscribers, including

employers and unions, engage in collective bargaining over the

level and type of benefits provided, and those benefits are an

important part of the overall package of rights and obligations

ultimately negotiated between labor and management. Individ-

ual subscribers, of course, also have an economic interest in

what they are going to pay for, and what they are going to

receive in, health care service. Finally, providers have the same

continuing economic interest which caused them to establish

BCBSM in the first place: to avoid the financial uncertainty

resulting from the inability of the needy to pay for health care.

Thus, all of the constituent elements of BCBSM’s corporate

membership have vitally important economic interests in

BCBSM— interests which motivated them to invest many years

of service and hard work in the enterprise.

The assumption of the court below that the corporate

membership had no reasonable expectation of continued con-

trol is simply incorrect. Although BCBSM has always been

subject to some degree of government regulation, the regula-

tory framework left, and still leaves, wide room for manage-

ment initiative. 422 Mich. at 48-49; Blue Cross and Blue Shield

of Michigan v. Demlow, 403 Mich. 399, 429, 270 N.W.2d 845,

855 (1978). While BCBSM’s membership could expect changes

in regulatory requirements and constraints, nothing presaged

Michigan’s attempt to wrest control of BCBSM from its lawful

owners. In a very real sense, therefore, PA 350 subverts the

reasonable, investment-backed expectations of BCBSM’s cor-

porate membership.

In sum, the character of the governmental action—transfer-

ring control of a corporation—goes well beyond regulation; its

impact on the property interests of BCBSM’s membership is

absolute; and it interferes with substantial investment-backed

expectations. Accordingly, those sections of PA 350 which

divest the corporate membership of its rights to elect the board

of directors (§ 301(7)), to determine its own members

(§ 305(1)), and to amend the articles of incorporation and

corporate bylaws (§§ 203, 302(1)), constitute an unconstitu-

tional taking of private property unless just compensation is

paid.

3. Since Michigan Has Not Provided For Just Compensa-

tion, BCBSM Is Entitled To An Injunction

Michigan has not offered to compensate BCBSM’s member-

ship for the taking of its property. Moreover, it has no mecha-

nism for post-taking compensation. 422 Mich. at 98 n.4.

BCBSM is accordingly entitled to an injunction to prevent an

uncompensated, unconstitutional taking of its private property.

CONCLUSION

For the reasons stated above, this Court should note proba-

ble jurisdiction of this appeal.

Dated: July 25, 1985

Respectfully submitted,

STANLEY D. ROBINSON

Kaye, Scholer, Fierman,

Hays & Handler

425 Park Avenue

New York, New York 10022

(212) 407-8000

Attorney for Appellant

Of Counsel:

Randolph S. Sherman

Joel Katcoff

Of Counsel:

William A. Saxton

Keefe A. Brooks

Butzel Long Gust Klein

& Van Zile

1881 First National Building

Detroit, Michigan 48226

(313) 963-8142

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.