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Stewart v. Azar

United States District Court, District of Columbia

June 29, 2018

RONNIE MAURICE STEWART, et al., Plaintiffs,
ALEX M. AZAR II, et al., Defendants. Kentucky HEALTH Component Comments



         In 2010, Congress enacted the Patient Protection and Affordable Care Act - popularly known as Obamacare - which is “a comprehensive national plan to provide universal health insurance coverage” across the nation. See Nat'l Fed'n of Indep. Bus. v. Sebelius, 567 U.S. 519, 583 (2012). One central component of that statute was an expansion of Medicaid, allowing states to provide “health care to all citizens whose income falls below a certain threshold.” Id. at 531. This “expansion, ” the Supreme Court has held, represented “a shift in kind, not merely degree.” Id. at 583. While the “original program was designed to cover medical services for four particular categories of the needy: the disabled, the blind, the elderly, and needy families with dependent children, ” the Affordable Care Act “transformed” Medicaid “into a program to meet the health care needs of the entire nonelderly population with income below 133 percent of the poverty level.” Id.

         Defendants in this case have sought to roll back those reforms. Upon assuming office in March 2017, Defendant Seema Verma, the Administrator for the Centers for Medicare & Medicaid Services - along with then-Secretary of the Department of Health and Human Services Tom Price - immediately circulated a letter to the Governors of all states to share her belief that the ACA's Medicaid expansion “was a clear departure from the core, historical mission of the program.” Sec'y of Health & Human Servs., Dear Governor Letter (Mar. 14, 2017), The letter encouraged states to apply for “waiver[s]” of some of the program's coverage requirements - especially for the expansion group - promising to “fast-track” approval of such petitions. Id.

         Kentucky is one state to board that train. After the ACA went into effect, it elected to broaden Medicaid to include the expansion population, and by April 2016, more than 428, 000 new residents had thereby received medical assistance. In July 2017, however, the state submitted an experimental plan to CMS called “KY HEALTH, ” which is made up of several components, most significantly Kentucky HEALTH. That latter program promised to “comprehensively transform” its Medicaid program. Under that plan, the state would impose “community-engagement” requirements for the expansion population, along with some of the traditional population as well. This new mandate would require that those recipients work (or participate in other qualifying activities) for at least 80 hours each month as a condition of receiving health coverage. The project also called for, among other things, increased premiums and more stringent reporting requirements. Consistent with CMS's earlier invitation, the Secretary approved Kentucky's application on January 12, 2018, waiving several core Medicaid requirements in the process.

         Plaintiffs in this case are fifteen Kentucky residents, each of whom is currently enrolled in the state's Medicaid program. Together, they fear that Kentucky HEALTH will relegate them to second-class status within Medicaid, putting them and others “in danger of losing” their health insurance altogether. They have thus brought this action to challenge the Secretary's approval of Kentucky HEALTH.

         Although the Secretary is afforded significant deference in his approval of pilot projects like Kentucky's, his discretion does not insulate him entirely from judicial review. Such review reveals that the Secretary never adequately considered whether Kentucky HEALTH would in fact help the state furnish medical assistance to its citizens, a central objective of Medicaid. This signal omission renders his determination arbitrary and capricious. The Court, consequently, will vacate the approval of Kentucky's project and remand the matter to HHS for further review.

         I. Background

         The Court begins with an overview of the statutes governing Medicaid and its experimental projects. It then turns more specifically to Kentucky's challenged plan, before concluding with a brief procedural history of the current suit.

         A. Statutory Background

         1. Medicaid Program

         Since 1965, the federal government and the states have worked together to provide medical assistance to certain vulnerable populations under Title XIX of the Social Security Act, colloquially known as Medicaid. See 42 U.S.C. § 1396-1. The Centers for Medicare and Medicaid Services (CMS), a federal agency within the Department of Health and Human Services, has primary responsibility for overseeing Medicaid programs. Under the cooperative federal-state arrangement, participating states submit their “plans for medical assistance” to the Secretary of HHS. Id. To receive federal funding, those plans - along with any material changes to them - must be “approved by the Secretary.” Id.; see also 42 C.F.R. § 430.12(c). Currently, all states have chosen to participate in the program.

         Before the Secretary can approve a state plan, the Medicaid Act sets out certain minimum parameters that all states must follow. See 42 U.S.C. § 1396a (listing 83 separate requirements). One such provision requires state plans to “mak[e] medical assistance available” to certain low- income individuals. Id. § 1396a(a)(10)(A). Until recently, that group included pregnant women, children, and their families; some foster children; the elderly; and people with certain disabilities. Id. In 2010, however, Congress enacted the Affordable Care Act “to increase the number of Americans covered by health insurance.” NFIB, 567 U.S. at 538. Under that statute, states can choose to expand their Medicaid coverage to include additional low-income adults under 65 who would not otherwise qualify. See 42 U.S.C. § 1396a(a)(10)(A)(i)(VIII). It also allowed states to cover certain former foster children under the age of 26. Id. § 1396a(a)(10)(A)(i)(IX).

         Generally, a state must cover all qualified individuals or forfeit its federal Medicaid funding. Id. § 1396a(a)(10)(B). Although it may choose not to cover this ACA expansion population, see NFIB, 567 U.S. at 587, if the state decides to provide coverage, those individuals become part of its mandatory population. In that instance, the state must afford the expansion group “full benefits” - i.e., it must provide “medical assistance for all services covered under the State plan” that are substantially equivalent “in amount, duration, or scope . . . to the medical assistance available for [other] individual[s]” covered under the Act. See 42 U.S.C. § 1396d(y)(2)(B); 42 C.F.R. § 433.204(a)(2); see also Jones v. T.H., 425 U.S. 986 (1976).

         The Medicaid Act also ensures that enrolled individuals receive a minimum level of coverage. Under section 1396a, states must cover certain basic medical services, see 42 U.S.C. §§ 1396a(a)(10)(A), 1396d(a), and the statute limits the amount and type of premiums, deductions, or other cost-sharing charges that a state can impose on such care. Id. § 1396a(a)(14); see also id. § 1396o. Other provisions require states to provide up to three months of retroactive coverage once a beneficiary enrolls, see id. § 1396a(a)(34), and to ensure that recipients receive all “necessary transportation . . . to and from providers.” 42 C.F.R. § 431.53. Finally, states must “provide such safeguards as may be necessary to assure” that eligibility and services “will be provided, in a manner consistent with simplicity of administration and the best interests of the recipients.” 42 U.S.C. § 1396a(a)(19).

         2. Section 1115 of Social Security Act

         Both before and after the passage of the ACA, a state wishing to deviate from the Medicaid Act's requirements must obtain a waiver from the Secretary of HHS. See 42 U.S.C. § 1315. In enacting the Social Security Act (and, later, the Medicaid program within the same title), Congress recognized that statutory requirements “often stand in the way of experimental projects designed to test out new ideas and ways of dealing with the problems of public welfare recipients.” S. Rep. No. 1589, 87th Cong., 2d Sess. 19, reprinted in 1962 U.S.C.C.A.N. 1943, 1961-62. To that end, Section 1115 of the Social Security Act allows the Secretary to approve “experimental, pilot, or demonstration project[s]” in state medical plans that would otherwise fall outside Medicaid's parameters. The Secretary can approve only those projects that “in [his] judgment . . . [are] likely to assist in promoting the [Act's] objectives.” 42 U.S.C. § 1315(a). Once the Secretary has greenlighted such a project, he can then waive compliance with the requirements of Section 1396a “to the extent and for the period . . . necessary to enable [the] State . . . to carry out such project.” Id. § 1315(a)(1).

         While the ultimate decision whether to grant approval rests with the Secretary, his discretion is not boundless. Before HHS can act on a waiver application, the state “must provide at least a 30-day public notice[-]and[-]comment period” regarding the proposed program and hold at least two hearings at least 20 days before submitting the application. See 42 C.F.R. §§ 431.408(a)(1), (3). Once a state completes those prerequisites, it then sends an application to CMS. Id. § 431.412 (listing application requirements). After the agency notifies the state that it has received the waiver application, a federal 30-day public-notice period commences, and the agency must wait at least 45 days before rendering a final decision. Id. §§ 431.416(b), (e)(1).

         B. Factual Background

         1. CMS's Actions

         It is no secret that the current administration hopes to “prompt[ly] repeal[] the Patient Protection and Affordable Care Act.” Exec. Order No. 13765, Minimizing the Economic Burden of the Patient Protection and Affordable Care Act Pending Repeal, 82 Fed. Reg. 8351 (Jan. 20, 2017). “In the meantime, ” it has promised to “take all actions consistent with law to minimize” the Act's impact, including on states. Id. To that end, the new CMS Administrator circulated a letter on March 14, 2017, alerting states of the agency's “intent to use existing Section 1115 demonstration authority” to help revamp Medicaid. See Dear Governor Letter at 2. In that letter, Defendant Verma and then-Secretary Price lamented “[t]he expansion of Medicaid through the Affordable Care Act” as “a clear departure from the core, historical mission of the program.” Id. at 1. Together they promised to find “a solution that best uses taxpayer dollars to serve” those individuals they deemed “truly vulnerable.” Id.

         On January 11, 2018, Brian Neale, Director of CMS, issued a follow-up letter to all state Medicaid Directors, fleshing out that “new policy.” See AR 90-99. The agency, he said, would “assist states in their efforts to improve Medicaid enrollee health and well-being through incentivizing work and community engagement among” certain adult mandatory Medicaid groups. Id. This was “a shift from prior agency policy.” AR 92. While other welfare programs - such as Temporary Assistance for Needy Families (TANF) and Supplemental Nutritional Assistance Program (SNAP) - condition benefits on working, see 42 U.S.C. § 607; 7 U.S.C. § 2029(a)(1), there is no equivalent for the Medicaid program. Indeed, during the 50-plus years of Medicaid, CMS has not previously approved a community-engagement or work requirement as a condition of Medicaid eligibility. See AR 4. Instead, the agency has consistently denied these requests, finding that work requirements “could undermine access to care” and were thus inconsistent with the purposes of Medicaid. See, e.g., Letter from Andrew M. Slavitt, Acting Administrator, Ctrs. For Medicare & Medicaid Servs., HHS to Thomas Betlach, Director, Az. Health Care Cost Containment Sys. at 2-3 (Sept. 30, 2016), at

         In the 2018 State Medical Director (SMD) letter, however, the agency espoused a new commitment to “support[ing] state efforts to test incentives that make participation in work or other community engagement a requirement for continued Medicaid eligibility” and encouraged states to apply for Section 1115 waivers for this purpose. See AR 90. It then “identified a number of issues for states to consider as they develop[ed]” a community-engagement requirement for the Medicaid program. Id. at 93-98. To date, at least ten states have applied for such Medicaid waivers. See ECF No. 40 (Amicus Brief of AARP, et al.) at 2 n.1.

         2. KY HEALTH

         One of those states is the Commonwealth of Kentucky. On August 24, 2016, Governor Matt Bevin submitted an application to CMS requesting a Section 1115 waiver to implement an experimental project, Helping to Engage and Achieve Long Term Health, or KY HEALTH. See AR 5432-33, 5447. He followed up with an amended (though similar) KY HEALTH application on July 3, 2017. That application had two key programs relevant here (as well as some others not challenged): (1) Kentucky HEALTH - not to be confused with the umbrella KY HEALTH - a “program” that applies only to “adult beneficiaries who do not qualify for Medicaid on the basis of a disability”; and (2) Substance Use Disorder (SUD) Treatment, which would be available for all Medicaid beneficiaries. See AR 2-3. The Court outlines each in turn.

         a. Kentucky HEALTH

         Kentucky HEALTH is a program primarily (though not exclusively) targeting the expansion group of adults covered under the ACA. See AR 2-3, AR 5442. The Commonwealth believed that this project would “transform” the state's Medicaid program by, among other things, predicating Medicaid eligibility for most of the expansion population on workforce participation or community service. See AR 2, 15-16.

         On January 12, 2018 (just one day after issuing the SMD letter), the Secretary approved Kentucky HEALTH, granting waivers to implement the following features:

1) Community-engagement requirement, which requires beneficiaries to spend at least 80 hours per month on qualifying activities (including employment, job-skills training, education, community service, and participation in SUD treatment) or lose their Medicaid coverage;
2) Limits on retroactive eligibility, which excuse the state from “provid[ing] three months of retroactive eligibility for beneficiaries receiving coverage through the Kentucky HEALTH program; except for pregnant women and former foster care youth”;
3) Monthly premiums, including premiums varied based on income and/or length of time enrolled in Medicaid;
4) Limits on non-emergency medical transportation, which “relieve Kentucky of the requirement to assure non-emergency medical transportation to and from providers for the new adult group” - i.e., adults without disabilities, except for those who are medically frail, former foster-care youth, or pregnant;
5) Reporting requirements, which mandate that individuals provide information for an annual redetermination and report changes in income or circumstances that affect Medicaid eligibility within 10 days; and
6) Lockouts, which allow the state to deny Medicaid coverage for up to six months for any beneficiary who (a) has an income above 100% of the FPL and (b) failed to meet her premium or reporting requirements.

AR 2, 13-15.

         Kentucky HEALTH also included “commercial market health insurance” features, see AR 6, such as a deductible account, an incentive and savings account called My Rewards. Id. at 6-7. The Secretary approved each of those mechanisms as part of Kentucky HEALTH and, in doing so, agreed to “fund[]” those programs “through the Section 1115(a)(2) expenditure authority.” CMS Br. at 42. As part of that approval, the Secretary allowed Kentucky to penalize recipients who used the emergency room for “non-emergent” purposes, by deducting $75 from their new My Rewards health account (an account where Kentucky provides virtual funds for healthy behaviors). See AR 33-35, 5463.

         With those programs in place, the Commonwealth expected to save roughly $331 million dollars, see AR 5513 (Estimated Fiscal Projections), primarily by reducing its Medicaid population by an estimated 95, 000 persons. Compare AR 5421, with AR 5422.

         b. SUD Program

         In the same KY HEALTH application, Kentucky also sought approval for an SUD Program. Traditionally, Medicaid bars states from receiving any “payments with respect to care or services for any individual who has not attained 65 years of age and who is a patient in an institution for mental diseases [IMD].” 42 U.S.C. § 1396d(a)(29); see also 42 U.S.C. § 1396d(a)(14) and (16)(A) (separately allowing payments for individuals under age 21). An IMD is a “hospital, nursing facility, or other institution . . . that is primarily engaged in providing diagnosis, treatment, or care of persons with mental diseases.” Id. § 1396d(i). In other words, the statute prohibits the federal government from reimbursing any treatment in mental-health facilities (at least for beneficiaries between 21 and 64).

         Increasingly, this provision has posed problems for states. An estimated 21% of Medicaid-eligible adults suffer from a substance-use disorder, and Kentucky's citizens are no exception. See AR 5468. The state estimates that nearly “90, 000 newly enrolled Kentuckians may have a SUD requiring treatment.” Id. In 2014, the state expanded its coverage of mental health and SUD treatment options, “allowing Medicaid recipients to receive coverage for the full spectrum of inpatient and outpatient SUD services.” Id. As the state put it, however, “coverage of benefits mean[s] little without access to providers.” Id. Although there were 26 qualified mental-health facilities within Kentucky, none could provide care (or, at least, none could receive federal funding for such care) because of the “IMD exclusion.” Id.

         The Secretary recognized as much and circulated a State Medical Director letter in 2015, informing states of “a new opportunity for demonstration projects approved under section 1115 . . . to ensure that a continuum of care is available to individuals with SUD.” Letter No. 15-003 at 1 (July 27, 2015), smd15003.pdf. It encouraged states to propose “demonstration projects” under Section 1115 for treating SUDs. Id. If the Secretary approved any such project, Section 1115 would then require that the project costs (including patient-treatment costs) be “regarded as expenditures under the State [Medicaid] plan, ” meaning that they would be treated as reimbursable under Medicaid. See 42 U.S.C. § 1315(a)(2)(A). So long as states treated their SUD programs as part of a “demonstration” project, the federal government could thus help pick up the tab.

         In 2017, the current administration confirmed its commitment to “work[ing] with states on section 1115(a) demonstrations . . . to combat the ongoing opioid crisis.” Letter No. 17-003 at 1 (Nov. 1, 2017), smd17003.pdf. In a new SMD Letter, the Secretary reaffirmed that through the “section 1115 initiative, states will have an opportunity to receive federal financial participation (FFP) for the continuum of services to treat addiction to opioids or other substances, including services provided to Medicaid enrollees residing in residential treatment facilities.” Id. at 2. In total, twelve states (including Kentucky) have received approval on SUD demonstration projects. See MaryBeth Musumeci, Key Questions about Medicaid Payment for Services in “Institutions for Mental Disease”, Henry J. Kaiser Family Foundation (June 18, 2018). Another thirteen have applications pending. Id.

         As part of KY HEALTH, the Secretary approved an “[SUD] program available to all Kentucky Medicaid beneficiaries.” AR 3. The “SUD program [allows] beneficiaries with SUD to access benefits that include SUD residential treatment, crisis stabilization and withdrawal management services provided in IMDs, which would otherwise be excluded from federal reimbursement.” AR 85. Relatedly, the Secretary waived the requirement that Kentucky cover the non-emergency use of medical transportation (NEMT) “to and from methadone treatment, which requires daily dosing, for all Medicaid populations.” AR 85. The plaintiffs have not challenged the SUD program (or any other component of KY HEALTH besides Kentucky HEALTH).

         C. Procedural History

         Before submitting its Section 1115 application to CMS, Kentucky's Department for Medicaid Services held three public hearings and conducted two public-comment periods. See AR 5509, 5410. Throughout this process, the state and CMS were engaged in “continued negotiations” regarding the program's terms. See AR 5413, 5410. CMS also opened a federal public-comment period on Kentucky HEALTH. See AR 7-8. On January 12, 2018, CMS notified the Governor's office that the application had been approved. See AR 2-9.

         Two weeks later, Plaintiffs brought this nine-count suit seeking declaratory and injunctive relief on behalf of themselves and a “statewide proposed class . . . of all residents of Kentucky who are enrolled in the Kentucky Medicaid program on or after January 12, 2018.” Compl., ¶ 33. Most named Plaintiffs have an income below 133% of the federal poverty line; many have serious medical conditions. See ECF Nos. 33-2-17 (Declarations). Almost all either already have part-time jobs or are actively seeking work, yet each fears that she may not be able to comply with the new “community-engagement” requirement. Id. Together, they worry that such a requirement - along with Kentucky HEALTH's other measures - places them in danger of losing Medicaid completely. Id. Their Complaint alleges principally that by approving Kentucky HEALTH, Defendants violated the Constitution and the Administrative Procedure Act. See Compl., ¶¶ 339-408.

         On March 30, 2018, the Court granted Kentucky's Motion for Intervention. See Minute Order. Defendants then moved to transfer, asking the Court to send the case to the Bluegrass State, specifically the Frankfort Docket of the Central Division of the Eastern District of that state. See ECF No. 6 at 2 n.2. The Court denied that request on April 10, 2018, finding that this case was of “national, rather than local, significance” and would be properly adjudicated within the District of Columbia. See Stewart v. Azar, 2018 WL 1730304, at * 6 (D.D.C. Apr. 10, 2018). In the meantime, the parties have filed competing Motions for Summary Judgment. The Court heard oral argument on June 15, 2018, and because Kentucky HEALTH will take effect on July 1, 2018, has issued this Opinion on an expedited basis.

         II. Legal Standard

         The parties have cross-moved for summary judgment on the administrative record. The summary-judgment standard set forth in Federal Rule of Civil Procedure 56(c), therefore, “does not apply because of the limited role of a court in reviewing the administrative record.” Sierra Club v. Mainella, 459 F.Supp.2d 76, 89 (D.D.C. 2006); see also Bloch v. Powell, 227 F.Supp.2d 25, 30 (D.D.C. 2002), aff'd, 348 F.3d 1060 (D.C. Cir. 2003). “[T]he function of the district court is to determine whether or not as a matter of law the evidence in the administrative record permitted the agency to make the decision it did.” Sierra Club, 459 F.Supp. 2d. at 90 (quotation marks and citation omitted). “Summary judgment is the proper mechanism for deciding, as a matter of law, whether an agency action is supported by the administrative record and consistent with the [Administrative Procedure Act] standard of review.” Loma Linda Univ. Med. Ctr. v. Sebelius, 684 F.Supp.2d 42, 52 (D.D.C. 2010) (citation omitted), aff'd, 408 Fed. App'x 383 (D.C. Cir. 2010).

         The Administrative Procedure Act “sets forth the full extent of judicial authority to review executive agency action for procedural correctness.” FCC v. Fox Television Stations, Inc., 556 U.S. 502, 513 (2009). It requires courts to “hold unlawful and set aside agency action, findings, and conclusions” that are “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” 5 U.S.C. § 706(2). Agency action is arbitrary and capricious if, for example, the agency “entirely failed to consider an important aspect of the problem, offered an explanation for its decision that runs counter to the evidence before the agency, or is so implausible that it could not be ascribed to a difference in view or the product of agency expertise.” Motor Vehicle Mfrs. Ass'n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983).

         In other words, an agency is required to “examine the relevant data and articulate a satisfactory explanation for its action including a rational connection between the facts found and the choice made.” Id. at 43 (quoting Burlington Truck Lines v. United States, 371 U.S. 156, 168 (1962)) (internal quotation marks omitted). Courts, accordingly, “do not defer to the agency's conclusory or unsupported suppositions, ” United Techs. Corp. v. Dep't of Def., 601 F.3d 557, 562 (D.C. Cir. 2010) (quoting McDonnell Douglas Corp. v. Dep't of the Air Force, 375 F.3d 1182, 1187 (D.C. Cir. 2004)), and “agency ‘litigating positions' are not entitled to deference when they are merely [agency] counsel's ‘post hoc rationalizations' for agency action, advanced for the first time in the reviewing court.” Martin v. Occupational Safety & Health Review Comm'n, 499 U.S. 144, 156 (1991) (citation omitted). Although a reviewing court “may not supply a reasoned basis for the agency's action that the agency itself has not given, ” a decision that is not fully explained may, nevertheless, be upheld “if the agency's path may reasonably be discerned.” Bowman Transp., Inc. v. Arkansas-Best Freight System, Inc., 419 U.S. 281, 285-86 (1974) (citation omitted).

         III. Analysis

         In this case, Plaintiffs accuse HHS of “tak[ing] by regulatory fiat what it could not accomplish in Congress.” Pl. MSJ at 3. The Secretary and Kentucky, they say, sought to do little more than “knock people off Medicaid and undermine the Medicaid expansion enacted by Congress.” Id. at 17. With that view in mind, their nine-count Complaint - which relies almost exclusively on the APA - challenges nearly every component of Kentucky HEALTH.

         First, they attack the project as a whole, claiming the Secretary erred by finding that it was likely to promote the objectives of Medicaid. See Compl, Count VIII. Second, in Counts II-VII, they challenge each individual component of that program - i.e., the community-engagement requirement, the premiums, the reporting requirements, the lockouts, the limits on NEMT and retroactive eligibility, and the penalties for non-emergency use of the emergency room. For the latter counts, Plaintiffs principally maintain that each of those features is unlikely to promote the Act's objectives. In Counts III and IV, Plaintiffs further allege that the Secretary could not permit certain premium or cost sharing (such as penalties on non-emergency use of the emergency room) through his Section 1115 authority. Beyond that, Plaintiffs challenge the Secretary's issuance of the SMD Letter (Count I), as well as allege violations under the Take Care Clause (Count IX).

         For reasons discussed in more detail below, the Court need adjudicate only one count of Plaintiffs' Complaint to grant them full relief: Count VIII, which challenges the Secretary's approval of Kentucky HEALTH as a whole. Before the Court can reach that dispute, however, it must first address several threshold issues.

         A. Threshold Issues

         Whether his approval was lawful or not, the Secretary argues that this Court has no power to review it either because (1) Plaintiffs cannot establish standing for their challenge, or (2) the decision is “committed to agency discretion by law, ” 5 U.S.C. § 701(a)(2), thus barring any judicial oversight under the APA.

         1. Standing

         Article III of the Constitution limits the jurisdiction of federal courts to actual “Cases” and “Controversies.” U.S. Const., art. III, § 2. But not just any dispute will do. See Lujan v. Defs. of Wildlife, 504 U.S. 555, 559-61 (1992). A plaintiff must demonstrate that she suffers: 1) an injury-in-fact that is 2) caused by the conduct complained of and 3) “likely” to be “redressed by a favorable decision.” ...

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