Case Name: AMERICAN FEDERATION OF STATE, COUNTY AND MUNICIPAL EMPLOYEES v. DEPARTMENT OF MENTAL HEALTH
Court: Michigan Supreme Court
Jurisdiction: Michigan
Decision Date: 1996-06-25
Citations: 452 Mich. 1
Docket Number: Docket No. 100552
Parties: AMERICAN FEDERATION OF STATE, COUNTY AND MUNICIPAL EMPLOYEES v DEPARTMENT OF MENTAL HEALTH
Judges: Levin, Cavanagh, and Boyle, JJ., concurred with Mallett, J.
Reporter: Michigan Reports
Volume: 452
Pages: 1–24

Head Matter:
AMERICAN FEDERATION OF STATE, COUNTY AND MUNICIPAL EMPLOYEES v DEPARTMENT OF MENTAL HEALTH
Docket No. 100552.
Argued December 6, 1995
(Calendar No. 9).
Decided June 25, 1996.
Rehearing denied 453 Mich 1204.
The American Federation of State, County and Municipal Employees, AFL-CIO, and Lola DeBois and Shirley Towns, employees of Michigan Community Service, Inc., a nonprofit corporation providing residential treatment for developmentally disabled adults, brought an action in the Ingham Circuit Court against the Department of Mental Health and the Civil Service Commission, seeking a declaration that proposed revisions of departmental guidelines and the department’s standard form contract constitute rules under the Administrative Procedures Act, MCL 24.210 et seq.; MSA 3.560(101) et seq., and thus are required to be promulgated pursuant to the act’s specific rule-making procedures. The plaintiffs also sought to epjoin adoption of the revisions. The court, James R. Giddings, J., granted summary disposition for the defendants, finding that the revisions did not constitute rule making. The Court of Appeals, Jansen, P.J., and R. L. Ziolkowsh, J., (Connor, J., assenting), reversed and remanded to the trial court for entry of summary disposition for the plaintiffs, finding that while the department’s decision to contract with private providers is a permissive exercise of statutory authority, the revisions of the guidelines and the standard contract nevertheless constitute rules under the apa, requiring promulgation pursuant to apa procedures (Docket No. 140834). The defendant appeals.
In an opinion by Justice Mallett, joined by Justices Levin, Cavanagh, and Boyle, the Supreme Court held:
The Department of Mental Health’s proposed revised guidelines and standard form contract prescribing departmental policies for the provision of care to group home residents constitute rule making under the apa. Consequently, the department was required to follow the procedural requirements designed to afford the interested parties notice and an opportunity to be heard before implementing them.
1. The department may not do indirectly what it could not do directly; namely, prescribe policies and standards affecting the care it is statutorily required to provide without complying with apa procedures. The guidelines and standard form contract terms that gov- em the provision of care to group home residents constitute rules within the apa definitions because they set forth the department’s standards and policy concerning the care administered in group homes, implementing the applicable requirements of the Mental Health Code. In reality, the standard form contract is an all or nothing proposition — if the plaintiff were to voluntarily choose not to contract, it would choose to go out of business.
2. While the department has discretion regarding whether to contract for the provision of statutorily mandated services, once it decides to do so, it cannot abdicate its responsibilities under the Mental Health Code and the apa and set the standards and policies that regulate the provision of such services without complying with the apa’s procedural requirements. The terms of the standard form contract that govern the provision of care to group home residents that are developed and set by the department must be promulgated as a rule. Only those contract provisions that serve to implement an agency’s statutory duties or mission can be deemed a rule under the apa definition. It is crucial that standard contracts that prescribe an agency’s policies regarding the implementation or application of its statutory duties be subjected to the democratic process contemplated by the apa.
Vacated and remanded.
Justice Weaver, joined by Chief Justice Brickley and Justice Riley, dissenting, stated that the guidelines and the standard contract utilized by the Department of Mental Health when contracting with group home providers for the purchase of specialized residential mental health services do not constitute rules or rule making, and thus are exempt from the formal adoption requirements of the Administrative Procedures Act.
The Mental Health Code authorizes the Department of Mental Health to contract for services for mentally handicapped residents by utilizing a standard form contract to obtain these services in provider homes. Once a provider agrees to enter into a contract with the department, the department’s guidelines also apply. The guidelines have no legal force or effect, however, until a provider agrees to be bound to the terms of an individual contract with the department.
The revised guidelines, as interpretive rules, and the standard form contract, as an exercise of permissive authority, are excused from the apa’s rule-making procedures because they do not affect the rights of the general public, but only the rights of the parties who voluntarily contract with the department. Furthermore, the standard contract itself is the means and manifestation of the department’s exercise of permissive statutory authority. Because the department’s decision to contract with private providers is a permissive exercise of statutory power, and the guidelines do not affect the public under MCL 24.207Q); MSA 3.560(107)0), the standard contract and the guidelines are not rules. Thus, the revisions of the guidelines and the standard contract do not constitute rule making, but fall under statutory exceptions to the apa definition of a rule.
In this case, the act of supplying guidelines to private mental health providers who choose to enter into a contractual arrangement with the department does not convert the guidelines into legislative rules. Rather, the guidelines are interpretive rules that inform providers of the standards the department expects and demands. The use of a standard form contract, and the revisions the department chose to make to that contract by virtue of the revised guidelines, is an exercise of permissive authority that is expressly excused from the apa’s definition of a rule. The department’s choice of with whom to contract is a permissive exercise of its statutory power. Should the plaintiffs seek such a contractual relationship, they are free within the parameters of bargaining to change or accept any of the teims of the proposed contract, and, upon acceptance and receipt of the contract, the terms of the guidelines.
206 Mich App 382; 522 NW2d 657 (1994) vacated.
Webb & Hildebrandt, P.C. (by L. Rodger Webb), for the plaintiffs.
Frank J. Kelley, Attorney General, Thomas L. Casey, Solicitor General, and Gary P Gordon and Richard P. Gartner, Assistant Attorneys General, for the defendant.

Opinion:
Mallett, J.
In this case, we must determine whether the guidelines and standard contract utilized by the Department of Mental Health when contracting with group home providers for the purchase of specialized residential mental health services constitute administrative "rules" that must be promulgated pursuant to the Administrative Procedures Act, MCL 24.201 et seq.-, MSA 3.560(101) et seq. We hold that to the extent that they set forth departmental policy and standards concerning the care received by individuals in group homes, they constitute "rules" for purposes of the apa.
FACTS
Plaintiffs Lola DeBois and Shirley Towns are employees of Michigan Community Service, Inc., a nonprofit corporation providing residential treatment for developmentally disabled adults. Plaintiff American Federation of State, County, and Municipal Employees (afscme) is a voluntary, unincorporated association that represents public employees. Plaintiffs brought suit against the Department of Mental Health and the Civil Service Commission, arguing that proposed revisions of departmental guidelines and the standard form contract, which is incorporated by reference in the guidelines and is used whenever the department contracts with private residential mental health service providers, constitute "rules" under the apa. Plaintiffs argued that as such, they must be promulgated pursuant to the specific rule-making procedures of the apa.
Plaintiffs sought declaratory and injunctive relief against the department to enjoin the revisions of the guidelines. A preliminary injunction was granted by the trial court, and a motion filed by the department to vacate the injunction was denied. Plaintiffs then filed a motion for summary disposition regarding whether the revisions of the guidelines and standard contract constituted rule making. The trial court denied plaintiffs' motion, and instead, granted summary disposition for defendants pursuant to MCR 2.116(I)(2) and MCR 2.116(C)(10).
Plaintiffs appealed. The Court of Appeals reversed the trial court's grant of summary disposition in favor of defendants and remanded to the trial court for entry of summary disposition in favor of plaintiffs.
i
The Mental Health Code entrusts to the Department of Mental Health the duty of providing "adequate and appropriate mental health services . to all citizens throughout the state." MCL 330.1116; MSA 14.800(116). In carrying out its statutory duty, the department has for many years provided care to individuals through various state institutions and programs. In the late 1970s, the department was involved in a lawsuit concerning the care of patients in state mental hospitals. A consent decree ended that lawsuit and provided that patients be cared for "in the least restrictive setting." Residential Systems Co v Int'l Union, United Automobile, Aerospace & Agricultural Implement Workers of America, unpublished decision of the NLRB, Region 7, issued April 8, 1988 (Case No. 7-EC-18329). This resulted in a mass movement of former patients of state institutions into group homes that are owned and operated by private contractors. The Mental Health Code permits the department to carry out its duty to provide care to such patients by contracting with private operators. MCL 330.1116(j); MSA 14.800(116)0).
The department has utilized a standard form contract with hundreds of group home providers for the provision of care to developmentally disabled persons who in the past were cared for directly by the department. In 1990, the department issued a notice, in the form of a "proposed guideline revision," indicating proposed changes to the standard form contract that is incorporated by reference and attached to the guidelines. The express purpose of the proposed guidelines was to rescind and replace the standard form contract.
While the guidelines purport to allow modification of the standard contract terms upon "prior written approval of the director," the record indicates that, in reality, group home providers may only do business with the department if they agree to the standard form contract without modifications. The following excerpt from proceedings in the circuit court is telling:
The Court: The fact of the matter is, Mr. Gartner, and correct me if I'm wrong, isn't this an either/or situation? The Department says, if you want to do business with us, here are the conditions of this contract, and you either agree with those conditions or we will not be doing business with you; isn't that a fact?
Mr. Gartner: That's not unusual; sure, that's true.
The Court: My question wasn't how unusual it was, my question was, is it true that the Department says here are the standards, either you comply with them or we have no contract; isn't that true?
Mr. Gartner: Sure, it's true.
In light of this background, we think it fairly obvious that the department may not do by contract what it could not do if it were providing these residential mental health services itself. If the department did not contract for these services, it would have to comply with the relevant apa procedures before making the types of substantive changes relating to the provision of care in group homes that it is attempting in the proposed guidelines and standard form contract. It defies reason to allow the department to do indirectly what it could not do directly; namely, prescribe policies and standards affecting the care it is statutorily required to provide without complying with apa procedures.
The contract involved here is not for the provision of light bulbs, laundry services, or the proverbial widget. Rather, many of the provisions in this standard form contract, and the changes to those provisions, go to the heart of the department's statutory mandate. The following sampling of the proposed changes to the contract are instructive: (1) The omission of language requiring group homes to comply with all Department of Mental Health guidelines and directives, (2) the omission of language prohibiting certain monies intended for direct-care worker training and wages from being used for administrative employee bonuses, (3) the omission of language requiring homes to submit staff verification reports, (4) the addition of a new provision permitting up to five percent of certain monies for direct-care workers training and wages to be used for other purposes, (5) the omission of provisions requiring certain minimum preemployment inquiries of persons applying to work at a group home, (6) the omission of a provision that required continued in-service training of direct-care staff, (7) the omission of language requiring group homes to periodically evaluate their direct-care staff in order to assess and improve their job performance, and (8) the omission of a provision requiring staff who are involved in passing out medication to successfully complete an in-service training program. It is evident from this sampling that many of the contract's provisions set forth departmental policy and standards that have a direct effect on the care provided in group homes, care that the department is statutorily mandated to provide.
ii
The guidelines and standard form contract constitute "rules" within the APA definition. Pursuant to the apa, a "rule" is: (1) "an agency regulation, statement, standard, policy, ruling, or instruction of general applicability," (2) "that implements or applies law enforced or administered by the agency, or that prescribes the organization, procedure, or practice of the agency . . . ." MCL 24.207; MSA 3.560(107).
Many provisions of the standard form contract set forth the department's standards and policy concerning the care administered in group homes in the state. As such, the guidelines and contract provisions imple ment and apply the Mental Health Code's requirement that the department provide mental health services appropriate to the public's needs and prescribe the department's procedure relevant to these services. Further, they have direct applicability to all those who reside and work in these homes. The "general applicability" requirement does not exclude from the definition of a rule those rules that are directed at particular persons rather than the public at large. See Bonfield, State Administrative Rule Making, § 3.3.2(b), pp 78-80.
The dissent concludes that the proposed guidelines and standard contract are merely "guidelines" or an "interpretive statement" and do not constitute "rules" because they do not affect the rights of the general public, but only the rights of those who voluntarily enter into a contractual relationship with the department. This conclusion is factually and legally in error.
The label an agency gives to a directive is not determinative of whether it is a rule or a guideline under the APA. Detroit Base Coalition for the Human Rights of the Handicapped v Dep't of Social Services, 431 Mich 172, 188; 428 NW2d 335 (1988). Instead, we must review the "actual action undertaken by the directive, to see whether the policy being implemented has the effect of being a rule." Id., quoting Schinzel v Dep't of Corrections, 124 Mich App 217, 219; 333 NW2d 519 (1983). See also Bienenfeld, Michigan Administrative Law, p 4-5. Likewise, an agency may not circumvent apa procedural requirements by adopting a guideline in lieu of a rule. MCL 24.226; MSA 3.560(126). Further, in order to reflect the apa's preference for policy determinations pursuant to rules, the definition of "rule" is to be broadly construed, while the exceptions are to be narrowly construed. Detroit Base Coalition, supra at 183-184.
In contrast to a rule, the apa defines a "guideline" as "an agency statement or declaration of policy which the agency intends to follow, which does not have the force or effect of law, and which binds the agency but does not bind any other person." MCL 24.203(6); MSA 3.560(103)(6). The standard form contract is not a "guideline" because, contrary to the dissent's assertions, it does bind other persons, namely, the private group home operators who seek to provide residential mental health services under contract with the department. As noted earlier, the standard form contract is in reality an all or nothing proposition. Group home providers, many of whose sole purpose for organizing is to provide residential mental health services under contract with the department, simply do not have the bargaining power to negotiate deviations from the standard terms.
The contention that the standard contract is merely a guideline because it only binds providers if they voluntarily enter into a contract with the department is effectively refuted by the Court of Appeals holding in Delta Co v Dep't of Natural Resources, 118 Mich App 458; 325 NW2d 455 (1982). In Delta Co, the dnr argued that the trial court erred in finding that the apa was violated when the dnr conditioned issuance of a license to operate a solid waste disposal area on "guidelines, drawings and policies, and engineering expertise." Id. at 467. The Court held:
Here, the license was conditioned on compliance with 31 stipulations which were departmental guidelines and internal policies. Clearly, then, these guidelines were binding. Therefore, they effectively were rules under the guise of guidelines and policies. They did not fall within the exceptions to the rule. The "stipulations" did affect the rights and practices available to the public. The rights of the public may not be determined, nor licenses denied, on the basis of unpromulgated policies. [Id. at 468.]
As in the present case, the agency's directives in Delta Co could only be binding if the plaintiff voluntarily chose to seek licensure. However, it is clear from the Court of Appeals holding that this did not render the agency's directive to be any less binding. Similarly, the Department of Mental Health's standard form contract and guidelines are not "guidelines" merely because a plaintiff can choose not to contract with the department. That "choice" for the plaintiff here is even more ludicrous than for the plaintiff in Delta Co. While the county could seek another landfill, the group home provider's sole purpose of formation is often to provide services pursuant to contract with the Department of Mental Health. By "choosing" not to contract, the provider chooses to go out of business.
The dissent also argues that the guidelines and standard contract are not rules because they are an "exercise of permissive authority that is expressly excused from the apa's definition of rule." Post at 21. The dissent reasons that because the department may choose whether to enter into contracts for the provi sion of residential services, the standard form contract cannot be a rule. The error in this reasoning is that while the department has discretion regarding whether to contract for the provision of statutorily mandated services, once it chooses to do so, it cannot abdicate its responsibilities under the Mental Health Code and the APA and set the standards and policies that regulate the provision of such services without complying with the apa's procedural requirements.
The Court of Appeals decision in Spear v Michigan Rehabilitation Services, 202 Mich App 1; 507 NW2d 761 (1993), makes precisely this point. In Spear, the plaintiff contended that the agency reduced and terminated her benefits pursuant to an agency policy of eligibility based on need and means that should have been, but was not, adopted as a rule consistent with the requirements of the apa. The Court of Appeals agreed, reversing, in a unanimous decision, the circuit court's conclusion that because it was within the agency's discretionary powers whether to apply a "needs test" for determining eligibility, the policy need not be promulgated by a rule. The Court reasoned that while the initial determination whether to apply a needs test was discretionary, once the agency decided to employ such a test, the policies implementing it were not an exercise of discretion and did constitute a rule. The Court explained:
It does not constitute the decision to exercise discretionary statutory authority under subsection j, rather it is an agency policy of general applicability implementing a law enforced or administered by the agency where the agency has chosen to implement a needs test. That is, while the agency's decision to employ a needs test represents the discretionary exercise of statutory authority exempt from the definition of a rule under subsection j, the test itself, which is developed by the agency, is not exempt from the definition of a rule and, therefore, must be promulgated as a rule in compliance with the Administrative Procedures Act. [Id. at 5.]
That reasoning applies equally here. While the department can choose not to contract with private group home providers in order to fulfill its duties under the Mental Health Code, once it chooses to do so, the terms of the standard form contract that govern the provision of care to group home residents that are developed and set by the department must be promulgated as a rule.
Finally, the dissent's policy argument, post at 23, that requiring the guidelines and standard form contract to be promulgated as a rule would "subject! ] literally thousands of present and future contracts with the state to an unnecessarily burdensome process" is unconvincing for two reasons. First, only those contract provisions that serve to implement an agency's statutory duties or mission can be deemed a rule under the apa definition. Incidental contract provisions, such as for the provision of laundry services at a state mental institution, do not "implement! ] or appl[y] law enforced or administered by the agency" or "prescribe! ] the organization, procedure, or practice of the agency" and therefore do not come within the definition of a rule.
Second, and perhaps more fundamental, it is crucial that standard contracts that prescribe an agency's policies regarding the implementation or application of its statutory duties be subjected to the democratic process contemplated by the apa. Justice Riley, in her partial concurrence and dissent in Clonlara, Inc v State Bd of Ed, 442 Mich 230, 255-256; 501 NW2d 88 (1993), explained the important democratic function served by the APA:
In Michigan, the exercise of legislative authority duly delegated to administrative agencies is referred to as rule making, and the apa prohibits rule making without undergoing strict public scrutiny through "public hearings, public participation, notice, approval by the joint committee on administrative rules, and preparation of statements, with intervals between each process." Detroit Base Coalition for Human Rights of Handicapped v Dep't of Social Services, 431 Mich 172, 178; 428 NW2d 335 (1988).
The extensive notice and hearing procedures mandated by the apa " 'are calculated to invite public participation in the rule-making process, prevent precipitous action by the agency, prevent the adoption of rules that are illegal or that may be beyond the legislative intent, notify affected and interested persons of the existence of the rules, and make the rules readily accessible after adoption.' " Id. at 189-190, quoting Bienenfeld, Michigan Administrative Law (1st ed), § 4, p 4-1.
More important, the APA is essential to the preservation of a democratic society. Put simply, without public oversight and scrutiny of legislative action undertaken by administrative agencies, such agencies would rule without the normal safeguards of our republic. Indeed, the apa is a bulwark of liberty by ensuring that the law is promulgated by persons accountable directly to the people.
The apa's function in this regard is especially crucial here, where an agency is relegating to private entities the performance of duties it was entrusted with by statute.
in
For all these reasons, we hold that those provisions of the Department of Mental Health's proposed revised guidelines and standard form contract prescribing departmental policies for the provision of care to group home residents constitute rule making under the apa. Consequently, the department was required to follow the procedural requirements designed to afford the interested parties notice and an opportunity to be heard before implementing them. We therefore vacate the Court of Appeals decision and remand for consideration of the appropriate remedy. We further order that any contracts currently in force remain binding on the parties until the trial court reaches its ultimate disposition.
Levin, Cavanagh, and Boyle, JJ., concurred with Mallett, J.
For example, one proposed change would require that only direct-care staff "who work independently with recipients" need to complete eighty credit hours of training. The previous version required all care staff, regardless of contact with patients, to acquire the eighty hours of training. Another proposed change would delete the need for "periodic evaluations of staff." Yet another would eliminate the requirement that all provider homes have "written personnel policies and procedures." Proposed Revised DMH-3008B.
MCL 24.201 et seq.-, MSA 3.660(101) et seq.
If it appears to the court that the opposing party, rather than the moving party, is entitled to judgment, the court may render judgment in favor of the opposing party. [MCR 2.116(I)(2).]
Except as to the amount of damages, there is no genuine issue as to any material fact, and the moving party is entitled to judgment or partial judgment as a matter of law. [MCR 2.116(C)(10).]
206 Mich App 382; 522 NW2d 657 (1994).
Guideline III-C-001-0004, part (V)(B), P 3.
Guidelines do not allow department staff who are directly involved in the contracting process to negotiate deviations from the standard terms.
The APA requires an agency to give notice of proposed rules or rule changes, to hold a public hearing, and to submit the proposed rule or rule changes to the Legislature's Joint Committee on Administrative Rules for review and approval. In contrast, proposed guidelines and guideline revisions do not require a public hearing, legislative review, or legislative approval. MCL 24.224-24.226 and 24.231 et seq.-, MSA 3.560(124)-3.560(126) and 3.560(131) et seq.
In this regard, it is important to recognize that many provisions in the standard contract involved here do not come within the definition of a rule. I would hold that only those contract provisions that touch and concern the care received by group home residents constitute rale making. Consequently, only the proposed changes to those provisions must be subjected to the APA's procedural requirements.
Incidentally, the dissent's reliance on Clonlara is puzzling. Crucial to the decision in that case, unlike here, was that the agency did not have rule-making authority. Clonlara is distinguishable on that basis.
Michigan's Administrative Procedures Act is unique in its extensive involvement of the Legislature in the rule-making process. Its requirements undoubtedly yield a more burdensome rule-making procedure than under the federal system. I am mindful that in adhering to its stringent requirements, some efficiency of government may be lost. This Court, however, must remain true to the statute's mandates. If the Legislature desires to shift the balance between efficiency and the democratic concerns addressed by the APA, it can do so. Concern for the efficient operation of our state agencies and departments, while valid, should not force this Court's hand.
Further, the result we reach does not prevent an agency from making changes to its standardized contracts, as long as those changes do not directly bear on the agency's statutory mandates and mission.
Although AFSCME and the individual plaintiffs may have standing, we question what remedy may appropriately be afforded these parties. The parties have not addressed what remedy would be appropriate to protect the different interests of the individual and union plaintiffs.