By: Adam McCoy & Shawn Namet
On April 13, 2018, the United States Court of Appeals for the Fourth Circuit published an opinion in Association for Accessible Medicines v. Frosh. The Court reversed the district court’s dismissal of the dormant commerce clause challenge brought by the Association for Accessible Medicines (“AAM”) to a Maryland statute intended to prohibit price gouging in the sale of prescription drugs. The Court held that the statute violates the dormant commerce clause because it directly regulates transactions that took place outside of Maryland.
Facts and Procedural History
During the 2017 legislative session Maryland’s legislature passed HB 631, “An Act concerning Public Health – Essential Off-Patent or Generic Drugs – Price Gouging – Prohibition” (“The Act”). Maryland’s governor refused to sign the bill, but the bill was enacted over his refusal. The Act prohibits manufacturers or wholesale distributers from “engag[ing] in price gouging in the sale or an essential off-patent or generic drug.” Md. Code Ann., Health-General § 2-802(a). The Act prohibited the “unconscionable increase” in the price of drugs, defined as price increases that are “excessive and not justified by the cost of producing the drug or the cost of appropriate expansion of access to the drug to promote public health” such that consumers are left with “no meaningful choice about whether to purchase the drug at an excessive price” due to the drug’s “importance . . . to their health” and “[i]nsufficient competition in the market.” Id. § 2-801(f). “Essential” drugs are those “made available for sale in [Maryland]” included “on the Model List of Essential Medicines most recently adopted by the World Health Organization” or are “designated . . . as an essential medicine due to [their] efficacy in treating a life-threatening health condition or a chronic health condition that substantially impairs an individual’s ability to engage in activities of daily living.” Id. § 2-801(b)(1).
Violations of the Act could carry a penalty of $10,000 per violation. The Act also authorized actions to enjoin the sale of a given medication at the increased price. To assist with enforcement, the Act permitted the Maryland Medical Assistance Program to bring potential violations to the attention of the Maryland Attorney General. The Medical Assistance Program was authorized to notify the Attorney General in the event prices rose above thresholds provided by the Act.
AAM, an organization of pharmaceutical companies including drug manufacturers and distributors, challenged the statute in the United States District Court for the District of Maryland. Only one of the manufacturers in AAM covered by the statute was based in Maryland. These manufacturers sold their products to wholesale distributors, none of which are based in Maryland, and the majority of these sales took place in states other than Maryland. AAM challenged the statute on the grounds that it violated the dormant commerce clause and that it was unconstitutionally vague. The district court granted Maryland’s motion to dismiss the dormant commerce clause claim but denied the motion as to the vagueness claim.
The Act Violates the Dormant Commerce Clause
AAM asks the Fourth Circuit to overrule the district court decision dismissing AAM’s claim that the Act violated the dormant commerce clause by directly regulating wholly out-of-state commerce. The Fourth Circuit outlines the Supreme Court precedent that governs the existence and application of the dormant commerce clause. Implicit in the power given to Congress through the textual commerce clause is a corollary power to constrain states from enacting legislation that interferes with or burdens interstate commerce. This doctrine is known as the dormant commerce clause and is designed to prevent state economic protectionism and to prevent states from enacting “regulatory measures designed to benefit in-state economic interests by burdening out-of-state competitors.” Brown v. Hovatter, 561 F.3d 357, 362 (4th Cir. 2009).
Within the dormant commerce clause is the principle against extraterritoriality that “a State may not regulate commerce occurring wholly outside of its borders.” Star Sci., Inc. v. Beales, 278 F.3d 339, 355 (4th Cir. 2002). The Fourth Circuit walks through several Supreme Court cases that established the elements of the principal against extraterritoriality, but there are essentially three restrictions from the principal against extraterritoriality. (1) State statutes may not regulate commerce that takes place wholly outside the state’s borders, whether or not the commerce has effects within the state; (2) State statutes that directly control commerce occurring wholly outside the legislating state’s boundaries are invalid; (3) Courts may invalidate a state statute if the statute may interact with legitimate regulatory schemes of other states to cause inconsistent legislation arising from projection of one state regulatory regime into the jurisdiction of another state.
The Fourth Circuit first rejects a reading of Supreme Court precedent offered by Maryland that the principle against extraterritoriality is limited to the context of price affirmation statutes. The Fourth Circuit rejects Maryland’s interpretation, which was shared by two other circuits, and holds the principle against extraterritoriality is violated if the state law “regulates the price of any out-of-state transaction, either by its express terms or by its invariable effect.” Pharmaceutical Research & Manufacturers of America v. Walsh, 538 U.S. 644, 669 (2003).
Next, the Fourth Circuit agrees with AAM’s argument that the district court was wrong in upholding the Act and agrees that the Act violates the dormant commerce clause by directly regulating prices for prescription drugs in out-of-state transactions, even though the provisions are not triggered until the drugs are offered for sale in Maryland. The Fourth Circuit holds the Act violates the dormant commerce clause because the Act is not triggered by any conduct that takes place in Maryland and the price controls apply outside of the state. Additionally, the Act has the potential to create a significant burden on the interstate commerce of prescription drugs.
The Fourth Circuit focuses on the plain language of the statute to find it regulates conduct that takes place outside of Maryland and does not even require that conduct actually occur within Maryland. The Act applies to price gouging of “essential off-patent or generic drug[s]” but only requires they be made available for sale in Maryland, not that any sale actually occur. The Act specifically targets the gouging of prices that occur outside of Maryland.
The impact on transactions outside of Maryland also causes the Act to violate the dormant commerce clause. The Act is not concerned with the price Maryland consumers pay for the drugs, but instead focuses on the price the manufacturer or wholesalers charge at the initial sale of the drug. It then measures that price against the price increase to determine if it is an “unconscionable” increase because it is not justified by the cost of product the drug or expanding access to the drug. The Fourth Circuit found this compelled manufacturers and wholesalers to comply with Maryland law outside of Maryland since the majority of the initial sales of the drug take place outside of Maryland. It violates the dormant commerce clause for the Act to attempt to penalize a manufacturer or wholesaler based on what they charge for a drug outside of Maryland.
The Fourth Circuit was also concerned by the burden this type of legislation would create on interstate commerce if it was enacted by other states. The Fourth Circuit relies on Healy v. Beer Inst., 491 U.S. 324, 335–36 (1989) to support that it must consider how the statute would interact with legitimate regulatory schemes of other states and what effect would arise if other states implemented similar statutes. Particularly concerning is the possibility that similar restrictions imposed by other states could cause drug manufacturers and wholesalers to be subject to conflicting price requirements. The pricing of the drug in one state could be illegal based on laws, such as the Act in Maryland, of another state. The Fourth Circuit found this was precisely the type of conflict the dormant commerce clause exists to prevent.
The Fourth Circuit reversed the district court’s decision and found the Act is an unconstitutional violation of the dormant commerce clause. The Fourth Circuit remanded the case to the district court to enter judgment for AAM.