The U.S. Court of Appeals for the Fourth Circuit has struck down a Maryland law banning “excessive” prices for generic drugs, breathing new life into the extraterritoriality prong of the Dormant Commerce Clause that prohibits state and local laws that regulate commerce in other states. Ass’n for Accessible Medicines v. Frosh, --- F.3d ----, 2018 WL 1770978 (4th Cir. 2018). Finding that the law attempted to control drug prices set in transactions upstream from consumer sales in Maryland, the court in a 2-1 split invalidated the law, breaking with other circuits that have narrowed the extraterritorial doctrine to only bar express regulations of out of state pricing.
Maryland’s law prohibited manufacturers and wholesalers from engaging in “price gouging” regarding the sales of off-patent and generic drugs deemed essential for treating a life-threatening or chronic health condition, that are made available for sale in Maryland. Md. Code Ann., Health-General §§ 2-801(b)(1), 2-802(a) (2017). The statute defined “price gouging” as an “excessive” increase in price that was not justified by market forces such as the cost of manufacturing the drug and would result in consumers “having no meaningful choice about whether to purchase the drug at an excessive price.” Id. at § 2-801(f).
The parties agreed that manufacturers and wholesalers set prices of drugs well before they reach Maryland consumers in transactions that occur almost exclusively outside the State. By targeting these initial price determinations, the law attempted to control, and had the effect of controlling, market-wide prices of drugs. The Fourth Circuit ruled that the statute unconstitutionally allowed Maryland to “enforce the Act against parties to a transaction that did not result in a single pill being shipped to Maryland.” Slip Op. at 12-15.
Importantly, the Fourth Circuit also invoked the Dormant Commerce Clause’s command to examine how one state’s law interacts with others states’ regulatory schemes, including evaluating the possibility of other states adopting similar laws. The opinion in Ass’n for Accessible Medicines relied on the “protect[ion] against inconsistent legislation arising from the projection of one state regulatory regime into the jurisdiction of another State. The practical effect of the statute must be evaluated not only by considering the consequences of the statute itself, but also by considering how the challenged statute may interact with the legitimate regulatory regimes of other States and what effect would arise if not one, but many or every, State adopted similar legislation.” Id. at 17-18, quoting Healy v. Beer Institute, 491 U.S. 324, 336-37 (1989).
In applying the extraterritoriality analysis to Maryland’s law, the Court stated its disagreement with the Ninth and Tenth Circuits, which only apply the extraterritoriality doctrine to “price affirmation” statutes that link in-state pricing of a good to out-of-state prices. Chinatown Neighborhood Ass’n v. Harris, 794 F.3d 1136, 1139 (9th Cir. 2015); Energy and Env't Legal Inst. v. Epel, 1173 (10th Cir. 2015). The Ninth and Tenth and other circuits have read broadly a 2003 Supreme Court opinion finding that the extraterritoriality doctrine did not apply to a Maine law allowing the state to negotiate rebates with out-of-state drug manufacturers in exchange for access to state customers. E.g., Pharmaceutical Research & Manufacturers of America v. Walsh, 538 U.S. 644, 669 (2003
The Fourth Circuit’s decision underscores that businesses and other regulated entities have powerful constitutional arguments against overreaching state and local legislation that burdens national commerce. In an increasingly interconnected national economy, many laws will have extraterritorial effects. Regulated entities should alert local and state law makers that their ordinances and statutes may have constitutional defects that can lead to court challenges, with the possibility of judgments against the governments for damages and attorneys’ fees under 42 U.S.C. § 1983.
The Dormant Commerce Clause is a live issue at the Supreme Court as well. While not directly implicating the extraterritoriality doctrine, the Supreme Court recently heard argument in South Dakota v. Wayfair, Inc., No. 17-494 (argued April 17, 2018), regarding the authority of states under the Dormant Commerce Clause to tax internet sales by entities that lack the traditional physical nexus to the taxing state. The Wayfair ruling likely will provide important insight into how aggressively the Supreme Court will apply the Dormant Commerce Clause to protect business. The court is considering whether to overrule a 1992 decision that the Dormant Commerce Clause prohibits the states from requiring out-of-state retailers that do not have a physical presence in the state to collect taxes on sales to state residents.