On Friday, April 13, 2018, in an opinion that may have far-reaching effects, the United States Court of Appeals for the Fourth Circuit found Maryland’s new drug price-gouging prohibition law unconstitutional under the dormant Commerce Clause of the United States Constitution, which generally constrains states’ power to enact legislation that interferes with or burdens interstate commerce. Given the number of states seeking to impose either reporting and transparency requirements on drug manufacturers related to drug price increases, or other measures designed to limit the amount by which drug prices can be increased, this decision is significant. Vermont, California, Nevada, Oregon, New York, and Louisiana have all passed drug pricing laws over the past couple of years, and several other states are considering similar legislation. In particular, Illinois and Louisiana are considering drug price-gouging laws based on the Maryland law.

Maryland’s law, effective October 1, 2017, was the first state law enacted to prohibit what the state considered “price gouging” by pharmaceutical manufacturers or wholesale distributors related to price increases of generic prescription drugs. The Arent Fox Health Care Team previously summarized the requirements of the Maryland law in a prior Alert.

Maryland’s Drug Price-Gouging Prohibition Law

The Maryland law prohibits “unconscionable increases” in the price of any “essential off-patent or generic drug.” Under the Maryland law, the Maryland Medical Assistance Program (Maryland’s Medicaid Program) is authorized to report to the Maryland Attorney General any price increase when:

  1. The price increase results in:
    1. The Wholesale Acquisition Cost (WAC) of the drug to be 50% or more of the WAC within the previous one-year period; or
    2. The price the Maryland Medicaid Program paid for the drug to be at least 50% more than the price paid within the previous one-year period; and
  2. The WAC for a 30-day prescription or a full course treatment would exceed $80.

If these criteria are met, the law authorizes the Attorney General to send a “request” to the manufacturer that it is potentially in violation of the law, requiring the manufacturer to submit a statement that provides a justification for the price increase within 45 days of the Attorney General’s request. If after receiving the information, the Attorney General believes price gouging occurred, the Attorney General can bring a lawsuit against a manufacturer and seek various remedies, such as:

  1. Restraining or enjoining violations of the law;
  2. Acquiring refunds for consumers due to price gouging;
  3. Requiring a manufacturer or distributor to sell a generic drug to Maryland’s health plans or programs at the price it was available in the year before the violation occurred; and
  4. Imposing a maximum of $10,000 civil penalty for each violation.

Association for Accessible Medicines Challenges the Law’s Constitutionality

In July 2017, the Association for Accessible Medicines (AAM) (formerly, the Generic Pharmaceutical Association) sued Maryland, arguing that the law violates the dormant Commerce Clause and is unconstitutionally vague. The United States District Court for the District of Maryland (the District Court) granted Maryland’s motion to dismiss AAM’s suit as to the dormant Commerce Clause and also refused to enjoin enforcement of the law. AAM appealed the decision.

Fourth Circuit’s Decision: The Law Violates the Dormant Commerce Clause

In a split 2-1 decision, the Fourth Circuit held that the Maryland law violates the dormant Commerce Clause because it directly regulates the price of transactions that occur outside of Maryland. In its decision, the majority emphasized that only one of AAM’s member manufacturers are based in Maryland, no wholesalers impacted by the Maryland law are based in Maryland, and the vast majority of sales regulated by the Maryland law would occur outside of the state of Maryland.

The majority found that the dormant Commerce Clause was violated for the following reasons:

  1. The Maryland law is not triggered by any conduct that takes place within Maryland. Although the District Court held that the Maryland law is triggered only when a drug is made available for sale within Maryland, the Fourth Circuit majority held that the Maryland law is triggered by sales upstream from mere consumer sales, and these upstream sales occur almost exclusively outside of Maryland.
  2. The Maryland law controls the price of transactions that occur outside of Maryland. In the majority’s view, the Maryland law is not actually focused on the price Maryland consumers pay for drugs, but instead measures price increases based on the price the drug manufacturer or wholesaler charges “in the initial sale of the drug,” and also found it significant that by the law’s own terms, “retailers that sell the drug directly to consumers cannot be held liable.” Both the plaintiff and defendants agreed that nearly all of these transactions occur outside of Maryland.
  3. The Maryland law implicates “price controls” as opposed to “upstream pricing impact.” The Fourth Circuit rejected Maryland’s argument that any implications of the Maryland law would amount to merely “upstream pricing impact of a state regulation,” and instead found that the law seeks to impose price controls over the prices that drug manufacturers may charge for their products.
  4. The Maryland law, if similarly enacted by other states, would impose a significant burden on interstate commerce involving prescription drugs. If other states enact similar laws, manufacturers could not comply with both laws in a single transaction.

In a lengthy, in-depth analysis of dormant Commerce Clause jurisprudence, the sole dissenting Fourth Circuit judge argued that the majority erred in equating a “single transaction” with “commerce,” and argued that a state is only constrained from regulating commerce wholly outside of its borders if no transactions in the applicable stream of commerce take place within the state.

The Fourth Circuit reversed the District Court’s dismissal and remanded the case back to the lower court with instructions to enter judgment in favor of AAM. However, Maryland will likely appeal the decision. In a April 13, 2018 statement, Maryland Attorney General Brian Frosh said that he is “evaluating all options with regard to next steps” and is “committed to pursuing efforts to eliminate price gouging.

Impact of the Decision

The decision in this case is of particular interest to pharmaceutical manufacturers and others in the industry, as well as those interests that led to the Maryland law’s original passage. And while an appeal is certainly expected, the decision as it currently stands likely will be of interest to state legislatures currently considering similar measures. As noted earlier, both Illinois and Louisiana are considering enacting legislation based on the Maryland law, at least for the time being. Multiple interests will be watching to see whether the Fourth Circuit’s decision alters those legislative plans

Additionally, pharmaceutical industry groups have brought similar lawsuits arguing that other state drug pricing and transparency laws violate the Commerce Clause. The Pharmaceutical Research and Manufacturers of America (PhRMA) and the Biotechnology Innovation Organization (BIO) have sued Nevada over its law requiring manufacturers to disclose pricing and rebate information for diabetes drugs. Among other claims, the plaintiffs argue that the Nevada law’s disclosure requirements violate the Commerce Clause by overriding trade-secret protection laws in other states.

Likewise, PhRMA also filed a lawsuit seeking to block California’s new drug transparency law. The Arent Fox Health Care team previously covered this lawsuit in a prior Alert. As in the other cases, the plaintiff argued that the law violates the dormant Commerce Clause – in this case, because it would impose nationwide restrictions on drug prices. Additionally, the plaintiff alleged that the California law violated the First Amendment of the United States Constitution by forcing pharmaceutical manufacturers to speak – providing health plans and pharmacy benefit managers 60 days advanced notice of certain WAC increases.

It is unknown how these other lawsuits will be resolved; however, the legal issues surrounding states’ efforts to control drug pricing are likely to be front-and-center for the pharmaceutical industry for quite some time.