By Jeffrey H. Brochin, J.D.
A Maryland statute intended to prohibit price gouging by pharmaceutical companies violated the dormant commerce clause of the U.S. Constitution because it directly regulated the price of transactions that occurred outside of Maryland. States are constrained from enacting legislation that interferes with or burdens interstate commerce, and the principle against extraterritoriality—as it relates to the dormant commerce clause—prohibits a state from regulating commerce occurring wholly outside of its borders (Association for Accessible Medicines v. Frosh, April 13, 2018, Thacker, S).
Background. In response to reports of price gouging by pharmaceutical manufacturers in the sale of certain prescription medications, Maryland’s legislature passed HB 631, "An Act concerning Public Health – Essential Off-Patent or Generic Drugs – Price Gouging – Prohibition," which went into effect October 1, 2017. The Act prohibited a manufacturer or wholesale distributor from engaging in price gouging in the sale of essential off-patent or generic drugs. The essential medications subject to the law are those made available for sale in Maryland that either appear on the Model List of Essential Medicines most recently adopted by the World Health Organization or those designated as an essential medicine due to their efficacy in treating a life-threatening health condition or a chronic health condition.
A manufacturer or wholesale distributor that is found to be in violation of the Act may face a number of legal consequences, including a civil penalty of $10,000 per violation or an action to enjoin the sale of the medication at the increased price. The Association for Accessible Medicines (AAM) is a voluntary organization of prescription drug manufacturers and wholesale distributors and other entities in the pharmaceutical industry. AAM’s member-manufacturers, only one of which is based in Maryland, typically sell their products to wholesale pharmaceutical distributors, none of which are based in Maryland. The vast majority of these sales occur outside Maryland’s borders.
AAM filed an action against Maryland’s Attorney General, and the Secretary of the Maryland Department of Health (collectively, "Maryland"), alleging, among other claims, that the Act violates the dormant commerce clause and is unconstitutionally vague. Maryland filed a motion to dismiss AAM’s suit, which the district court granted as to the dormant commerce clause claim but denied as to the vagueness claim, and AAM filed the instant appeal.
Principle against extraterritoriality. Implicit in the constitutional allocation to the federal government of the power to regulate commerce among the states, is a corollary constraint on the power of the states to enact legislation that interferes with or burdens interstate commerce. This doctrine, known as the "dormant" commerce clause, is based on a concern regarding economic protectionism and it seeks to prevent state regulatory measures designed to benefit in-state economic interests by burdening out-of-state competitors.
The principle against extraterritoriality as it relates to the dormant commerce clause is derived from the notion that a state may not regulate commerce occurring wholly outside of its borders. A state law violates the extraterritoriality principle if it either expressly applies to out-of-state commerce or has that practical effect, regardless of the legislature’s intent.
Extraterritoriality and price control. Maryland argued that the U.S. Supreme Court limited the principle against extraterritoriality in the dormant commerce clause context to price affirmation statutes, and it cited previous cases in support of that position. However, the instant federal appeals court found that Maryland’s reading of those rulings was too narrow: the Supreme Court’s previous statements did not suggest that the rule was to be applied exclusivelyto price control or price affirmation statutes; rather, the Supreme Court’s holdings emphasized that the extraterritoriality principle is violated if the state law at issue regulates the price of any out-of-state transaction, either by its express terms or by its inevitable effect.
The merits of AAM’s challenge. The court next turned to the merits of AAM’s dormant commerce clause challenge. AAM asserted that the Act directly regulates the prices charged for prescription drugs in out-of-state transactions, even though its provisions are triggered only when one of those drugs is available for sale in Maryland. Maryland acknowledged that the Act is intended to reach the manufacturers’ conduct in the series of wholesale transactions that occur "upstream" from consumer retail sales but argued that these indirect effects do not violate the dormant commerce clause’s prohibition on direct regulation.
District court erred. The court agreed with AAM that the district court erroneously upheld the Act under the dormant commerce clause. First, the Act is not triggered by any conduct that takes place within Maryland. Second, even if it were, the Act controls the prices of transactions that occur outside the state. Finally, the Act, if similarly enacted by other states, would impose a significant burden on interstate commerce involving prescription drugs. All of these factors combined to create a violation of the dormant commerce clause.
The appellate court reversed the district court’s dismissal of AAM’s dormant commerce clause challenge and remanded the case with instructions to enter judgment in favor of AAM.
The case is No. 17-2166.
Attorneys: Jonathan D. Janow (Kirkland & Ellis, LLP) for Assn. for Accessible Medicines. Joshua Neal Auerbach, Office of the Attorney General of Maryland, for Brian E. Frosh.
Companies: Assn. for Accessible Medicines
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