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4th Circ. Finds Md. Drug Pricing Law Unconstitutional

A split Fourth Circuit has deemed unconstitutional a Maryland law allowing the state attorney general to go after generic-drug makers for price gouging, with the majority holding in a Friday published decision that the act impermissibly regulates the price of transactions taking place outside the state.

In a 2-1 decision, the majority reversed a lower court’s ruling upholding Maryland House Bill 631 in the face of a challenge by a generic-drug maker trade group, holding that the law flouts the U.S. Constitution’s dormant commerce clause by seeking to control the price of drug sales that occur outside the state, even if the medications never end up within its borders.

“To be clear, we in no way mean to suggest that Maryland and other states cannot enact legislation meant to secure lower prescription drug prices for their citizens,” U.S. Circuit Judge Stephanie D. Thacker wrote in the majority’s opinion, taking aim at dissenting U.S. Circuit Judge James A. Wynn Jr.’s suggestion that the decision implies that drugmakers have a constitutional right to engage in price gouging.

Rather, Judge Thacker wrote, the majority is simply saying that Maryland needs to address its concerns about abusive prescription drug pricing practices in a statute that complies with the Constitution.

“Although we sympathize with the consumers affected by the prescription drug manufacturers’ conduct and with Maryland’s efforts to curtail prescription drug price gouging, we are constrained to apply the dormant commerce clause to the act,” Judge Thacker said.

But Judge Wynn blasted that conclusion in a lengthy dissent, accusing the majority of extending the commerce clause's extraterritoriality doctrine beyond the circumstances in which the U.S. Supreme Court and the Fourth Circuit have applied it and diverging from the narrow approach taken by other circuit courts, as well.

Contrary to what the majority found, Maryland’s general police powers allow it to “regulate matters of legitimate local concern,” which is exactly what the state was doing here by targeting practices designed to prey on its citizens who have no choice but to buy needed medications at any cost, Judge Wynn said. In fact, the judge noted, the state has repeatedly represented that its Legislature intended for the statute to only apply to drugs ultimately sold within its borders.

"The majority opinion’s expansive conception of the extraterritoriality doctrine renders numerous state consumer protection statutes unconstitutional, and significantly expands federal courts’ authority to second-guess states’ efforts to protect their citizens,” Judge Wynn wrote. “I do not believe that either the Framers or the Supreme Court intended for the commerce clause to serve such a purpose.”

The Association for Accessible Medicines filed suit in July, challenging H.B. 631, which was passed earlier in the year in response to reports of price gouging by pharmaceutical manufacturers. The law bars drug manufacturers or wholesale distributors from imposing unconscionable price increases on the prices of “essential” off-patent or generic prescription medications and authorizes $10,000 penalties for each violation.

The trade group asserted that the statute unlawfully regulates out-of-state transactions, saying the law’s “sweeping price control reaches into every corner of the United States, if not beyond.”

AAM also contended that the law was overly vague, saying, for example, that the statute isn’t clear about what constitutes an unconscionable price increase, providing no guidance besides terms like “excessive” and “not justified.”

Maryland then moved for dismissal, and though Senior U.S. District Judge Marvin J. Garbis rejected the request with regard to the vagueness claim, he was swayed when it came to the commerce clause challenge. The judge held in late September that the statute didn’t improperly regulate commerce outside the state and thus, could take effect at the beginning of the next month as scheduled.

The trade group promptly went to the Fourth Circuit, which took its side Friday, with the majority saying the act isn’t triggered by any conduct that occurs within Maryland and even if it were, the statute controls the prices of transactions that occur outside its border.

On top of that, if other states enacted similar statutes, the act would significantly burden interstate commerce by opening the door to conflicting requirements that could be difficult for drugmakers to reconcile, the majority found.

“All of these factors combine to create a violation of the dormant commerce clause,” Judge Thacker wrote.

AAM CEO Chester Davis Jr. said in a Friday statement, “As AAM has always maintained, this law, and any others modeled from it, would harm patients because the law would reduce generic drug competition and choice, thus resulting in an overall increase in drug costs due to increased reliance upon more-costly branded medications.”

Meanwhile, Maryland Attorney General Brian E. Frosh called the majority ruling disappointing in a Friday statement.

“As Judge Wynn’s dissent explains, the panel majority misunderstood the scope of the statute, which protects Maryland consumers against unconscionable increases in the price of certain essential medicine, and which does not regulate prices charged to consumers in other states,” Frosh said, noting that they are evaluating all options with regard to next steps.

U.S. Circuit Judge G. Steven Agee joined Judges Thacker and Wynn on the panel for the Fourth Circuit.

AAM is represented by Jonathan D. Janow, Matthew D. Rowen and Jay P. Lefkowitz PC of Kirkland & Ellis LLP.

The state is represented by Frosh and Assistant Attorneys General Joshua N. Auerbach and Leah J. Tulin.

The case is Association for Accessible Medicines v. Brian E. Frosh et al., case number 17-2166, in the U.S. Court of Appeals for the Fourth Circuit.