Another State Drug Pricing Law… Another Legal Challenge; Trade Group Sues California in Latest Lawsuit against Drug Pricing Transparency Bill

December 17, 2017By David C. Gibbons & Alan M. Kirschenbaum

On December 8, 2017, the pharmaceutical manufacturers’ trade association, Pharmaceutical Research and Manufacturers of America (PhRMA), filed a complaint in federal district court in the Eastern District of California seeking declaratory and injunctive relief against implementation and enforcement of California’s recently enacted California Senate Bill 17 (SB 17).  SB 17, which is set to become effective on January 1, 2018, imposes notification and reporting requirements on pharmaceutical manufacturers for certain price increases on their products sold to state purchasers in California, as we described in our previous post (here).  Further information on the implementation of SB 17 can be found on the California Office of Statewide Health Planning and Development (OSHPD) website here.

PhRMA’s lawsuit challenges SB 17 on three distinct constitutional grounds. First, PhRMA asserts that SB 17 violates the Commerce Clause by regulating interstate commerce.  Compl. at 3.  The U.S. Constitution gives Congress the power to regulate commerce “among the several states” (U.S. Const. art. I, § 8, cl. 3), which thereby prohibits states, like California, from discriminating against or inappropriately burdening interstate commerce.  PhRMA argues that SB 17’s requirement that pharmaceutical manufacturers provide a 60-day notice to certain purchasers will restrict prices nationwide by effectively “banning” wholesale acquisition cost (WAC) increases, given that WAC is defined in Medicare drug payment methodologies as a national drug pricing metric.  Compl. at 3, 21; see 42 U.S.C.  § 1395w–3a(c)(6)(B) (WAC “means, with respect to a drug or biological, the manufacturer’s list price for the drug or biological to wholesalers or direct purchasers in the United States”).  Furthermore, according to PhRMA, SB 17 “penalizes” manufacturers for WAC increases greater than 16% “regardless of whether that increase affects the price that customers in California ultimately pay” for drugs.  Compl. at 3.  PhRMA also avers that the 60-day drug price increase notice will cause purchasers, nationwide, to stockpile such products and potentially cause a purchasing spike, which could lead to drug shortages and harm to patients. Id. at 3, 24.  Overall, PhRMA argues, SB 17 will “disrupt the drug market” through its unconstitutional regulation of drug prices and downstream effect on drug purchasing. Id. at 4, 25.

Second, PhRMA asserts that SB 17 violates the First Amendment by compelling manufacturers to speak and in a manner that expresses viewpoints that are neither speaker- nor content-neutral, as required under the U.S. Constitution. Id. at 4, 26.  PhRMA’s complaint states that SB 17 “forc[es] manufacturers to speak about drug pricing where they otherwise would not [and] discriminates based on both content and viewpoint by forcing manufacturers to endorse and disseminate the message the required statements unavoidably convey—that prescription drug prices are too high and that only chemical changes or improvements to a drug can justify” WAC price increases of 16% over a two- or three-year period. Id. at 4-5; see also id. at 27.

Third, PhRMA argues that SB 17 is unconstitutionally vague, in violation of the Fourteenth Amendment Due Process Clause. Id. at 5.  In determining whether a WAC price increase is greater than 16% and thus triggers SB 17’s notification requirements, a manufacturer must take into account “the proposed increase and the cumulative increases that occurred within the previous two calendar years prior to the current year.”  SB 17, § 127677(a).  PhRMA states that, with an effective date of January 1, 2018, SB 17 is vague as to whether or how it may apply retroactively.  Compl. at 18, 31.  For example, SB 17 could be interpreted to require a price increase taken in January 2018 to be benchmarked against price increases taken all the way back to January 2016, two years prior to the effective date of the bill.  SB 17 is silent on whether the reporting requirement must take into account drug prices in effect prior to the effective date of the bill. Id.

In addition, PhRMA asserts that SB 17 is unclear as to whether a price increase taken on January 2, 2018, for example, would require notice to be provided to statutory purchasers on November 3, 2017, even though the statute was not in effect at that time. Id. at 5.  In fact, manufacturers could not have provided notice on November 3, 2017 since the portal on which state purchasers were to register in order to receive notice was not available until December 1, 2017.  Therefore, on November 3, 2017, there was no system in place to allow manufacturers to provide notice of a WAC price increase taken on January 2, 2018.

PhRMA, acting on behalf of its member companies, is seeking declaratory judgment that SB 17 is unconstitutional as well as a permanent injunction preventing the implementation or enforcement of the provisions noted above. We will continue to track this litigation as it progresses.