Fourth Circuit Finds Maryland Price Gouging Law Unconstitutional

April 16, 2018By Serra J. Schlanger & Alan M. Kirschenbaum

On Friday, April 13, 2018, the U.S. Court of Appeals for the Fourth Circuit ruled that Maryland’s law prohibiting “price gouging” by generic pharmaceutical manufacturers (HB 631) is unconstitutional because it violates the dormant commerce clause by directly regulating transactions that occur outside of Maryland. Circuit Judge Agee joined the majority opinion written by Circuit Judge Thacker; Circuit Judge Wynn wrote a dissenting opinion that HB 631 does not violate the commerce clause (both opinions are available here).

As discussed in our previous post on HB 631 (see here), this law sought to limit generic drug pricing by prohibiting a generic drug manufacturer or wholesale distributor from making unconscionable increases in the price of an “essential off-patent or generic drug.” To assist the Maryland Attorney General (AG) in identifying violations, the law authorized the Maryland Medical Assistance Program (“MMAP”) to notify the AG of a price increase when (1) the Wholesale Acquisition Cost (“WAC”) of a prescription drug increased by at least 50% within the preceding one-year period or when the price paid by MMAP would increase by at least 50% within the preceding one-year period, and (2) the WAC for either a 30-day supply or a full course of treatment exceeded $80. The law also provided the AG with civil remedies, including injunctive relief, monetary relief, and civil penalties, for violations of the law.

As we also previously reported, in July 2017 the Association for Accessible Medicines (“AAM”) filed suit seeking declaratory and injunctive relief against the implementation and enforcement of HB 631. AAM challenged HB 631 on two constitutional grounds: (1) that HB 631 violates the dormant Commerce Clause of the Federal Constitution because it regulates commerce wholly outside of Maryland; and (2) that HB 631 is impermissibly vague and therefore violates the Fourteenth Amendment Due Process Clause.

This case reached the Fourth Circuit after AAM appealed a decision by the U.S. District Court for the District of Maryland that granted the State of Maryland’s motion to dismiss AAM’s challenge based on the dormant commerce clause, but allowed the vagueness claim to proceed. The District Court also denied AAM’s motion for injunctive relief.

The Fourth Circuit relied on three determinations to find HB 631 unconstitutional:

  1. The law focuses, not on the price that a Maryland consumer pays for a drug, but instead on the price initially charged by the manufacturer or wholesaler. Therefore, a violative price gouging transaction may occur outside of Maryland even if the transaction “did not result in a single pill being shipped into Maryland.”
  2. Even if the Act did require a nexus to an actual sale in Maryland, a violation is triggered by the manufacturer’s or wholesaler’s initial sale. These “upstream” sales occur almost exclusively outside of Maryland.
  3. If other states enacted similar laws, this would impose a significant burden on interstate commerce involving prescription drugs.

Because the Fourth Circuit found HB 631 unconstitutional based on AAM’s dormant commerce clause argument, the Court did not address whether the statute was also void for vagueness. However, the majority did acknowledge that the law’s “relatively subjective definition of what constitutes an unlawful price increase only exacerbates the problem[s]” that would occur if other states imposed similar laws. The majority stressed that, although Maryland could not constitutionally control prescription drug pricing in the manner utilized by HB 631, Maryland and other states could enact other legislation to secure lower prescription drug prices for their citizens.

Another commerce clause challenge has been brought by the Pharmaceutical Research and Manufacturers of America against a price increase transparency law in California (see our previous post here). We will continue to watch developments in the growing number of states that are seeking to limit drug costs through legislation, as well as legal challenges to those laws.