Maryland AG Seeks SCOTUS Review of Generics Price-Gouging Prohibition Struck Down by Fourth Circuit

October 26, 2018By David C. Gibbons & Jeffrey N. Wasserstein

Maryland Attorney General (“AG”) Brian Frosh is not going down without a fight in his bid to defend a Maryland law prohibiting “price gouging” by generic pharmaceutical manufacturers. H.B. 631, 437th Gen. Assemb., Reg. Sess. (Md. 2017) (hereinafter, “HB 631”), was passed by the Maryland General Assembly on April 20, 2017 and was set to take effect on October 1, 2017, but for the lawsuit filed by the generic drugs trade association, Association for Accessible Medicines (“AAM”).  See our previous blog posts on HB 631 here and the AAM lawsuit here.

Briefly, HB 631 aims to curb increases in generic drug pricing in two ways. First, it prohibits a generic drug manufacturer or wholesale distributor from making “unconscionable increases” in the price of an “essential off-patent or generic drug.”  HB 631 defines an “unconscionable increase” as “an increase in the price of a prescription drug that:

(1)  is excessive and not justified by the cost of producing the drug or the cost of appropriate expansion of access to the drug to promote public health; and

(2)  results in consumers for whom the drug has been prescribed having no meaningful choice about whether to purchase the drug at an excessive price because of:

(I.)  the importance of the drug to their health; and

(II.)  insufficient competition in the market for the drug.”

Second, HB 631 authorizes the Maryland Medical Assistance Program (“MMAP”) to notify the Maryland AG of a price increase when the Wholesale Acquisition Cost (“WAC”) of a prescription drug increases by at least 50% from the WAC within the preceding one-year period or when the price paid by MMAP would increase by at least 50% from the WAC within the preceding one-year period and the WAC for either a 30-day supply or a full course of treatment exceeds $80.

AAM, in its original complaint, challenged HB 631 on two constitutional grounds. First, AAM alleged that HB 631 violates the dormant Commerce Clause of the U.S. Constitution because it regulates commerce wholly outside of Maryland.  Compl. at 2, 23-27, AAM v. Frosh, No. 1:17-cv-1860 (D. Md. July 6, 2017).  The Commerce Clause empowers Congress to regulate commerce “among the several states,” and thereby prohibits states from discriminating against or unduly burdening interstate commerce.  U.S. Const. art. I, § 8, cl. 3; see, e.g., Philadelphia v. New Jersey, 437 U.S. 617, 623-624 (1978).  AAM argued that HB 631 violates the dormant Commerce Clause by targeting transactions between pharmaceutical manufacturers and wholesale distributors or retail pharmacy chains with centralized warehouses, none of which are within Maryland.  Furthermore, AAM alleged, the transactions themselves, including pricing determinations, are made on a national basis and do not take place within the State of Maryland.  AAM stated that “next to none of the largest generic drug manufacturers . . . reside in Maryland, so the only involvement a manufacturer has in the overwhelming majority of off-patent and generic prescription drug sales in Maryland is via an upstream sale that occurred entirely outside of the state.”  Compl. at 2.  AAM went on to argue that price restraints imposed by HB 631 would “inevitably affect commercial transactions, pricing, and commerce in other states.” Id. at 13.

Second, AAM argued that HB 631 is impermissibly vague and, therefore, violates the Fourteenth Amendment Due Process Clause. See U.S. Const. amend. XIV, § 1.

The U.S. District Court for the District of Maryland 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.

On appeal by AAM, the United States Court of Appeals for the Fourth Circuit reversed the district court’s ruling and remanded the matter to the district court with instructions to enter a judgment in favor of AAM. Despite a vigorous dissent by Judge Wynn, the majority held that HB 631 is unconstitutional under the dormant Commerce Clause “because it directly regulates transactions that take place outside Maryland.”  Op. at 19, AAM v. Frosh, No. 1:17-cv-2166 (4th Cir. Apr. 13, 2018).  Because the court found HB 631 unconstitutional under the dormant Commerce Clause, it did not reach the merits of the void for vagueness claim. The Fourth Circuit majority stated, “[HB 631] attempts to dictate the price that may be charged elsewhere for a good.  Any legitimate effects [HB 631] may have in Maryland are insufficient to protect the law from invalidation.” Id. at 15.  The court went on to say that the “practical effect” of HB 631, like those state laws struck down previously under the dormant Commerce Clause by the Supreme Court, “is to specify the price at which goods may be sold beyond Maryland’s borders.” Id. at 17; see also Baldwin v. G.A.F. Seelig, Inc., 294 U.S. 511 (1935); Healy v. Beer Inst., Inc., 491 U.S. 324 (1989).  For additional details on the Fourth Circuit’s opinion, see our blog post here. The State of Maryland subsequently filed a petition with the Fourth Circuit for rehearing en banc, which was denied on July 24, 2018.

On October 19, 2018, the State of Maryland filed a Petition for a Writ of Certiorari, seeking review of the Fourth Circuit’s decision by the Supreme Court of the United States. The question presented to the Supreme Court is “whether the states’ sovereign power to regulate in-state commerce includes the power to impose consumer-protection requirements on both in-state and out-of-state manufacturers of goods destined for sale in the state.”  Petition for a Writ of Certiorari at 2, Frosh v. AAM, No. 18-______ (Oct. 2018). Criticizing the Fourth Circuit’s opinion, the State of Maryland contends that the “majority’s opinion rests on a reading of this Court’s precedent that would deprive a state of power to protect consumers from predatory commercial practices that originate out of state, even though they are directed into the state and will directly harm its citizens.” Id. at 11.  Relying on Judge Wynn’s dissenting opinion, Maryland argues that HB 631 “does not regulate wholly out-of-state commerce even if it affects the price of some out-of-state sales.” Id. at 12.  Maryland emphasizes the Court’s holding in Pharm. Research & Mfrs. of America v. Walsh, 538 U.S. 644 (2003), a dormant Commerce Clause case in which the Court held that, “unlike price control or price affirmation statutes,” state laws that neither regulate the price of an out-of-state transaction nor tie the price of in-state products to out-of-state prices do not fail on constitutional grounds. Walsh, 538 U.S. at 669-670; see also Petition for a Writ of Certiorari at 15-17. Walsh concerned a state law that required prescription drug manufacturers to enter into rebate agreements, in addition to rebate agreements required under the Medicaid Drug Rebate Program, for drugs offered through a state discount prescription drug program open to all state residents. The Court found that this requirement did not impose a “disparate burden” on out-of-state versus in-state drug manufacturers and that manufacturers could not avoid this requirement by operating entirely within the state. Walsh, 538 U.S. at 670.  On that basis, the Court upheld the state law, even though it had some extraterritorial impacts.  At issue then, in Frosh, is the breadth of this “extraterritoriality doctrine,” a judicial construct embedded in the dormant Commerce Clause, and whether a state may regulate commerce that begins outside its borders but, as with HB 631, ends within the state.

Regardless of its decision, if the Supreme Court takes up the State of Maryland’s appeal, the impact of the Court’s decision could be far-reaching, given that several states have enacted drug pricing transparency laws aimed at shaming drug manufacturers into limiting price increases. We also note that regulations directed at increasing drug pricing transparency have now emerged at the federal level as well, in a Centers for Medicare and Medicaid Services’ proposed rule that would require WAC to be disclosed in direct-to-consumer television advertisements (see our blog post about this here).  We will continue to track the progress of Maryland’s cert. petition, other litigation in this area, and state and federal drug pricing legislation and rulemaking.