Amerisourcebergen Drug Corp. v. N.Y. Dep't of Health

213 N.Y.S.3d 198

227 A.D.3d 1286

AMERISOURCEBERGEN DRUG CORPORATION et al., Appellants,

v.NEW YORK STATE DEPARTMENT OF HEALTH et al., Respondents.

Supreme Court, Appellate Division, Third Department, New York.

Calendar Date: March 29, 2024

Decided and Entered: May 23, 2024

Massey & Gail LLP, Washington, DC (Jonathan S. Massey of counsel) and O’Connell and Aronowitz, Albany (Cornelius D. Murray of counsel) and Wachtell, Lipton, Rosen & Katz, New York City (Jonathan M. Moses of counsel) and Morgan Lewis & Bockius LLP, Washington, DC (Stephanie Schuster of counsel), for appellants.

Letitia James, Attorney General, Albany (Frederick A. Brodie of counsel), for respondents.

Before: Garry, P.J., Clark, Pritzker, Ceresia and Mackey, JJ.

MEMORANDUM AND ORDER

Mackey, J.

Appeal from an order of the Supreme Court (Christina L. Ryba, J.), entered December 15, 2022 in Albany County, which, among other things, granted defendants’ cross-motion for summary judgment dismissing the complaint.

In January 2018, then-Governor Andrew M. Cuomo announced that he was proposing an "[o]pioid [e]pidemic [s]urcharge" of "2 cents per milligram of active opioid ingredient on prescription drugs" in the upcoming state budget. The measure, known as the Opioid Stewardship Act (L 2018, ch 57, part NN [hereinafter OSA]), created an "opioid stewardship fund" whose monies were to derive from the opioid surcharge and would be used for substance abuse services and to support a program that monitors the prescribing and dispensing of controlled substances (see State Finance Law § 97-aaaaa [4]; Public Health Law §§ 3323[3]; 3343-a [1][a]).¹ The OSA required a $100 million annual payment by "[a]ll manufacturers and distributors" of opioids in the state, whom the OSA refers to as "licensees" (Public Health Law § 3323[2], [3]). Licensees’ share of the payment was proportionate to the morphine milligram equivalent (hereinafter MME) material that a licensee sold in the state in the preceding calendar year. Even though adopted in April 2018 and effective in July 2018, the OSA required a payment for licensees’ ratable share of MME opioid sales for the 2017 and 2018 calendar years, continuing through the 2022 calendar year. Payments were quarterly, with one-fourth of the annual amount due paid each quarter, except for the first payment, which was to be paid in full on January 1, 2019 (see Public Health Law § 3323[6]).² Pertinent here, the OSA provided that "[n]o licensee shall pass the cost of their ratable share amount to a purchaser, including the ultimate user of the opioid, or such licensee shall be subject to penalties" of up to "one million dollars per incident" (hereinafter the pass-through prohibition) (Public Health Law § 3323[2], [10][c]).

Pharmaceutical industry groups and one licensee challenged the constitutionality of the OSA in the U.S. District Court for the Southern District of New York, seeking declaratory judgments and injunctive relief (see Healthcare Distrib. Alliance v. Zucker, 353 F Supp 3d 235, 243 [SD N.Y.2018], revd in part sub nom. Association far Accessible Medicines v. James, 974 F.3d 216 [2d Cir 2020], cert denied. — U.S. —, 142 S Ct 87, 211 L.Ed.2d 20 [2021]). Ultimately, the District Court found that the pass-through prohibition of the OSA violated the Dormant Commerce Clause, as the prohibition had "the effect of discriminating between the purchasers of opioids in New York and those outside it" (id. at 262-263). The District Court concluded that, despite the presence of a severability clause in the OSA, the pass-through prohibition was inseverable from the rest of the statute and, thus, the entirety of the OSA was unconstitutional (id. at 264-265). Accordingly, the court enjoined the collection of taxes under the OSA (id. at 266).

After the District Court’s decision, the Legislature amended the OSA to provide that the opioid stewardship payment would be collected only for opioid sales that took place in calendar years 2017 and 2018 (see L 2019, ch 59, part XX, § 5). For subsequent years, the Legislature reimposed a tax on the sale of opioids, but the tax was assessed on a per MME basis and did not include a pass-through prohibition (see L 2019, ch 59, part XX, § 1; codified as Tax Law §§ 497-499). The amended OSA took effect on July 1, 2019 (see L 2019, ch 59, part XX, § 6).

After the enactment of the amended OSA, the State elected not to seek reversal of the District Court’s invalidation of the pass-through prohibition. Rather, the State sought reversal of only the District Court’s invalidation of the remaining provisions of the OSA, including the opioid stewardship payment. On appeal, the Second Circuit reversed in part, finding that the District Court lacked jurisdiction to abrogate the payment requirement of the OSA or enjoin the payment’s enforcement, as federal law removes such acts from a distinct court’s jurisdiction (see Association for Accessible Medicines v. James, 974 F.3d 216, 221, 227 [2d Cir 2020], cert denied — U.S. —, 142 S Ct 87, 211 L.Ed.2d 20 [2021]). Thus, the Second Circuit reversed "the District Court’s judgment invalidating and enjoining enforcement of the opioid stewardship payment and all other provisions of the OSA except for the pass-through prohibition, the invalidation of which" was not before it (id. at 228). As such, the District Court’s decision invalidating the pass-through provision stood (see id.), but the propriety of opioid stewardship payments based on a licensee’s share of the 2017 and 2018 New York opioid market remained at issue.

In May 2022, plaintiffs, national distributors of pharmaceuticals who were not parties to the federal litigation, commenced this action, claiming that the OSA’s remaining provisions were not severable from the now-unconstitutional pass-through prohibition, and thus the entire statute should be stricken. In the alternative, plaintiffs claimed that the OSA was invalid under the Due Process Clauses of the U.S. and N.Y. Constitutions because it was imposed retroactively.

In this litigation, plaintiffs seek a declaration that the OSA is invalid, an injunction against its enforcement, and a refund of $57,355,054.77 in opioid stewardship payments that they made under protest.³ Defendants moved pre-answer to dismiss the complaint. Plaintiffs asked Supreme Court to treat defendants’ motion as one for summary judgment, as the parties’ contention lay solely with the viability of defendants’ collection of the opioid stewardship payments, and cross-moved for summary judgment. Defendants likewise cross-moved for summary judgment. Supreme Court granted defendants’ cross-motion for summary judgment and dismissed the complaint. The court found the existence and strong language of the severability clause to be determinative of the severability issue, stating, "there is absolutely no evidence to suggest that the Legislature would have abandoned its intended goal of raising revenue for the prevention and treatment of opioid addiction simply because it could not prevent licensees from passing on the cost of the stewardship payments." This was so, the court noted, because the primary purpose of the OSA was to "raise significant revenue" for the prevention and treatment of opioid addiction and the OSA serves this purpose without the pass-through prohibition. On the substantive due process issue, the court found that the period of retroactivity in the OSA was relatively short, its attempt to "generate immediate revenue" was legitimate, and plaintiffs did not justifiably rely on not being taxed for their MME sales in 2017. As such, the retroactive portion of the OSA did not offend due process. Plaintiffs appeal.

[1, 2] Initially, plaintiffs contend that Supreme Court erred in severing the pass-through prohibition from the remainder of the OSA. "In that regard, it is axiomatic that a court should refrain from declaring a statute unconstitutional when only a portion thereof is objectionable, and this is particularly true when[,] as here[,] the law contains a severability clause" (Local Govt. Assistance Corp. v. Sales Tax Asset Receivable Corp., 5 A.D.3d 829, 832, 773 N.Y.S.2d 460 [3d Dept 2004] [internal quotation marks, brackets and citation omitted], mod 2 N.Y.3d 524, 780 N.Y.S.2d 507, 813 N.E.2d 587 [2004]; see also Matter of New York State Superfmd Coalition v. New York State Dept. of Envtl. Conservation, 75 N.Y.2d 88, 94, 550 N.Y.S.2d 879, 550 N.E.2d 155 [1989]). Nevertheless, where severance of the offending provision would result in a statutory scheme unintended by the Legislature, the entire statute must be deemed unconstitutional (see People ex rel. Alpha Portland Cement Co. v. Knapp, 230 N.Y. 48, 60, 129 N.E. 202 [1920], cert denied. 256 U.S. 702, 41 S.Ct. 624, 65 L.Ed. 1179 [1921]; see also People v. On Sight Mobile Opticians, 24 N.Y.3d 1107, 1109, 2 N.Y.S.3d 406, 26 N.E.3d 234 [2014]; CWM Chem. Servs., L.L.C. v. Roth, 6 N.Y.3d 410, 423, 813 N.Y.S.2d 18, 846 N.E.2d 448 [2006]). The question is "whether the [Legislature, if partial invalidity had been foreseen, would have wished the statute to be enforced with the invalid part exscinded, or rejected altogether" (Matter of Westinghouse Elec. Corp. v. Tully, 63 N.Y.2d 191, 196, 481 N.Y.S.2d 55, 470 N.E.2d 853 [1984] [internal quotation marks and citation omitted]).

[3] Plaintiffs contend that the pass-through prohibition may not be severed from the remainder of the OSA because enforcing the opioid stewardship payment without the pass-through prohibition would allow licensees to pass on the cost of the payments to their customers. They argue that such a result would negate the Legislature’s entire purpose in enacting the OSA, i.e., to hold opioid licensees financially accountable for their culpable role in creating the national opioid epidemic, We disagree.

While the legislative history of the OSA indeed reveals that lawmakers placed great importance on preventing opioid licensees from passing the cost of the stewardship payments...