Ass'n for Accessible Medicines v. Frosh

887 F.3d 664

ASSOCIATION FOR ACCESSIBLE MEDICINES, Plaintiff–Appellant,

v.Brian E. FROSH, in his official capacity as Attorney General for the State of Maryland; Dennis R. Schrader, in his official capacity as Secretary of the Maryland Department of Health, Defendants–Appellees,Chamber of Commerce of the United States of America, Amicus Supporting Appellant,AARP; AARP Foundation; Knowledge Ecology International ; Maryland Citizens' Health Initiative Education Fund, Incorporated; Public Citizen; Public Justice Center; Maryland Citizens' Health Initiative Education Fund, Incorporated; Disability Rights Maryland, Amici Supporting Appellee.

No. 17-2166

United States Court of Appeals, Fourth Circuit.

Argued: January 24, 2018

Decided: April 13, 2018

ARGUED: Jay P. Lefkowitz, Kirkland & Ellis LLP, New York, New York, for Appellant. Joshua Neal Auerbach, Office of the Attorney General of Maryland, Baltimore, Maryland, for Appellees. ON BRIEF: Jonathan D. Janow, Matthew D. Rowen, Kirkland & Ellis LLP, Washington, D.C., for Appellant. Brian E. Frosh, Attorney General, Leah J. Tulin, Assistant Attorney General, Office of the Attorney General of Maryland, Baltimore, Maryland, for Appellees. Warren Postman, Janet Galeria, United States Chamber Litigation Center, Washington, D.C.; William S. Consovoy, Bryan K. Weir, Consovoy Mccarthy PARK PLLC, Arlington, Virginia, for Amicus Chamber of Commerce of the United States of America. William Alvarado Rivera, Iris Y. González, David Edmon, AARP Foundation Litigation, Washington, D.C., for Amici AARP, AARP Foundation, Knowledge Ecology International, The Maryland Citizens' Health Initiative Education Fund, and Public Citizen. K'Shaani Smith, Murnaghan Appellate Advocacy Fellow, Public Justice Center, Baltimore, Maryland, for Amici Public Justice Center, Maryland Citizens' Health Initiative Education Fund, Incorporated, and Disability Rights Maryland, Incorporated.

Before AGEE, WYNN, and THACKER, Circuit Judges.

Reversed and remanded by published opinion. Judge Thacker wrote the majority opinion, in which Judge Agee joined. Judge Wynn wrote a dissenting opinion.

THACKER, Circuit Judge:

The Association for Accessible Medicines ("AAM") appeals the district court's dismissal of its dormant commerce clause challenge to a Maryland statute prohibiting price gouging in the sale of prescription drugs. AAM also appeals the district court's refusal to enjoin enforcement of the statute on the basis that it is unconstitutionally vague. We hold that the statute violates the dormant commerce clause because it directly regulates the price of transactions that occur outside Maryland.¹ Accordingly, we reverse the district court's dismissal of that claim and remand with instructions to enter judgment in favor of AAM.

I.Factual Background and Procedural History

A.Maryland's Anti-Price Gouging Statute

In response to reports of price gouging by pharmaceutical manufacturers in the sale of certain prescription medications, Maryland's legislature passed HB 631, "An Act concerning Public Health—Essential Off-Patent or Generic Drugs—Price Gouging—Prohibition" (the "Act"), during the 2017 legislative session. J.A. 42–48.² Maryland's governor refused to sign the bill, citing constitutional and other concerns, and the bill became law without his signature. The Act went into effect on October 1, 2017.

The Act prohibits "[a] manufacturer or wholesale distributor" from "engag[ing] in price gouging in the sale of an essential off-patent or generic drug." Md. Code Ann., Health–General § 2-802(a). The Act defines "price gouging" as "an unconscionable increase in the price of a prescription drug." Id. § 2-801(c). "Unconscionable increase" is further defined as an increase that "[i]s 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 "[r]esults in consumers ... having no meaningful choice about whether to purchase the drug at an excessive price" due to the drug's "importance ... to their health" and "[i]nsufficient competition in the market." Id. § 2-801(f). The "essential" medications subject to the law are those "made available for sale in [Maryland]" that either "appear[ ] on the Model List of Essential Medicines most recently adopted by the World Health Organization" or are "designated ... as an essential medicine due to [their] efficacy in treating a life-threatening health condition or a chronic health condition that substantially impairs an individual's ability to engage in activities of daily living." Id. § 2-801(b)(1).

A manufacturer or wholesale distributor determined to be in violation of the Act may face a number of legal consequences, including a civil penalty of $10,000 per violation or an action to enjoin the sale of the medication at the increased price. See Md. Code Ann., Health–General § 2-803(d). To assist the Maryland Attorney General in identifying violations, the Act provides that the Maryland Medical Assistance Program "may notify the Attorney General" in the event of a particular price increase, including when an increase "[w]ould result in an increase of 50% or more in the wholesale acquisition cost of the drug within the preceding 1-year period" or when a 30-day supply of the drug "would cost more than $80 at the drug's wholesale acquisition cost." Id. § 2-803(a).

B.AAM's Suit Challenging the Act

AAM is a voluntary organization with a membership that consists of prescription drug manufacturers and wholesale distributors and other entities in the pharmaceutical industry. AAM's member-manufacturers, only one of which is based in Maryland, typically sell their products to wholesale pharmaceutical distributors, none of which are based in Maryland . The vast majority of these sales occur outside Maryland's borders.

On July 6, 2017, AAM filed this action against Brian Frosh, Maryland's Attorney General, and Dennis R. Schrader, Secretary of the Maryland Department of Health (collectively, "Maryland"). Among other claims, AAM asserts that the Act violates the dormant commerce clause and is unconstitutionally vague. Maryland filed a motion to dismiss AAM's suit, which the district court granted as to the dormant commerce clause claim but denied as to the vagueness claim. The district court also denied AAM's motion for a preliminary injunction. AAM timely appealed.

II.Dormant Commerce Clause Challenge

AAM argues that the district court improperly dismissed its claim that the Act violates the dormant commerce clause by directly regulating wholly out-of-state commerce. We review the dismissal de novo, "accepting [AAM's] well-pleaded allegations as true and drawing all reasonable inferences in [AAM's] favor." Schilling v. Schmidt Baking Co. , 876 F.3d 596, 599 (4th Cir. 2017).

A.The Dormant Commerce Clause and the Principle Against Extraterritoriality

Implicit in the constitutional allocation of the "Power ... To regulate Commerce ... among the several States," U.S. Const. art. I, § 8, cl. 3, to the federal government is a corollary "constraint on the power of the States to enact legislation that interferes with or burdens interstate commerce." Brown v. Hovatter , 561 F.3d 357, 362 (4th Cir. 2009). This doctrine, known as the "dormant" commerce clause, "is driven by concern about economic protectionism" and seeks to prevent state "regulatory measures designed to benefit in-state economic interests by burdening out-of-state competitors." Id. at 363 (quoting Dep't of Revenue of Ky. v. Davis , 553 U.S. 328, 337–38, 128 S.Ct. 1801, 170 L.Ed.2d 685 (2008) ).

The principle against extraterritoriality as it relates to the dormant commerce clause is derived from the notion that "a State may not regulate commerce occurring wholly outside of its borders." Star Sci., Inc. v. Beales , 278 F.3d 339, 355 (4th Cir. 2002) (citing Healy v. Beer Inst. , 491 U.S. 324, 335–36, 109 S.Ct. 2491, 105 L.Ed.2d 275 (1989) ; Brown-Forman Distillers Corp. v. N.Y. State Liquor Auth. , 476 U.S. 573, 582–83, 106 S.Ct. 2080, 90 L.Ed.2d 552 (1986) ; Edgar v. MITE Corp. , 457 U.S. 624, 642–43, 102 S.Ct. 2629, 73 L.Ed.2d 269 (1982) (plurality opinion)). The principle "reflect[s] the Constitution's special concern both with the maintenance of a national economic union unfettered by state-imposed limitations on interstate commerce and with the autonomy of the individual States within their respective spheres." Healy , 491 U.S. at 335–36, 109 S.Ct. 2491 (footnote omitted). A state law violates the extraterritoriality principle if it either expressly applies to out-of-state commerce, see Carolina Trucks & Equip., Inc. v. Volvo Trucks of N. Am., Inc. , 492 F.3d 484, 491–92 (4th Cir. 2007), or has that "practical effect," regardless of the legislature's intent, Star Sci. , 278 F.3d at 355.

1.

One of the earliest cases to address the extraterritoriality principle as it relates to the dormant commerce clause is Baldwin v. G.A.F. Seelig, Inc. , 294 U.S. 511, 55 S.Ct. 497, 79 L.Ed. 1032 (1935). The New York law at issue in Baldwin required milk dealers to pay a minimum amount to milk producers, even when the milk was purchased outside New York. See id. at 519, 55 S.Ct. 497. The parties agreed that "New York ha[d] no power to project its legislation into Vermont by regulating the price to be paid in that state for milk acquired there." Id. at 521, 55 S.Ct. 497. In holding that the law violated the dormant commerce clause, the Supreme Court observed that the law essentially operated as a duty on milk produced in other states and therefore unlawfully burdened interstate commerce. See id. at 521–22, 55 S.Ct. 497.

A plurality of the Court expounded on this concept nearly half a century later in Edgar v. MITE Corp. , 457 U.S. 624, 102 S.Ct. 2629, 73 L.Ed.2d 269 (1982) (plurality opinion). The Illinois law challenged in Edgar required "any takeover offer for the shares of a target company [to] be registered with the Secretary of State" if Illinois shareholders owned at...