4th Circuit finds Maryland price-gouging law unconstitutional

In a 2-1 ruling, the Court of Appeals for the Fourth Circuit has ruled that Maryland’s 2017 price-gouging law (HB 631) is unconstitutional. The law (Md. Code Ann., Health–General §§ 2-801 et seq.) had prohibited price gouging (defined as an “unconscionable increase in the price of a prescription drug”) for an “essential off-patent or generic drug,” and had provided civil penalties and injunctions for violations.

The Court found that the law violated the Dormant Commerce Clause under Article I, sec.8, cl.3 of the Constitution — the power retained by the federal government to regulate interstate commerce, and the corollary that states are prevented from enacting laws that interfere with or burden interstate commerce. Specifically, the Court agreed with the argument of the Association for Accessible Medicines (formerly known as the Generic Pharmaceutical Association) that the Maryland law violated this extraterritoriality principle because it was not limited to sales wholly within Maryland, controls the price of transactions that occur wholly outside Maryland, and burdens the interstate commerce of prescription drugs.

Much of the opinion centers around the precise language of the Maryland law. For example, in finding that the Maryland law was not limited to sales wholly within the state, the Court noted that “essential off-patent or generic drug” is defined in part at as “made available for sale in [Maryland].”

This “made available for sale” language does not limit the Act’s application to sales that actually occur within Maryland, nor does it restrict the Act’s operation to the context of a resale transaction with a Maryland consumer. Indeed, Maryland acknowledges that the Act is intended to reach sales upstream from consumer retail sales. See Oral Argument at 20:45–55, Ass’n for Accessible Meds. v. Frosh, No. 17-2166 (4th Cir. Jan. 24, 2018), http://www.ca4.uscourts.gov/oral-argument/listen-to-oral-arguments (“[T]he conduct that violates the statute could manifest itself in a wholesale transaction that occurs out-of-state.”). Such “upstream” sales would occur almost exclusively outside Maryland.

Therefore, the Act targets conduct that occurs entirely outside Maryland’s borders, a conclusion supported by the Act’s prohibition of a manufacturer’s use of the defense that it did not directly sell to a consumer in Maryland.

Similarly, the Court found that the law by design targeted upstream pricing and sale of prescription drugs outside of Maryland, evidenced by the fact that the pivotal trigger for the law’s application is the initial sale, which parties agreed that nearly always occurred outside of Maryland.

Therefore, the Act effectively seeks to compel manufacturers and wholesalers to act in accordance with Maryland law outside of Maryland. This it cannot do.

This ruling represents an obvious setback to efforts by states to legislate against high prices, but the Court’s opinion is clear that it should not be read to suggest that price gouging of pharmaceuticals is somehow constitutionally protected:

This is a sweeping and incorrect conclusion to draw from our holding that Maryland is prohibited from combating prescription drug price gouging in the manner utilized by the Act. Prescription drug manufacturers are by no means “constitutionally entitled,” id. at 57, to engage in abusive prescription drug pricing practices. But Maryland must address this concern via a statute that complies with the dormant commerce clause of the U.S. Constitution.

Judge Wynn wrote the detailed dissent, recounting the history of the law and the policy underpinnings of the law and challenging the broad interpretation of the extraterritoriality doctrine.

It is unclear as of yet whether the state will attempt to seek an en banc appeal or petition the Supreme Court for a writ of certiorari. A more simple option, given the overwhelming popularity of the law, would be to redraft next session following the parameters of the Court’s ruling, with greater care as to precisely tailored language needed to overcome a challenge, such as clarifying the “made available for sale within the State” definition to more clearly apply only to sales within the state so as to avoid arguments over statutory construction and questions of extraterritoriality.

The opinion is available here: Assoc. for Accessible Medicines v. Frosh, No. 17-2166 (4th Cir. 2018)