Assoc. for Accessible Medicine v. Brian Frosh

After a series of high-profile incidents in which several generic pharmaceutical manufacturers imposed multiple-thousand-fold price increases for single-source generic drugs that treat rare and life-threatening conditions, the Maryland legislature enacted legislation prohibiting "unconscionable" price increases for certain generic drugs "made available for sale" to Maryland consumers. Md. Code Ann. Health-Gen. §§ 2-801 to - 803 (2017). But a trade association representing generic pharmaceutical manufacturers-which styles itself the "Association for Accessible Medicines" ("AAM" or "Plaintiff")-brought this action to enjoin the Maryland statute on grounds that it violates the dormant Commerce Clause and is unconstitutionally vague. The district court upheld Maryland's authority under the dormant Commerce Clause to protect its citizens from the abusive pricing practices at issue. I agree with the district court's holding, but my colleagues in the majority hold otherwise.

In particular, the majority opinion holds that the Maryland statute violates the dormant Commerce Clause's "extraterritoriality doctrine" to the extent that it applies to sales of generic drugs between manufacturers and distributors consummated outside of Maryland, even when the generic drugs involved in such out-of-state transactions are subsequently resold to Maryland consumers. Ante at 671-72. Put differently, the majority opinion concludes that the Commerce Clause bars Maryland from protecting its citizens against unconscionable pricing practices by out-of-state generic drug manufacturers who distribute their drugs to Maryland's citizens through an out-of-state intermediary. That conclusion conflicts with the approach taken by several of our sister circuits in deciding whether a state statute's extraterritorial reach violates the dormant Commerce Clause.

Contrary to the majority opinion's conclusion, Maryland is authorized under its "general police powers to regulate matters of legitimate local concern." Lewis v. BT Inv. Mgrs., Inc. , 447 U.S. 27 , 36, 100 S.Ct. 2009 , 64 L.Ed.2d 702 (1980) (internal quotation marks omitted). Here, Maryland legitimately targeted generic drug pricing practices specifically designed to prey on the special vulnerabilities of a defenseless group of Maryland's citizens. Simply put, the Maryland statute-which applies equally to in-state and out-of-state manufacturers and distributors-does not implicate the concerns that lie at the heart of the Supreme Court's dormant Commerce Clause jurisprudence: economic protectionism, discrimination against interstate commerce, and State regulation of streams of transactions that never cross through the State's borders. See Dep't of Revenue of Ky. v. Davis , 553 U.S. 328 , 337-38, 128 S.Ct. 1801 , 170 L.Ed.2d 685 (2008). Accordingly, I respectfully dissent.

I.

Two recent reports by the federal government regarding generic drug pricing gave rise to Maryland taking action to protect its citizens from abusive pricing practices by a subset of generic drug manufacturers. Both reports were prompted by media stories highlighting significant increases in the price of certain generic drugs. See, e.g. , Jonathan D. Alpern et al. , High-Cost Generic Drugs-Implications for Patients and Policy Makers, 371 N. Engl. J. Med. 1859, 1859-60 (2014); Andrew Pollack, Once a Neglected Treatment, Now an Expensive Specialty Drug , N.Y. Times, Sept. 21, 2015, at B1.

The first report, prepared by the Government Accountability Office ("GAO") in response to a request by a bipartisan group of legislators, examined pricing trends for generic drugs covered by the Medicare program's outpatient prescription drug benefit, commonly referred to as "Medicare Part D." See U.S. Gov't Accountability Off., GAO-16-706, Generic Drugs Under Medicare: Part D Generic Drug Prices Declined Overall, but Some Had Extraordinary Price Increases (2016) [hereinafter, "GAO Report"]. The GAO Report found that for a basket of 1,441 "established generic drugs"-"drugs that were continuously billed under Medicare Part D ... during [the] study period"-prices fell, on average, 0.7 percent per quarter from the first quarter of 2010 through the second quarter of 2015. See id. at 9. Although prices for established generic drugs generally declined during the 2010 to 2015 period, the GAO Report further found that "315 of the 1,441 established drugs experienced an extraordinary price increase-a price increase of at least 100 percent." Id. at 12. Notably, the number of established drugs experiencing a price increase of at least 100 percent increased during the five-year study period:

45 drugs experienced such an increase between the first quarter of 2010 and the first quarter of 2011, whereas 103 drugs experienced such an increase between the first quarter of 2014 and the first quarter of 2015. Id. at 12, 18.

A smaller subset of established generic drugs experienced even more "extraordinary" price increases-48 such drugs experienced a price increase of 500 percent or greater and 15 such drugs experienced a price increase of 1,000 percent or greater. Id. at 14. The vast majority of these extraordinary price increases persisted throughout the term of the study. Id. at 18.

Most of the established generic drugs experiencing extraordinary price increases were not among the 100 most heavily prescribed established generic drugs covered under Medicare Part D. To that end, stakeholders interviewed by GAO reported that "[i]f a generic drug serves a small [patient] population, ... it [is] more susceptible to price increases" because "there may be little financial incentive for a [competing] manufacturer to enter the market" and thus less "downward pressure on price." Id. at 24. Stakeholders also reported that supplier and buyer consolidation can drive price increases, as can difficulty manufacturing a particular generic drug. Id.

The second report, prepared by the United States Senate Special Committee on Aging, investigated and analyzed several "abrupt and dramatic" price increases for certain generic drugs. See Senate Special Comm. on Aging, Sudden Price Spikes in Off-Patent Prescription Drugs: The Monopoly Business Model that Harms Patients, Taxpayers, and the U.S. Health Care System 3 (2016) [hereinafter, "Senate Report"]. The Senate Report examined the circumstances surrounding large price increases for seven generic drugs, all of which had lacked patent protection for decades, sold by four generic pharmaceutical companies-two of which were formed and managed by since-convicted investor Martin Shkreli. 1 Id. at 5-6. All seven price increases exceeded 300 percent, with five of the price increases at or exceeding 2,000 percent. Id. at 6.

The Senate investigation revealed that the four companies followed a common "business model" in acquiring and marketing the seven generic drugs. Id. at 4. In particular, each case involved a (1) single-source generic drug (2) distributed through a "closed distribution system" that (3) was essential to-the "gold standard" for-(4) treating a rare condition. Id. at 4, 30-31. Each of these four characteristics allowed the company to "exercise de facto monopoly pricing power, and then impose and protect astronomical price increases," the Senate committee found. Id. at 4.

For example, single-source drugs distributed through closed-distribution systems-which make it harder for potential entrants to bring to market a competitive product or attract and retain patients-are unlikely to face competition, thereby allowing sellers to charge monopoly prices, notwithstanding the generic drug's lack of patent protection. Id. at 4, 30-31. Likewise, when a generic drug is the "gold standard" for treating a particular condition, physicians continue to prescribe the drug, even in the face of substantial price increases. Id. at 30; see also , e.g. , id. at 56 (chief executive of one generic firm explaining that it had monopoly "pricing power" for a generic drug that is the standard-of-care for treating a rare and deadly disease because, absent the drug, patients would face "liver failure or a liver transplant or even death"). And because the generic drugs treat a "rare" condition "the patient population dependent upon them [is] too small to organize effective opposition to the price increase." Id. at 31.

The Senate Report found that the large price increases "devastated patients ... across the nation," many of whom were "forced to go without vital medicine[s]" or switch to alternative, potentially less effective, therapies. Id. at 7-8. The price increases also harmed providers. For example, the Johns Hopkins Health System, which is headquartered in Maryland, reported that it lost nearly $1 million in 2015 alone as a result of several-hundred-fold price increases for two of the drugs. Id. at 6-8. The price increases also led to increases in spending by governmental health care programs, including state Medicaid programs. Id. at 110. The report further concluded that existing federal competition laws were inadequate to prevent the dramatic price increases and suggested several statutory and regulatory remedies. Id. at 116-25.

After reviewing these reports, the Maryland legislature decided to enact legislation to combat what it concluded were abusive pricing practices by certain generic drug suppliers. To that end, on May 27, 2017, the Maryland General Assembly passed HB 631. That statute, which went into effect on October 1, 2017, prohibits manufacturers and distributors from engaging in "price gouging" in the sale of an "essential off-patent or generic drug." Md. Code Ann. Health-Gen. § 2-802(a). The statute exempts "wholesale distributors" from liability, however, if they impose a price increase that "is directly attributable to additional costs for the drug imposed on the wholesale distributor by the manufacturer of the drug." Id. § 2-802(b).

HB 631 defines "essential off-patent or generic drug" as a drug: (1) "[f]or which all exclusive marketing rights, if any, granted under the federal Food, Drug, and Cosmetic Act, § 351 of the federal Public Health Service Act, and federal patent law have expired"; (2) that is listed on the Model List of Essential Medicines, as adopted by the World Health Organization, or that has been has been designated, according to specified criteria, an "essential medicine" by the Maryland Secretary of Health; (3) "[t]hat is actively manufactured and marketed for sale in the United States by three or fewer manufacturers"; and (4) that is "made available for sale" in the State of Maryland. Id. § 2-801(b)(1). "Essential off-patent or generic drug" also includes any "drug-device combination product used for the delivery of a drug" for which all exclusive marketing rights have expired. Id. § 2-801(b)(2). Although HB 631 regulates only those generic drugs "made available for sale" in Maryland, "a person who is alleged to have violated [the statute] may not assert as a defense that the person did not deal directly with a consumer residing in the State." Id. §§ 2-801(b)(1), 2-803(g).

The statute defines "price gouging" as an "unconscionable increase in the price of a prescription drug." Id. § 2-801(c). Tracking many aspects of the "business model" identified in the Senate Report, the statute provides that an "unconscionable increase" means an increase in price that (1) "[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 (2) "[r]esults in consumers for whom the drug has been prescribed having no meaningful choice about whether to purchase the drug at an excessive price" due to the "importance of the drug to their health" and insufficient market competition. Id. § 2-801(f).

HB 631 authorizes the Attorney General to petition a Maryland circuit court to restrain or enjoin violations of the statute; restore money to consumers obtained as a result of violations; require manufacturers that have engaged in "price gouging" to provide the drug to participants in any state health plan or state health program at the drug's last permissible price for a period of up to one year; and order civil penalties of up to $10,000. Id. § 2-803(d).

HB 631 also confers monitoring authority on the State's Medicaid program, the Maryland Medical Assistance Program (the "Medicaid Program"). In particular, the Medicaid Program may notify the Attorney General of certain price increases to an "essential off-patent or generic drug." Specifically, the Medicaid Program may notify the Attorney General if (1) a price increase, either by itself or together with other price increases, would cause a fifty percent or more increase, as measured within a one year time period, to the wholesale acquisition cost or price paid by the Medicaid Program; and (2) it would cost $80 at the wholesale acquisition cost to obtain a thirty day supply of the maximum recommended dosage, a full course of treatment, or if the drug is not made available in such quantities, it would exceed $80 at the wholesale acquisition cost to obtain a thirty day supply or full course of treatment. Id. § 2-803(a). After receiving notification of such an increase, the Attorney General may demand that the manufacturer imposing the increase submit documentation that itemizes the cost of production; provides explanation for the price increase, including information related to any expenditures made to "expand access to the drug," as well as the associated benefits to the public health; and any other relevant information. Id. § 2-803(b).

II.

On appeal, AAM argues that HB 631, as applied to any transaction consummated outside of Maryland's borders, violates the Commerce Clause, regardless of whether the drugs involved in such transaction later are resold in Maryland. Before addressing the merits of that claim, it is first necessary to determine what the Maryland legislature intended when it limited HB 631's extraterritorial reach to generic drugs "made available for sale" in Maryland. Id. § 2-801(b)(1). The district court held, correctly in my view, that HB 631 is "triggered only when there is a drug ... made available for sale within [Maryland]." Ass'n for Accessible Meds. v. Frosh , No. 17-cv-1860, 2017 WL 4347818 , at *6 (D. Md. Sept. 29, 2017). The majority opinion, however, concludes that HB 631 "is not triggered by any conduct that takes place within Maryland." Ante at 670; see also id. at 670-71 ("[ Section 2-801(b)(1)'s] plain language allows Maryland to enforce [HB 631] against parties to a transaction that did not result in a single pill being shipped to Maryland."); id. at 671 (asserting that HB 631 does not "require a nexus to an actual sale in Maryland"). For several reasons, I disagree with the views of my colleagues in the majority.

To begin, the majority opinion's conclusion that HB 631 requires no "nexus to an actual sale in Maryland," id. at 671, runs contrary to the State's representation as to its own statute's extraterritorial reach. Before the district court and this Court, the State repeatedly asserted that HB 631 " in no way prohibits any of AAM's members from selling drugs at a conscience-shocking price to distributors, to the extent that those drugs are later sold in California or in any other state." J.A. 291 (emphasis added); see also Appellee's Br. 7 (representing that HB 631 "applies only when drugs are sold in Maryland"). Put differently, the State represents that HB 631 "does not reach, or purport to reach, any stream of commerce that does not end in Maryland ." Mem. In Support of Defs.' Mot. to Dismiss, at 23, Ass'n for Accessible Meds. v. Frosh , No. 17-cv-1860 (D. Md. Aug. 14, 2017), ECF No. 29-1 (emphasis added). Because pre-enforcement constitutional challenges to state statutes-like AAM's dormant Commerce Clause challenge-are disfavored, see Wash. State Grange v. Wash. State Republican Party , 552 U.S. 442 , 450-51, 128 S.Ct. 1184 , 170 L.Ed.2d 151 (2008), and because the State repeatedly has represented that HB 631's reach does not extend to generic drugs that are not later sold in Maryland, principles of federalism and judicial restraint dictate that we construe the statute's reach as not extending to any stream of commerce that does not end in Maryland.

The majority opinion's conclusion that the statute extends to drugs not ultimately sold in Maryland also conflicts with AAM's understanding of the statute's extraterritorial reach. In particular, AAM asserts that HB 631 "reach[es] 'sale[s]' that take place outside of Maryland, so long as the objects of those sales are later resold in Maryland ." Appellant's Br. 28 (emphasis added). AAM, therefore, has not challenged the State's representation-and the district court's conclusion-that HB 631 is "triggered only when there is a drug ... made available for sale within [Maryland]." Frosh , 2017 WL 4347818 , at *6. In such circumstances, the majority opinion errs in reaching out to reject the State's construction of its own statute, and AAM's acquiescence in that construction. Cf. United States v. Al-Hamdi , 356 F.3d 564 , 571 n.8 (4th Cir. 2004) ("It is a well settled rule that contentions not raised in the argument section of the opening brief are abandoned.").

Even if the parties disagreed as to whether the statute's applicability requires an in-state sale, Maryland rules of statutory construction-which this Court must follow-support rejecting the majority opinion's broad interpretation of the statute's extraterritorial reach. See Carolina Trucks & Equip., Inc. v. Volvo Trucks of N. Am., Inc. , 492 F.3d 484 , 489 (4th Cir. 2007) ("In construing a state law, we look to the rules of construction applied by the enacting state's highest court.").

In Carolina Trucks , this Court considered a dormant Commerce Clause challenge to a South Carolina statute that prohibited motor vehicle manufacturers from "sell[ing], directly or indirectly, a motor vehicle to a consumer in this State, except through a new motor vehicle dealer." Id. at 488 . The plaintiff argued that the phrase "in this State" modified only the term "consumer," meaning the statute prohibited "manufacturer-to-consumer sales to South Carolina buyers without regard to the state in which the sales took place"-including sales consummated outside of South Carolina's borders. Id. Noting that "[t]he statute is ambiguous as to what 'in this State' modifies," this Court rejected the plaintiff's proposed broad construction of the statute's extraterritorial reach. Id at 488-89. In reaching that conclusion, we emphasized that broadly construing the ambiguous statutory language would run contrary to South Carolina rules of statutory construction, which "provide that statutes must not be read to operate outside the state's borders." Id.

Like the statute at issue in Carolina Trucks , Section 2-801(b)(1)'s limitation of HB 631's reach to essential generic drugs "made available for sale" in Maryland is at least ambiguous as to the statute's extraterritorial reach. In particular, this Court reasonably could interpret the statute as applying only to those specific unconscionably priced pills that are sold or resold in Maryland-as the State represents and the district court concluded-or as extending to any unconscionably priced generic drug, some pills of which are "made available for sale" in Maryland, regardless of whether the particular pills subject to an enforcement action actually are sold or resold in Maryland-as the majority concludes. And like South Carolina law, Maryland law dictates that "unless an intent to the contrary is expressly stated, acts of the legislature will be presumed not to have any extraterritorial effect." Chairman of Bd. of Trs. of Emps.' Ret. Sys. v. Waldron , 401 A.2d 172 , 183-84 (Md. 1979) (emphasis added). Carolina Trucks , therefore, requires that we reject a "broader interpretation" of Section 2-801(b)(1)'s extraterritorial reach, like that adopted by the majority opinion.

Additionally, the majority opinion's broad construction of the statute's extraterritorial reach conflicts with the rule of construction, applied by Maryland courts, requiring a court "whenever reasonably possible, [to] construe and apply a statute to avoid casting serious doubt upon its constitutionality." R.A. Ponte Architects, Ltd. v. Invs.' Alert, Inc ., 857 A.2d 1 , 18 (Md. 2004) (quoting Becker v. State , 363 Md. 77 , 767 A.2d 816 , 824 (Md. 2001) ). To be sure, a State statute that regulated sales in streams of commerce not ending in that State would raise significant concerns under the dormant Commerce Clause. But that is not a concern here because Maryland law obliges that we interpret the law narrowly-and in accordance with the State's own construction-as applying only to sales in streams of commerce ending in Maryland.

III.

Because HB 631 regulates, at most, sales of essential generic drugs in streams of commerce that end in Maryland, AAM's Commerce Clause challenge is without merit.

The Commerce Clause entrusts Congress with the authority "[t]o regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes." U.S. Const. art. I, § 8, cl. 3. The Supreme Court "has long recognized that this affirmative grant of authority to Congress also encompasses an implicit or 'dormant' limitation on the authority of the States to enact legislation affecting interstate commerce." Healy v. Beer Inst. , 491 U.S. 324 , 326 n.1, 109 S.Ct. 2491 , 105 L.Ed.2d 275 (1989). To that end, the "dormant" Commerce Clause "prohibits States from legislating in ways that impede the flow of interstate commerce." Star Sci., Inc. v. Beales , 278 F.3d 339 , 355 (4th Cir. 2002). Although some earlier Supreme Court decisions broadly applied the dormant Commerce Clause to invalidate state laws, "modern" dormant Commerce Clause jurisprudence "is driven by concern about economic protectionism-that is, regulatory measures designed to benefit in-state economic interests by burdening out-of-state competitors," Davis , 553 U.S. at 337-38 , 128 S.Ct. 1801 (internal quotation marks omitted).

AAM does not argue that HB 631 implicates either of these concerns underlying the Supreme Court's modern dormant Commerce Cause jurisprudence: discrimination against interstate commerce or favoring in-state economic interests over out-of-state economic interests. Rather, AAM contends-and the majority opinion agrees-that HB 631 violates the "extraterritoriality doctrine."

The extraterritoriality doctrine-a judge-made doctrine which states that a State may not regulate "commerce occurring wholly outside [its] boundaries,"

Healy , 491 U.S. at 336 , 109 S.Ct. 2491 ; see also Star Sci. , 278 F.3d at 355 -has been characterized by our sister circuits as the "the most dormant" of the Supreme Court's dormant Commerce Clause jurisprudence, Energy & Envtl. Legal Inst. v. Epel ( EELI ), 793 F.3d 1169 , 1172 (10th Cir. 2015) (Gorsuch, J.); IMS Health Inc. v. Mills , 616 F.3d 7 , 29 n.27 (1st Cir. 2010) ("Extraterritoriality has been the dormant branch of the dormant Commerce Clause."), vacated sub nom. on other grounds IMS Health, Inc. v. Schneider , 564 U.S. 1051 , 131 S.Ct. 3091 , 180 L.Ed.2d 911 (2011). Indeed, several circuits have questioned the continuing vitality of the extraterritoriality doctrine following the Supreme Court's decision in Pharmaceutical Research & Manufacturers of America v. Walsh, which "pointedly referred to [the extraterritoriality doctrine] as 'the rule that was applied in Baldwin [ v. G.A.F. Seelig, Inc. , 294 U.S. 511 , 55 S.Ct. 497 , 79 L.Ed. 1032 (1935),] and Healy .' " IMS Health , 616 F.3d at 29 n.27 ; EELI , 793 F.3d at 1174-75 ; see also Am. Beverage Ass'n v. Snyder , 735 F.3d 362 , 381 (6th Cir. 2013) (Sutton, J., concurring) (noting that there never has been "a single Supreme Court dormant Commerce Clause holding that relied exclusively on the extraterritoriality doctrine to invalidate a state law").

Not only have courts questioned the extraterritoriality doctrine's continuing vitality, judges and commentators also have questioned the constitutional rationale underlying the doctrine, in light of new and expanded modes of interstate commerce, changes to the Supreme Court's interpretation of the Commerce Clause, and the availability of potentially more appropriate constitutional provisions, like the Due Process Clause, to ensure that States do not unduly extend their regulatory authority beyond their borders. See Am. Beverage , 735 F.3d at 377-80 (describing the extraterritoriality doctrine as "a relic of the old world with no useful role to play in the new"); Brandon P. Denning, Extraterritoriality and the Dormant Commerce Clause: ADoctrinal Post-Mortem , 73 La. L. Rev. 979 , 998 (2013) ; Jack L. Goldsmith & Alan O. Sykes, The Internet and the Dormant Commerce Clause , 110 Yale L.J. 785 , 788-90, 806 (2001). Nevertheless, unless and until the Supreme Court repudiates the extraterritoriality doctrine as a separate line of dormant Commerce Clause jurisprudence, we are constrained to determine whether HB 631, as applied to out-of-state transactions involving essential generic drugs later sold in Maryland, amounts to a regulation of "commerce occurring wholly outside [Maryland's] borders," as the Supreme Court used that phrase in Healy .

The majority opinion concludes that HB 631 regulates " commerce occurring wholly outside the boundaries of [Maryland]," Healy , 491 U.S. at 336 , 109 S.Ct. 2491 (emphasis added)-and therefore violates the dormant Commerce Clause-because it "controls the price of transactions that occur wholly outside of the state," ante at 671 (emphasis added). I, however, conclude that the Supreme Court's Commerce Clause jurisprudence-including its decisions applying the extraterritoriality doctrine, in particular-and this Court's decisions applying that jurisprudence do not support equating a single "transaction" with "commerce," as the majority opinion does in striking down HB 631.

The Supreme Court first defined "commerce," as that term is used in the Commerce Clause, in Gibbons v. Ogden , 22 U.S. (9 Wheat.) 1, 6 L.Ed. 23 (1824) (Marshall, J.). There, the appellee argued that the meaning of commerce is "limit[ed] to traffic, to buying and selling, or the interchange of commodities." Id. at 189. Writing for the Court, Chief Justice Marshall rejected the appellee's narrow definition-which sought to limit the meaning of commerce to a single exchange of goods-stating that "[c]ommerce, undoubtedly, is traffic, but it is something more: it is intercourse. It describes the commercial intercourse between nations, and parts of nations, in all its branches ..." Id. at 189-90.

Notwithstanding Chief Justice Marshall's expansive definition of commerce in Gibbons , between the late Nineteenth Century and the New Deal the Supreme Court narrowly interpreted the term, treating each distinct transaction within a single stream of economic activity as a piece of "commerce." For example, in Carter v. Carter Coal Co. , 298 U.S. 238 , 56 S.Ct. 855 , 80 L.Ed. 1160 (1936), the Supreme Court struck down a federal law establishing boards responsible for determining the wages, hours, and working conditions of coal mine employees, id. at 280-84 , 56 S.Ct. 855 . The Court concluded that Congress lacked power under the Commerce Clause to regulate coal mine workers' terms of employment because "the relation of employer and employee ... in all producing occupations is purely local in character." Id. at 303 , 56 S.Ct. 855 . In reaching this conclusion, the Court rejected the argument that the subsequent sale of the mined coal rendered the terms of the miners' employment in "commerce," and therefore subject to congressional regulation. Id. "Mining brings the subject-matter of commerce into existence. Commerce disposes of it," the Court held. Id. at 304 , 56 S.Ct. 855 . Carter is one example of a series of cases excluding "production" and "manufacturing" from the definition of "commerce." See also, e.g. , Champlin Ref. Co. v. Corp. Comm'n of State of Okl. , 286 U.S. 210 , 2