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Association for Accessible Medicines v. Frosh

United States District Court, D. Maryland

September 29, 2017

FROSH, et al. Defendants


          Marvin J. Garbis, United States District Judge.

         The Court has before it Defendants' Motion to Dismiss [ECF No. 29], Plaintiff's Motion for Preliminary Injunction [ECF No. 9] and the materials submitted relating thereto. The Court has held a hearing and has had the benefit of the arguments of counsel.

         I. BACKGROUND

         Plaintiff Association for Accessible Medicines (“AAM”) is a nonprofit, voluntary association representing a number of manufacturers and distributors of generic and biosimilar medicines. AAM brings an action for declaratory and injunctive relief under the Commerce Clause and the Fourteenth Amendment Due Process Clause, pursuant to 42 U.S.C. § 1983 and § 1988, against Brian E. Frosh and Dennis R. Schrader in their respective capacities as Attorney General for the State of Maryland and Secretary of the Maryland Department of Health (collectively, “Defendants”).

         AAM challenges the constitutionality of Maryland's House Bill 631 (“HB 631”), which prohibits manufacturers and wholesale distributors from engaging in price-gouging in the sale of essential off-patent or generic drugs that are made available for sale in Maryland. § 2-802(a). AAM alleges that HB 631 violates the dormant Commerce Clause as applied to the sales of drugs between out-of-state manufacturers and out-of-state wholesale distributors. Additionally, AAM brings a facial challenge to HB 631 as impermissibly vague under the Due Process Clause of the Fourteenth Amendment.

         A. History of HB 631

         Defendants state that HB 631 “seeks to protect Marylanders from the imposition of unconscionable price increases for certain off-patent or generic drugs in circumstances of market failure or dysfunction.” Defs.' Mot. Dismiss at 1, ECF No. 29-1. It was enacted in response to two government reports detailing price-gouging of off-patent drugs under specific market conditions. Id. at 4.

         One of the reports, issued by the U.S. Senate's bipartisan Special Committee on Aging, is entitled “Sudden Price Spikes in Off-Patent Prescription Drugs: The Monopoly Business Model that Harms Patients, Taxpayers, and the U.S. Health Care System.” Defs.' Mot. Dismiss Ex. A (“U.S. Senate Report”). This Report describes a “business model” in which some generic drug companies would choose to produce a drug serving a small market for which there was only one manufacturer, ensure the drug was the “gold standard” for the condition it treats, control access to the drug through a closed distribution system or specialty pharmacy, and engage in “price gouging, ” or “maximizing profits by jacking up prices as high as possible.” U.S. Senate Report at 4. Illustrations provided of this “business model” included:

• Turing's increase of Daraprim (which treats the life-threatening toxoplasmosis) from $13.50 to $750.00 per pill, a more than 5000% increase,
• Retrophin's increase of Thiola (which treats a genetic kidney disease) from $1.50 to $30.00 per pill, a nearly 2000% increase,
• Valeant's increase of Cuprimine and Syphine supplies (which treat Wilson's disease) from a few hundred dollars per supply to $26, 189.00 or $21, 267.00 per supply, respectively, corresponding to 5, 785% and 3, 162% increases; and
• Rodelis's increase of 30 capsules of Seromycin (which treats a life-threatening form of multi-drug resistant tuberculosis) from $500.00 to $10, 800.00, an increase of 2060 %.

Id. at 4-6.

         The second report, issued by the Government Accountability Office in August 2016, studied a basket of 1, 441 established generic drugs and found that, during the period from 2010 to 2015, manufacturers had imposed at least one “extraordinary price increase” for 315 of those drugs.[1] Defs.' Mot. Dismiss Ex. B at 12 (“GAO Report”). Moreover, “out of the 351 extraordinary price increases, 48 were 500 percent or higher and 15 were 1, 000 percent or higher.” GAO Report at 14.

         HB 631 was introduced in early 2017 and passed both houses of the Maryland General Assembly by large bipartisan majorities. Although it was not signed by Governor Larry Hogan, it is scheduled to go into effect on October 1, 2017.

         B. Text of HB 631

         Under HB 631, “[a] manufacturer or wholesale distributor may not engage in price gouging in the sale of an essential off- patent or generic drug.” § 2-802(a).[2] “Price gouging” is defined as “an unconscionable increase in the price of a prescription drug.” § 2-801(c). The term “[u]nconscionable increase” is defined 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.

         § 2-801(f). HB 631 contains a reporting provision that authorizes the Maryland Medical Assistance Program (“MMAP”) to notify the Attorney General when there is an increase in a drug price that amounts to an increase of “50% or more in the wholesale acquisition cost of the drug” within the preceding one year, or if a 30-day supply or full course of treatment would “cost more than $80 at the drug's wholesale acquisition cost.”[3]§ 2-803(a). If there is such a notification by MMAP, the Attorney General may request the manufacturer to submit a statement to the Attorney General justifying the price increase. § 2-803(b). The Attorney General also has the power to require a manufacturer or distributor to produce records relevant to determining whether a violation has occurred. § 2-803(c).

         Finally, HB 631 authorizes Maryland Circuit Courts, [4] on petition of the Attorney General, to issue orders to compel the violating party to produce certain records, to restrain or enjoin a violation, to restore to any consumer money lost as a result of the violation, to require a violating party engaging in price-gouging to make the drug available at the pre-violation price for one year, and to impose a civil penalty of up to $10, 000 for each violation. § 2-803(d). Except for compelling parties to produce records, the Attorney General may not bring an action without first giving the violating party an opportunity to justify the price increase. § 2-803(e). It is not a defense that the manufacturer or distributor did not deal directly with a consumer residing in Maryland. § 2-803(g).



         A motion to dismiss filed pursuant to Rule 12(b)(6) tests the legal sufficiency of a complaint. A complaint need only contain “‘a short and plain statement of the claim showing that the pleader is entitled to relief, ' in order to ‘give the defendant fair notice of what the ... claim is and the grounds upon which it rests.'” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (citations omitted). When evaluating a 12(b)(6) motion to dismiss, a plaintiff's well-pleaded allegations are accepted as true and the complaint is viewed in the light most favorable to the plaintiff. However, conclusory statements or “a formulaic recitation of the elements of a cause of action will not [suffice].” Id. A complaint must allege sufficient facts “to cross ‘the line between possibility and plausibility of entitlement to relief.'” Francis v. Giacomelli, 588 F.3d 186, 193 (4th Cir. 2009) (quoting Twombly, 550 U.S. at 557). Inquiry into whether a complaint states a plausible claim is “‘a context-specific task that requires the reviewing court to draw on its judicial experience and common sense.'” Id. Thus, if “the well-pleaded facts [contained within a complaint] do not permit the court to infer more than the mere possibility of misconduct, the complaint has alleged - but it has not ‘show[n]' - ‘that the pleader is entitled to relief.'” Id. (quoting Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009).


         i. Legal Standard

         To determine whether a state statute violates the dormant Commerce Clause, the court must conduct a two-tiered analysis. Brown-Forman Distillers Corp. v. New York State Liquor Auth., 476 U.S. 573, 579 (1986); Star Scientific Inc. v. Beales, 278 F.3d 339, 355 (4th Cir. 2002).

         Under the first tier, “[w]hen a state statute directly regulates or discriminates against interstate commerce, or when its effect is to favor in-state economic interests over out-of-state interests, ” the statute is generally struck down “without further inquiry.” Brown-Forman, 476 U.S. at 579. Thus, for state statutes that discriminate against interstate commerce, the court applies “a virtually per se rule of invalidity.” Philadelphia v. New Jersey, 437 U.S. 617, 624 (1978), see also Wyoming v. Oklahoma, 502 U.S. 437, 454-55 (1992).

         When a statute does not discriminate against interstate commerce but “regulates even-handedly” and only incidentally affects interstate commerce, the court conducts a second tier analysis, involving a balancing test first articulated under Pike v. Bruce Church, Inc., 397 U.S. 137, 142 (1970). Under this balancing test, courts look to “whether the State's interest is legitimate and whether the burden on interstate commerce clearly exceeds the local benefits.” Brown-Forman, 476 U.S. at 579. “A ‘less strict scrutiny' applies under [this] undue burden tier.” Yamaha Motor Corp., U.S.A. v. Jim's Motorcycle, Inc., 401 F.3d 560, 567 (4th Cir. 2005) (internal citations omitted).

         Based on recent Supreme Court precedent, there may be an emerging “third strand” of analysis that applies to “certain price control and price affirmation laws that control ‘extraterritorial' conduct - that is, conduct outside the state's borders.” Energy & Env't Legal Inst. v. Epel, 793 F.3d 1169, 1172 (10th Cir. 2015), cert. denied, 136 S.Ct. 595 (2015). Three Supreme Court decisions illustrate the reasoning under this “third strand, ” or extraterritoriality principle: Baldwin v. G.A.F. Seelig, Inc., 294 U.S. 511 (1935), Brown-Forman, 476 U.S. 573 (1986), and Healy v. Beer Inst., Inc., 491 U.S. 324 (1989).

         In Baldwin, the Supreme Court struck down a New York law that prohibited out-of-state companies from selling milk in the state unless they purchased their milk from dairy farmers at the same price paid to New York dairy farmers. The Court explained that it impermissibly established “a wage scale or a scale of prices for use in other states, ” and would “bar the sale of the products, whether in the original packages or in others, unless the scale has been observed.” Baldwin, 294 U.S. at 528.

         In Brown-Forman, the Supreme Court struck down a provision of the New York Alcoholic Beverage Control Law that required liquor distillers or producers selling to wholesalers within the state to affirm that their prices for products sold to in-state wholesalers were no higher than the lowest price at which the same product was sold in any other state during that month. The Court found that, although the statute was addressed only to the sale of liquor in New York, it had the impermissible “practical effect” of controlling liquor prices in other states. Brown-Forman, 476 U.S. at 583.

         Similarly, in Healy, the Supreme Court struck down the Connecticut Liquor Control Act, which required out-of-state beer shippers to affirm that the prices of their products sold to Connecticut wholesalers were no higher than the prices of those same products sold in bordering states. The Court reasoned that the statute tied pricing decisions to the regulatory schemes of these bordering states, thus preventing brewers from undertaking competitive pricing in other states. Healy, 491 U.S. at 338-39.

         The Supreme Court and other courts have stated that this extraterritoriality principle is limited to price-control statutes or price-affirmation statutes which link prices paid in-state with those paid out-of-state. See Pharm. Research & Mfrs. of Am. v. Walsh, 538 U.S. 644, 669 (2003); Energy & Env't Legal Inst., 793 F.3d at 1175 (explaining that extending the Baldwin doctrine to become a “weapon far more powerful than” the two established tiers would be a “novel lawmaking project [the court] decline[s] to take up on [its] own”); Ass'n des Eleveurs de Canards et d'Oies du Quebec v. Harris, 729 F.3d 937, 951 (9th Cir. 2013) (“[t]he Supreme Court has explained that Healy and Baldwin involved ‘price control or price affirmation statutes'” and are inapplicable to a statute “that does not dictate the price of a product and does not ‘t[ie] the price of its in-state products to out-of-state prices.'”).

         In Walsh, nonresident drug manufacturers challenged a Maine statute that required certain manufacturers selling drugs in Maine to enter into a rebate agreement with the Maine State Commissioner, or else meet a set of prior authorization requirements to dispense drugs in the state. Walsh, 538 U.S. at 653-54. The Walsh plaintiff argued that “with the exception of sales to two resident distributors, all of their prescription drug sales occur outside of Maine, ” so the act must be impermissible extraterritorial regulation. Id. at 656. The Supreme Court disagreed, explaining that the rule articulated in Baldwin and Healy “is not applicable to this case” because the Maine Act is not a price-control or price-affirmation statute, does not regulate prices of any out-of-state transaction, and does not tie in-state prices to out-of-state ones. Id. at 669.

         The Fourth Circuit has also declined to apply the Baldwin, Brown-Forman, and Healy price-parity principle in a situation similar to the context of the instant case involving HB 631. In Star Scientific, a cigarette manufacturer challenged the constitutionality of the Master Settlement Agreement (“MSA”) between the Commonwealth of Virginia and the major tobacco manufacturers, which assesses an escrow payment amount on each cigarette sold by nonparticipating tobacco manufacturers “within the Commonwealth, whether directly or through a distributor, retailer, or similar intermediary or intermediaries.” Star Scientific, 278 F.3d at 354. Presenting a “third-strand” extraterritoriality argument, the Star Scientific plaintiff contended that the statute required it to “make payments on cigarettes sold by it to independent distributors in other states if the cigarettes are later sold into Virginia, ” and thus “regulates transactions beyond the Commonwealth's borders.” Id.

         The Fourth Circuit distinguished the Star Scientific statute from the laws at issue in Healy and Brown-Forman, because Virginia's Star Scientific statute expressly limited its applicability to the sale of cigarettes “within the Commonwealth.” Star Scientific, 278 F.3d at 356. Moreover, the court noted that to the extent that the statute may affect the prices charged by out-of-state distributors, the effect would be “applicable only to prices charged on cigarettes sold within Virginia.” Id. Because the statute did not insist on “price parity” with the prices of cigarettes sold outside of the state, it did not have the “‘practical effect' of controlling prices or transactions occurring wholly outside of the boundaries of Virginia, as was the case in Brown-Forman and Healy.” Id.

         ii. Application to HB 631: First Tier and Extraterritoriality

         Regardless of whether these extraterritoriality cases are construed as a separate line of cases or as applications of the first tier analysis, Energy & Env't Legal Inst., 793 F.3d at 1174-75, this Court must follow Star Scientific's reasoning. Like the plaintiff in Star Scientific, AAM argues that HB 631 impermissibly regulates conduct occurring wholly outside the state, because its members are manufacturers and wholesalers of generic drugs who almost all reside outside of Maryland, operate under national contracts, and do not sell directly to actors in Maryland.[5] Pl.'s Opp. Mot. Dismiss at 21, ECF No. 36. Even if that characterization is correct, [6] that argument was rejected by the Fourth Circuit in Star Scientific and must be rejected here.

         The structure of HB 631 is similar to the challenged statute in Star Scientific. HB 631 only regulates drug manufacturers or wholesale distributors engaging in the sale of an essential off-patent or generic drug “made available for sale in the State.” § 2-801(b)(1). The Virginia statute in Star Scientific regulates tobacco product manufacturers selling cigarettes to consumers within the Commonwealth, “whether directly or through a distributor, retailer or similar intermediary or intermediaries.” Va. Code Ann. § 3.2-4200. Therefore, both HB 631 and the Star Scientific statute apply only to products being made available for sale within the boundaries of the state, and both laws place liability on the out-of-state manufacturer whether or not the Maryland sale was direct or through an intermediary.

         To the extent that HB 631 may affect the prices charged by out-of-state distributors or producers, the effect would be applicable only to prices charged on drugs to be sold within Maryland. As with the challenged law in Star Scientific, HB 631 does not tie the price charged on the sales of in-state drugs with the price charged on the sales of out-of-state drugs. Because HB 631 does not “insist on price parity” with drugs sold outside of the state, it does not have the “practical effect” of regulating commerce occurring wholly outside of the state, as was the case in Baldwin, Brown-Forman, and Healy. Star Scientific, 278 F.3d at 356.

         AAM tries to distinguish Star Scientific by arguing that the punishable act in Star Scientific was refusing to pay the required escrow amount on each cigarette sold by nonparticipating tobacco manufacturers within Virginia (which is “in-state”), whereas the punishable act under HB 631 is the sale of drugs at unconscionable prices between an out-of-state manufacturer and an out-of-state distributor. Hearing Rough Tr. at 9:14-24 (Sept. 14, 2017).

         AAM's comparison is inaccurate. HB 631 and the Star Scientific statute are triggered only when there is a drug or a cigarette made available for sale within the state. Whether any subsequent fine or escrow payment is made within Maryland is not relevant to the analysis. Under HB 631, a sale of drugs between an out-of-state manufacturer and an out-of-state distributor - regardless of the price - does not give rise to liability. Only if those drugs are then made available for sale in Maryland would the provisions of HB 631 apply to the transaction. Indeed, HB 631 is more limited in scope than the law in Star Scientific: whereas the Star Scientific law ...

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