Association for Accessible Medicines v. Frosh
Lynn C. Tyler*
Why It Made the List
At least since the notorious Martin Shkreli commandeered the headlines by raising the price of Daraprim, an anti-parasitic drug, from $13.50 to $750.00 per pill, drug pricing has been a topic not only of national conversation, but of executive and legislative efforts to control. When states attempt to legislate in this area, limits on their power imposed by the U.S. Constitution must be considered, and that is the subject of Association for Accessible Medicines v. Frosh.
In 2017, responding to well-publicized reports of alleged price gouging by pharmaceutical manufacturers, Maryland’s legislature passed HB 631, “An Act concerning Public Health – Essential Off-Patent or Generic Drugs – Price Gouging – Prohibition” (“the Act”). The Act prohibited “[a] manufacturer or wholesale distributor” from “engag[ing] in price gouging in the sale of an essential off-patent or generic drug.” The “essential” medications subject to the law were those “made available for sale in [Maryland]” that either “appeared on the Model List of Essential Medicines most recently adopted by the World Health Organization” or were “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.” The Act defined “price gouging” as “an unconscionable increase in the price of a prescription drug.” “Unconscionable increase” was in turn 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.”
The Association for Accessible Medicines (“AAM”) challenged the constitutionality of the Act by alleging that it violated the dormant commerce clause and was 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, which gave AAM the right to an immediate appeal.
The court began by reviewing general principles and leading cases involving the dormant commerce clause. The constitution gives Congress the power to regulate commerce among the states and, as a corollary, it restrains “the power of the States to enact legislation that interferes with or burdens interstate commerce.” Under the dormant commerce clause, “a State may not regulate commerce occurring wholly outside of its borders.” A state law that either expressly seeks to regulate out-of-state commerce or has that practical effect violates the dormant commerce clause. From a Supreme Court case, the court quoted the following principles against the states’ extraterritorial regulation of commerce:
- A state statute may not regulate “commerce that takes place wholly outside of the State’s borders, whether or not the commerce has effects within the State.” Specifically, a state law may not have “the practical effect of establishing ‘a scale of prices for use in other states.’”
- “A statute that directly controls commerce occurring wholly outside the [legislating state’s] boundaries . . . is invalid regardless of whether the statute’s extraterritorial reach was intended by the legislature.” The statute’s “practical effect” is the focus of the inquiry.
- In evaluating a statute’s “practical effect,” the Court considers “not only . . . the consequences of the statute itself, but also . . . how the challenged statute may interact with the legitimate regulatory regimes of other States and what effect would arise if . . . every[ ] State adopted similar legislation.”
As shown below, the court found the Act failed both the “wholly outside of the State’s borders” and “practical effect” principles.
The court then turned to AAM’s challenge to the Act. The court first found that “the Act’s plain language allows Maryland to enforce the Act against parties to a transaction that did not result in a single pill being shipped to Maryland.” Although the Act applied only to a drug that was made available for sale in Maryland, that language “does not limit the Act’s applicability to sales that actually occur within Maryland.” In other words, as long as a drug was made available for sale in Maryland, the Act applied to transactions that did not involve a Maryland consumer or, indeed, anyone in Maryland. The Act thus regulated conduct occurring entirely outside of Maryland. Maryland admitted that the Act was intended to reach sales upstream from consumer retail sales, sales which “would occur almost exclusively outside Maryland.”
The court found the Act unconstitutional because “[e]ven if the Act did require a nexus to an actual sale in Maryland . . . it still controls the price of transactions that occur wholly outside the state.” Indeed, only drug manufacturers and wholesale distributors, not retailers, could be held liable under the Act “and the parties agree that nearly all of these transactions occur outside Maryland.” Thus, “the Act is effectively a price control statute” that regulated the prices drug manufacturers and wholesale distributors could lawfully charge for sales that took place outside of Maryland. The court distinguished the Act from other regulations that had been upheld because they merely had an “upstream pricing impact.” Rather, the Act imposed a price control because “it aims to override prescription drug manufacturers’ reaction to the market and to regulate the prices these manufacturers charge for their products.” The Acts’ “practical effect” was to specify the price at which covered drugs could be sold outside Maryland.
Finally, the court concluded that the Act burdened interstate commerce in prescription drugs. A similar regulation imposed by one or more other states could subject drug companies to conflicting requirements. The Act’s “relatively subjective definition of what constitutes an unlawful price increase only exacerbate[d] the problem.” Again, the court noted that if other states adopted similar legislation, a drug manufacturer could make lawful sales in one state that exposed itself to enforcement action in another state. Accordingly, it found the Act unconstitutional.
Judge Wynn wrote a lengthy dissent. He began by noting “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” and recent reports by the federal government on generic drug pricing supported the need for the legislation. Judge Wynn’s first disagreement with the majority came over the extraterritorial reach of the Act. As noted above, the Act states that it applies to generic drugs “made available for sale” in Maryland and the majority concludes that this provision did not require “a single pill being shipped to Maryland.” Judge Wynn countered that Maryland represented the Act only applied when the drug at issue was sold in Maryland. Further, the case was filed before Maryland had attempted to enforce the Act, a disfavored action, so “principles of federalism and judicial restraint dictate that we conclude the statute’s reach as not extending to any stream of commerce that does not end in Maryland.” He added that under Maryland law a statute is presumed not to have any extraterritorial effect unless a contrary intent is expressly stated.
Judge Wynn next took on the extraterritoriality doctrine entirely. He noted that other circuits have referred to the doctrine “as ‘the most dormant’ of the Supreme Court’s dormant Commerce Clause jurisprudence.” He added that courts and commentators have also “questioned the constitutional rationale underlying the doctrine in light of new and expanded modes of interstate commerce” and other factors. More specifically, he argued that Supreme Court and Fourth Circuit cases do not consider a single transaction to be “commerce.” Rather, “the Supreme Court now interprets the term ‘commerce’ as encompassing a stream of transactions—including those transactions necessary to produce a good, such as labor contracts, and those by virtue of which the good is distributed and sold to end-users.” Accordingly, the Act did not regulate “commerce” in Judge Wynn’s view because it did not regulate any stream of transactions that did not enter Maryland.
Judge Wynn next took on the majority’s argument that the Act could subject drug manufacturers and wholesale distributors to inconsistent state legislation or regulations. First, AAM did not argue that there was an actual conflict, nor was a conflict imminent. Second, the Act did not prevent a drug company or wholesaler from imposing an unconscionable price increase for pills to be sold outside Maryland and an acceptable increase for pills to be sold in Maryland.
Finally, Judge Wynn discussed several cases to support his view that States have the power to “‘supersede market forces’ by imposing wage and price restrictions when gross inequality in bargaining power leads to market failure.” Further, he cited still more cases that rejected constitutional challenges to price control statutes as long as the statutes did not discriminate between in-state and out-of-state firms. For all these reasons (and others), Judge Wynn would have upheld the constitutionality of the Act.
Maryland filed a petition for certiorari, which was denied earlier this year. One obvious impact is that the Maryland legislature will have to try again if it still wants to limit price increases for generic drugs. One obvious change to the Act that could improve its odds of surviving a similar challenge would be to require that the price increase is applied to a drug actually sold in Maryland, as opposed to the “made available for sale” language of the Act. With this opinion as a starting point, the Maryland legislature should have no problem identifying similar statutes that withstood a dormant commerce clause challenge.
Time (and future cases) will tell if AAM v. Frosh awakens dormant commerce clause jurisprudence from its alleged slumber, whether in the context of drug pricing or more generally. Will the majority opinion be construed broadly or narrowly? Will it embolden businesses to challenge other state attempts at economic regulation? How will it be received by other circuits that may not have addressed the doctrine recently? The Supreme Court’s denial of certiorari is not supposed to have any precedential effect. It is hard to believe, however, that the Court denied certiorari because the issue was not sufficiently important. Judge Wynn wrote a thorough dissent and also claimed that the case created a conflict with other circuits. Did the Supreme Court disagree that there is a conflict, or perhaps agree with the majority opinion?
The FDA and CMS have taken a number of steps to try to increase competition in the pharmaceutical market, including generics. In FY 2018, the FDA has approved a record number of generic drugs. In February, it also issued 74 guidance documents for specific generic drugs (22 new and 52 revised) to assist drug companies with obtaining approval for those drugs. If these and other actions make an impact by limiting price increases, perhaps the need for state regulation in this area will lessen. It seems more likely, however, that at least some of the questions posed in the prior paragraph will be answered by a future Top 10 case.
* Lynn C. Tyler is a partner in the Indianapolis office of Barnes & Thornburg LLP and is the chair of the firm’s Food, Drug & Device Group.
 887 F.3d 664, 667 (4th Cir. 2018), cert. denied, ___ U.S. ___, 2019 WL 659800 (2019).
 Md. Code Ann., § 2-802(a) (2107).
 Id. § 2-801(b)(1).
 Id. § 2-801(c).
 Id. § 2-801(f).
 The Court described AAM as a voluntary organization consisting of prescription drug manufacturers, wholesale distributors, and other firms in the pharmaceutical industry. It noted that there were no wholesale distributors and only one pharmaceutical manufacturer in Maryland. Id. at 667.
 Id. (quoting Brown v. Hovatter, 561 F.3d 357, 362 (4th Cir. 2009)).
 Id. at 668.
 Id. at 669 (quoting Healy v. Beer Institute, 491 U.S. 324, 336 (1989); citations omitted).
 Id. at 671.
 Id. at 672.
 Id at 673.
 Id. at 675-77.
 Id. at 678.
 Id. at 679.
 Id. at 680.
 Id. at 681 (citing cases).
 Id. at 681-82.
 Id. at 683.
 Id. at 689.
 Id. at 690.
 Id. at 691-92.
 Id. at 693.