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Fourth Circuit Rules that Maryland’s Anti-Price Gouging Act for Off-Patent or Generic Drugs is Unconstitutional

The U.S. Court of Appeals for the Fourth Circuit last month handed manufacturers and wholesalers of off-patent drugs a victory by ruling that Maryland’s anti-price gouging act violates the U.S. Constitution’s dormant commerce clause.  The legislation, like many others, was enacted in the wake of the Martin Shkreli case, where the former Turing Pharmaceutical CEO raised the price of a vital and old prescription drug by 5,000 percent. Although the Circuit sympathized with consumers affected by this type of conduct, it held, in a majority opinion written by Judge Stephanie Thacker, that Maryland overstepped its constitutional limits in seeking to compel manufacturers of off-patent or generic drugs to act in accordance with Maryland law outside of Maryland.

The statute, “An Act concerning Public Health — Essential Off-Patent or Generic Drugs — Price Gouging — Prohibition,” prohibits manufacturers and wholesale distributors from engaging in price gouging in the sale of essential off-patent or generic drugs.  It defines “price gouging” as the “unconscionable increase in the price of a prescription drug.” § 2-801(c).  Manufacturers and wholesalers who engage in price gouging face a civil penalty of $10,000 per violation or an injunction against the sale of the drug at the increased price.  The Act authorizes the Maryland Medical Assistance Program to notify the Attorney General of any price increase.  Maryland Governor Larry Hogan refused to the sign the bill because of constitutional concerns, but it still became law and went into effect on October 1, 2017.

Before the Act took effect, the Association for Accessible Medicines (“AAM”) filed suit, alleging that the Act violated the dormant commerce clause and was unconstitutionally vague.  On appeal of the district court’s decision granting Maryland’s motion to dismiss as to the dormant commerce clause claim, AAM argued that the Act regulates out-of-state drug transactions.  The Fourth Circuit agreed, finding that the Act was not limited to sales wholly within Maryland.  Ass’n for Accessible Meds. v. Frosh, 887 F.3d 664, 671 (4th Cir. 2018).  And even if there were a required nexus to sales in Maryland, and the Fourth Circuit held there was not, the court found that the Act still violates the commerce clause because it seeks to control the initial sale of the drugs—upstream pricing and sales—that often occur outside of Maryland.  It’s precisely this extraterritorial regulation of commerce that takes places wholly outside of Maryland that violates the commerce clause, the court concluded.

In a dissenting opinion, Judge James A. Wynn Jr. wrote that Maryland’s “general police powers” authorize the state to regulate matters of legitimate local concern, including generic drug pricing practices designed to prey on defenseless groups of Maryland citizens.  

The Fourth Circuit made clear that its decision does not prevent states from enacting legislation to regulate prescription drug prices, citing the U.S. Supreme Court’s decision in Pharmaceutical Research & Manufacturers of America v. Walsh, 538 U.S. 644 (2003).  There, a Maine statute established a program under which the state negotiated rebates with drug manufacturers to reduce the price for drugs offered to the program’s participants.  On a challenge that the Maine law constituted extraterritorial regulation, the Supreme Court held that unlike price control statutes, Maine’s program did not expressly or inevitably regulate out-of-state transactions.

The Fourth Circuit’s decision will likely have significant implications for similar state statutes enacted to combat increasing off-patent and generic drug prices.  California’s price transparency law, which requires drug companies to disclose price increases, is currently being challenged by various drugmakers.  

The Fourth Circuit remanded the case to the District Court with instructions to enter judgment in favor of AAM.  Maryland may appeal the decision to have the case heard en banc

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