The Daily Record
Steve Lash
April 13, 2018

A divided federal appeals court Friday struck down a Maryland law designed to prevent unwarranted price increases by the generic-drug industry, saying the statute unconstitutionally encroaches on Congress’ province to regulate interstate commerce.

In its published 2-1 decision, the 4th U.S. Circuit Court of Appeals said the 2017 law directly regulates the price of transactions that occur outside of the state, authority the Constitution leaves to the federal legislature and not the Maryland General Assembly.

“A state may not regulate commerce occurring wholly outside its borders,” Judge Stephanie D. Thacker wrote in an opinion Judge G. Steven Agee joined. “The principle reflects the Constitution’s special concern both with the maintenance of a national economic union unfettered by state-imposed limitations on interstate commerce and the autonomy of the individual states within their respective spheres. A state law violates the extraterritoriality principle if it either expressly applies to out-of-state commerce or has that practical effect, regardless of the legislature’s intent.”

Maryland Attorney General Brian E. Frosh said in a statement Friday no decision has been made regarding whether to seek review by the full 4th U.S. Circuit Court of Appeals or to appeal directly to the U.S. Supreme Court.

The law, which went into effect Oct. 1, prohibits a significant price increase of an essential off-patent or generic drug and gives the Maryland attorney general the power to order the manufacturer to explain the reasons behind a significant price increase as well as request a court order restraining or enjoining a violation.

Gov. Larry Hogan in June allowed the law to go into effect without his signature, citing his concerns about its constitutionality.

The Association for Accessible Medicines, a trade group, filed suit in July, challenging the law as unconstitutional. U.S. District Judge Marvin J. Garbis, who sits in Baltimore, dismissed the interstate commerce challenge, prompting AAM’s appeal.

The 4th Circuit found three factors pointing to the law’s violation of the Constitution’s Interstate Commerce Clause.

“First, the act is not triggered by any conduct that takes place within Maryland,” Thacker wrote. “Second, even if it were, the act controls the prices of transactions that occur outside the state. Finally, the act, if similarly enacted by other states, would impose a significant burden on interstate commerce involving prescription drugs.”

For example, “if multiple states enacted this type of legislation, then a manufacturer may consummate a transaction in a state where the transaction is fully permissible, yet still be subject to an enforcement action in another state (such as Maryland) wholly unrelated to the transaction,” Thacker added.

Frosh, who lobbied for the legislation and whose office has defended it in court, said in the statement that he is “disappointed” with the 4th Circuit’s decision.

The majority “misunderstood the scope of the statute, which protects Maryland consumers against unconscionable increases in the price of certain essential medicine, and which does not regulate prices charged to consumers in other states,” Frosh said. “We are evaluating all options with regard to next steps.  We remain committed to pursuing efforts to eliminate price gouging and to safeguarding Marylanders’ access to prescription drugs.”

Chester “Chip” Davis Jr., the AAM’s president and chief executive officer, praised the 4th Circuit’s decision.

“As AAM has always maintained, this law, and many others modeled from it, would harm patients because the law would reduce generic drug competition and choice, thus resulting in an overall increase in drug costs due to increased reliance upon more-costly branded medications,” Davis said in a statement Friday.

Dissenting Judge James A. Wynn Jr. said the Maryland statute falls within the state’s “general police powers to regulate matters of legitimate local concern” without violating the Interstate Commerce Clause.

“Here, Maryland legitimately targeted generic drug pricing practices specifically designed to prey on the special vulnerabilities of a defenseless group of Maryland citizens,” Wynn wrote. “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 (state-law generated) Commerce Clause jurisprudence: economic protectionism, discrimination against interstate commerce, and state regulation of streams of transactions that never cross through the state’s borders.”

The 4th Circuit rendered its decision in Association for Accessible Medicines v. Brian E. Frosh et al., 17-2166.

Daily Record legal affairs writer Heather Cobun contributed to this report.

Last modified: April 13, 2018