Assoc. for Accessible Medicine v. Brian Frosh

Opinion

FILED: July 24, 2018

UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT

No. 17-2166 (1:17-cv-01860-MJG)

ASSOCIATION FOR ACCESSIBLE MEDICINES,

Plaintiff - Appellant,

v.

BRIAN E. FROSH, in his official capacity as Attorney General for the State of Maryland; DENNIS R. SCHRADER, in his official capacity as Secretary of the Maryland Department of Health,

Defendants - Appellees.

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CHAMBER OF COMMERCE OF THE UNITED STATES OF AMERICA,

Amicus Supporting Appellant.

AARP; AARP FOUNDATION; KNOWLEDGE ECOLOGY INTERNATIONAL; MARYLAND CITIZENS’ HEALTH INITIATIVE EDUCATION FUND, INCORPORATED; PUBLIC CITIZEN; PUBLIC JUSTICE CENTER; MARYLAND CITIZENS’ HEALTH INITIATIVE EDUCATION FUND, INCORPORATED; DISABILITY RIGHTS MARYLAND,

Amici Supporting Appellee.

ORDER The petition for rehearing en banc was circulated to the full court. Judge Wilkinson,

Judge Niemeyer, Judge Traxler, Judge King, Judge Duncan, Judge Agee, Judge Diaz,

Judge Floyd and Judge Thacker voted to deny rehearing en banc. Chief Judge Gregory,

Judge Wynn and Judge Harris voted to grant rehearing en banc. Judge Motz and Judge

Keenan did not participate in the poll. The court denies the petition for rehearing en banc.

Entered at the direction of Judge Thacker.

For the Court

/s/ Patricia S. Connor, Clerk

2 WYNN, Circuit Judge, dissenting from the denial of rehearing en banc:

With respect, I must dissent from my colleagues’ refusal to grant en banc rehearing

in this case. The right of a State to protect the health, safety, and welfare of its citizens

should not be denied by the judicial expansion of a judge-made doctrine with a name that

aptly describes what it should be, the dormant Commerce Clause’s “extraterritoriality

doctrine.”

In expanding the extraterritoriality doctrine beyond the contexts in which the

Supreme Court and this Court previously have applied it—and in a manner that the panel

majority concedes conflicts with the approach taken by other circuits—the majority

opinion materially encroaches upon the States’ reserved powers to legislate to protect the

health, safety, and welfare of their citizens. See, e.g., L’Hote v. City of New Orleans, 177

U.S. 587, 596 (1900). By doing so, the majority opinion errantly turns the dormant

Commerce Clause into a “weapon” for federal judges to second-guess efforts by state

legislatures to protect the health and welfare of their citizens, Energy & Envtl. Legal Inst.

v. Epel (EELI), 793 F.3d 1169, 1175 (10th Cir. 2015) (Gorsuch, J.), even when such efforts

do not implicate the two concerns underlying the Supreme Court’s “[m]odern” dormant

Commerce Clause jurisprudence: state regulations that “discriminate against interstate

commerce” or “impose undue burdens on interstate commerce,” South Dakota v. Wayfair,

138 S. Ct. 2080, 2090–91 (2018). As then-Judge, now-Justice Gorsuch has explained,

federal courts should not embark on such an “audacious” and “novel lawmaking project”

absent clear instruction from the Supreme Court. EELI, 793 F.3d at 1175. At a minimum,

3 the careful deliberation of this entire Court is warranted before we choose a path that

diverges from our sister circuits and raises serious federalism concerns.

At issue is a Maryland law (“HB 631”) that prohibits “unconscionable” price

increases for certain generic drugs “made available for sale” to Maryland consumers. Md.

Code Ann., Health-Gen. §§ 2-801-803 (2017). 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 HB 631 to restrain what it viewed as abusive pricing practices

specifically designed to prey on the special vulnerabilities of a defenseless group of

Maryland citizens.

The majority opinion holds that the statute when applied to any sale of covered

drugs consummated outside of Maryland—even when the drugs are later resold to

Maryland consumers—violates the extraterritoriality doctrine by regulating “commerce

occurring wholly outside [Maryland’s] boundaries.” Ass’n for Accessible Meds. v. Frosh,

887 F.3d 664, 681 (4th Cir. 2018) (quoting Healy v. Beer Inst., 491 U.S. 324, 336 (1989)).

That doctrine—which the Supreme Court has not applied in nearly 30 years—has been

characterized by our sister circuits as the “the most dormant” of the Supreme Court’s

dormant Commerce Clause jurisprudence. See, e.g., EELI, 793 F.3d at 1172. More

significantly, to date, the extraterritoriality doctrine has been applied “only [to] price

control or price affirmation statutes that link in-state prices with those charged elsewhere

and discriminate against out-of-staters,” id. at 1174 (emphasis added), and there never has

been “a single Supreme Court dormant Commerce Clause holding that relied exclusively

4 on the extraterritoriality doctrine to invalidate a state law,” Am. Beverage Ass’n v. Snyder,

735 F.3d 362, 381 (6th Cir. 2013) (Sutton, J., concurring), as the majority opinion does

here.

My dissenting opinion details several ways in which the majority opinion errs in

adopting and applying its novel approach to the extraterritoriality doctrine. To begin, the

majority opinion ignores basic principles of federalism and judicial restraint to reject the

State’s own interpretation of the statute’s extraterritorial reach before the State had sought

to enforce the statute against any generic manufacturer. Frosh, 887 F.3d at 678–80

(Wynn, J., dissenting). Then, relying on its own expansive interpretation of HB 631’s

reach, the majority opinion extends the extraterritoriality doctrine beyond the contexts in

which the Supreme Court and this Court previously have applied it. Id. at 680–87.

Notably, the majority opinion concedes that its expansive construction of the

extraterritoriality doctrine conflicts with the approach taken by other circuits. See Frosh,

887 F.3d at 670 (majority op.); see also EELI, 793 F.3d at 1174; Ass’n des Eleveurs de

Canards et d’Oies du Quebec v. Harris, 729 F.3d 937, 951 (9th Cir. 2013); IMS Health,

Inc. v. Mills, 616 F.3d 7, 30 (1st Cir. 2010).

The Maryland statute’s constitutionality finds further support in the Supreme

Court’s most recent opinion dealing with the dormant Commerce Clause—South Dakota

v. Wayfair, 138 S. Ct. 2080 (2018)—which the Court issued after the panel decided this

case. In Wayfair, the Court considered a South Dakota statute that requires out-of-state

sellers who deliver, on an annual basis, “more than $100,000 of goods or services into the

State or engage in 200 or more separate transactions for the delivery of goods into the state”

5 to collect and remit sales tax, regardless of whether the seller has a physical presence in

South Dakota. Id. at 2088–89. South Dakota sought to collect sales taxes from Wayfair,

an online retailer who made substantial sales to South Dakota residents but lacked a

physical presence in the state. Id. at 2089. The South Dakota Supreme Court held that the

statute was unconstitutional as-applied to out-of-state sellers who lacked a physical

presence in the state, like Wayfair, under the Supreme Court’s decisions in Quill Corp. v.

North Dakota, 504 U.S. 298 (1992), and National Bellas Hess, Inc. v. Department of

Revenue of Ill., 386 U.S. 753 (1967). Those decisions held that a State could not require a

seller to collect and remit sales tax unless it had a “physical presence such as ‘retail outlets,

solicitors, or property within the State.’” Wayfair, 138 S. Ct. at 2091 (quoting Bellas Hess,

386 U.S. at 758).

Wayfair overruled the “physical presence” rule set forth in Quill and Bellas Hess.

Id. at 2099. The Court reached this conclusion for several reasons relevant to the dormant

Commerce Clause challenge to the Maryland price-gouging statute. To begin, the Court

reaffirmed both Justice Marshall’s “broad definition of commerce” as “‘the interchange of

commodities’ and ‘commercial intercourse’ . . . and the concurrent regulatory power of the

States.” Id. at 2090 (emphasis added) (quoting Gibbons v. Ogden, 9 Wheat. 1, 6 (1824)).

As my dissenting opinion more fully explains, the majority opinion fails to adhere to that

“broad” definition of commerce by equating “commerce” with a single “transaction” and

usurps the States’ concurrent regulatory authority. Frosh, 887 F.3d at 683 (Wynn, J.,

dissenting).

6 Second, Wayfair emphasized the “significant parallels” between the Due Process

Clause “minimum contacts” standard for personal jurisdiction and the restrictions on state

regulation imposed by the Commerce Clause. Wayfair, 138 S. Ct. at 2093. Noting that

“physical presence” is not required to satisfy the minimum contacts test, the Court stated

that physical presence is likewise a “poor proxy” in the dormant Commerce Clause context.

Id. The Court further explained that the physical presence rule is particularly inappropriate

when considered in light of the “day-to-day functions of marketing and distribution in the

modern economy.” Id. at 2095. Here, the majority opinion strikes down the Maryland

price-gouging statute because it “controls the prices of transactions that occur outside the

state,” regardless of whether the drugs conveyed by those out-of-state transactions are later

resold in Maryland. Frosh, 887 F.3d at 670 (majority op.). The majority’s myopic focus

on the location of the transaction is precisely the “physical presence” approach Wayfair

rejected as “artificial in its entirety.” Wayfair, 138 S. Ct. at 2095. Likewise, just as e-

commerce and nationwide distribution chains rendered the physical presence rule

outmoded, so too do the modern nationwide distribution and reimbursement systems for

generic pharmaceuticals counsel against the location-focused approach of the majority

opinion.

Third, Wayfair held that the bright-line physical presence rule ran contrary to the

Court’s dormant Commerce Clause jurisprudence, which has “eschewed formalism for a

sensitive, case-by-case analysis of purposes and effects.” Id. at 2094 (quoting West Lynn

Creamery, Inc. v. Healy, 512 U.S. 186, 201 (1994)). The majority opinion’s rule—that a

State is categorically barred from regulating any transaction consummated outside of the

7 State’s borders regardless of whether the subject of that transaction is ultimately sold or

resold in the State—embraces the same formalism that Wayfair rejected, rather than

following the case-by-case approach the Court has prescribed. Thus, the majority

opinion’s pre-enforcement invalidation of the Maryland statute is antithetical to the Court’s

case-by-case approach to dormant Commerce Clause questions.

Fourth, Wayfair stated that the physical presence rule amounted to “an extraordinary

imposition by the Judiciary on States’ authority to collect taxes and perform critical public

functions.” Id. at 2095. As explained more fully in my dissent, “the majority opinion’s

expansive interpretation of the extraterritoriality doctrine substantially intrudes on the

States’ reserved powers to legislate to protect the health, safety, and welfare of their

citizens,” calling into question the constitutionality of numerous state antitrust and

consumer protection statutes. Frosh, 887 F.3d at 687-88 (Wynn, J., dissenting).

Accordingly, like the physical presence rule overruled in Wayfair, the majority opinion’s

expansive interpretation of the extraterritoriality doctrine—an interpretation that the

majority opinion concedes is in conflict with that of other circuits—interferes with “States’

authority to . . . perform critical public functions.” Wayfair, 138 S. Ct. at 2095.

Finally, Wayfair replaced Bellas Hess and Quill’s physical presence rule with a

“substantial nexus” test that has its genesis in Due Process Clause jurisprudence. Id. at

2091. Applying that test, the Court held that North Dakota could require Wayfair and the

other defendant on-line retailers to collect and remit sales tax because of their “economic

and virtual contacts” with the State. Id. at 2099. Likewise, under governing Due Process

Clause jurisprudence, at a minimum, generic drug manufacturers that “targeted” Maryland

8 consumers—by, for example, marketing their drugs to Maryland consumers or

physicians—lawfully would be subject to the Maryland statute, even if they sold their drugs

through out-of-state intermediaries, see J. McIntyre Machinery, Ltd. v. Nicastro, 564 U.S.

873, 882 (2011) (opinion of Kennedy, J.), meaning that the majority’s pre-enforcement

invalidation of the Maryland statute was all-the-more improper.

In sum, the majority opinion’s expansive (re)interpretation of the extraterritoriality

doctrine expressly diverges from the approach taken by the other circuits and is in

significant tension—if not outright conflict—with the Supreme Court’s most recent

exposition of the limitations on state action imposed by the dormant Commerce Clause.

More significantly, the majority opinion’s expansive interpretation of the extraterritoriality

doctrine significantly incurs on the States’ reserved powers to enact legislation to protect

the health, safety, and welfare of their citizens. The division between this Court and our

sister circuits and the significant federalism concerns posed by the majority opinion’s

expansion of the long-dormant extraterritoriality doctrine make this a case ripe for

rehearing en banc as a matter of exceptional importance.

With respect, I dissent.