How States Can Avoid Dormant Commerce Clause Legal Challenges When Regulating Drug Costs

New state laws designed to control the costs of brand-name and generic prescription drugs often face legal challenges from the pharmaceutical industry. These lawsuits can vary depending on the individual state law, but recent industry lawsuits analyzed by the National Academy for State Health Policy (NASHP) share a common legal thread – drug manufacturers and their trade organizations contend these new state laws violate the federal Dormant Commerce Clause (DCC) case law.

The Constitution’s Interstate Commerce Clause gives Congress the authority to regulate commerce between states, and industry lawsuits have created a body of federal case law that guides what states may and may not do to interstate commerce. Essentially, federal case law has created DCC to make sure states don’t create policies that have the unintended consequence of hindering, affecting, or shaping industry business practices in other states, or that “unduly burden” the multi-state operations of national businesses. This issue – the extent to which a state law or policy can impinge on federal interstate commerce authority – has been shaped by years of federal court cases.

The pharmaceutical industry has used DCC as one way to challenge recent state laws that attempt to eradicate price gouging or bring more transparency to how the industry establishes drug prices. Here are two examples of legislation that pharmaceutical trade groups are now challenging:

  • Maryland’s anti-price gouging law: Earlier this year, Maryland became the first state to enact a law protecting consumers from generic prescription drug price-gouging. The law, which went into effect Oct. 1, 2017, prevents manufacturers of generic and off-patent drugs from price gouging or imposing “excessive and not justified” increases in drug prices.

In July, the Association for Accessible Medicines, the trade association that represents generic and biosimilar drugs, filed a lawsuit charging that the law was unconstitutional.

  • Nevada’s drug transparency law: Among other provisions, a new Nevada law aims to bring transparency to diabetes drug pricing by forcing manufacturers to provide information about the costs of manufacturing and marketing diabetes drugs, including company’s profits. Two pharmaceutical industry trade groups have filed a lawsuit to block the recently-enacted law, arguing it is unconstitutional.

In the cases of both Maryland and Nevada, the industry has alleged that these laws have ripple effects impacting how the industry conducts business in other states. A judge has already ruled against the industry’s DCC complaint in Maryland. The Maryland Attorney General’s response to the industry lawsuit is an important read for any state policymaker concerned about the industry’s potential legal challenges.

The Pharmaceutical Research and Manufacturers of America and the Biotechnology Innovation Organization filed a lawsuit against Nevada’s law in September, arguing the new law is preempted by federal statute and is unconstitutional. While the final outcome of the various legal aspects of the court challenges in Nevada and Maryland are not known yet, the decisions will shape how states approach drug cost control policies.

In the meantime, NASHP believes states can craft strong and effective drug cost regulations that have good potential to avoid an industry challenge based on the DCC. There may, however, be other legal challenges to these laws, even if DCC is not invoked in the legal challenges.

NASHP’s white paper by Anna Zaret and Darien Shanske provides insight and analysis to explain the issues in DCC case law that will help states craft policy that avoids running afoul of existing DCC case law. In addition to the paper, NASHP has a table featuring policy guidelines (see below) that state policymakers can consider as they develop drug cost policies.

NASHP also has a longer DCC research document available to state officials only upon request. For a copy of that DCC white paper, please contact Jennifer Reck.

DCC Table