On June 12, the Eighth Circuit ruled in Association for Accessible Medicine v. Ellison that portions of Minnesota’s prescription drug price-gouging law impermissibly regulate interstate commerce and barred Minnesota from applying that law to certain out-of-state drug manufacturers. This ruling is one of the first major appellate court decisions implicating the so-called extraterritoriality principle under the Dormant Commerce Clause since the Supreme Court’s decision in National Pork Producers Council v. Ross in 2023. There, the Supreme Court narrowly interpreted the Dormant Commerce Clause and ruled that state laws cannot be invalidated simply because they affect wholly out-of-state businesses.
Given the recent surge in state laws aimed at curbing the high cost of prescription drugs and their impact on out-of-state drug manufacturers — and the drug industry’s efforts to use the courts to thwart these new policies — the decision in Ellison offers one example of how courts will grapple with those laws and the contours of state authority over prescription drug regulation. This Expert Column summarizes the litigation over Minnesota’s price-gouging law and how that litigation may affect other laws that set limits on prescription drug prices, including laws governing prescription drug affordability boards (PDABs).
Background
In response to the industry’s excessive price hikes for prescription drugs, Minnesota adopted a suite of policies to make prescription drugs more affordable. One of those policies — the price-gouging law — prohibits drug manufacturers from excessively increasing the price of generic drugs sold in Minnesota. The law applies to all drug manufacturers licensed to sell drugs in Minnesota. Although most drug manufacturers — including those who control over 90% of the market — are located outside Minnesota, they must obtain a Minnesota license to sell their drugs in the state.
Under Minnesota’s price-gouging law, a generic drug is excessively priced when its price increase is: (i) higher than 15% of the wholesale acquisition cost within one year or more than 40% over a three-year period and (ii) more than $30 for a 30-day supply or treatment lasting more than 30 days. The price hike must meet both criteria to be considered excessively priced.
The prohibition against excessive pricing applies only to drug manufacturers — not to any other players in the drug supply chain, such as distributors or pharmacies. Liability is triggered if an excessively priced drug is sold, dispensed, or delivered to consumers in Minnesota. The penalty for violating the law is $10,000 for each violation per day. Minnesota-licensed manufacturers who withdraw their drugs from Minnesota to circumvent the law would face a $500,000 penalty. To avoid this latter penalty, a manufacturer would have to relinquish their state license and withdraw from the Minnesota market altogether.
Litigation Before the Minnesota District Court
In July 2023, the Association of Accessible Medicine (AAM), a trade group that represents manufacturers and distributors of generic drugs, challenged the price-gouging law in a Minnesota federal district court, arguing that the law violates the Dormant Commerce Clause. What is the Dormant Commerce Clause? The U.S. Constitution gives Congress the authority to regulate interstate commerce. The courts have reasoned that Congress’ authority to regulate interstate commerce implicitly bars some state laws that unduly burden or interfere with interstate commerce. Thus, even when Congress has not legislated in an area, a state law in that area may be prohibited under the Dormant Commerce Clause if it unduly interferes with the national market. While a state may violate the Dormant Commerce Clause in various ways, the litigation over price-gouging laws has been over the so-called “extraterritoriality principle,” which bars states from regulating commerce that occurs wholly outside their own borders.
In Association for Accessible Medicine v. Ellison, AAM argued that the Minnesota price-gouging law violated the Dormant Commerce Clause because it regulates business transactions that take place entirely outside Minnesota. A similar argument was recently rejected by the U.S. Supreme Court in Pork Producers. There, hog farmers — mostly located in the Midwest — challenged a California law that prohibited selling in California pork products from inhumanely raised hogs. The farmers claimed that the California law had impermissible extraterritorial effects because it dictated how farmers outside California must arrange their farming operations. But the Supreme Court rejected that claim, holding that the Dormant Commerce Clause does not necessarily bar “state laws that have the practical effect of controlling commerce outside the State.”
In Ellison, however, the district court sided with AAM and ruled that the Minnesota price-gouging law directly regulated out-of-state drug manufacturers. The Minnesota price-gouging law was unlike the California law in Pork Producers, which only affected out-of-state farmers indirectly, the district court reasoned. Although Minnesota’s law applies only to sales within Minnesota, the court still found that the law impermissibly regulated out-of-state manufacturers based on how the drug supply chain works. Out-of-state manufacturers do not typically sell their drugs directly in the state. Instead, they sell them “to large national wholesale distributors, who in turn sell to retail pharmacies, hospitals, and other health care facilities,” the court explained.
For this reason, manufacturers have no control over the prices at which the intermediaries may sell the drugs. Thus, by penalizing out-of-state manufacturers who sell their drugs to intermediaries for the excessive prices at which the drugs are subsequently sold, Minnesota sought to directly regulate wholly out-of-state transactions. The court found it critical that the Minnesota law “imposes liability on manufacturers whose drugs wind up in Minnesota even if the manufacturer has done everything in its power to prevent its drugs from being resold in Minnesota.”
The district court then barred Minnesota from enforcing the law against out-of-state manufacturers who sell drugs to out-of-state intermediaries. The law, however, still applies to drug manufacturers located in Minnesota and out-of-state manufacturers who send drugs to Minnesota directly. But this is only a sliver of drug manufacturers, as most are located outside Minnesota and use intermediaries to distribute and sell drugs in the state.
Appeal to the Eighth Circuit
Minnesota appealed to the Eighth Circuit, which also sided with AAM and ruled that the Minnesota law “has the specific impermissible extraterritorial effect of controlling prices outside of Minnesota.” Embracing a similar rationale as the district court, the Eighth Circuit found that the Minnesota law, in effect, restricts prices that manufacturers set in other states because it requires out-of-state manufacturers to sell their drugs to wholesalers at a specified price. Under the law, the court noted, “a Colorado manufacturer would be penalized if it sold drugs to a New Jersey distributor at prices above those proscribed by the Act and those drugs ended up in Minnesota.” This direct regulation of generic drug sales that occur wholly outside of Minnesota affects extraterritorial prices and is therefore impermissible under the Dormant Commerce Clause, the court concluded.
Other Drug Pricing Laws Challenged Under the Extraterritoriality Principle
Ellison is not the first court decision to invalidate state price-gouging laws based on the extraterritoriality principle. In fact, the extraterritoriality principle has become a key litigation theory that the pharmaceutical industry has advanced to challenge state efforts to address drug prices. In a similar challenge, the Fourth Circuit invalidated Maryland’s generic drug price-gouging law based on the same reasoning, a decision that the Supreme Court declined to review in 2019. And a California federal district court recently deployed the principle to partially bar a California law prohibiting reverse settlement payments — a tactic used by patented drug manufacturers to prevent generics from entering the market.
The Dormant Commerce Clause has also been cited in litigation to challenge state PDAB laws. In Amgen Inc. v. Mizner, Amgen — the manufacturer of Enbrel, a drug that the Colorado PDAB found to be unaffordable — argued that Colorado’s PDAB law violates the extraterritoriality principle because it “directly regulates the prices charged in wholly-out-of-state transactions.” A Colorado federal district court, however, dismissed the case, reasoning that Amgen had no “standing” to sue because it had not been harmed by the PDAB law.
Although the Amgen case was dismissed on procedural grounds, the court’s reasoning offers some insights into how the extraterritoriality argument may fare in the PDAB context. Recall that the Minnesota price-gouging in Ellison applies only to generic drug manufacturers nationwide. PDAB laws operate differently. They establish upper payment limits (UPLs) for drugs that are found to be unaffordable for consumers within the state. The UPL is the maximum price that may be paid or billed for a prescription drug that is dispensed or distributed in that state.
As the court found in Amgen, the UPL does not directly regulate drug manufacturers because it does not apply directly to a wholesaler’s purchase from a manufacturer. Rather, Colorado’s UPL “applies directly to downstream transactions for the actual sales and reimbursements of the prescription drug dispensed to Colorado consumers.” This distinction is significant and suggests that PDAB laws, at least those like Colorado’s, likely do not violate the extraterritoriality principle under the Dormant Commerce Clause.
Takeaways
While the Eighth Circuit’s decision in Ellison is a setback in curbing excessive price hikes of generic prescription drugs, it is not final. Although the state has not done so yet, Minnesota could still ask the Supreme Court to intervene and clarify the extraterritoriality principle’s valence. As noted above, the Supreme Court declined to review a similar Fourth Circuit decision in 2019, but that was before the Court’s 2023 decision in Pork Producers. The Eighth Circuit’s decision could thus be a prime opportunity for the Supreme Court to clarify the scope of the extraterritoriality principle under the Dormant Commerce Clause.
Given the amount of money at stake for the drug industry, litigation will continue to follow state policies to lower drug prices. Recent court decisions, such as those in Ellison and Amgen, offer important lessons learned about the Dormant Commerce Clause that can help guide policymakers in crafting policies that will withstand legal challenges.
