Big Pharma Penalized, U.S. District Courts Rules in Favor of Maryland’s Price-Gouging Law

Pharmaceuticals have not been enjoying the greatest couple years when it comes to the court of public opinion. From Martin Shkreli’s infamous price jacking to recent price fixing convictions against Heritage Pharamaceuticals CEO Jeffrey Glazer, the hits have kept on coming as pharmaceutical scandals come out of the woodwork. Now, pharmaceutical companies have taken a hit in District Court as a judge has handed the first round victory to an anti-price gouging law out of Maryland targeting generic pharmaceuticals.

Despite the many instances of abuses on the part of pharmaceutical companies in the last few years, Congress has been slow to take any meaningful action on the issue. This has left the states to take action on their own and Maryland’s law–taking effect on October 1st just a few weeks back–is the first successful law of its kind.  However, pharmaceutical interests were very keen to see that was not the case. After the law was passed back in May, the Association for Accessible Medicines (AAM)–a group of generic pharmaceutical companies–quickly challenged the law as unconstitutional and sought a preliminary injunction to prevent the law from taking effect while their lawsuit was ongoing.

While the recent district court ruling shot down the potential of an injunction, the lawsuit is still far from over. Let’s take a look at the details of the statute out of Maryland, the AAM’s challenges to the law, the ruling of the court, and the trends of similar laws across the country.

big pharmaUnderstanding the Maryland’s Statute

The price gouging law, passed with a substantial bipartisan majority, is focused exclusively on off-patent and generic medications. It does not apply whatsoever to name brand drugs under patent protection.

It’s primary provision allows for Maryland to look into claims of unconscionable increases in the prices of generic medication. Where such an increase is found by the attorney general of Maryland, a fine of up to $10,000 can be levied against the manufacturer or distributor for each violation. The attorney general can also require companies to return money to consumers lost as a result of price gouging, order a stop to price gouging activities, an require a drug manufacturer to make a drug available to Medicaid participants at the pre-gouging price for up to a year.

In pursuing these investigations, the law allows the attorney general to require the accused company to produce records and justify their price changes. An opportunity to explain their increases is generally required under the law before levying fines. The information given in these explanations is held confidential by the attorney general where necessary.

The exact amount or percentage increase that would constitute “unconscionable” is not precisely defined in the law. However, “unconscionable” is far from a new legal concept and is often brought  up in the context of contract law as a situation where terms are so egregiously unjust in the favor of a party with greater bargaining power that a reasonable person would never agree to them. For example, where a life saving medicine is made incredibly expensive-beyond all market forces-but a purchaser has an option of either paying that price or suffering extreme consequences. This ambiguity when it came to the term unconscionable was central to AAM’s challenge to the law.

What are the AAM’s Arguments for Unconstitutionality?

AAM, as generic drug manufacturers, obviously didn’t care much for the law. Their challenges, however, were not frivolous attempts to slow down its progress. They made two primary arguments. First, the law overreached Maryland’s bounds by effecting potential pricing in states beyond just Maryland. Second, that the law itself was unconstitutionally vague.

The first argument hinged on a fairly uncommon argument in this day and age-the dormant commerce clause. The commerce clause is the power of the federal government to regulate commerce involving multiple states. However, in its current interpretation, the dormant commerce clause is a product of this power which prevents states from passing legislation which favors one state over the other. The dormant commerce clause also requires a balancing test where a law places a burden on commerce between states. However, it is exceedingly rare to see a law struck down on this basis in recent history. What’s more, merely burdening interstate commerce faces a much less rigorous test for constitutionality than favoring one state over another in a law.

The second argument, that the law was void for vagueness, pointed at the lack of concrete definition to the term “unconscionable” and said that the law was unconstitutional because manufacturers couldn’t know when they were violating it. In general, a law is unconstitutional were it doesn’t give the public notice of when they are violating it, impinging on their constitutional due process rights.

What was the District Court Ruling?

In deciding on the case, the District Court did several things which amount to handing a rousing victory to Maryland. First, it denied all injunctions and allowed the law to go forward as planned. Preliminary injunctions require, among other things, a showing that the plaintiff is particularly likely to succeed. The court just didn’t think that likelihood was here for AAM.

Second, the court outright dismissed AAM’s claims regarding the dormant commerce clause. They ruled that the law applies neutrally to all interstate commerce and thus the argument held no weight.

However, it wasn’t a clean sweep for Maryland here. The court didn’t rule in favor of AAM’s vagueness argument, but they did allow litigation on the issue to go forward. The judge felt the arguments were reasonable enough to bear fully exploring. Even then, the judge went out of his way in his ruling to note he didn’t think the arguments were necessarily winning ones.

This case is far from over. Even with the vagueness argument making its way through the ruling, AAM have already made it clear that they look to appeal and believe their case will succeed in the higher courts. For now though, it’s a victory for Maryland and the price gouging law will continue as planned.

Good News: Maryland’s Law is a Growing Trend

Maryland’s price gouging law may be the first to be passed, but it looks to be part of a concerted effort by the states to address this issue where the federal government has not. 36 states have introduced, if not passed, nearly 200 bills related to pharmaceutical pricing in the last year. Nevada passed a law in June, a month after Maryland, which requires drug manufacturers to release price and profits on insulin every year. Ohio has an upcoming vote on a law which would make it illegal for the state and its agents to buy drugs at a higher price than the U.S. Department of Veteran Affairs.

At least for Maryland’s law, AAM and a few others have criticized it for targeting generic drugs. They say that generic drugs are driving down medical costs and going them doesn’t make sense. However, this argument is a bit tone deaf in the of the off-patent Daraprim being the very drug at the center of Martin Shkreli’s infamous price hikes.

Regardless of how you feel about Maryland’s law, there’s little question that price gouging on necessary medications is an issue to be addressed. Living with an illness such as diabetes in difficult enough without wondering whether your insulin may suddenly skyrocket in price. For now, Maryland has won this round. However, this is a trend to keep an eye on–both out of the states and the federal government.

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