PhRMA Challenges Constitutionality of California’s New Drug Pricing Transparency Law

On December 8, 2017, the Pharmaceutical Research and Manufacturers of America (PhRMA) filed a lawsuit in the US District Court for the Eastern District of California seeking to block California’s new drug transparency law.

 The complaint for Pharm. Research and Mfrs. of Am. v. Brown challenges a law that imposes on drug manufacturers onerous reporting and notification requirements related to pricing actions. The Arent Fox Health Care team previously summarized the requirements of California's Drug Pricing Transparency law (which was passed on October 11, 2017) in an October 20, 2017 Alert. PhRMA asserts that the law, particularly its advance notice requirements, violates the Commerce Clause, the First Amendment, and the Due Process Clause of the United States Constitution.

Drug Pricing Transparency Laws & Litigation Challenging Their Adoption

California’s drug pricing transparency law followed the adoption of similar drug pricing statutes in Nevada and Maryland. While all three state laws impose drug pricing obligations on drug manufacturers, the California law is unique in that it requires manufacturers to provide 60 days’ advance written notice of drug price increases to purchasers, including state agencies, health plans, insurers, and pharmacy benefit managers. Specifically, the law requires the manufacturer of a drug with a wholesale acquisition cost (WAC) of more than $40 for a course of therapy to notify purchasers of any increase of more than 16% in the drug’s WAC. The notice must include the date of the scheduled price increase, the current WAC of the drug, the dollar amount of the increase, and the cumulative price increases that occurred for the past two years. The notice must also include a statement regarding “whether a change or improvement in the drug necessitates the price increase” and if so, a description of the specific change or improvement.  
PhRMA’s challenge to the California law is one in a series of lawsuits brought by pharmaceutical industry groups this year seeking to block state drug pricing and transparency laws. In September 2017, PhRMA and the Biotechnology Innovation Organization (BIO) sued Nevada over its law requiring manufacturers to disclose pricing and rebate information for diabetes drugs. In July 2017, the Association for Accessible Medicines sued Maryland, claiming the recently passed “price gouging” law was unconstitutional. While the court in both cases declined to grant preliminary injunctions related to enforcement of these state laws, both lawsuits are ongoing.

PhRMA Alleges the California Law is Unconstitutional

As noted above, PhRMA asserts that the California law is unconstitutional because it violates the Commerce Clause, the First Amendment, and the Due Process Clause. First, according to the complaint, the law impermissibly restricts the WACs used nationwide and directly regulates out-of-state pricing in violation of the Commerce Clause. In general, the Commerce Clause prohibits states from impermissibly burdening interstate commerce, and PhRMA argues that the law’s requirements regarding notice and disclosure of increases in a drug’s WAC – a federally defined list price – will impose burdens on out-of-state commerce. According to the complaint, the law would, in effect, require manufacturers to give 60 days’ notice of WAC increases nationwide. Moreover, advance notices of price increases will signal to purchasers nationwide that they should attempt to stockpile drugs during the 60-day window, which could produce drug shortages. In addition, PhRMA asserts that advance notice of WAC increases for saturated therapeutic classes with substantial generic competition is likely to result in all generic competitors raising the WACs of their competing products in order to avoid a run on their products.  Manufacturer trade associations made similar commerce clause arguments in the lawsuits challenging the Nevada and Maryland drug price transparency laws.
PhRMA also advanced a novel argument that the law’s advance notice requirement compels speech in violation of the First Amendment. The law not only requires manufacturers to give advance notice of intended WAC increases, but it also requires manufacturers to provide a justification for price increases, thereby forcing manufacturers to convey a message they may disagree with – that manufacturers are primarily responsible for increases in drug prices and that only changes or improvements in the drug can justify an increase. Moreover, PhRMA argues that the law discriminates based on speaker, content, and viewpoint, because it singles out pharmaceutical manufacturers, forcing them to communicate publicly about drug pricing and to convey the message that manufacturers are responsible for high drug prices.
Lastly, PhRMA points to the law’s ambiguities, which PhRMA argues render the law unconstitutionally vague in violation of the Due Process clause. Specifically, although the law’s effective date is not until January 1, 2018, manufacturers cannot discern whether WAC increases from 2016 and 2017 are retroactively included to determine the cumulative WAC increases which trigger the 60-day advance notice. Furthermore, it is unclear whether WAC increases taken in the first 60 days of 2018 are subject to the 60-day notice requirement, meaning that manufacturers would have had to provide notices in November 2017 of any planned WAC increases in January 2018. PhRMA also alleges that the California’s Office of Statewide Health Planning and Development, the agency responsible for implementing and interpreting the law, has failed to provide any guidance, despite PhRMA’s repeated requests.