The Ninth Circuit’s opinion in PhRMA v. County of Alameda, No. 13 16833, 2014 WL 4814407 (9th Cir. Sept. 30, 2014), is a triumph of petty local politics over sound public policy. At issue is an ordinance enacted in Alameda County, California, that requires drug manufacturers worldwide to fund a local “stewardship program” under which Alameda County’s residents can dispose of their unused drugs. See Alameda Health and Safety Code §§ 6.53.010 et seq. We support the safe and proper disposal of pharmaceutical products, but this targeted tax on drug companies is remarkably ill conceived.
Under the ordinance, any drug manufacturer in the world whose products find their way into Alameda County—in whatever quantity and by whatever means—has to set up “disposal kiosks” throughout the county for the collection of unused drugs. Not just its own drugs; any company’s drugs. The kiosks must be “convenient and adequate to serve the needs of Alameda County residents,” and manufacturers have to promote the “stewardship program” to the public via “educational and outreach materials.” After drugs are collected in the kiosks, manufacturers are responsible for disposing of the products at medical waste facilities. Id. at *1.
There are additional strings attached, and here is where it gets interesting. The ordinance prohibits manufacturers from implementing any fee to recoup the cost of the “stewardship program,” either at the time the drugs are sold in Alameda County or when the drugs are collected for disposal. The ordinance also exempts local pharmacies from any responsibility for collecting and disposing of unused drugs. This is true even though local pharmacies are most directly connected to the purchase of drugs within the county and are in the best position to spread the cost of collection and disposal among the consumers who actually purchase, use, and dispose of the products. (It may be that county lawmakers were motivated to exempt pharmacies because more than one large pharmacy chain has a world headquarters in Alameda County, but we are speculating.)
As the Washington Legal Foundation cogently observed in an amicus brief filed in the Ninth Circuit, the county ordinance is transparent in its purpose—to ensure that the cost of collecting and disposing of Alameda County’s unused drugs is imposed on anyone but Alameda County’s residents. That cost instead is transferred to drug companies—both innovators and generic, no matter where they reside or make their products—if even one pill or capsule is sold into Alameda County by any means.
The pharmaceutical industry challenged this novel tariff through a lawsuit filed by trade organizations—Pharmaceutical Research and Manufacturers of America, the Generic Pharmaceuticals Association, and the Biotechnology Industry Organization—claiming that the ordinance violated the dormant Commerce Clause by wrongfully regulating interstate commerce. The lawsuit, however, did not fare well, and the Ninth Circuit’s recent opinion affirmed an order from the district court granting summary judgment.
The Ninth Circuit’s opinion raises several questions, and we are not convinced the court found the correct answers. The plaintiffs argued that the ordinance discriminates against drug manufacturers outside Alameda County, but the Ninth Circuit rejected that argument because the ordinance treats all manufacturers the same and because the ordinance does not shift costs outside Alameda County. Id. at *3. Hmm. We are not constitutional law scholars, but this holding makes us want to dig deeper. First, the ordinance does not treat everyone the same: It exempts local pharmacies, even though they, like drug manufacturers, sell the drugs that supposedly require collection and disposal. Second, where the Ninth Circuit sees an ordinance that does not shift costs outside the county, we see one that is unabashedly forward in doing exactly that. The prohibition on local fees and the exemption of local pharmacies are dead giveaways.
So what was the Ninth Circuit’s support? The plaintiff trade groups had three members with headquarters in Alameda County and two members with manufacturing facilities in Alameda County. So the costs will be borne in Alameda County, right? Id. This sounds like a good point—until you understand that the plaintiff trade groups have hundreds of members nationwide, a fact not found in the Ninth Circuit’s opinion. As a practical reality, substantially all of the costs will shift outside the County, which is exactly what the lawmakers intended. The Ninth Circuit also noted that to the extent the costs results in an increase in drug prices worldwide, Alameda County residents will bear that cost, too. Id. But when comparing the population of this one California county to the drug-purchasing population of the world, the portion of the cost to be borne by county residents is miniscule. Again, we do not deal with the Commerce Clause on a day-to-day basis, but we think the plaintiffs had a point on this one.
The plaintiffs also argued that the ordinance directly regulates interstate commerce by controlling conduct outside the state. The Ninth Circuit rejected this argument because the parties stipulated that (1) any manufacturer that does not sell drugs in Alameda County is not required to do anything under the ordinance and (2) the ordinance does not require implementation of stewardship programs outside Alameda County. Id. at *4. We suspect this “only in Alameda County” vision is an overly simplistic view of the issue. Drug manufacturers sell their products through distributors and other intermediaries, who determine the ultimate destinations of the products. It is difficult to imagine an effective way for a manufacturer to carve a single county—one of 58 counties in California and one of 9 counties that make up the greater Bay Area—out of the distribution chain. Maybe whole states (Alabama or West Virginia come to mind), but counties? Again, as a practical reality, there really is no way to view this ordinance as anything other than an unavoidable tax on the sale of drugs in interstate commerce. We suspect the Commerce Clause has something to say about that.
Finally, the Ninth Circuit applied the Pike v. Bruce Church balancing test and determined that the burden on interstate commerce was not excessive in relation to the local benefit. Id. at **5-6. The parties do not appear to have contested this point much, probably because the issue arose on summary judgment, but maybe they should have. The Ninth Circuit marginalized the burden by referring to the relatively modest cost of the “stewardship program”—at most $1.2 million per year. Id. at *5. But even accepting that estimate, that is just one county. Imagine how many counties will enact similar tariffs now that the Ninth Circuit has given a green light. The benefits of the stewardship program are also questionable. Your blogger happens to reside in Alameda County, and there are already dozens of places in the County where residents can dispose of unused prescription drugs. We’ve been to the one off the freeway that leads to the Oakland airport, where you don’t even have to get out of your car. Guys wearing rubber gloves take care of everything.
The ordinance therefore is not about collecting and disposing of drugs, which is already being done. It is about shifting the cost away from Alameda County to drug manufacturers, no matter where they can be found. We are not sure why drug manufacturers warrant this special treatment. We have all order of chemicals in our garage—paint, wall paper remover, gasoline for a string trimmer we never use, i.e., substances that actually present environmental health hazards. We pay an annual fee with our local property taxes to fund disposal services for these products. When we take our car for an oil change or a new battery, we pay a point-of-purchase disposal fee. These measures internalize the cost of disposal with those who generate the waste, which seems a rational approach to follow. Similar measures, however, are off the table for unused prescription drugs because the ordinance prohibits
When writing this post, we came across the county’s website publicizing the ordinance. It promotes “third party stewardship program developers” who have “consulted with” the county and have “indicated interest in being contacted by” drug manufacturers. These apparently are county-approved vendors who will run a “stewardship program” on behalf of drug manufacturers in exchange for a fee. This is worse than a tax; it’s a shakedown. Our opinion of Alameda County’s elected officials, which was already very low, just got even lower.