The first year law school class we most anticipated was Constitutional Law. Then disappointment greeted us when we learned that the first year course covered only broad institutional topics such as judicial review and separation of powers. The sexy bits – First Amendment, Fourth Amendment, Equal Protection, and Due Process – were reserved for higher level courses. Con Law I threatened to be a snooze-fest. No worries. Our teacher, Cass Sunstein, kept the class lively and made a compelling case that the institutional architecture of the Constitution was, in fact, the primary source of civil rights. The Bill of Rights might get asked to the prom, but checks and balances, jurisdictional doctrines, and even the lonely, oft-forgotten Tenth Amendment are lovely, lifelong companions. And consider the commerce clause. (U.S. Const. art. I, section 8, cl. 3.) You might remember reading how there was enormous controversy as to whether the commerce clause could support enactment of the 1964 Civil Rights Act. How could Congress regulate the dealings of a little BBQ restaurant in Birmingham or a motel in Atlanta? SCOTUS decided that the commerce clause could support such federal intervention. And yet, if that is so, what couldn’t the commerce clause support? Our courts are still wrestling with that question. Remember the challenges to the Affordable Care Act?
There is a flip side to the endlessly elastic, expansive commerce clause: say hello to the dormant commerce clause, which is like the crazy uncle who falls asleep on the couch and wakes up at odd moments to utter something loud and inconvenient. The dormant commerce clause perks up every once in a while to announce that a state’s effort to regulate commerce has gone too far. James Madison originally harbored doubts that states could impose shipping tonnage duties, given that the commerce clause invested such powers in a unitary, federal authority. In the judicial context, Chief Justice Marshall first alluded to the dormant commerce clause in Gibbons v. Ogden, 22 U.S. 1 (1824). The notion is that implicit in the power of Congress to regulate commerce is a corollary constraint on the power of states to enact legislation that interferes with or burdens interstate commerce. A state cannot regulate commerce occurring wholly outside its borders. A state law violates the dormant commerce clause’s extraterritoriality principle if it either expressly applies to out-of-state commerce or if it has that practical effect, regardless of the legislature’s intent.
When we were in law school, the big dormant commerce clause case was City of Philadelphia v. New Jersey, 437 U.S. 617 ((1978), in which SCOTUS held that New Jersey could not exclude Philly’s garbage. (Insert your favorite Jersey jokes here.) To a certain extent, the dormant commerce clause came to be thought of as primarily prohibiting a state from discriminating against commerce from another state. But there is more to the dormant commerce clause than a nondiscrimination principle. Think of Kassel v. Consolidated Freightways Corp., 450 U.S. 662 (1981), where SCOTUS struck down Iowa’s law against double/tandem tractor trailers as constituting an unreasonable burden on interstate commerce. There wasn’t discrimination against commerce from another state, but the rule would have had a deleterious affect on trucks rolling through Iowa and other states.
All that being said, Justices Scalia and Thomas essentially decried the dormant commerce clause doctrine as a judicial fraud. That was and remains a minority position. We certainly do not think the dormant commerce clause is a fraud, and we have hosted a couple of excellent guest posts on this blog about whether the dormant commerce clause might stop states from using their corporation registration statutes to extend personal jurisdiction over companies that played no actual in-state role in the matter being litigated. See here and here for example.
Todays case, Ass’n for Accessible Meds v. Frosh, 2018 U.S. App. LEXIS 9265, 2018 WL 1770978 (4th Cir. April 13, 2018), involves an interesting application of the dormant commerce clause. It applied to drugs, so we aren’t wandering too far afield. Maryland enacted a statute (the Act) concerning “Public Health – Essential Off Patent or Generic Drugs – Price Gouging – Prohibition” that regulated drug pricing both inside and outside Maryland. The Act prohibited manufacturers and wholesale distributors from charging an “unconscionable” price even on initial, upstream sales of drugs that occurred outside Maryland. A prescription drug manufacturer trade association filed a lawsuit challenging the Act on the grounds that it violated the dormant commerce clause and was unconstitutionally vague. The district court denied the plaintiff’s motion for a preliminary injunction, and the matter went up to the Fourth Circuit. The appellate court held that the district court got it wrong, that the antigouging Act’s reach beyond Maryland’s borders was a violation of the dormant commerce clause, and that judgment should be entered in favor of the plaintiff. Adios, antigouging Act.
Only one member of the plaintiff trade association was a drug manufacturer actually based in Maryland. Drug manufacturers typically sell their products to wholesale pharmaceutical distributors – not one of which was based in Maryland. Thus, very few of the sales regulated by the Act took place within Maryland’s borders. In defending the Act, Maryland was forced to acknowledge that it intended to reach the series of upstream, wholesale transactions, not merely the downstream sales to Maryland consumers. Maryland argued that the effects on upstream, out-of-Maryland sales were indirect effects that could not implicate the dormant commerce clause. But it is hard to see how such outside-Maryland effects were indirect when they were fully intended by the legislature. Moreover, the Act explicitly prohibited a manufacturer’s use of a defense that it did not directly sell to a consumer in Maryland. The inescapable fact is that the Act was a price control on sales outside Maryland. The Fourth Circuit held that Maryland cannot impose its price preferences outside its borders, even if it thinks it has to do so to create lower prices for consumers within its borders.
Further, the Fourth Circuit considered how the Act might interact with the legitimate regulatory regimes of other states. Different states could subject prescription drug manufacturers to conflicting requirements with respect to wholesale pricing. The commerce clause protects against inconsistent legislation arising from the projection of one state regulatory regime onto the jurisdiction of another state. None of this was intended by the Fourth Circuit to say that states cannot enact legislation to secure lower prescription drug prices. (There was a vigorous dissent in the case, which was longer than the majority opinion and which excoriated the majority for blessing price gouging). The issue is how a state goes about regulating prices within its borders. If it tries to do so by regulating external transactions, it runs afoul of the dormant commerce clause.
We cannot read the Frosh case without daydreaming about how its logic applies to the sorts of cases we deal with every day. We know from preemption precedents that jury verdicts can be treated as a species of state legislation. When juries are permitted to rewrite product labels and Instructions for Use, how are they not imposing extraterritorial effects? How are they not setting up prescription drug and device manufacturers to face inconsistent regulatory regimes? How are they not interfering with interstate commerce? Perhaps you think that we are extending the logic of the dormant commerce clause too far, but at least, unlike the crazy-quilt of jury verdicts we read about every day, it is logic.