Amicus Curiae Brief — Pharmaceutical Research and Manufacturers of America v. Walsh, Acting Commissioner, Maine Department of Human Services

No. 01-188 SEP 19 2002

In the CLERK

Supreme Court of the Unite ates

+

PHARMACEUTICAL RESEARCH AND

MANUFACTURERS OF AMERICA,

Petitioner.

Vv.

CONCANNON, ET AL.,

Respondents.

+

On Writ of Certiorari to the United States Court of

Appeals for the First Circuit

+

BRIEF AMICUS CURIAE OF PACIFIC LEGAL

FOUNDATION IN SUPPORT OF PETITIONER

>

DEBORAH J. LA FETRA

Counsel of Record

Pacific Legal Foundation

10360 Old Placerville Road,

Suite 100

Sacramento, California 95827

Telephone: (916) 362-2833

Facsimile: (916) 362-2932

Counsel for Amicus Curiae

Pacific Legal Foundation

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wWN\ RN

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i

QUESTION PRESENTED

Whether a Maine statute providing for affordable prescription

drugs, which penalizes companies that won’t drop prices for

uninsured residents, violates the Constitution’s Commerce

Clause.

TABLE OF CONTENTS

Page

QUESTION PRESENTED ...... 2... ccccccccsccccccccces i

TABLE OF AUTHORITIES .........cccccscccccccccvees iii

INTEREST OF AMICUS CURIAE ..... 2.0.2... 06 5c cee eees l

STATEMENT OF THE CASE .........ccccccccccvcceees l

SUMMARY OF ARGUMENT ...... 2... 6.66 c eee ee eens 3

Th Sc heses de cibcbbseeccccevecococececess 5

I MAINE RX IS PROTECTIONIST

LEGISLATION ENACTED IN VIOLATION

OF THE DORMANT COMMERCE CLAUSE ........ 5

A. A Statute Violates the Dormant

Commerce Clause If It Is Protectionist,

Regardless of Whether It Is Discriminatory ....... 8

B. Maine Rx Is Protectionist Because Its

Manipulation of Drug Prices for the Economic

Advantage of Maine’s Drug Consumers Causes

Significant Impacts on Interstate Commerce ...... 14

Il. MAINE RX DAMAGES THE

AMERICAN COMMON MARKET ..............+.- 20

A. By Reinvesting Profits into Research and

Development, American Pharmaceutical

Companies Lead the World in the Creation

of Life-Saving and Life-Enhancing Drugs ....... 20

B. Pharmaceutical Price Controls Have

a Direct, Adverse Impact on Research,

Development, and Innovation ..............45: 23

EB os sec cecdesoceeceeees 26

2 ener oe

iil

TABLE OF AUTHORITIES

Page

Cases

Adams v. Florida Power Corp.,

I i a a ]

American Trucking Associations v.

Scheiner, 483 U.S. 266 (1987) ........... ccc eeees 7

Associated Indus. of Missouri v.

EN Ne GA EE ED o oo ceccdéccccecesece: 3

Baldwin v. G. A. F. Seelig, Inc., 294 U.S. 511 (1935) ..... 3

Brown-Forman Distillers Corp. v. New York

State Liquor Authority, 476 U.S. 573 (1986) ..... 10-12

C & A Carbone, Inc. v. Town of Clarkstown,

es od ee ae ce enews 9,12

Camps Newfound/Owatonna v. Town

of Harrison, 520 U.S. 564 (1997) ...........4.. 10, 16

Chevron, U.S.A., Inc. v. Echazabal,

i ai ne co eanecenéeeseeses ]

City of Philadelphia v. New Jersey,

nat ee ck inenkbaneces 6, 10

CTS Corp. v. Dynamics Corp.

of America, 481 U.S. 69 (1987) ...........0005. 7,13

Edgar v. MITE Corp., 457 U.S. 624 (1982) ........... 13

General Motors Corp. v. Tracy, 519 U.S. 278 (1997) ..... 8

H. P. Hood & Sons, Inc. v. Du Mond,

EE re 5,9

Halliburton Oil Well Cementing Co. v.

ane a cnc cudetescedeses ll

iv

TABLE OF AUTHORITIES—Continued

Page

Healy v. Beer Institute, 491 U.S. 324 (1989) ........... 12

Hughes v. Alexandria Scrap Corp.,

Sy ST od ceucekesnbeasesuesennesec 5

Hunt v. Washington State Apple Adver.

Comm'n, 432 U.S. 333 (1977) ...........44.- 7,9, 11

McLeod v. J. E. Dilworth Co.,

i nD onc sbneuudededetadenevics 3

Kassel v. Consolidated Freightways Corp.,

SED cewede Secs sacecécoaceses Ses O

Oklahoma Tax Comm'n v. Jefferson

Eheas, Bad.. FOG UB. TIS CRSOOD cccccccccccccccces 13

Oregon Waste Sys., Inc. v. Department

of Envtl. Quality, 511 U.S. 93 (1994) ............4.. 6

Pharmaceutical Research and

Manufacturers of America v. Medows,

184 F. Supp. 2d 1186 (N.D. Fla. 2001) ............. 18

Pharmaceutical Research and

Manufacturers of America v.

Concannon, 249 F.3d 66 (2001) ........... 2-3, 17, 19

Pharmaceutical Research and Manufacturers

of America v. Commissioner, 2000 U.S. Dist.

LEXIS 17363 (D. Me. Oct. 26, 2000) .............. 15

Pike v. Bruce Church, Inc., 397 U.S. 137 (1970) ... 3,6, 11

South-Central Timber Development, Inc. v.

Wunnicke, 467 U.S. 82 (1984) ............00000- 19

Southern Pac. Co. v. Arizona ex rel.

SL, BE Ge PS CUED cc cbccccccccceccecess y

eee

Vv

TABLE OF AUTHORITIES—Continued

Page

West Lynn Creamery, Inc. v. Healy,

DE CD cocnnchsencdctevavencavceses 7

World-Wide Volkswagen Corp. v. Woodson,

PP ED eehetccedeecdesdtdévccecceses 9

United States Constitution

ee EE OD cncudacneceeuetidesescesses 5

Statutes

3s § 8 SY Terre rere 2

ee GeO, Ses GER, Za, BH SEED cc ccccccccccccccceces 17

DE Sebudenecessescosecadessvecsoceses 2, 18

ie sccceseesdsccoueseseeecesoss l

DT CetbeneUbhbeeeeoeusceeneeresecseeaces l

DED cesacdenecenonseesinedessneccasue 17

DU btecbetedevebtneanesccsseesecoucodcas 2

DT ++tnbeddindedes aeiiecnnpsesececees 2, 18

DT hdd ocikenNdweneedentedadessséeeraveseeees 23

Dt <ccbees Quedseneedheenssenessaneseées 23

EE cdecédcduendshetadéanerdededescaer 2

Dy SaGdweedndennd Us bobs Gensestvesencedess 18

Ee re 15

Court Rules

I a a es es |

Dy soubceeeedéuedeesiusitheecveceseccccees l

vi

TABLE OF AUTHORITIES—Continued

Page

Miscellaneous

1 Records of the Federal Convention

of 1787 (M. Farrand ed. 1911) ............0 0c eeeee 6

Barrington, Conrad J., Note and Comment,

Pharmaceutical Research and Manufacturers

of America v. Concannon and Maine's

Prescription Drug Rebate Statute: A Twenty-First

Century Solution to the Medicaid Crisis,

23 Whittier L. Rev. 1127 (2002) ...............4.. 16

Collins, Richard B., Economic Union

As a Constitutional Value,

63 N.Y.U. L. Rev. 43 (1988) .............. 8-9, 13, 24

Comanor, William S., The Political Economy

of the Pharmaceutical Industry, 24 Journal

of Economic Literature 1178 (1986) ............... 22

Congressional Budget Office, How

Increased Competition from Generic

Drugs Has Affected Prices and Returns in

the Pharmaceutical Industry (July, 1998) ........ 21-23

Danzon, Patricia M., Pharmaceutical Price

Regulation (Ann Petty ed., 1997) .............. 24-25

Drahozal, Christopher R., Preserving

the American Common Market: State

and Local Governments in the United States

Supreme Court, 7 S. Ct. Econ. Rev. 233 (1999) .... 8, 20

General Accounting Office, Report to Congressional

Requesters, Prescription Drugs: Expanding

Access to Federal Prices Could Cause Other

Price Changes, GAO/HEHS-00-118 (2000) ...... 14-16

Vii

TABLE OF AUTHORITIES—Continued

Page

General Accounting Office, Report to the

Chairman, Special Committee on

Aging, U.S. Senate, Prescription Drugs:

Spending Controls in Four European

Countries, GAO/HEHS-94-30 (1994). ....... 20-23, 25

General Accounting Office, Letter Report

to the Honorable Ron Wyden, House

of Representatives, Pharmacy Benefit

Managers: Early Results on Ventures with

Drug Manufacturers, GAO/HEHS-96-45 (1995) ..... 17

Gifford, Daniel J., Federalism, Efficiency, the

Commerce Clause, and the Sherman Act:

Why We Should Follow a Consistent Free-

Market Policy, 44 Emory L.J. 1227 (1995)........... 9

Grabowski, Henry, Health Reform and

Pharmaceutical Innovation (1994) .............06. 22

Grabowski, Henry, The Impact of the

Clinton Health Care Reform Plan:

Health Reform and Pharmaceutical

Innovation, 24 Seton Hall L. Rev. 1221 (1994) ... 21, 26

H.R. 5186 (Drug Importation Act of 2002) ............ 23

Harrison, Christopher Scott, Comment,

Protection of Pharmaceuticals As Foreign

Policy: The Canada-U.S. Trade Agreement

and Bill C-22 Versus the North American

Free Trade Agreement and Bill C-91,

26 N.C. J. Int’] L. & Com. Reg. 457 (2001) ......... 25

Kolassa, Eugene M., Elements of

Pharmaceutical Pricing 108-09

ee petoe 24

Viii

TABLE OF AUTHORITIES—Continued

Page

Lawrence, Michael A., Toward a More

Coherent Dormant Commerce Clause:

A Proposed Unitary Framework,

21 Harv. J.L. & Pub. Pol’y 395 (1998) .............. 6

Office of Technology Assessment,

Pharmaceutical R&D: Costs, Risks,

and Rewards, OTA-H-522 (1993) ............. 21-22

O’Grady, Catherine Gage, Targeting

State Protectionism Instead of Interstate

Discrimination Under the Dormant Commerce

Clause, 34 San Diego L. Rev. 571 (1997) ....... 10-11

Palumbo, Francis B., The Role of

the State As a Drug Purchaser,

56 Food Drug L. J. 267 (2001) ............. 14-16, 24

Pancoast, Abigail B., Comment,

A Test Case for Re-evaluation of the

Dormant Commerce Clause: The Maine Rx

Program, 4 U. Pa. J. Const. L. 184 (2001) ....

Petragnani, Amy M., Comment,

The Dormant Commerce Clause:

On Its Last Leg, 57 Alb. L. Rev. 1215 (1994) ........ 6

Phelps, Whitney Magee, Maine's Prescription

Drug Plan: A Look into the Controversy,

Be Ge as Fs UP GED ov ccc ccccsccccceccccecs 7

Posner, Richard A., Economic Analysis

of Law § 25.3 (Sth ed. 1998) .............. eee eeee 4

Regan, Donald H., The Supreme Court and State

Protectionism: Making Sense of the Dormant

Commerce Clause, 84 Mich. L. Rev. 1091 (1986) .... 10

15, 18-19

err fr -

= Oe ee ><) nee

ix

TABLE OF AUTHORITIES—Continued

Page

Stambaugh, Christopher R., Note,

State Price Control Laws Are

the Wrong Prescription for the

Problem of Unaffordable Drugs,

12 Fordham Intell. Prop. Media

& Ent. L.J. 897 (2002) ........... 17-18, 22-23, 25-26

Stanton, Jerry, Lesson for the United States

from Foreign Price Controls on

Pharmaceuticals, 16 Conn. J. Int’] L. 149 (2000) .. 22, 24

Stone, Geoffrey R.., et al.,

Constitutional Law (3d ed. 1996) ..............055. 3

The Federalist No. 6 (A. Hamilton) (Rossiter ed. 1961) ... 5

U.S. Census (2000) (http://quickfacts.

census.gov) (visited Sept. 10,2002) ............... 14

U.S. International Trade Commission, Report to

the Committee on Finance, U.S. Senate, Global

Competitiveness of U.S. Advanced-Technology

Manufacturing Industries: Pharmaceuticals,

EE is cep acceecsenbeboocese 22

Weingast, Barry R., The Economic Role of

Political Institutions: Market-Preserving

Federalism and Economic Development,

Se NU WEEE occcccscccscccosases 20

Woellert, Lorraine, The States Step into

the Breach, Bus. Week, Aug. 6, 2001, at33.......... 24

. ee

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INTEREST OF AMICUS CURIAE

Pacific Legal Foundation (PLF) was founded 29 years ago

and is widely recognized as the largest and most experienced

nonprofit legal foundation of its kind. PLF litigates matters

affecting the public interest at all levels of state and federal

courts and represents the views of thousands of supporters

nationwide. PLF is an advocate for limited government,

individual rights, and free enterprise and believes public

officials must be respectful of the constitutional limitations on

federal power. PLF established a Free Enterprise Project in

which we submit amicus briefs in cases impacting America’s

economic vitality. For example, PLF filed amicus briefs in

Chevron, U.S.A., Inc. v. Echazabal, 122 S. Ct. 2045 (2002), and

Adams v. Florida Power Corp., 122 S. Ct. 643 (2001). PLF

believes that Maine’s statutory threat to impose pharmaceutical

price controls overstepped the bounds of its sovereignty and

intrudes unconstitutionally on the American national

marketplace. '

STATEMENT OF THE CASE

I~ May, 2000, Maine enacted an Act to Establish Fairer

Pricing for Prescription Drugs, thus creating the Maine Rx

Program. The program, funded wholly by “rebates” from drug

manufacturers, subsidizes retail prescription drug purchases for

Maine citizens. Me. Rev. Stat. tit. 22, § 2681(3)-(5) (2001).

The law provides that manufacturers will make payments to the

State based on the quantity of drugs dispensed to Maine Rx

participants by retailers. Me. Rev. Stat. tit. 22, § 2681(4).

' Pursuant to this Court’s Rule 37.3(a), all parties have consented to

the filing of this brief. Letters evidencing such consent have been

filed with the Clerk of the Court.

Pursuant to Rule 37.6, Amicus Curiae affirms that no counsel for

any party authored this brief in whole or in part and that no person

or entity made a monetary contribution specifically for the prepara-

tion or submission of this brief.

2

Using the Maine Rx program, residents can purchase drugs

from retail pharmacies at discounts funded by the rebates. Me.

Rev. Stat. tit. 22, § 2681(5). The “rebate agreements” are not

freely entered into—the Act mandates that manufacturers

“shall” subsidize Maine Rx drugs. Me. Rev. Stat. tit. 22,

§ 2681(3). The Act enforces Maine Rx provisions using

Medicaid regulatory powers to require “prior authorization” by

state officials for prescriptions dispensed to Medicaid patients.

Me. Rev. Stat. tit. 22, § 2681(7). Prior authorization creates a

procedural obstacle to Medicaid patients’ access to listed drugs,

which in turn reduces Medicaid-funded purchases of those

drugs.

In addition, the Act provides that failure to comply is

considered a violation of the Maine Unfair Trade Practices Act,

which allows a private right of action and additional penalties.

Me. Rev. Stat. tit. 10, §§ 212-13. Finally, and most ominously,

the Act contemplates imposing direct price controls on retailers

in 2003 if the Maine Rx program does not lower drug prices to

the State’s satisfaction. Me. Rev. Stat. tit. 22, § 2693(1)(B).

The Pharmaceutical Research and Manufacturers of

America sued to invalidate Maine Rx on the grounds that the

Act violates the dormant Commerce Clause and was preempted

by the Medicaid statute under the Supremacy Clause. The

district court agreed but the First Circuit Court of Appeals

reversed, finding that Maine Rx only regulates in-state activities

and sets forth prior authorization procedures consistent with

those permitted by Medicaid law. The First Circuit held that

the Act does not regulate out-of-state prices, either on its face

or by its effect. Pharmaceutical Research and Manufacturers

of America v. Concannon (PhRMA), 249 F.3d 66, 81 (2001).

Furthermore, the court held that there is nothing in the Act tying

the in-state prices of prescription drugs to out-of-state prices, or

imposing controls on wholly out-of state transactions. /d. at 81-

82. On a facial challenge of the statute, the court below refused

to hold that the “negotiators’ ” potential for abuse actually

3

regulates drug prices. Jd. at 82. The court thus concluded that

while Maine Rx regulates a large amount of in-state commerce,

there is no actual extraterritorial reach, and the Act is not per se

invalid. Jd.

The First Circuit also reviewed the act under the balancing

test from Pike v. Bruce Church, Inc., 397 U.S. 137, 142 (1970):

“Where the statute regulates even-handedly to effectuate a

legitimate local public interest, and its effects on interstate

commerce are only incidental, it will be upheld unless the

burden imposed on such commerce is clearly excessive in

relation to the putative local benefits.” Balancing the increased

access to prescription drugs for residents of Maine against the

drug manufacturers’ possible loss of profits, the court held that

the “putative local benefits” clearly outweigh the incidental

“effects on interstate commerce.” PhRMA, 249 F.3d at 83-84.

Thus, the First Circuit found no dormant Commerce Clause

violation under either the strict per se test or the lesser Pike

balancing test.

On June 28, 2002, this Court granted certiorari.

SUMMARY OF ARGUMENT

The Constitution “was framed upon the theory that the

peoples of the several states must sink or swim together, and

that in the long run prosperity and salvation are in union and not

division.” Baldwin v. G. A. F. Seelig, Inc., 294 U.S. 511, 523

(1935). That is, individual residents of the several States are

citizens of a nation, and some state statutes are incompatible

with this ideal. Stone, Geoffrey R., et al., Constitutional Law

293-94 (3d ed. 1996). Furthering this ideal, the Commerce

Clause of the Constitution created an “area of free trade among

the several States.” Associated indus. of Missouri v. Lohman,

511 U.S. 641, 650 (1994) (quoting McLeod v. J. E. Dilworth

Co., 322 U.S. 327, 330 (1944)). Despite these benefits of free

trade, states have incentives to enact regulations or taxes that

impose costs on other states while the benefits remain in the

4

state. Posner, Richard A., Economic Analysis of Law § 25.3,

at 699 (Sth ed. 1998). This is precisely what Maine seeks to

accomplish—lower drug prices for its own residents at the

expense of residents outside the state’s borders.

Case law interpreting the dormant Commerce Clause has

never approached a problem precisely like that posed by Maine

Rx. In this case, the state imposed a facially-neutral statutory

scheme that has the effect of regulating out-of-state transactions

to obtain an economic advantage for its own residents. While

pharmaceutical consumers living in Maine enjoy lower drug

prices, the pharmaceutical companies’ natural reaction to

increase drug prices for other consumers outside the state

presents a potentially significant impact on interstate

commerce. Maine’s manipulation of interstate commerce for

the economic advantage of its residents undercuts the national

free-market policies underlying the dormant Commerce Clause

and is akin to the protectionism traditionally held

unconstitutional under that provision.

America’s history is based on our willingness to take

risks, and on free-market support of innovation. In considering

the constitutionality of Maine Rx, the Court should act to

protect the American common market in pharmaceuticals—the

world leader in this critical industry. The American common

market in pharmaceuticals is a worldwide success, benefitting

hundreds of millions of people. Drug manufacturers reinvest

much of their profits to fund the high risk research essential to

developing innovative new drugs and therapies. Controlling

drug prices limits pharmaceutical research and development

(R&D), thus delaying or diminishing the life-enhancing

possibilities that such research will yield. The Maine Rx

requirements that pharmaceutical companies provide Medicaid-

level discounts to all Maine residents or face price controls

serve only to benefit Maine drug consumers while this

manipulation of interstate commerce will force consumers in

other states to face increased drug prices to compensate for

Rr Grr ee

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a

5

revenue lost in Maine. If Maine carries through on its threat to

impose price controls, American patients in general will pay

the price in reduced health. For the reasons set forth below, the

decision of the First Circuit Court of Appeal should be

reversed.

ARGUMENT

I

MAINE RX IS PROTECTIONIST

LEGISLATION ENACTED IN VIOLATION

OF THE DORMANT COMMERCE CLAUSE

The Commerce Clause provides that “the Congress shall

have Power . . . [t]o regulate commerce . . . among the several

States ....” U.S. Const. art. 1, § 8, cl. 3. When the Framers

designed the United States Constitution, they included this

clause to prevent economic barriers to trade from threatening

the new political order. Hughes v. Alexandria Scrap Corp.,

426 U.S. 794, 807 (1976) (Commerce Clause designed to help

the states form “a cohesive whole” after the revolution). This

Court has long held that the flip side of the Commerce

Clause—the “dormant” Commerce Clause—forbids State

regulation of interstate commerce. H. P. Hood & Sons, Inc. v.

Du Mond, 336 U.S. 525, 537-38 (1949). As Justice Jackson

wrote for the Court:

Our system, fostered by the Commerce Clause,

is that every farmer and every craftsman shall be

encouraged to produce by the certainty that he will

have free access to every market in the Nation, that

no home embargoes will withhold his exports, and

no foreign state will by customs duties or regulations

exclude them.

Id. at 539. The Framers sought to curb interstate exploitation

by stronger states and by those with geographic advantages.

The Federalist No. 6 (A. Hamilton) (Rossiter ed. 1961);

6

1 Records of the Federal Convention of 1787 at 19, 164

(M. Farrand ed. 1911).

The fundamental prohibition of the dormant Commerce

Clause, as interpreted by the Supreme Court, is against

“discrimination” —.e., “differential treatment of in-state and

out-of-state economic interests that benefits the former and

burdens the latter.” Oregon Waste Sys., Inc. v. Department of

Envtl. Quality, 511 U.S. 93, 99 (1994). A state statute that

discriminates on its face against out-of-state businesses or

goods is “virtually per se unlawful” and must be justified under

the “strictest scrutiny,” a standard that the state almost never

can satisfy. Jd. at 101; City of Philadelphia v. New Jersey,

437 U.S. 617, 624 (1978). A state regulation that is not facially

discriminatory may nonetheless be unlawful if the burdens it

imposes on interstate commerce exceed the benefits. Pike,

397 U.S. at 142. The Court only rarely strikes down statutes

under this balancing test. Petragnani, Amy M., Comment, The

Dormant Commerce Clause: On Its Last Leg, 57 Alb. L. Rev.

1215, 1249 (1994) (“The Court is no longer applying the

dormant Commerce Clause to overturn state legislation unless

the statute is clearly or facially discriminatory.”).

This Court’s dormant Commerce Clause cases are

supposed to follow one of two theories. The first theory is that

the dormant Commerce Clause “provide[s] an economic

blueprint for the nation’s economic functioning,” while the

second theory purports that the clause “fulfill[s] a political

vision of a federal government responsive to the needs of all

citizens while at the same time respecting and honoring the

institutional interests of the States.” Lawrence, Michael A..,

Toward a More Coherent Dormant Commerce Clause: A

Proposed Unitary Framework, 21 Harv. J.L. & Pub. Pol’y 395,

411 (1998). In this case, PhRMA argued the economic

blueprint theory by analogizing Maine’s statute to price

affirmation statutes that have been declared unconstitutional by

this Court, under a “practical effect” test. Maine, on the other

tA NES Sen ee

7

hand, argued the political vision theory, asserting that the

benefits to the state must be weighed against the burden to

commerce. Phelps, Whitney Magee, Maine's Prescription

Drug Plan: A Look into the Controversy, 65 Alb. L. Rev. 243,

255 (2001). Thus, the “economic blueprint” theory maps to the

strict per se invalidity test (applied to both extraterritorial reach

and to discriminatory legislation) while the “political vision”

theory maps to the Pike balancing test. These separate lines of

inquiry have led to a morass of confusion—even to members of

this Court, who describe the analysis as “hopelessly confused,”

Kassel v. Consolidated Freightways Corp., 450 U.S. 662, 706

(1981) (Rehnquist, J., dissenting), a “quagmire,” West Lynn

Creamery, Inc. v. Healy, 512 U.S. 186, 210 (1994) (Scalia, J.,

concurring), and “not always . . . easy to follow.” CTS Corp. v.

Dynamics Corp. of America, 481 U.S. 69, 87 (1987).

The basic problem is that the two supposedly separate

analyses have been blurred, using the language from one test to

support a result that purportedly was arrived at using the other

test. For example, the Court has struck down facially neutral

state statutes that it determines to be discriminatory in effect.

In West Lynn Creamery, 512 U.S. at 190-91, the Court struck

down a Massachusetts milk pricing order that imposed a tax on

all milk and used the proceeds to fund a subsidy to in-state milk

producers. Although the milk tax was facially non-

discriminatory because it applied equally to all milk, the Court

invalidated the pricing order based on a “case-by-case analysis

of purposes and effects” rather than legal doctrine. /d. at 201.

In American Trucking Associations v. Scheiner, 483 U.S. 266,

286 (1987), the Court struck down facially neutral taxes on

trucks based on their “practical effect” of imposing “a cost per

mile on appellants’ trucks that is approximately five times as

heavy as the cost per mile borne by iocal trucks.” See also

Hunt v. Washington State Apple Adver. Comm'n, 432 U.S. 333,

350-54 (1977). In each case the state statute was neutral on its

face, which ordinarily would have resulted in the Court’s

applying a balancing test that rarely leads to invalidation of the

statute. Instead, the Court looked to the practical effect of the

statute and found that it unconstitutionally interfered with free

trade. Drahozal, Christopher R., Preserving the American

Common Market: State and Local Governments in the United

States Supreme Court, 7 S. Ct. Econ. Rev. 233, 245 (1999)

(Preserving the American Common Market).

On top of this confusion comes this case—unlike any

other in the dormant Commerce Clause canon. Maine wants

lower drug prices for consumers within its border, but does not

want Maine taxpayers to pay for the discount via the state

treasury. Instead, the state enacts a statutory scheme to shift to

the pharmaceutical companies the cost of the marginal

difference between the market value of the drugs and the price

the state believes is fair. Because those companies are based

outside of Maine and engaged in interstate commerce, the state

must bear the burden of showing that its regulation does not

have the potential to cause significant effects on interstate

commerce. One factor the Court should consider is the impact

on interstate commerce if Maine’s regulation is replicated in

other states, regardless of whether that replication is “the

sincerest form of flattery” or in retaliation.

A. A Statute Violates the Dormant

Commerce Clause If It Is Protectionist,

Regardless of Whether It Is Discriminatory

The dormant Commerce Clause preserves “a national

market for competition undisturbed by preferential advantages

conferred by a State upon its residents or resident competitors.”

General Motors Corp. v. Tracy, 519 U.S. 278, 299 (1997).

When states burden commerce outside their borders, they

interfere in policy choices of other states or of the federal

government or both. If this interference devolves into

economic warfare, the ultimate losers will be the smaller and

weaker states and those with less favorable geography—like

Maine. Collins, Richard B., Economic Union As a

Se eR ete

ON eM

9

Constitutional Value, 63 N.Y.U. L. Rev. 43, 64 (1988)

(Economic Union). The free-trade objectives incorporated in

the dormant Commerce Clause further the efficient allocation

of resources within American society, just as free trade among

nations helps to further the efficient allocation of resources in

the world. Gifford, Daniel J., Federalism, Efficiency, the

Commerce Clause, and the Sherman Act: Why We Should

Follow a Consistent Free-Market Policy, 44 Emory L.J. 1227,

1227-28 (1995).

Indeed, this Court frequently asserts that the dormant

Commerce Clause calls for an American “common market.”

C & A Carbone, Inc. v. Town of Clarkstown, 511 U.S. 383, 423

(1994); World-Wide Volkswagen Corp. v. Woodson, 444 U.S.

286, 293 (1980); Hunt v. Washington State Apple Adver.

Comm 'n, 432 U.S. at 350; H. P. Hood, 336 U.S. at 538. Tying

this economic policy to political processes, regulations must

allow those primarily affected by the regulation to register their

approval or disapproval about the measure through the political

process directly by voting. Southern Pac. Co. v. Arizona ex rel.

Sullivan, 325 U.S. 761, 767 n.2 (1945) (“[T]o the extent that the

burden of state regulation falls on interests outside the state, it

is unlikely to be alleviated by the operation of those political

restraints normally exerted when interests within the state are

affected.”). Regulations are like other products: when costs are

not borne by producers, these costs are disregarded, and

producers create more of the products than an efficient market

would supply. When costs imposed by legislation are exported

outside the state, there is less political pressure to minimize

these costs and there is a greater chance that the law will reduce

aggregate welfare. Economic Union, 63 N.Y.U. L. Rev. at 68.

A common understanding of protectionism is the act

of guarding or shielding one’s own. Economic Union,

63 N.Y.U. L. Rev. at 74 (“Classic protectionism meant

shielding domestic producers against competition from

imports.”). However, the dormant Commerce Clause doctrine

10

applies to both producer and consumer favoritism.

Brown-Forman Distillers Corp. v. New York State Liquor

Authority, 476 U.S. 573, 580 (1986) (“Economic protectionism

is not limited to attempts to convey advantages on local

merchants; it may include attempts to give local consumers an

advantage over consumers in other States.”). In Camps

Newfound/Owatonna v. Town of Harrison, 520 U.S. 564, 575-

76 (1997), the Court rejected the Town’s argument that the

dormant Commerce Clause concerns the protection of

out-of-state producers only, holding instead that impermissible

protection can come both in the form of preferences to

local merchants and advantages to local consumers: “{I)t

matters little that it is the camp that is taxed rather than the

campers. ... The economic incidence of the tax falls at least in

part on the campers... .” /d. at 580; see also Philadelphia v.

New Jersey, 437 U.S. at 627 (“{A] State may not accord its own

inhabitants a preferred right of access over consumers in other

States to natural resources located within its borders.”).

Protectionist practices are repugnant simply because they

are directly inconsistent with the quest for national unity.

O’Grady, Catherine Gage, Targeting State Protectionism

Instead of Interstate Discrimination Under the Dormant

Commerce Clause, 34 San Diego L. Rev. 571, 626-27 (1997)

(Targeting State Protectionism). Protectionism ought to be

targeted as the evil prohibited by the dormant Commerce

Clause because it is “hostile in its essence” and likely to cause

resentment and invite retaliation. Regan, Donald H., The

Supreme Court and State Protectionism: Making Sense of the

Dormant Commerce Clause, 84 Mich. L. Rev. 1091, 1113-14

(1986). States do not have the right to regulate transactions

occurring outside their borders regardless of whether they

intend to discriminate against interstate commerce. A state may

not purposefully manipulate the channels of interstate

commerce to isolate the state from the national economy or

11

protect resident economic interests from the national market.’

A protectionist statute purposefully makes use of the state’s

own borders or the network of the interstate market to improve

the position of local residents simply because they are local.

See Targeting State Protectionism, 34 Sar. Diego L. Rev. at

588.

The Court has applied this anti-protectionist theory in

several cases, most frequently those that apply the “per se

invalidity” higher level of scrutiny. In Brown-Forman

Distillers Corp. v. New York State Liquor Authority, 476 U.S.

573, the Court invalidated a New York law that set price

ceilings for liquor sold in-state based on the seller’s lowest

price in other states. This Court held that a state law that

“directly regulates or discriminates against interstate

commerce” will generally be struck down “without further

inquiry.” Jd. at 579. The Court presumed that the law

improperly burdened interstate commerce by forcing up the

price of liquor in other states, particularly smaller ones. /d.

at 582-84. In other words, New York was exploiting market

power as a large consumer to gain advantage at the expense of

smaller states. The Court was willing to assume the law had

these effects, even in the absence of proof. Jd.’

> This Court need not decide whether the protectionism or

discrimination was deliberate. See Hunt v. Washington State Apple

Adver. Comm'n, 432 U.S. at 352 (“[W]e need not ascribe an

economic protection motive to the North Carolina Legislature to

resolve this case . . . .”); Pike, 397 U.S. at 145-46 (finding intent

irrelevant); Halliburton Oil Well Cementing Co. v. Reily, 373 U.S.

64, 72 (1963) (acknowledging that state tax law at issue may have

discriminated accidentally but striking law down anyway). Most of

the dormant Commerce Clause opinions say nothing about intent.

> The Court was unwilling to “indulg{e] the . .. assumption” that the

state would be sensitive to Commerce Clause concerns in the

implementation of its statute. “The protections afforded by the

(continued...)

12

Similarly, in Healy v. Beer Institute, 491 U.S. 324, 336

(1989), the Court held:

[The] Commerce Clause . . . precludes the

application of a state statute to commerce that takes

place wholly outside of the State’s borders, . . . [and]

a statute that directly controls commerce occurring

wholly outside the boundaries of a State exceeds the

inherent limits of the enacting State’s authority, and

isinvalid ....

The critical inquiry in determining a state law’s validity is

whether it has the “practical effect” of regulating commerce

occurring outside the state’s borders. In Healy and

Brown-Forman, this Court held that a State may not regulate in

a manner that sets prices on transactions between buyers and

sellers in other States, to ensure a more favorable price structure

for domestic consumers at the expense of consumers in other

States. Under these cases, the laws were subject to a “virtually

per se rule of invalidity” under the dormant Commerce Clause.

It did not matter if the statute did not on its face regulate out-of-

state transactions.

In our federal system, uniform national standards, where

appropriate, are for Congress to set. As the Founders knew and

this Court’s dormant Commerce Clause jurisprudence has

recognized, allowing one state to impose its laws on commerce

nationwide would place commerce at the mercy of local,

parochial interests and create an anarchy of conflicting state

legal regimes which would destroy commercial confidence and

create hostility between the states. See, e.g., C & A Carbone,

Inc. v. Town of Clarkstown, 511 U.S. at 406 (O’Connor, J.,

> (...continued)

Commerce Clause cannot be made to depend on the good grace of a

state agency.” Jd. at 582 n.5.

—_—-

13

concurring) (differing state regimes regulating flow of solid

waste would result in “the type of balkanization the Clause is

primarily intended to prevent”). State laws regulating corporate

takeovers, for example, restrain share sales occurring entirely

outside the regulating state. They prevent some takeovers

altogether and raise costs of others substantially. This Court

struck down one such law in Edgar v. MITE Corp., 457 U.S.

624 (1982). In that case, the challenged Illinois statute

regulated corporations of other states, corporations doing little

or no business in the state, and corporations lacking local

shareholders. /d. at 645-46. The critical factor was that the

regulated transactions between buyers and sellers outside

Illinois were not sufficiently Ilinois’s affair to justify so much

interference. /d. at 646. (This was the largest point of

differentiation with CTS Corp. v. Dynamics Corp. of America,

481 U.S. at 93, upholding an Indiana takeover statute that was

confined to corporations that were chartered in the state, had a

large number of local shareholders, and were principally based

or had major operations there.)

In sum, an approach to dormant Commerce Clause

challenges based on protectionism furthers several compelling

policies: The approach prevents states from engaging in overtly

hostile acts against their sister states, thus provoking retaliation

by competitor states. Oklahoma Tax Comm'n v. Jefferson

Lines, Inc., 514 U.S. 175, 179-80 (1995). Striking down

protectionist legislation protects weaker states from acts by

bigger, stronger states offering benefits to their own citizens at

the expense of Americans outside their state borders.

Moreover, a rule based on anti-protectionism serves the virtues

of simplicity and certainty. See Economic Un’ ,63 N.Y.U.L.

Rev. at 113.

14

B. Maine Rx Is Protectionist Because Its

Manipulation of Drug Prices for the Economic

Advantage of Maine’s Drug Consumers Causes

Significant Impacts on Interstate Commerce

The protectionist nature of Maine Rx is demonstrated by

its impact on Maine residents versus non-Maine residents. The

Court should ask: “What is the potential impact on the rest of

the /.merican common market?”’ A manufacturer may offer

special pricing in a limited number of states. But there is a real

question as to how much a manufacturer could absorb if it is

expected to sharply cut prices for residents of many states.

Palumbo, Francis B., The Role of the State As a Drug

Purchaser, 56 Food Drug L. J. 267, 271-72 (2001) (Role of the

State). So while the facts of this case involve the relatively

small Maine market, the Court should consider what would

happen if California were to adopt a “California Rx” program.‘

Or if California joined with some other populous states to form

a “Big Multi-State Rx” program. This is not outside the realm

of possibility. For example, Maine Rx is not Maine’s first

attempt to obtain lower drug prices for its residents. In 2000, a

coalition of Maine, Vermont, and New Hampshire solicited

bids from pharmacy benefit manager organizations to run all

three states’ drug programs. The three states, which

collectively have programs with over one million enrollees and

one billion dollars in annual drug expenditures, sought to

capitalize on their combined market share power by negotiating

discounts without limitations. In any of these scenarios, the

price cuts for residents within states with these programs would

likely increase prices charged to customers in other states. See,

e.g, General Accounting Office (GAO), Report to

Congressional Requesters, Prescription Drugs: Expanding

Access to Federal Prices Could Cause Other Price Changes,

* In 2000, Maine had 1.27 million residents and California had 33.87

million residents. U.S. Census (2000) (http://quickfacts.census.gov)

(visited Sept. 10, 2002).

f-

:

:

:

f

‘

’

15

GAO/HEHS-00-1 18 (2000) (a study of whether Federal Suppl:

Schedule (FSS) prices should be extended to other programs

concluded that prices paid by others would have to rise). The

larger. the group that would be newly entitled to receive a

governmentally mandated price, the greater the incentive for

drug manufacturers to raise that price for other purchasers. /d.

So the states, in providing “coverage” for noninsured residents,

may indeed be passing on the bill to other citizens in the form

of increased premiums or decreased access in their private or

employer-based health programs, as these programs may reduce

coverage if the state steps in. Role of the State, 56 Food Drug

L. J. at 272.

Two aspects of Maine Rx demonstrate the statute’s

protectionist nature. First is the provision forbidding

companies from altering their distribution channels. Me. Rev.

Stat. tit. 22. § 2697(2)(D). No drug manufacturers are located

in Maine, and only one distributor resides there. As the district

court correctly noted, the Act’s purpose and effect is to lower

the revenues received by these out-of-state manufacturers on

drugs to be sold in Maine. See Pharmaceutical Research and

Manufacturers of America v. Commissioner, 2000 U.S. Dist.

LEXIS 17363, at *15(D. Me. Oct. 26, 2000) (observing that the

practical effect of the Act is to limit the revenue an out-of-state

manufacturer can obtain when it sells drugs to out-of-state

distributors that are destined for Maine). No valid argument

can be made that the Acct, in its intent or practical effect, does

not reach transactions between manufacturers and distributors.

Pancoast, Abigail B., Comment, A Jest Case for Re-evaluation

of the Dormant Commerce Clause: The Maine Rx Program,

4U. Pa. J. Const. L. 184, 19° (2001) (Test Case).

Maine correctly foresaw that leaving the state would

otherwise be the reasoned response of the companies. In a

boycotting effort, three prescription companies decided not to

ship their medicines directly to Maine, using out-of-state

wholesalers to supply non-Medicare recipients in the state.

16

Barrington, Conrad J., Note and Comment, Pharmaceuticai

Research and Manufacturers of America v. Concannon and

Maine's Prescription Drug Rebate Statute: A Twenty-First

Century Solution to the Medicaid Crisis, 23 Whuttier L. Rev.

1127, 1132 (2002) (AstraZeneca, Bristol-Myers Squibb, and

Smith-Kline Beecham). These companies’ quick departure

from the market vividly demonstrates the adverse

incentives created by Maine Rx. This Court has held

that “strong incentives,” in lieu of direct regulation, are

sufficient to implicate the dormant Commerce Clause. Camps

Newfound/Owatonna, 520 U.S. at 578.

Second, when Maine requires pharmaceutical companies

to offer discounted drug prices to Maine residents, the

companies can be expected to recoup their losses by increasing

prices paid by other people beyond Maine’s borders. The

GAO addressed this very issue in a 2000 study of whether

FSS prices should be extended to other programs. The GAO

concluded that prices paid by others would have to rise.

GAO, Report to Congressional Requesters, Prescription Drugs:

Expanding Access to Federal Prices Could Cause Other

Price Changes, GAO/HEHS-00-118. So Maine, by providing

“coverage” for noninsured residents, may be passing on

the bill to other citizens in the form of increased premiums or

decreased access in their private or employer-based health

programs. See Role of the State, 56 Food Drug L.J. at 271.

Maine Rx sets the goal of “negotiations” between the

manufacturers and the state to be FSS prices, which are the

best prices obtained by any private purchaser. A private

health plan cannot possibly negotiate a better price from a

drug manufacturer. Then, Maine Rx Program participants

are not subject to formularies, unlike the beneficiaries of

many health plans that negotiate discounts from drug

Tey

’

17

manufacturers. Uninsured and insured residents alike may all

enroll in the Maine Rx Program and rely on private purchasers

in other states to negotiate best-price discounts. In this

scenario, purchasers in other states will have to pay more

because drug manufacturers will be less inclined to give

competitive discounts when they have to give the same

discounts to the entire state of Maine. Stambaugh, Christopher

R., Note, State Price Control Laws Are the Wrong Prescription

for the Problem of Unaffordable Drugs, 12 Fordham Intell.

Prop. Media & Ent. L.J. 897, 924 (2002) (Wrong Prescription).

The State can be expected to respond to this argument by

asserting that the manufacturers voluntarily choose to provide

rebates to Maine Rx participants. But Maine did not intend

these agreements to be voluntary—in deciding to subject

uncooperative manufacturers to’ the prior authorization

requirement, the state had obviously determined that a

voluntary program would not be sufficiently effective. The

court below accepted the state’s argument in this regard,

holding that Maine Rx “merely says that the Commissioner of

the Maine Department of Human Services shall use ‘best efforts

to obtain an initial rebate amount equal to or greater than the

rebate calculated under the Medicaid program ... .”” PhRMA,

249 F.3d at 82 (citing Me. Rev. Stat. tit. 22, § 2681(4)(B)).

* Although Maine Rx describes the State's role as a Pharmacy

Benefit Manager (PBM), Me. Rev. Stat. tit. 22, § 2681(1), real

PBMs use formulanes to help contro! drug costs by (1) encouraging

the use of formulary drugs through compliance programs that inform

physicians and enrollees about which drugs are on the formularies;

(2) limiting the number of drugs a plan will cover; or (3) developing

financial incentives to encourage the use of formulary products.

GAO Letter Report to the Honorable Ron Wyden, House of

Representatives, Pharmacy Benefit Managers: Early Results on

Ventures with Drug Manufacturers, GAO/HEHS-96-45 (1995).

Maine Rx does not use formularies.

18

Thus the First Circuit held that the program was voluntary and

the manufacturers could withdraw at any time. /d.

This holding represents willful blindness. The statute says

manufacturers “shall” provide rebates (Me. Rev. Stat. tit. 22,

§ 2681(3)) and the very nature of the program demands

manufacturers’ compliance. First, the program contained the

unconstitutional “anti-profiteering” sections, threatening treble

compénsatory damages, punitive damages, and civil penalties

up to $100,000 if a company demanded terms the state

determined to be “unreasonable” or if a manufacturer alters its

business practices to avoid Maine’s new law. Me. Rev. Stat.

tit. 22, § 2697.° Second, Maine Rx imposes the prior

authorization requirement on nonparticipants. Me. Rev. Stat.

tit. 22, § 2681(7). Prior authorization means that a state

bureaucrat has to approve a medication a doctor chooses for his

or her patients. It slows down the dispensing procedure so

much that instead of waiting for approval, doctors and patients

are likely to seek alternative therapies. Wrong Prescription,

12 Fordham Intell. Prop. Med. & Ent. L. J. at 921. Asa

consequence, market shares of drugs that require pnor

authorization decline significantly. Pharmaceutical Research

and Manufacturers of America v. Medows, 184 F. Supp. 2d

1186, 1192 (N.D. Fla. 2001) (maming drugs taken off a

preferred drug list and requiring prior authorization: market

share of Imitrex fell from 60% to 6%; the market share of

Prilosec fell from 38% to 4%, and the market share of Allegra

fell from 17% to 1%). The two provisions combined can only

be construed as a requirement. Jest Case, 4 U. Pa. J. Const. L.

at 196.

* The district court declared these provisions unconstitutional and

the state did not appeal that ruling. They remain relevant to the

inquiry before this Court, however, as they demonstrate that Maine

never anticipated that manufacturers would voluntarily comply with

the “negotiated” rebates.

_ ee

19

This Court has expressly held that a state law using the

state’s leverage in one market where it does participate to

achieve a separate regulatory purpose is subject to the dormant

Commerce Clause as a state regulation and is not market

participation. South-Central Timber Development, Inc. v.

Wunnicke, 467 U.S. 82, 96-98 (1984) (holding that Alaska’s

Statute limiting buyers of its timber to those who agreed to

process the purchased timber in Alaska to be subject to the

dormant Commerce Clause). Jest Case, 4 U. Pa. J. Const. L.

at 198. The court below recognized that Maine is not acting as

a typical market participant as it neither buys nor sells

pharmaceuticals (PhRMA, 249 F.3d at 80), but it erred by its

failure to acknowledge the regulatory sanctions imposed by the

program. Thus, Maine Rx fails dormant Commerce Clause

analysis because it regulates extraterritonal economic

transactions by imposing either a rebate agreement or a prior

authorization requirement on drugs that are part of an out-of-

state sale between out-of-state manufacturers who do not grant

rebates, and out-of-state wholesalers and distributors. See Test

Case, 4 U. Pa. J. Const. L. at 198.

As shown above, Maine Rx is likely to harm non-Maine

drug consumers because pharmaceutical companies will seek to

recoup the discounts they are required to offer to Maine

residents by selling drugs outside the state at higher prices. As

additional, and more populous, states replicate Maine’s

Statutory scheme, the impact on consumers in those states

without an “Rx” statute becomes more severe, causing a

significant impact on interstate commerce as a whole. This

protectionist policy should be held to be a violation of the

dormant Commerce Clause.

20

MAINE RX DAMAGES THE

AMERICAN COMMON MARKET

For private enterprise to flourish, a federal system must

‘“prevent[] the lower governments from using their regulatory

authonty to erect trade barriers against the goods and services

from other political units.” Weingast, Barry R., The Economic

Role of Political Institutions: Market-Preserving Federalism

and Economic Development, || J.L. Econ. & Org. 1, 4 (1995)

(Market-Preserving Federalism). The creation and preservation

of a national common market is a central feature of “market-

preserving federalism”—federalism that fosters economic

growth by limiting the encroachment of a country’s political

system upon its markets. /d. at 3-4; Preserving the American

Common Market, 7 S. Ct. Econ. Rev. at 235.

A. By Reinvesting Profits into Research and

Development, American Pharmaceutical

Companies Lead the World in the Creation

of Life-Saving and Life-Enhancing Drugs

The American common market has created the most

successful pharmaceutical industry in the world. Among the

world’s top 15 companies in the innovative drug industry in

1991, 8 were based in the United States. GAO, Report to the

Chairman, Special Committee on Aging, U.S. Senate,

Prescription Drugs: Spending Controls in Four European

Countries, GAO/HEHS-94-30 (1994) (Prescription Drugs).

United States-based pharmaceutical firms developed over 40

percent of the new major global drugs discovered between 1970

and 1992. Jd. Success in this case is measured not only by the

number of dollars in revenue, but by the number of lives saved

and enhanced. American pharmaceutical companies generate

more new and improved drugs than any other country. The

reason can be traced to investment in R&D. Countries with

higher drug prices tend to be associated with more

pharmaceutical R&D and many new drugs. Conversely, in low-

21

price countries like Spain and Australia, R&D spending is low

and very few new drugs are developed. Prescription Drugs,

GAO/HEHS-94-30, at ch. 3:2.2. United States companies

invest in the drawn-out development of new drugs because

(1) they look forward to recovering their investment if the drug

makes it through the gauntlet to be certified by the Food and

Drug Administration (a process estimated to take |2 years with

an average cost of $194 million (1990 dollars, net of various

tax breaks) Office of Technology Assessment, Pharmaceutical

R&D: Costs, Risks, and Rewards, OTA-H-522 at | (1993)

(Costs, Risks and Rewards)). and (2) they enjoy national patent

protection for the first few years the drug is on the market.

Pharmaceutica! R&D is nsky and expensive. Grabowski,

Henry, Zhe /mpact of the Clinton Health Care Reform Plan

Health Reform and Pharmaceutical Innovation, 24 Seton Hal!

L. Rev. 1221, 1234-40 (1994) (Pharmaceutical Innovation). see

also Congressional Budget Office, How /ncreased Competition

from Generic Drugs Has Affected Prices and Returns in

the Pharmaceutical Industry 2-3 (July, 1998) (/ncreased

Competition). Drug developers invest heavily in R&D because

they expect to profit from it. /ncreased Competition at 2

(“Producers of innovator drugs invest heavily in research and

development (R&D), hoping to recoup that investment in

profits from future sales while a drug is under patent and they

have a monopoly on its manufacture.”); see also

Pharmaceutical Innovation, 24 Seton Hall L. Rev. at 1258 (“A

firm undertaking long-term nsky R&D programs on new drugs

must make an investment decision on the bases of

expectations.”’). Higher drug prices strengthen the incentive for

R&D. The GAO estimated that a 1% decline in drug prices

leads to a 0.68% decline in R&D spending. This is consistent

with previous economic analyses of the pharmaceutical

industry, in which other measures of the incentive for

R&D—for example, firms’ profit rates and market

shares—were positively related to R&D. GAO, Prescription

22

Drugs, GAO/HEHS-94-30, at ch. 3:3 (citing Comanor, William

S., The Political Economy of the Pharmaceutical Industry,

24 Journal of Economic Literature 1178 (1986)); U.S.

International Trade Commission, Report to the Committee on

Finance, U.S. Senate, Global Competitiveness of U.S.

Advanced-Technology Manufacturing Industries.

Pharmaceuticals, US ITC Pub. 2437 (1991).

The dramatic increase in real revenues to new drugs

throughout the 1980s sent signals to the industry that more

investment would be rewarded handsomely. The industry

responded by increasing its commitment to investment in R&D.

Costs, Risks and Rewards, OTA-H-522 at 104, Wrong

Prescription, 12 Fordham Intell. Prop. Media & Ent. LJ.

at 906. A few “blockbuster” drugs have generated incredible

profits for their patent owners. Stanton, Jerry, Lesson for the

United States from F oreign Price Controls on Pharmaceuticals,

16 Conn. J. Int'l L. 149, 169 (2000) (Lesson) (citing

Grabowski, Henry, Health Reform and Pharmaceutical

Innovation 13-25 (1994)). But laws that would limit the

amount that drug developers can make from future blockbuster

drugs would drastically reduce the expected profits for drug

developers, and therefore would drastically reduce investment

in pharmaceutical R&D. Jd.”

R&D innovation further depends on patent protection

because competing drug manufacturers would undersell the

developers before the developers recouped their investment in

R&D and made a profit from it. “Without patents, many new

drugs could be easily and quickly duplicated by other

” While other options for funding R&D exist, such as debt financing

and equity financing, these options are not feasible given the

extremely high cost—if not outright impossibility—of gathering

impartial information to provide to investors. This is why most

major pharmaceutical companies finance their R&D through retained

earnings. Prescription Drugs,GAO/HEHS-94-30 at App. V:2.2 n.8.

~~ -

23

manufacturers, preventing the innovator firm from obtaining

enough reward to justify its investment.” /ncreased

Competition at 3. With patent protection, a drug developer

looks to demand a pnce high enough to recoup the costs of

R&D and make a profit. Jd Patents do not guarantee a profit

for drug developers, but they make it a possibility by allowing

drug developers to demand higher prices than they could

without patent protection. Wrong Prescription, 12 Fordham

Intell. Prop. Media & Ent. L.J. at 903-04.

R&D clearly emerges as the primary cause of Amencan

dominance in pharmaceutical innovation. Moreover, by

advancing the state of scientific and medical knowledge, R&D

benefits society above and beyond revenue received by direct

sales of the resulting drugs. Prescription Drugs, GAO/HEHS-

94-30 at Appendix V:1. The national commitment to

maintaining America’s standing as the leader in pharmaceutical

development must not be undermined by this Court's approval

of a states’ efforts to reduce drug prices for their populations."

B. Pharmaceutical Price Controls

Have a Direct, Adverse Impact on

Research, Development, and Innovation

Possibly the biggest threat to pharmaceutical companies

who do business in Maine is the prospect of price controls if the

“negotiations” on rebates do not favor the state in the amount

the state deems appropriate. Me. Rev. Stat. tit. 22, §§ 2691,

2693(1). Price controls enacted by even one state can damage

the American common market in pharmaceuticals. But price

controls are unlikely to remain so contained. Protectionist

politics invite retaliatory protectionism by other states, unti]

* Congress may be willing to risk some trade-offs between price

reduction and R&D. See. e.g, H.R. 5186 (Drug Importation Act of

2002) (permitting reimportation of drugs from Canada at possibly

lower prices). The wisdom of such a choice is not before this Court,

and, at any rate, does not implicate the Commerce Clause.

24

protectionists dominate in all states. Economic Union,

63 N.Y.U. L. Rev. at 77. Specific to this case, twenty-three

states already have considered enacting “clones” of the Maine

Rx Program legislation. Woellert, Lorraine, The States Step

into the Breach, Bus. Week, Aug. 6, 2001, at 33. If this Court's

decision invites these other states to follow Maine’s example,

lessons learned by other nations’ imposition of pnce controls

suggest that American patients will surely suffer.

Canada, the United Kingdom, France, Japan, and other

countries have implemented pharmaceutical price controls for

many years. Lesson, 16 Conn. J. Int’! L. at 160-64; see also

Danzon, Patricia M., Pharmaceutical Price Regulation 15-29

(Ann Petty ed., 1997). The forms of their price regulations

vary, but they all stifle competition and discourage innovation

in the pharmaceutical industry. Lesson, 16 Conn. J. Int’! L.

at 165-71; Pharmaceutical Price Regulation at 58-64. In many

of these countries, purchasing power is lower than in the United

States, and in most of these countries, the level of research and

development of pharmaceuticals is not as extensive as in the

United States. Role of the State, 56 Food Drug L.J. at 269

(citing Kolassa, Eugene M., Elements of Pharmaceutical

Pricing 108-09 (Haworth Press 1997).

A study by Wharton economist Patricia Danzon used

empirical evidence to thoroughly examine the effects of each of

these countries’ price regulations on incentives for

pharmaceutical innovation, production efficiency, goals of

controlling total drug expenditures, and quality of patient care.

Pharmaceutical Price Regulation at 3-4. The evidence showed

that no country with price controls has had innovative success

in the pharmaceutical industry that matches that of the United

States. Jd. at 58-63. In fact, Danzon found “a rough negative

correlation between the stringency of a country’s price controls

25

and the innovative success of its domestic pharmaceutical

industry.” /d. at 63.

France, Germany, Sweden, and the United Kingdom have

adopted price restraint mechanisms. Although they differ in

their application, these countnes’ measures did lower

prescnption drug prices. However, these policies created a

conflict between the interest in containing prescription drug

costs and the economic burden subsequently borne by the

domestic pharmaceutical industry, particularly on

pharmaceutical R&D. This tension transcended the specifics of

each country’s pharmaceutical policies. Prescription Drugs,

GAO/HEHS-94-30, at ch. 3.1. Based on its analysis of the four

counties noted above, the GAO found that a reduction in

prescnption drug prices can be expected to reduce companies’

spending on pharmaceutical R&D because firms will have less

incentive to invest in R&D when they expect to receive lower

prices for their products. /d.

Price controls in other countries allow them to “free-ride”

on Amencan manufacturers who invest in innovation.

Pharmaceutical Price Regulation at 93. Controlled prices that

cover only slightly more than the marginal cost of

manufacturing a drug discourage pharmaceutical innovation by

making R&D a less profitable investment. Wrong Prescription,

12 Fordham Intell. Prop. Media & Ent. LJ. at 913.

Recognizing this cause and effect, the United States has

pressured other countries to relax their regulations on drug

prices. Harrison, Christopher Scott, Comment, Protection of

Pharmaceuticals As Foreign Policy: The Canada-U.S. Trade

Agreement and Bill C-22 Versus the North American Free

Trade Agreement and Bill C-9], 26 N.C. J. Int'l L. & Com.

Reg. 457, 457-62 (2001) (discussing how the United States

26

pressured Canada to abandon its compulsory licensing law for

patented pharmaceuticals).

From a public policy perspective, little can be gained from

the imposition of price controls over new drugs and a great deal

lost. Even if the government eliminated all profits from future

drugs coming into the market, the prospective savings in terms

of overall health care costs would be less thar one percent of

health care costs. Wrong Prescription, 12 Fordhain Intell. Prop.

Media & Ent. L.J. at 900. However, these actions would have

precipitous effects on the incentives for research on innovative

new medicines. Over the long term, patient welfare would be

lower and total health care costs higher. Pharmaceutical

Innovation, 24 Seton Hall L. Rev. at 1259.

Maine holds out the most feared consequence for

pharmaceutical companies’ failure to “negotiate” to the state’s

desired outcome: price controls. The certain adverse effect of

price controls on America’s premier pharmaceutical industry is

a factor this Court should consider as it analyzes the impact of

Maine Rx on the American common market.

+

CONCLUSION

Maine Rx would force pharmaceutical companies to

provide drugs to Maine residents at lower prices than are

available to the rest of the country. As a consequence,

Americans not residing in Maine are likely to pay higher drug

prices to make up the difference. Moreover, Maine’s threatened

price controls coerce cooperation in the Maine Rx statutory

scheme. This is protectionist legislation that cannot be

sanctioned under the dormant Commerce Clause.

- Co ee meme ©

27

The judgment of the First Circuit Court of Appeals should

be reversed.

DATED: September, 2002.

Respectfully submitted,

DEBORAH J. La FETRA

Counsel of Record

Pacific Legal Foundation

10360 Old Placerville Road,

Suite 100

Sacramento, Califorma 95827

Telephone: (916) 362-2833

Facsimile: (916) 362-2932

Counsel for Amicus Curiae

Pacific Legal Foundation