A Gift in this Holiday Season…New York’s Opioid Surcharge Blocked by Judge as Unconstitutional
Health & Life Sciences Alert 12/21/18 Roger N. Morris, Leah A. Tinney
New York’s first-in-the-nation law imposing a surcharge on drug manufacturers and distributors based on the amount of opioids sold into the state has been struck down as unconstitutional.
On December 19, 2018, U.S. District Judge Katherine Polk Failla blocked the state of New York from enforcing a recently enacted law that aimed to collect $600 million from drug manufacturers and distributors to defray the costs of combating the opioid addiction epidemic. In her finding, Judge Polk Failla noted that the concerns driving New York’s decision to adopt the Opioid Stewardship Act (OSA) were valid, but the means by which the state attempted to extract payments from licensees violated the U.S. Constitution.
Language within the OSA mandates that opioid manufacturers and distributors collectively pay $100 million to the state every year, until 2024. The amount each licensee owed was based on self-reported data, capturing the amount of opioids sold into the state in the preceding year. The first of these reports was due to the state on August 1, 2018, and captured all opioid sales into New York in 2017.
The Healthcare Distribution Alliance, a coalition of opioid distribution companies, initiated a suit challenging the law’s constitutionality in July 2018. Months later, the Association for Accessible Medicines, a coalition of makers of generic drugs, and Dublin-based Mallinckrodt subsidiary SpecGx also filed lawsuits, seeking an injunction against a provision barring manufacturers and distributors from passing on the costs of stewardship payments to downstream purchasers.
Judge Polk Failla’s determination centered on this “pass-through” provision of the law. According to the court, the state’s ability to fine licensees who violate the section conflicts with the Dormant Commerce Clause of the Constitution in two key ways.
The first conflict, she wrote, is that the OSA could be interpreted to mean that the state may impose such a penalty on opioid sales made outside New York. Although the state argued that it has no plans to do so, this promise was not codified in the law.
“New York’s position is seriously, if not mortally, wounded by the fact that the text of the OSA places no such limitation on the pass-through prohibition,” Judge Polk Failla wrote. “If OSA’s provisions are given their clearest meaning, the Dormant Commerce Clause violation is clear. An opioid manufacturer based in Maine that wished to pass on the surcharge it paid on New York transactions by selling opioids at a markup to a pharmacy in New Mexico could face a million-dollar penalty from New York State.”
A second conflict would exist even if the state mitigated the above concern by limiting the pass-through provision to in-state purchasers. In that scenario, out-of-state drug companies who sell into New York could choose to pass on the cost of the surcharge to purchasers in other states. New York opioid customers would be protected from any price increases in their purchases, while New York would potentially receive a source of funding subsidized by out-of-state purchasers of opioids.
“New York could completely avoid the political consequences of its action, as no New York-based business or taxpayer would face a higher cost. Rather, out-of-state drug purchasers, with no representation in New York’s Legislature or executive, would bear the cost of New York’s policy program,” Judge Polk Failla wrote. “This shifting of burdens and benefits is antithetical to the idea of intra-national free trade and demonstrates why the Dormant Commerce Cause exists.”
The state had suggested in previous filings that the pass-through provision could be severed from the law, allowing the rest of the law to stand absent that section. Judge Polk Failla disagreed, saying that the intent of the law was never to have the annual $100 million payment raised on the backs of consumers.
“The Court understands that New York prefers to have $100 million in anticipated stewardship charges in its budget, but the Governor, Commissioner, and legislators explicitly pledged that the costs of the bill would not flow to end-users and pharmacies,” Judge Polk Failla wrote. “This clearly suggests that a bill that merely imposed a surcharge, without any mechanism for preventing the costs of that surcharge from flowing to the consumer, was ‘never intended.’”
The state is expected to appeal Judge Polk Failla’s decision. Alternatively, lawmakers may move to amend the law to address the court’s concerns. According to its spokeswoman, the New York Department of Health “is reviewing this decision and considering all . . . options.”
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