After several high-profile instances of skyrocketing drug costs—like Martin Schkreli’s unconscionable increase in the price of a drug used to treat AIDS related conditions—Maryland passed a law that banned pharmaceutical companies from price gouging generic drugs. The Fourth Circuit, however, recently held that the Maryland law violates the Dormant Commerce Clause Doctrine’s extraterritoriality principle by regulating sales in other states. The court’s ruling depends of a broad reading of the Maryland law. According to the court, the law applies to the sale of any drug that is also made available for sale in Maryland, even if the drugs at issue were not bound for the state. In other words, Maryland is regulating sales in other states simply because identical pills are being sold in Maryland.
Assuming that the Fourth Circuit’s reading of the statute is correct (Judge Wynn, who writes a lengthy dissenting opinion, disagrees with the majority’s interpretation), its constitutional analysis is correct as well. The extraterritoriality principle of the DCCD prohibits a state from directly regulating conduct outside its borders. The Maryland law should have been written more narrowly so that it applied only to sales within the state.
The Fourth Circuit’s opinion, however, could be read to suggest that even such a limited law might be unconstitutional because it would have the “practical effect” of controlling conduct beyond the state’s borders. As I have argued at length in a recent law review article, I think that would be wrong. State regulations often have practical effects beyond their borders. In my view, a state’s regulation of in-state conduct should violate the extraterritoriality principle only when it: (1) inescapably has the practical effect of regulating conduct beyond the state’s borders; and (2) such regulated extraterritorial conduct lacks a corresponding in-state interest. A narrower law that was tied to sales in Maryland would easily fit this test because the state would clearly have an interest in the sale of pills bound for its citizens.
As the Fourth Circuit mentions, one state should not be permitted to regulate the country. The extraterritoriality doctrine is needed to protect each state from overreach by other states. I think Judge Wynn’s dissent is therefore wrong when he essentially argues that the extraterritoriality is dead or should be read as narrowly as possible. However, state sovereignty demands that states be able to protect their interests, even if doing so has some indirect extraterritorial effects. The courts therefore need to strike a balance between state sovereignty and interstate harmony. I tried to do that in my law review article, but I don’t see it in the Fourth Circuit’s opinion.