THE PATENT ACT AND THE CONSTITUTIONALITY OF STATE PHARMACEUTICAL REGULATION.

• Author: Feldman, Robin

1. INTRODUCTION

1. INTRODUCTION 40 II. STATES' RIGHTS IN THE FEDERAL SYSTEM 41 III. THREE LEVELS OF PREEMPTION & DRUG PAYMENT RATE REGULATION 44 IV. REGULATORY TAKINGS UNDER THE FIFTH AMENDMENT 50 V. EXAMPLES OF STATE REGULATION OF HEALTH CARE RATES 54 A. THE STATE IN ITS ROLE AS COMMERCIAL PAYER IN THE MARKETPLACE 56 VI. CONCLUSION 57 In recent years, pharmaceutical prices have risen at an alarming rate, increasing pressure on state budgets. In response, numerous states have begun to explore methods of addressing the problem, with some considering legislation to regulate drug prices directly. (1) In fact, one recent study indicates that in 2017, more than 80 pharmaceutical pricing bills were proposed in over 30 states nationwide. (2)

   This essay addresses issues of federalism, preemption and the Takings Clause as they relate to the intersection of patent law and state drug rate setting legislation. This work proceeds in three parts. Part I provides general background on the preemption doctrine as it applies to state regulation of areas that involve patents. Part II describes the three levels of preemption and applies those levels to state regulation of drug payment rates. Part III examines whether state regulation of drug payments would rise to the level of a regulatory taking under the Takings clause of the Fifth Amendment of the United States Constitution. Part IV provides existing examples of state regulation of health care rates. In addition, this section considers the issue of the state in its role as a commercial payer in the marketplace.

2. STATES' RIGHTS IN THE FEDERAL SYSTEM

   Under our federal system, states draw their power from the Tenth Amendment of the Constitution, which reserves to the states all power not specifically granted to the federal government nor forbidden by the Constitution. (3) The modern approach to the relationship between states and the federal government is one of concurrent and overlapping powers, with numerous state and federal regulatory programs existing in parallel. Examples run the gambit, from banking which operates under a dual system in which chartering taking place at either the national or state level, to federal and state taxation schemes, to securities law in which states are able to impose additional notice requirements on the sale of securities, to the joint federal and state Medicaid program in the healthcare realm. (4) Thus, as one of the author's has noted, "overlapping and concurrent powers are the norm, even when the federal government has staked out considerable territory." (5)

   Within this context, one cannot overemphasize the importance of a state's ability to respond to the needs of its local citizenry. The importance of local interests has a long and hallowed history in Constitutional jurisprudence, and states are considered to be on the frontlines of government "by the people." Given that law frequently involves settling the problems of people living together, such problems are likely to appear at the level of everyday life, close to local leadership and far from the hallways of the federal government. (6) Thus, states are considered particularly sensitive to, and particularly entitled to respond to, the needs of the population as those needs vary across different localities.

   Moreover, a state's ability to respond to the needs of its local citizenry is considered essential for securing the trust of the local electorate--and without that trust, states cannot play their proper role in maintaining the balance of power. Thus, "the 'political safeguards of federalism' ... depend on the states retaining important regulatory responsibilities and government functions mat touch the daily lives of their citizens." (7) In short, preemption must be cabined with particular care lest it threaten to "cut off state access to the wellsprings of popular support." (8)

   Notwithstanding the federal laws governing issuance validity, and infringement of a patent and the procedures to challenge a patent, states retain the ability to regulate traditional areas of state concern even if patents are involved. That a patent happens to be implicated in a certain issue does not automatically strip states of their core rights to regulate health, commerce, and contract law. For instance, states have the authority to regulate commercial contracts involving patents, deceptive practices involving patents, and in some cases, unfair competition involving patents. (9) Similarly, as part of their core rights, states have broad tax authority and may regularly tax products that implicate patents. (10) Moreover, states promulgate their own tax rules and regulations, including rules on exclusions, deductions and exemptions. By including healthcare expenditures in such rules, states already indirectly regulate the costs of healthcare. To put it simply, a state does not become impotent whenever a regulation would involve products that might be subject to a patent.

   The Federal Patent Act does not exist in a vacuum but rather arises against a backdrop of the commercial and economic systems in place within the states. At a basic level, the Patent Act "relies upon and presupposes a functioning state system of commerce and contract law." Commerce, contract and consumer laws traditionally are viewed as appropriate forums for reflecting and promoting local values and preferences, and as such, appropriate areas for state regulation. (11) State law cannot be entirely displaced simply because a particular commercial behavior relates to patents. In sum, as a general matter, the presence of patented products should not act to cut off a state's power in its traditional areas of activity.

3. THREE LEVELS OF PREEMPTION & DRUG PAYMENT RATE REGULATION

   Under modern Constitutional law, the doctrine of federal preemption delineates those areas in which state power is constrained by federal activity. Preemption generally comes in three forms: express, field, and conflict. Express preemption exists when Congress particularly specifies its intent to preempt state law. With field preemption, federal law may preempt state law if the "federal regulation [is] so pervasive as to make reasonable the inference that Congress left no room to supplement it." (12) Field preemption occurs when Congress "intended to foreclose any state regulation in the area, irrespective of whether state law is consistent or inconsistent with federal standards." (13) Finally, conflict preemption occurs when either "compliance with both federal and state regulations is impossible" or "state law 'stands as an obstacle to the accomplishment and execution'" of the federal scheme. (14) The following section examines drug payment rate regulation under the lens of each form of preemption.

   Express Preemption. The Patent Act does not expressly preempt drug payment rate regulation. As the Federal Circuit noted in 2007, "[t]here is no express provision in the patent statute that prohibits states from regulating the price of patented goods." (15) In the same vein, Judge Dyk in his dissent in the denial of an en banc hearing petition in Biotechnology, pointed out "[t]here is not a word in the cited legislative history of the Hatch-Waxman Act suggesting any concern about state price regulation of patented pharmaceutical products." (16) Quite simply, express preemption is not a concern here.

   Field Preemption. Nor is it likely that field preemption exists. The Patent Act does not regulate the price for any patented product. It does not guarantee or entitle a profit to the inventor at all, and most patent holders never garner any returns from their invention. Although patent holders are free to completely withhold their invention from the market, (17) for those who do choose to sell a product based on that patent, the Patent Act does not guarantee any particular level of profit, and certainly not at the level of a monopolist. In fact, the Supreme Court has held that given the language of the Patent Act, Congress could not have intended "the mere existence of a patent to constitute . .. market power." (18) In short, patent laws do not touch the issue of pricing or level of return in any manner.

   In addition, the very existence of the federal 340B program demonstrates that Congress did not intend to foreclose government regulation of the price of a patented product, including patented drugs, through the Patent Act. Born from a concern over increasing pharmaceutical prices, the federal 340B program requires pharmaceutical manufacturers that participate in Medicaid to provide discounted prices on covered outpatient drugs to healthcare facilities that serve vulnerable patient populations. Moreover, Congress continues to consider additional measures that address drug pricing, including the 2017 Improving Access to Affordable Prescription Drugs Act (19), which was introduced in the Senate on March 29, 2017.

   Congress would not have established the 340B program or continue to consider proposed drug pricing related legislation, if it believed that the Patent Act occupies the area of drug pricing as to foreclose any further regulation. Far from the "pervasive" regulation needed for field preemption, the Patent Act does not regulate the price of patented products, including pharmaceuticals, at all.

   Conflict Preemption. Lastly, conflict preemption is dubious as well. The first brand of conflict preemption, the "impossibility" type, is inapplicable given that one could comply with a rate setting law and the Patent Act simultaneously. As explained above, the Patent Act contains...