In light of the court’s ruling, the Oregon Department of Consumer and Business Services (DCBS) announced on February 21 that it is indefinitely suspending enforcement of the Act’s annual price increase reporting requirement, but that other manufacturer drug price reporting obligations, including the new drug and 60-day advance notice of price increase reporting requirements, are still in effect.

The PhRMA v. Stolfi ruling is a significant development in the realm of state drug price transparency laws. Not only has it resulted in Oregon’s annual price increase reporting requirements being suspended, but — if followed by other courts — the district court’s reasoning could have far broader implications. Numerous other states have enacted similar laws that require reporting of significant pricing information from manufacturers or other health care entities that could potentially be subject to similar challenges. That said, the district court’s opinion will likely not be the final word. On March 15, an appeal was filed by DCBS to the Ninth Circuit. As the district court itself noted in its declaratory judgment, “appellate review” of the district court’s opinion “is likely to lead to the termination of [the] litigation,” and it remains to be seen if the Ninth Circuit will uphold the lower court’s reasoning.

Background

The Act requires manufacturers to annually report information for certain types of prescription drugs that have a qualifying price increase, including the amount of the price increase, historic drug pricing data, factors that contributed to the price increase, direct costs to manufacturer the drug, and marketing and distribution information. A manufacturer that fails to report the required information may face up to $10,000 in civil penalties per day of violation. DCBS is required to publicly disclose the reported information unless (1) the manufacturer demonstrates that the information qualifies as a “trade secret” under Oregon law and (2) DCBS determines that “the public interest does not require disclosure of the information.” The second prong of this test is referred to as the “public-interest exception” and permits DCBS to disclose trade secrets where the agency deems the public interest to require such disclosure.

In 2019, PhRMA filed a lawsuit challenging the Act, alleging that the law: (1) violates the Takings Clause by permitting DCBS to disclose manufacturer trade secret information under the public-interest exception, thereby amounting to taking without just compensation; (2) infringes upon the Free Speech Clause by requiring manufacturers to justify their pricing decisions, constituting government-compelled speech; (3) violates the dormant Commerce Clause by restricting manufacturer drug prices nationwide; and (4) conflicts with and is therefore preempted by the federal Defend Trade Secrets Act of 2016 (DTSA). PhRMA’s lawsuit had also challenged an Oregon law requiring advance notice for qualifying price increases, 2019 Or. L. Ch. 436, but the parties agreed to stay proceedings on that challenge, and it was ultimately withdrawn by PhRMA through an amended complaint.

District Court Opinion

On February 16, 2024, the district court granted a declaratory judgment to PhRMA, and its full opinion followed on March 19, 2024. As described below, the court held that the Act was unconstitutional under the First Amendment and the Takings Clause. However, it denied summary judgment for both parties on PhRMA’s dormant Commerce Clause claim, and dismissed PhRMA’s preemption claim.

A.   Takings Clause (Fifth Amendment)

The court concluded that the Act’s public-interest exception results in a regulatory taking without just compensation in violation of the Fifth Amendment’s Takings Clause. In applying the factors identified by the Supreme Court in Ruckelshaus v. Monsanto Co., 467 U.S. 986 (1984), for evaluating whether a regulatory taking has occurred, the court concluded that all such factors supported the finding of a regulatory taking. Among other things, the court noted that DCBS had not explained how it determines when the public interest requires publication, which, in practice, places “an extremely low burden on [Oregon]” and results in an “irrevocable loss” for affected manufacturers. The court also explained that because the state is legally compelling the involuntary disclosure of trade secret information, manufacturers have a reasonable investment-backed expectation that the state will maintain the secrecy of such information.

The court also concluded that declaratory relief was warranted on the Takings Clause claim. The court noted that, as of May 2020, manufacturers had identified over 4,800 trade secrets in their submissions to DCBS and that, unless just compensation was provided, a taking would occur with each mandated public disclosure of such information. While no public disclosures had yet occurred, the court found that the “very real threat” of such destructive disclosures warranted declaratory relief.

B.         Free Speech Clause (First Amendment)

The court also concluded the Act's annual price increase reporting requirements violated the Free Speech Clause of the First Amendment. In reaching this conclusion, the court first evaluated whether the reporting requirements constituted compelled private speech or commercial speech and sided with Oregon’s stance that the Act regulates commercial speech. In support of this conclusion, the court observed that manufacturers are acting out of an “economic motivation” to provide information about prescription pricing in order to participate in the market, which the court found to provide strong support that the speech in question is commercial.

The court next evaluated whether the compelled commercial speech should be evaluated under intermediate scrutiny, which requires the government to directly advance a substantial governmental interest in its regulation of the conduct and to choose means not more extensive than necessary, or under a lower standard of review. The court concluded that intermediate scrutiny was appropriate, in part because manufacturers were being compelled to speak on a controversial topic and, in particular, justify why they fall on a side that Oregon “deems the wrong side” of the controversy.

In applying intermediate scrutiny, the court concluded that Oregon had not satisfied its burden. Oregon had asserted various governmental interests, including providing accountability for prescription drug pricing to permit purchasers and pharmacy benefit managers to negotiate discounts and rebates and providing buyers of prescription drugs with better information about drug pricing. But even assuming these constituted substantial governmental interests, the court found that Oregon had failed to show how the Act would actually directly advance such interests.

C.         Commerce Clause (Article I)

With respect to the dormant Commerce Clause claim, the court declined to grant summary judgment for either party. The court concluded that it could not determine the practical effect of the Act on interstate commerce, and, therefore, could not determine whether the extra-territorial effect of the Act would constitute a violation of the dormant Commerce Clause.

In particular, the court found that PhRMA had not provided evidence that having to report pricing information to Oregon could result in companies making different choices in other states. The court also noted that PhRMA’s dormant Commerce Clause argument was similar to an argument considered by the Ninth Circuit in PhRMA v. David. In that case, PhRMA had filed suit challenging California's price increase reporting law, S.B. 17, on dormant Commerce Clause and other grounds. The David district court denied PhRMA’s motion for summary judgment as to the dormant Commerce Clause claim, concluding that genuine issues of material fact existed as to whether S.B. 17’s advance notice requirements resulted in impermissible extraterritorial regulation. The Ninth Circuit affirmed, and PhRMA stipulated to the dismissal of the case with prejudice.

D.         Supremacy Clause (Article VI)

The court rejected PhRMA’s claim that the federal DTSA preempted the Act’s public-interest exception and granted summary judgment in favor of Oregon. PhRMA had asserted two theories of preemption, (1) that it was impossible to comply with both the DTSA and the public-interest exception and (2) that the public-interest exception posed an obstacle to the purpose and objectives of the DTSA. The court rejected both arguments.

In rejecting the impossibility preemption argument, the court reasoned that it would be possible to comply with both laws. Because disclosure under the public-interest exception would not clearly constitute an impermissible misappropriation under the DTSA, the two laws could simultaneously be complied with; and, in any event, DTSA’s savings clause would prevent manufacturers from bringing a claim under the DTSA for Oregon’s disclosure of trade secrets. With respect to the obstacle preemption argument, the court reasoned that nothing in text of the DTSA demonstrated that the federal law was intended to cabin states’ ability to impose reporting requirements. As such, the court concluded that the Act’s public-interest exception did not stand as an obstacle to the accomplishment of the purpose of the DTSA.

*           *           *

If you have any questions about the decision in PhRMA v. Stolfi and its implications, please contact any of the authors of this alert or the Hogan Lovells lawyer with whom you regularly work.

Authored by Melissa Bianchi, James Huang, Mahmud Brifkani, Breanna Reeves, Xochitl Halaby, and Rebecca Popkin