Judge Katherine Polk Failla, U.S. District Court for the Southern District of New York (Photo:  Diego M. Radzinschi/ALM)

A first-in-the-nation law passed this year in New York to curb the opioid epidemic by imposing a surcharge on opioid manufacturers and distributors based on the amount of product they sell in the state has been struck down as unconstitutional by a federal judge in Manhattan.

U.S. District Judge Katherine Polk Failla of the Southern District of New York said in a decision Wednesday that a section of the law intended to prevent opioid companies from passing the cost of the surcharge onto its customers violated a section of the U.S. Constitution.

The Healthcare Distribution Alliance, a coalition of opioid distribution companies, brought the litigation against the state in July, months after state lawmakers passed the law, called the Opioid Stewardship Act, in this year's state budget.

The law mandated that opioid and manufacturers collectively pay $100 million each year to the state over the next six years. The amount each company was expected to pay would have been determined by the state Department of Health based on the share of business they report in New York. The money was then expected to be used for opioid treatment, recovery, prevention and education services, according to the law.

The HDA said in a statement that, while it supports other methods to curb the opioid epidemic, it was grateful the court struck down the law.

“We are grateful for the court's determination that the Opioid Stewardship Act is unconstitutional,” the statement said. “The act's unconstitutional surcharge and cost-pass-through prohibition are the wrong way to address the opioid epidemic and would have resulted in significant disruption to patients and the healthcare system.”

M. Miller Baker, a partner at McDermott Will & Emery in Washington, D.C., represented the HDA in the matter. Baker said his client was delighted with the court's decision when reached by phone on Wednesday.

Failla said in her decision that the so-called pass-through provision of the law, which prohibits companies from passing on the cost of the surcharge, presented two conflicts with the Dormant commerce clause of the Constitution. Under the OSA, companies that seek to pass on that cost to consumers would face a financial penalty from the state.

The first conflict, she wrote, is that the text of the law could be interpreted to mean that DOH may unlawfully impose such a penalty on opioid sales made outside New York. The state has argued that it has no plans to do so, but Failla wrote that the promise wasn't 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,” 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.”

But even if the pass-through provision was only limited to in-state purchasers, it would still be unconstitutional, Failla wrote. If out-of-state drug companies who sell in New York are faced with the surcharge, they could lawfully choose to pass on that cost to purchasers in other states if they're not faced with the same penalty for doing so, she said.

“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,” 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, leaving it to be decided apart from the rest of the statute. That way, if the court struck down the pass-through provision, the rest of the law could still stand, if deemed to be constitutional. Failla disagreed, saying the intention of the law was never to have the annual $100 million Opioid Stewardship Fund 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,” 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.'”

It's possible the state could appeal the decision or lawmakers could move to amend the law to address the court's argument. A spokeswoman from DOH said they are reviewing the decision.

“The Department of Health is reviewing this decision and considering all our options,” the spokeswoman said. “New York State continues to take all steps necessary to fight the opioid epidemic.”

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