`Case 2:17-cv-02573-MCE-KJN Document 93 Filed 01/04/21 Page 1 of 15
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`UNITED STATES DISTRICT COURT
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`EASTERN DISTRICT OF CALIFORNIA
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`PHARMACEUTICAL RESEARCH AND
`MANUFACTURERS OF AMERICA,
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`No. 2:17-cv-02573-MCE-KJN
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`MEMORANDUM AND ORDER
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`Plaintiff,
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`v.
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`ROBERT P. DAVID, in his official
`capacity as Director of the California
`Office of Statewide Health Planning
`and Development,
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`Defendant.
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`Through the present action, Plaintiff Pharmaceutical Research and Manufacturers
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`of America (“PhRMA”) seeks a declaration that Section 4 of a California law, Senate
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`Bill 17 (“SB 17”), is unconstitutional and a permanent injunction preventing its
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`implementation by Defendant Robert P. David, Director of the Office of Statewide Health
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`Planning and Development (“OSHPD” or the “State”).1 Presently before the Court is
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`PhRMA’s Motion for Summary Judgment. ECF No. 64 (“PhRMA Mot.”). The Court
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`heard oral argument on December 17, 2020. For the reasons set forth below, that
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`Motion is DENIED.
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`1 Marko Mijic has replaced Robert P. David as the Acting Director of OSHPD.
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`Case 2:17-cv-02573-MCE-KJN Document 93 Filed 01/04/21 Page 2 of 15
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`BACKGROUND
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`A.
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`SB 17
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`On October 9, 2017, Governor Edmund G. Brown signed SB 17 into law. Section
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`4 of SB 17 amends the California Health and Safety Code to add Chapter 9, titled
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`“Prescription Drug Pricing for Purchasers,” which imposes various notice, reporting, and
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`justification obligations on the manufacturer of a prescription drug sold to certain
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`purchasers.2 More specifically, the manufacturer of a prescription drug subject to SB 17
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`must notify these purchasers at least 60 days before increasing the drug’s federally-
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`defined wholesale acquisition cost (“WAC”)3 if: (1) a course of therapy has a WAC of
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`more than $40, and (2) the proposed increase would result in a cumulative increase of
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`16 percent or more over the two calendar years prior to the current year. Cal. Health &
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`Safety Code § 127677(a)–(b). In addition to the date and amount of the planned
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`increase, each 60-day notice must include a statement as to whether a change or
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`improvement in the drug necessitates the price increase and describing the change, if
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`one occurred. Id. § 127677(c). The following legislative intent accompanies these new
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`obligations:
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`///
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`The Legislature finds and declares that the State of California
`has a substantial public interest in the price and cost of
`prescription drugs. California is a major purchaser . . . [and]
`also provides major tax expenditures through the tax exclusion
`of employer sponsored coverage and tax deductibility . . . of
`excess health care costs for individuals and families.
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`2 The statute specifies these purchasers as follows: (1) “[a] state purchaser in California,
`including, but not limited to, the Public Employees’ Retirement System, the State Department of Health
`Care Services, the Department of General Services, and the Department of Corrections and
`Rehabilitation, or an entity acting on behalf of a state purchaser”; (2) “[a] licensed health care service
`plan”; (3) “[a] health insurer holding a valid outstanding certificate of authority from the Insurance
`Commissioner”; and (4) a pharmacy benefit manger (“PBM”), as defined in California Business and
`Professions Code § 4430(j). Cal. Health & Safety Code § 12675(a)(1)–(4).
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`3 The WAC is defined by federal statute as “with respect to a drug or biological, the manufacturer’s
`list price for the drug or biological to wholesalers or direct purchasers in the United States, not including
`prompt pay or other discounts, rebates or reductions in price . . .” 42 U.S.C. § 1395w-3a(c)(6)(B).
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`Case 2:17-cv-02573-MCE-KJN Document 93 Filed 01/04/21 Page 3 of 15
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`It is the intent of the Legislature in enacting this chapter to
`provide notice and disclosure of information relating to the cost
`and pricing of prescription drugs
`in order
`to provide
`accountability to the state for prescription drug pricing.
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`It is further the intent of the Legislature to permit a
`manufacturer of a prescription drug to voluntarily make pricing
`decisions regarding a prescription drug, including any price
`increases. It is further the intent of the Legislature to permit
`purchasers, both public and private, as well as pharmacy
`benefit managers,
`to negotiate discounts and rebates
`consistent with existing state and federal law.
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`Id. § 127676.
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`B.
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`Procedural History
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`PhRMA commenced this action on December 8, 2017, seeking declaratory and
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`injunctive relief and naming OSHPD and Governor Brown as Defendants. The
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`Complaint alleged that Section 4 of SB 17 violates the Commerce Clause of the United
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`States Constitution by regulating interstate commerce through a de facto 60-day price
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`freeze nationwide on qualifying drugs; violates the First Amendment by compelling
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`pharmaceutical manufacturers to communicate specified information when they would
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`otherwise remain silent; and violates the Fourteenth Amendment’s Due Process Clause
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`because it is unconstitutionally vague about the possible retroactive application of
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`certain provisions.
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`On January 26, 2018, OSHPD and Governor Brown collectively filed a Motion to
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`Dismiss the Complaint. ECF No. 19. The Court granted that Motion, finding that
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`(1) Governor Brown must be dismissed as a party because he is immune from suit and
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`(2) the Complaint failed to allege facts sufficient to establish PhRMA’s standing. ECF
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`No. 37. PhRMA was granted leave to amend and subsequently filed its First Amended
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`Complaint (“FAC”). ECF No. 38. OSHPD filed a Motion to Dismiss the FAC, arguing
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`that this suit must again be dismissed for PhRMA’s lack of standing and for failure to
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`state a claim. ECF No. 43. The Court denied OSHPD’s motion, finding that the FAC
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`contained non-conclusory allegations in support of PhRMA’s Commerce Clause, First
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`Amendment, and Fourteenth Amendment claims. ECF No. 55.
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`Case 2:17-cv-02573-MCE-KJN Document 93 Filed 01/04/21 Page 4 of 15
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`On November 22, 2019, a Supplemental Pretrial Scheduling Order (“SPTSO”)
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`was issued, which required non-expert discovery to be completed within one year and
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`dispositive motions to be filed within 180 days after the close of discovery. ECF No. 58.
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`PhRMA objected to the SPTSO, seeking to bypass discovery and proceed directly to
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`summary judgment given that its arguments are facial challenges to SB 17’s
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`constitutionality. ECF No. 59. OSHPD, however, wanted to conduct discovery. ECF
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`No. 60. The Court sustained PhRMA’s objections and set a briefing schedule for
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`summary judgment. ECF No. 61. This matter has now been fully briefed. ECF Nos. 64,
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`70, 73, 74.
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`STANDARD
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`The Federal Rules of Civil Procedure provide for summary judgment when “the
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`movant shows that there is no genuine dispute as to any material fact and the movant is
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`entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a); see also Celotex Corp. v.
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`Catrett, 477 U.S. 317, 322 (1986). One of the principal purposes of Rule 56 is to
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`dispose of factually unsupported claims or defenses. Celotex, 477 U.S. at 325.
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`Rule 56 also allows a court to grant summary judgment on part of a claim or
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`defense, known as partial summary judgment. See Fed. R. Civ. P. 56(a) (“A party may
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`move for summary judgment, identifying each claim or defense—or the part of each
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`claim or defense—on which summary judgment is sought.”); see also Allstate Ins. Co. v.
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`Madan, 889 F. Supp. 374, 378–79 (C.D. Cal. 1995). The standard that applies to a
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`motion for partial summary judgment is the same as that which applies to a motion for
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`summary judgment. See Fed. R. Civ. P. 56(a); State of Cal. ex rel. Cal. Dep’t of Toxic
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`Substances Control v. Campbell, 138 F.3d 772, 780 (9th Cir. 1998) (applying summary
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`judgment standard to motion for summary adjudication).
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`In a summary judgment motion, the moving party always bears the initial
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`responsibility of informing the court of the basis for the motion and identifying the
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`Case 2:17-cv-02573-MCE-KJN Document 93 Filed 01/04/21 Page 5 of 15
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`portions in the record “which it believes demonstrate the absence of a genuine issue of
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`material fact.” Celotex, 477 U.S. at 323. If the moving party meets its initial
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`responsibility, the burden then shifts to the opposing party to establish that a genuine
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`issue as to any material fact actually does exist. Matsushita Elec. Indus. Co. v. Zenith
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`Radio Corp., 475 U.S. 574, 586–87 (1986); First Nat’l Bank v. Cities Serv. Co., 391 U.S.
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`253, 288–89 (1968).
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`In attempting to establish the existence or non-existence of a genuine factual
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`dispute, the party must support its assertion by “citing to particular parts of materials in
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`the record, including depositions, documents, electronically stored information,
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`affidavits[,] or declarations . . . or other materials; or showing that the materials cited do
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`not establish the absence or presence of a genuine dispute, or that an adverse party
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`cannot produce admissible evidence to support the fact.” Fed. R. Civ. P. 56(c)(1). The
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`opposing party must demonstrate that the fact in contention is material, i.e., a fact that
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`might affect the outcome of the suit under the governing law. Anderson v. Liberty Lobby,
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`Inc., 477 U.S. 242, 248, 251–52 (1986); Owens v. Local No. 169, Assoc. of W. Pulp and
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`Paper Workers, 971 F.2d 347, 355 (9th Cir. 1987). The opposing party must also
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`demonstrate that the dispute about a material fact “is ‘genuine,’ that is, if the evidence is
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`such that a reasonable jury could return a verdict for the nonmoving party.” Anderson,
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`477 U.S. at 248. In other words, the judge needs to answer the preliminary question
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`before the evidence is left to the jury of “not whether there is literally no evidence, but
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`whether there is any upon which a jury could properly proceed to find a verdict for the
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`party producing it, upon whom the onus of proof is imposed.” Anderson, 477 U.S. at 251
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`(quoting Improvement Co. v. Munson, 81 U.S. 442, 448 (1871)) (emphasis in original).
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`As the Supreme Court explained, “[w]hen the moving party has carried its burden under
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`Rule [56(a)], its opponent must do more than simply show that there is some
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`metaphysical doubt as to the material facts.” Matsushita, 475 U.S. at 586. Therefore,
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`“[w]here the record taken as a whole could not lead a rational trier of fact to find for the
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`nonmoving party, there is no ‘genuine issue for trial.’” Id. at 587.
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`In resolving a summary judgment motion, the evidence of the opposing party is to
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`be believed, and all reasonable inferences that may be drawn from the facts placed
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`before the court must be drawn in favor of the opposing party. Anderson, 477 U.S. at
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`255. Nevertheless, inferences are not drawn out of the air, and it is the opposing party’s
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`obligation to produce a factual predicate from which the inference may be drawn.
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`Richards v. Nielsen Freight Lines, 602 F. Supp. 1224, 1244–45 (E.D. Cal. 1985), aff’d,
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`810 F.2d 898 (9th Cir. 1987).
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`ANALYSIS
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`PhRMA argues that SB 17 is unconstitutional on its face in violation of the
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`dormant Commerce Clause and First Amendment.4 A facial challenge is a challenge to
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`an entire legislative enactment or provision. Foti v. City of Menlo Park, 146 F.3d 629,
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`635 (9th Cir. 1998) (explaining that a statute is facially unconstitutional if “it is
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`unconstitutional in every conceivable application, or it seeks to prohibit such a broad
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`range of protected conduct that it is unconstitutionally overbroad”). “A facial challenge to
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`a legislative Act is, of course, the most difficult challenge to mount successfully, since
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`the challenger must establish that no set of circumstances exists under which the Act
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`would be valid.” United States v. Salerno, 481 U.S. 739, 745 (1987). “In determining
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`whether a law is facially invalid, we must be careful not to go beyond the statute’s facial
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`requirements and speculate about ‘hypothetical’ or ‘imaginary’ cases.” Wash. State
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`Grange v. Wash. State Republican Party, 552 U.S. 442, 449–50 (2008). Facial
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`challenges are disfavored because they “often rest on speculation” and as a result, they
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`“raise the risk of premature interpretation of statutes on the basis of factually barebones
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`records.” Id. at 450 (internal citation and quotation marks omitted).
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`This case is also unique in that this Court has rarely encountered a situation
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`where a plaintiff seeks to bypass discovery and proceed directly to summary judgment.
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`4 PhRMA does not raise its Fourteenth Amendment Due Process claim in its present Motion.
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`PhRMA’s position has been that discovery is unnecessary because SB 17 is
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`unconstitutional on its face and thus, no further fact-finding is needed. See ECF No. 59.
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`Given the high standards for both summary judgment and facial challenges, PhRMA
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`must show SB 17 is invalid in all circumstances but as discussed below, the Court finds
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`that there are genuine disputes of material fact which prevent a finding that SB 17 is
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`unconstitutional on its face.
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`A.
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`Dormant Commerce Clause
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`The Commerce Clause empowers Congress to “regulate Commerce . . . among
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`the several States.” U.S. Const., art. I, § 83, c. 3. “The modern law of what has come to
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`be called the dormant Commerce Clause is driven by concern about ‘economic
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`protectionism that is, regulatory measures designed to benefit in-state economic
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`interests by burdening out-of-state competitors.’” Dep’t of Revenue of Ky. v. Davis,
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`553 U.S. 328, 337–38 (2008) (citing New Energy Co. of Ind. v. Limbach, 486 U.S. 269,
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`273–74 (1988)).
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`The Supreme Court has adopted a two-tiered approach to analyze whether a
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`state statute violates the Commerce Clause. First, “[w]hen a state statute directly
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`regulates or discriminates against interstate commerce, or when its effect is to favor in-
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`state economic interests over out-of-state interests,” the statute is generally struck down
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`without further inquiry. Brown-Forman Distillers Corp. v. N.Y. State Liquor Auth.,
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`476 U.S. 573, 579 (1986) (internal citations omitted). Second, when “a statute has only
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`indirect effects on interstate commerce and regulates evenhandedly,” the court must
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`“examine[] whether the State’s interest is legitimate and whether the burden on interstate
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`commerce clearly exceeds the local benefits.” Id. (citing Pike v. Bruce Church, Inc.,
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`397 U.S. 137, 142 (1970)).
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`Here, PhRMA bases its challenge on the first prong, i.e., whether SB 17 directly
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`regulates interstate commerce. “Direct regulation occurs when a state law directly
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`affects transactions that take place across state lines or entirely outside of the state’s
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`borders.” Valley Bank of Nevada v. Plus Sys., Inc., 914 F.2d 1186, 1189–90 (9th Cir.
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`1990) (internal quotation marks omitted). “The Supreme Court has emphasized that the
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`‘practical effect’ of a challenged statute is ‘the critical inquiry’ in determining whether that
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`statute constitutes direct regulation.” S.D. Myers, Inc. v. City & Cty. of S.F., 253 F.3d
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`461, 467 (9th Cir. 2001) (quoting Healy v. Beer Inst., 491 U.S. 324, 336 (1989)). The
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`practical effect “must be evaluated not only by considering the consequences of the
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`statute itself, but also by considering how the challenged statute may interact with the
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`legitimate regulatory regimes of other States . . . .” Healy, 491 U.S. at 336.
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`As indicated above, SB 17 requires prescription drug manufacturers to provide
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`60-day advance notice of a 16 percent or more increase in the WAC of a prescription
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`drug. Cal. Health & Safety Code § 127677(a)–(b). PhRMA posits that SB 17 directly
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`regulates out-of-state drug prices because the WAC is defined by federal statute and
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`must be uniform in every state. PhRMA Mot. at 8. However, these characteristics are
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`insufficient on their own to support PhRMA’s conclusion. See Nat’l Ass’n of Optometrists
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`& Opticians v. Harris, 682 F.3d 1144, 1148 (9th Cir. 2012) (“[A] state regulation does not
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`become vulnerable to invalidation under the dormant Commerce Clause merely because
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`it affects interstate commerce.”).
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`PhRMA claims SB 17 directly impacts out-of-state drug prices but what that
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`impact may actually be remains unclear. First, the WAC is a list price and not a
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`transaction price. See 42 U.S.C. § 1395w-3a(c)(6)(B). The transaction price of a
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`prescription drug is the result of negotiations between the manufacturer and purchaser
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`and includes discounts and rebates which are explicitly excluded from the federal
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`definition of the WAC. Id.; see Molina Decl., ECF No. 70-2, ¶¶ 15–19 (“Molina Decl.”).
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`Second, SB 17 is a notice statute rather than a price control or price tying statute. In
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`other words, SB 17 does not necessarily dictate the transaction price of prescription
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`drugs in other states. Compare Brown-Forman, 476 U.S. at 576, 583–84 (holding that
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`New York liquor affirmation statute essentially regulated the price of liquor in other states
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`by requiring distillers to affirm that the liquor prices in other states are not lower than
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`those in New York); Ass’n for Accessible Medicines v. Frosh, 887 F.3d 664, 673 (4th Cir.
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`2018) (finding Maryland statute that prohibited drug manufacturers from “price gouging”
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`essentially controlled the price of transactions that occur outside the state).
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`PhRMA also equates the 60-day advance notice period to a nationwide price
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`freeze which means that manufacturers cannot change the WAC outside California and
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`still comply with their legal obligations under SB 17. PhRMA Mot. at 8, 9 (“The fact that
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`SB 17 directly freezes a national price suffices to render it invalid.”). In support of its
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`argument that SB 17 has extraterritorial effects on out-of-state laws, PhRMA provides
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`three examples. First, PhRMA contends that the WAC is a component of reimbursement
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`formulas under several state Medicaid laws and thus SB 17 interferes with those laws.
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`Id. at 9. According to one of the State’s experts, however, none of the states use the
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`WAC solely in their reimbursement formulas:
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`In more than 86 percent of the states (44 of 51 [including
`D.C.]), Medicaid reimbursement is based on the lowest of
`several different prices, including WAC. Out of the 44 states
`that use the lowest of several prices in the reimbursement
`formula, 29 states use WAC among other prices to determine
`the lowest price only if Actual Acquisition Cost (“AAC”) or the
`National Average Drug Acquisition Cost (“NADAC”) is not
`available.
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`. . .
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`Furthermore, 39 of the 44 states that include WAC among
`several prices in their “lowest of” formulas also include NADAC
`. . . . NADAC is almost always lower than WAC. Therefore,
`WAC is not likely to be the basis of reimbursement in these
`states. This is also true because, in addition to NADAC, the
`list of several prices to determine the lowest one includes
`[Affordable Care Act Federal Upper Limit (“FUL”)] and
`[Maximum Allowed Cost (“MAC”)] in the various states’
`reimbursement formulas.
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`Of the remaining 7 states, 3 have reimbursement formulas
`which do not use the “lower of” language, but these
`reimbursement formulas specify that AAC or NADAC is the
`basis for reimbursement amount. For these states, WAC is
`only used if AAC or NADAC is not available.
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`. . .
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`The remaining 4 states have reimbursement formulas that do
`not include WAC in the list of several prices to determine the
`lowest price.
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`Case 2:17-cv-02573-MCE-KJN Document 93 Filed 01/04/21 Page 10 of 15
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`Saha Decl., ECF No. 70-1, ¶¶ 37–40 (“Saha Decl.”). Because state Medicaid
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`reimbursement does not rely necessarily on the WAC, it is difficult to see how SB 17
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`interferes with other states’ Medicaid laws.
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`PhRMA next contends that the federal government relies on the WAC in its
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`reimbursement formulas for Medicare Parts B and D. PhRMA Mot. at 9. Regarding
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`Medicare Part B reimbursement, the State’s expert offers the following explanation:
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`Since January 2005, the [Medicare Part B] reimbursement
`amount (also referred to as the payment limit) has generally
`been based on Average Sales Price (ASP) plus 6 percent. The
`ASP is computed using manufacturers’ actual sales, i.e., list
`price (i.e., WAC) less all price concessions. Thus, the actual
`prices in Medicare Part B reimbursements is not WAC, but a
`transaction price
`that reflects various negotiated price
`concessions. As a result, a change in WAC for a drug does
`not necessarily translate in a commensurate change in the
`reimbursement amounts (i.e., payment limits).
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`Saha Decl., ¶ 28. As for Medicare Part D, reimbursement is based on negotiations and
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`a competitive bidding process, and while the WAC may serve as a basis for the
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`negotiated prices, “the net prices received by the drug manufacturers for Part D drugs
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`are typically not equal to WAC, and these net prices may change even if WAC does not
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`change.” Id. ¶¶ 32, 34–35. Once again, it is unclear what impact, if any, SB 17 has on
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`Medicare reimbursement.
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`Lastly, PhRMA argues that because the WAC is the contractual starting point in
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`private contract negotiations, SB 17 essentially controls market transactions nationwide
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`and forces manufacturers to change their contracting behavior. PhRMA Mot. at 9.
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`However, PhRMA does not provide any explanation or examples as to how these market
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`transactions will be impacted, especially since such contracts involve negotiations on a
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`wide array of factors, including rebates and discounts.5 See Molina Decl., ¶¶ 15–22.
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`PhRMA seeks to infer direct regulation but fails to show how such negotiations will be
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`affected, especially since SB 17 notices are only required when the WAC increases by
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`16 percent or more.
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`In conclusion, PhRMA relies on a general proposition that because the WAC is
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`federally defined and must be uniform nationwide, SB 17 directly regulates out-of-state
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`drug prices. However, this alone does not render SB 17 unconstitutional. There are
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`genuine disputes of material fact as to whether providing advance notice of certain
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`increases in a prescription drug’s WAC results in either direct or extraterritorial
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`regulation. Ultimately, PhRMA has not met its burden in showing that SB 17 violates the
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`dormant Commerce Clause on its face and, accordingly, PhRMA’s Motion is DENIED as
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`to this claim.
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`B.
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`First Amendment
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`“As a general rule, laws that by their terms distinguish favored speech from
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`disfavored speech on the basis of the ideas or views expressed are content based.”
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`Turner Broad. Sys. v. F.C.C., 512 U.S. 622, 643 (1994). “A speech restriction is content-
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`neutral if it is ‘justified without reference to the content of the regulated speech.’” S.O.C.,
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`Inc. v. Cty. of Clark, 152 F.3d 1136, 1145 (9th Cir. 1998) (quoting Clark v. Cmty. for
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`Creative Non-Violence, 468 U.S. 288, 293 (1984)). “Content-based regulations are
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`presumptively unconstitutional” and “pass constitutional muster only if they are the least
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`restrictive means to further a compelling interest.” Id.
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`5 PhRMA relies on Nat’l Collegiate Athletic Ass’n v. Miller, 10 F.3d 633 (9th Cir. 1993), in arguing
`that SB 17’s regulation of a national list price violates the per se rule against state regulation in areas
`where national uniformity is required. In that case, the Ninth Circuit invalidated a Nevada statute that
`imposed standards for how the National Collegiate Athletic Association (“NCAA”), an interstate
`organization, conducted its enforcement proceedings on grounds that national uniformity is necessary for
`the NCAA’s operation and that it could not adopt alternative procedures for its business in other states. Id.
`at 638–39. Unlike the NCAA, the pharmaceutical industry is not a nationally uniform business since it is
`subject to different regulations in different states, as evidenced by the variance in state Medicaid and
`Medicare laws. See Saha Decl., ¶¶ 28, 32, 34–45, 37–40. Furthermore, there are a multitude of factors
`besides the WAC that are involved in pharmaceutical drug pricing. See Molina Decl., ¶¶ 15–22.
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`Even a statute that appears neutral on its face as to content and speaker can be
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`rendered unconstitutional if its purpose is to suppress speech and it unjustifiably burdens
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`expression. Sorrell v. IMS Health Inc., 564 U.S. 552, 565–66 (2011). “Commercial
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`speech is no exception.” Id. at 566. A “consumer’s concern for the free flow of
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`commercial speech often may be far keener than his concern for urgent political
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`dialogue.” Bates v. State Bar of Az., 433 U.S. 350, 364 (1977). “Commercial speech is
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`that ‘which does no more than propose a commercial transaction.’” Valle del Sol Inc. v.
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`Whiting, 709 F.3d 808, 818 (9th Cir. 2013) (internal citation omitted). “Such speech is
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`protected by the First Amendment, but to a lesser degree than other types of speech.”
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`Id.
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`Restrictions or prohibitions on commercial speech are traditionally subject to
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`intermediate scrutiny under the test laid out in Cent. Hudson Gas & Elec. Corp. v. Pub.
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`Serv., Comm’n of N.Y., 447 U.S. 557, 566 (1980). However, “[f]ive years after Central
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`Hudson, the [Supreme] Court held that Central Hudson’s intermediate scrutiny test does
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`not apply to compelled, as distinct from restricted or prohibited, commercial speech.”
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`CTIA – The Wireless Ass’n v. City of Berkeley, Cal., 928 F.3d 832, 842 (9th Cir. 2019).
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`Instead, when the government seeks to compel commercial speech, the Supreme
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`Court’s holding in Zauderer v. Office of Disciplinary Counsel of the Supreme Ct. of Ohio,
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`471 U.S. 626 (1985), applies. In such cases, “the government may compel truthful
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`disclosure in commercial speech as long as the compelled disclosure is ‘reasonably
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`related’ to a substantial government interest, and involves ‘purely factual and
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`uncontroversial information’ that relates to the service or product provided.” CTIA,
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`928 F.3d at 842 (quoting Zauderer, 471 U.S. at 651) (internal citations omitted).
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`PhRMA claims the following provision violates the First Amendment: “The notice
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`required by subdivision (a) shall include a statement regarding whether a change or
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`improvement in the drug necessitates the price increase. If so, the manufacturer shall
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`describe the change or improvement.” Cal. Health & Safety Code § 127677(c)(2). First,
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`the parties disagree as to whether SB 17 regulates commercial speech. If commercial
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`speech is involved, then the Zauderer test applies. If not, this Court must then determine
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`whether SB 17 is content-based and survives strict scrutiny or, alternatively, survives
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`rational basis review. In this instance, however, PhRMA ultimately fails to demonstrate
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`that SB 17 would not pass any level of scrutiny or review.
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`The State claims it “has a substantial public interest in the price and cost of
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`prescription drugs” as a major purchaser and further asserts that greater insight and
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`transparency into rising drug prices is necessary to ensure that such prices do not
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`threaten access to life-saving treatments. Def.’s Opp. Mot. Summ. J., ECF No. 70, at 17
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`(“State Opp.”); see Cal. Health & Safety Code § 127676. Requiring advance notice of
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`certain increases in the WAC “allows purchasers proactively to negotiate drug prices
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`before an eventual price increase may go into effect, and to find other alternative
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`therapeutics.” State Opp. at 18 (“Understanding whether a price increase is or is not the
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`result of a change or improvement in a drug also increases drug pricing transparency.”).
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`In response to these stated interests, PhRMA asserts that the State has failed to
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`demonstrate any sufficient interest that SB 17 serves, such as the prevention of
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`consumer deception or the promotion of health and safety, or connect such interests with
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`the scope of the notice and justification requirements. See PhRMA Mot. at 17–18. First,
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`PhRMA contends that if the State is concerned with drug pricing transparency, then all
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`market participants, such as pharmacy benefit managers, pharmacies, and wholesalers,
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`would also be subject to SB 17’s notice requirement. Id. at 18–19. However,
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`manufacturers are the ones who set or increase the WAC, which is already a publicly
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`available benchmark, thus an argument that they are being discriminated against is
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`unpersuasive. See State Opp. at 16; Saha Decl., ¶ 25.
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`PhRMA next argues that the State’s interest in addressing rising drug costs is
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`contradicted by the legislative intent, which states that pricing decisions should be left to
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`the manufacturers. PhRMA Mot. at 17–18; see Cal. Health & Safety Code § 127676. If
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`the State intends to control prices, then advance notice requirements are not the proper
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`means to do so and thus, the “only possible way the compelled statements could curb
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`drug prices would be through public shaming.” PhRMA Mot. at 18. PhRMA relies on
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`Nat’l Assn’ of Mfrs. v. SEC (“NAM”), which involved a requirement that mineral traders
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`must disclose whether their products were “conflict free.” 800 F.3d 518, 530 (D.D.C.
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`2015). The court found that such a disclosure was “hardly factual and non-ideological,”
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`and thus the requirement essentially forced “a company to publicly condemn itself” if its
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`products were not “conflict free.” Id. (internal citation and quotation marks omitted).
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`Unlike the disclosure requirement in NAM, however, explaining whether a 16 percent or
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`more increase in the WAC results from a change or improvement in the drug is hardly
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`inflammatory and does not force manufacturers to promote a state-sponsored message.
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`Such explanations do not on their own reach the level of public condemnation PhRMA
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`suggests and are related to the State’s interest in drug