A bottle of insulin as seen on Friday, Jan. 25, 2008. (sriram bala/Courtesy under Creative Commons)

The pharmaceutical industry is taking Nevada’s new insulin transparency law to court.

Two drug lobbying groups, the Pharmaceutical Research and Manufacturers of America (PhRMA) and the Biotechnology Innovation Organization (BIO), filed a lawsuit on Friday asking the U.S. District Court to declare that provisions of the law are preempted by federal law and violate the Constitution. The language of the complaint draws heavily on arguments the industry made during the legislative session, arguments that legislative attorneys eventually rebuffed, saying that the policy is “legally defensible.”

The two groups take exception to a particular provision of the bill, the original iteration of which was sponsored by Democratic Sen. Yvanna Cancela, requiring manufacturers of so-called essential diabetes drugs that increase the national list price of their drug by more than the medical care component of the Consumer Price Index during the previous year or by double the percentage increase in the medical care component of CPI over the previous two years to explain factors contributing to the increase, the total percentage of the increase attributable to each factor and an explanation of the role of each factor.

In the lawsuit, the plaintiffs use the same arguments to rebuff the transparency requirements in the bill that they used during the legislative session against an earlier provision in the bill, which would have capped prices of diabetes drugs and was amended out before the bill came to a floor vote. The drug lobby groups argue that the transparency provision acts as an “effective cap” by requiring disclosures from manufacturers whose essential diabetes drugs increase by more than the medical care component of CPI — disclosures the manufacturers believe will cripple their businesses and want to avoid at all costs.

Notably, the lawsuit does not challenge other provisions in the bill that require pharmaceutical sales representatives to register with the state and detail the gifts and samples they give to doctors, mandate certain financial disclosures from so-called pharmacy benefit managers related to their role as an intermediary in setting prices with diabetes drugs and ensure that health care-related nonprofits are being transparent about the contributions they receive from the pharmaceutical industry.

Republican Gov. Brian Sandoval, who said he was “proud” to sign the legislation when it reached his desk, said in a statement Tuesday that the lawsuit wasn’t a surprise and that the state would “vigorously defend” the law.

“The lawsuit does not come as a surprise because pharmaceutical companies publically threatened litigation from the inception of Senate Bill 539,” Sandoval said in a statement, referring to a final version of the measure sponsored by GOP Senate Minority Leader Michael Roberson that Cancela signed onto after the governor vetoed her bill. “My office will review the filing in consultation with the Attorney General’s office and I’m confident the Attorney General will vigorously defend this existing state law which was passed with bipartisan majorities of both houses.”

A spokeswoman for the attorney general’s office did not respond to a request for comment on the lawsuit Tuesday.

Before the lawsuit was filed, the state Department of Health and Human Services had been working with representatives of both PhRMA and BIO about the implementation of the legislation. Though PhRMA had notified the state on Thursday that it was considering litigation, state officials were under the impression Friday morning that the group was going to return with a list of concerns sometime after the Labor Day weekend.

The state had been compiling a draft list of so-called “essential diabetes drugs” to figure out which drug manufacturers and pharmacy benefit managers would be required to comply with the disclosure requirements contained in the law, and was planning on posting the draft list on its website in mid-September. In a statement, Cancela said that PhRMA’s lawsuit appeared to be a tactic to delay the implementation of the legislation.

“I was disappointed to learn about PhRMA’s lawsuit against the state. Most of the issues discussed in the complaint were not brought up during the bill’s hearings,” Cancela said in a statement. “It seems this could be a tactic to delay implementation of a major transparency bill, to which I ask, what are they hiding?”

So what arguments are the plaintiffs making? Here’s a look.

“The Constitution Vests Congress With Sole Authority To Establish Patent Policy”

The first argument the plaintiffs make is that the Nevada law impinges on Congress’s sole authority to set patent policy. The complaint quotes from Article I of the Constitution, which grants Congress the power “to promote the process of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings.”

In 1984, Congress enacted a law best known as the Hatch-Waxman Act, which created certain market and patent exclusivity periods for both branded and generic drug companies. In the complaint, the drug companies argue that patent protection is critical for the survival of their industry because it is “extraordinarily difficult, costly, and rare to discover a new drug,” pointing to the statistic that 95 percent of experimental medicines studied in humans fail to be both effective and safe.

The plaintiffs argue that Congress has clearly established protections for pharmaceutical patents in the law, which, under the Supremacy Clause of the U.S. Constitution, cannot be preempted by state law. Specifically, the Constitution says that the laws of the United States “shall be the Supreme Law of the Land.”

They point to a 2007 case in which BIO and PhRMA sued the District of Columbia for prohibiting the sale of prescription drugs within the city for an excessively high price. The court ruled that the D.C. act — which allowed residents to sue a drug company if the list price of the drug was 30 percent higher than the drug’s price in Canada, Germany, Australia or the United Kingdom — stood “as an obstacle to the federal patent law’s balance of objectives” in an attempt to restrain the reward received by patent holders.

Though an earlier draft of the pharmaceutical bill in Nevada contained a price control provision similar to the one in Washington D.C., the final version of the legislation signed by the governor did not. Still, the drug companies argue in the complaint that the provision of the Nevada law requiring manufacturers to detail why a price increase of an essential diabetes drug was necessary “in purpose and effect … punishes manufacturers for the price of their ‘essential’ diabetes drugs.”

“The only way a manufacturer can avoid forfeiting trade-secret protection for the ‘factors’ of a price increase is by limiting its list prices to the Act’s effective cap,” the complaint states. “SB 539 thus restrains patent holders from setting list prices in a manner that the federal patent laws secure in order to incentivize innovation.”

A memo from the Legislative Counsel Bureau in early May noted the same concern about the original version of the bill, which included a price control provision requiring manufacturers of essential diabetes drugs to reimburse patients and insurers if the costs of the drugs increased by more than a certain amount each year. Legislative legal counsel said that state price controls would be preempted by the Supremacy Clause “because it stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress in enacting the federal patent laws.”

It was in response to legislative legal staff’s concerns that Cancela removed the original price control portion of the bill.

The drug companies frame themselves as stuck between a rock and a hard place — either limit price increases of essential diabetes drugs to no more than the medical care component of CPI or face having to disclose certain information to the public, which they believe would hurt their competitive advantage. They argue that the Nevada law will overall discourage innovation and research on new diabetes drugs.

In the first hearing on the bill, Cancela addressed that exact concern, saying that innovation should not be a concern with insulin, which was invented in 1922. (The drug companies argue against that, saying they have made a number of small but significant changes that have improved diabetes drugs over the years.)

“You might also hear that transparency on prescription drug pricing will stifle innovation,” Cancela said at the time. “To that I would say that may be true for other drugs, it is not true for a 95-year-old drug like insulin.”

“SB 539 Conflicts with Federal Trade-Secret Law”

The plaintiffs also argue that the Nevada law conflicts with federal trade and state trade secret laws, which generally encourage and protect the details of how a company conducts its business.

Nevada and 47 other states have adopted, with some variations, the Uniform Trade Secrets Act, aimed at codifying and standardizing common law elements of trade secret law. Congress also enacted the Defend Trade Secrets Act in 2016 (DTSA), which allows the owner of a trade secret to sue in federal court if his or her trade secrets have been misappropriated.

The plaintiffs argue that because the Nevada law exempts trade secret protections for all information a manufacturer is required to report to the Department of Health and Human services, manufacturers lose trade-secret protections as soon as the department publishes its annual list of essential diabetes drugs, even before that information is turned over. They also argue that losing trade-secret protections in Nevada effectively means losing them in all of the other 49 states as well.

“In effect, SB 539 alters the operation of the DTSA—and the laws of every other jurisdiction in the nation—to eliminate trade-secret protection for confidential advertising, cost, marketing, pricing, and production information associated with diabetes drugs,” the complaint states.

Legislative attorneys met with representatives of the pharmaceutical industry during the legislative session over concerns about the data reporting requirements in the bill and the fact that the data would be exempted from the state’s trade secret law. But the attorneys determined that the industry’s concerns were mostly related to the difficulty of complying with the legislation, not legal concerns.

“We found that most of the problems that the industry mentioned in the meeting were policy concerns related to the difficulty of complying with the requirements of the bill and the potential effects of enacting the bill,” said Eric Robbins, principal deputy legislative counsel, in the opinion. “These concerns would not result in the bill being struck down in court. To the extent that the concerns expressed by the industry representatives were legal in nature, this office had previously researched those concerns and has determined that all provisions of Senate Bill 265 are legally defensible.”

“SB 539’s Uncompensated Elimination of Trade-Secret Protection for Valuable Information Violates the Fifth Amendment Takings Clause”

The complaint also brings up another concern raised during the legislative session, that the bill could possibly violate the Fifth Amendment’s Takings Clause, which protects against the government confiscating private property without due process or just compensation. Cancela had attempted to address that concern in the original version of the bill with the price control provision by creating an appeals process under which a company could declare mandatory reimbursements confiscatory under the Constitution.

Nevertheless, the plaintiffs argue that the Nevada law is a “categorical” taking of property rights — meaning that a state statute denies all economically beneficial or productive use of property — because it eliminates the trade-secret protections held by manufacturers. The drug companies argue that once the information is made public it immediately loses its value and the property right itself no longer exists.

Even if it weren’t a categorical taking, the plaintiffs argue that it would still constitute a “taking” and not be allowed because of the economic impact of the decision and the fact that manufacturers had a reasonable expectation that their company information would remain secret.

“SB 539 Violates the Commerce Clause by Overriding the Laws of Every Other State”

Finally, the organizations argue that the bill violates the Interstate Commerce Clause, a section of the U.S. Constitution that gives the federal government the authority to regulate interstate commerce. Specifically, it states that Congress has the power “to regulate Commerce with foreign Nations, and among the several states, and with the Indian Tribes.”

The text of that clause has been extrapolated to what’s known as the “Dormant Commerce Clause,” which refers to the way in which the U.S. Supreme Court has interpreted the Commerce Clause as a restriction on states’ ability to regulate interstate commerce.

The organizations state in the complaint that by removing trade-secret protections for manufacturers of essential diabetes drugs, none whom are headquartered in Nevada, the bill essentially nullifies the trade-secret laws of every other state and the federal government, preventing manufacturers from protecting and enforcing the trade secrets in the 49 other states.

As an example, they argue that Indiana and other states where Eli Lilly, one of the major insulin manufacturers, bases its operations have an interest in protecting the company’s trade secrets “in order to promote the company’s growth, which creates local jobs and fuels the local economy.”

“By enacting SB 539, Nevada legislators have told legislators in every other state that Nevada knows best, and its decision controls, when balancing the interest in protecting trade secrets against the interest in price transparency,” the complaint states. “The dormant Commerce Clause does not tolerate such efforts by one state to impose its preferred regulation on every other state.”

The organizations refer to these disclosures in the complaint as an “effective cap on a drug’s (list price)” that will apply nationwide.

The complaint cites an article on the Federal Trade Commission’s website, which argues that information disclosures could actually allow manufacturers’ competitors to coordinate on higher prices and reduce incentives to offer lower prices. They also cite an analysis on pharmaceutical price transparency from the nonpartisan Congressional Budget Office, which stated that because markets for health-care services can be so highly concentrated, “increasing transparency in such markets could lead to higher, rather than lower, prices because higher prices are easier to maintain when the prices charged by each provider involved can be observed by all the others.”

Proponents of the bill, however, believe that increased transparency will lead to lower costs for patients or, at the very least, give them the information they need to know to understand why their medicines cost as much as they do and make informed decisions about their health care.

Legislative lawyers also addressed the Interstate Commerce Clause concern in their May memo looking at the price control provisions of the original bill, saying that federal courts have typically struck down state price regulation laws under the Interstate Commerce Clause “because it substantially burdens interstate commerce occurring outside the state’s borders.” However, it was still the opinion of legislative attorneys that the disclosure requirements, minus the price control provisions, were “legally defensible.”

This story has been updated to include the sponsor of the bill, Sen. Michael Roberson.