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Nevada Governor Brian Sandoval shares a laugh before signing bills during the opening ceremony of the Culinary Health Center in Las Vegas on Thursday, June 15, 2017. Daniel Clark/The Nevada Independent Follow @DanJClarkPhoto

The health fund for Nevada’s most politically powerful labor union has told a federal court judge that the attorney general’s office and legislative lawyers could “potentially eviscerate” the state’s first-in-the-nation insulin transparency law.

The Culinary Health Fund, which played a key role in advocating for the transparency mandates on manufacturers of insulin and other essential diabetes drugs during the last legislative session, said in a recent court filing that the attorney general’s office “could not be relied upon” to defend the constitutionality of the law in court and that attorneys for the Legislature have been “even more brazen” in their interpretation of the law.

Two pharmaceutical lobbying groups trying to erase the law have been similarly critical, saying that the attorney general’s office has offered “no serious defense of the law” and the Legislature has made a “torturous interpretation” of it.

The battle over the constitutionality of the law is pitting Big Pharma, the executive branch, the Legislature and the health fund against one another ahead of a hearing this week.

The Nevada attorney general’s office, the Legislature, and the Culinary Health Fund are technically on the same side, allied in a fight to defend in court a law requiring manufacturers of diabetes drugs to explain any dramatic increases in costs of their life-saving medications to the state and, by extension, the public. But the law’s proponents are a house divided: The Legislature asked to intervene in the lawsuit late last month, saying its “sovereign powers” were not being defended by the attorney general’s office, and Culinary did the same last week, arguing that the other two defendants have taken positions that would “compromise and potentially eviscerate” the law.

On the other side are two immensely powerful pharmaceutical lobbying associations, the Pharmaceutical Research and Manufacturers of America (PhRMA) and the Biotechnology Innovation Organization (BIO), which argue in their lawsuit that the transparency mandates in the newly-enacted law require them to disclose trade secrets in violation of multiple sections of the U.S. Constitution and federal law. Drug companies argue the law would require them to keep the increases of their diabetes drugs to an “effective cap,” else face a litany of invasive disclosures about the nuances of their price setting protocols they say would cripple business.

The case hinges on a series of key questions surrounding pharmaceutical companies’ trade secrets — broadly, confidential business information that provides an enterprise with a competitive edge. Are all the data points drug manufacturers may be required to disclose to the state trade secrets? If so, does the recent change to Nevada’s trade secret law allow them to be disclosed, or is the change preempted by federal law? Can regulations somehow render companies’ concerns over their trade secrets moot, or could the state enter into confidentiality agreements to keep the some of the disclosed information from the public?

Court filings submitted by the attorney general’s office, the Legislature and the health fund reveal different interpretations about how the newly enacted law should be executed and, specifically, how the information the pharmaceutical companies say are protected as trade secrets could or should be handled. Meanwhile, the pharmaceutical companies argue that there is no way for the law to be executed without impinging on their trade-secret protections.

The court will hear arguments on Tuesday about why the state shouldn’t be allowed to continue down the path of implementing the law, which includes a number of different steps from publishing a list of “essential” diabetes drugs whose manufacturers will be required to report certain information to the state to developing the regulations needed to carry out the reporting process. What happens at the hearing will chart a new path for the law, either forward toward implementation or stalled in what is likely to be a tangled, protracted legal battle that has the potential to significantly shape the oversight of the pharmaceutical industry.

Culinary’s intervention

When the pharmaceutical lobbying groups sued over the constitutionality of the insulin transparency law, they initially only targeted the executive branch in their lawsuit — Gov. Brian Sandoval and the director of the state Department of Health and Human Services, Richard Whitley.

But the Legislature asked the court to intervene as a defendant in the lawsuit in late September, arguing that it has a right to “defend its sovereign powers.” With no opposition from the pharmaceutical companies, the court agreed to let them participate in the lawsuit.

Now, the Culinary Health Fund, which provides health-care benefits to more than 130,000 participants in Las Vegas, many of them diabetic, is also asking the court for permission to step in and offer its defense of the law. The health fund was one of the main proponents of state Sen. Yvanna Cancela’s original insulin transparency legislation, which morphed into a broader set of transparency mandates not only on pharmaceutical companies that manufacture insulin but other companies involved in the insulin pricing process as well.

In a motion filed Oct. 6, the health fund argues that the attorney general’s office, on behalf of Sandoval and Whitley, and legislative lawyers have taken positions “inconsistent with” the bill the Legislature passed earlier this year.

The health fund is critical of the fact that the attorney general’s office filed only five-and-a-half pages of response in response to a 24-page complaint from the pharmaceutical companies with “only a single case citation (on a collateral point), little attempt to challenge the lawsuit’s merit, and apparent (and legally unwarranted) concessions.” It became necessary to intervene in the lawsuit “a week after it became clear that the Office of the Attorney General could not be relied upon to defend the statute’s constitutionality,” the motion states.

“This is hardly the ‘full and vigorous defense of [SB 539’s] constitutionality’ that could demonstrate that the OAG is adequately representing the Fund’s interests,” the health fund says in the motion.

The health fund goes on to call the Legislature’s arguments “even more brazen,” suggesting that legislative lawyers are trying to “read key provisions out of the statute” in their attempt to prove the language of the law is not unconstitutional on its face. They call the Legislature’s position that the state could enter into confidentiality agreements to keep trade-secret information protected “untenable.”

“Private-party intervention is necessary when the government is taking ‘a position that actually compromises (and potentially eviscerates) the protections’ of the challenged law,” the health fund says.

The health fund also argues it has a separate interest from that of the executive and legislative branches in ensuring that any disclosures that manufacturers of essential diabetes drugs are required to make to the state are made available to the public. The overarching goal of the bill, as stated by lawmakers during the legislative session, was to “shine the light” on the insulin pricing process.

The fund raises concerns that the positions taken by the attorney general’s office and legislative lawyers — that Nevada’s trade secret law is redundant to federal law and that the industry’s concerns might either be addressed through the regulatory process or through confidentiality agreements between manufacturers and the state — could undermine universal access to that drug pricing information.

“The Fund’s narrow interest in maintaining public access to the pricing information that drug manufacturers are required to submit to DHHS is not shared by the government or by the general public,” the health fund says. “Both the OAG and the Legislative Counsel Bureau have made clear that they are willing to trade away the trade-secret exemption contained in SB 539, based on some political or legal calculus that is unclear to the Fund.”

The two pharmaceutical associations agree with the health fund that the law exempts the information required to be disclosed from Nevada’s trade secret law — rebuffing the positions taken by the attorney general’s office and legislative lawyers on the various ways concerns over trade secret might be avoided — but have opposed their request to intervene in the lawsuit nonetheless, saying it would “create unnecessary burdens, delays, and complexities” and that their interests are adequately represented by the other defendants.

“Plaintiffs consented to the Legislature’s motion, but it presented a close question because of the risk that adding a party would delay and complicate the litigation,” the pharmaceutical companies said in their response. “To allow a second intervention and a fourth defendant is a bridge too far.”

It is unclear whether the court will allow the Culinary Health Fund to intervene as a defendant in the lawsuit prior to the Tuesday hearing. It had not yet issued an order as of Saturday.

Three defenses of the law

But the overarching question is how the court will parse the three arguments put forward by the attorney general’s office, legislative lawyers and the health fund about whether the law should be allowed to move forward, at least in the short term. Even if the health fund isn’t admitted as a party to the lawsuit, they will likely be allowed to file a friend-of-the-court brief stating their arguments for the court to consider.

The case made by the attorney general’s office hinges largely on its position that that it’s too early for the industry to bring forward a lawsuit and that the implementation of the law shouldn’t be stalled because the law causes no immediate, irreparable harm. For instance, the first round of transparency disclosures required by certain pharmaceutical companies aren’t due until the beginning of July 2018, something the judge assigned to the case, U.S. District Court Judge James Mahan, noted in an earlier order.

Those disclosures can’t even happen until the Department of Health and Human Services goes through a public rulemaking process to develop the process by which those disclosures will be required, the attorney general’s office argues.

“More importantly, the public workshop and regulation hearing will allow the manufacturers and the Department to work cooperatively to adopt regulations that may address the concerns about trade secrets and ultimately render them moot,” the attorney general’s office states in its brief.

They also argue that Nevada’s trade secret law “appears to be redundant” to the federal Defend Trade Secrets Act, which Congress passed in 2016, and should protect the pharmaceutical companies’ interests even though the Legislature decided that any of the reportable information would not be subject to the state’s trade secret law. If the court gave the department time, they say that regulations may be able to address the pharmaceutical companies’ trade secret concerns.

But that’s one of the arguments that the Culinary Health Fund objects to in its motion to intervene, saying the attorney general office’s interpretation of the federal law is “misplaced.” The Legislature agrees with the health fund on that count, arguing that the Defend Trade Secrets Act was not intended to preempt state law.

The Legislature, meanwhile, makes the narrow argument that nothing in the “plain language” of the law requires trade secrets to be disclosed. Though the legislative branch is not responsible for carrying out the law, legislative lawyers suggest that manufacturers might be able to satisfy their disclosure requirements with “carefully drafted reports” that include the required details about how essential diabetes drugs prices are set.

Legislative attorneys also suggest that, should it be impossible for manufacturers to disclose the necessary information without revealing trade secrets, they could enter into confidentiality agreements with the Department of Health and Human Services that would allow the information to keep its trade-secret status. The Legislature’s intent with the law was “not to strip trade-secret protection from legitimate trade-secret information that manufacturers properly protect from disclosure” but to “draw a reasonable balance between obtaining more information for policymaking while also protecting some proprietary information from disclosure.”

“Not only does this interpretation best capture the Legislature’s objective in enacting the challenged provisions, but it also is consistent with reason and public policy and avoids unreasonable or absurd results,” legislative lawyers stated in their opposition to the request for a preliminary injunction.

But the Culinary Health Fund also takes issue with that argument, saying that there would have been no point in the Legislature exempting the information required to be disclosed to the state from trade secret law if trade secrets could be protected in other ways. (The Legislature’s response is that the exemption was made to protect the Legislature if manufacturers later tried to claim that information they had already disclosed to the state was a trade secret but also that they had no attempt to rewrite the entirety of trade secret law.)

“Given this long-standing historical pedigree, it would be unreasonable and absurd to interpret the challenged provisions as unraveling the careful balance struck by trade-secret law over the last century and a half, especially since there is nothing in the plain language or legislative history of the challenged provisions to indicate that the Legislature intended to unwind those 150 years of trade-secret law,” legislative lawyers wrote.

Legislative lawyers also push back on one of the key constitutional arguments put forward by the pharmaceutical companies, which argue that the law violates the Takings Clause of the U.S. Constitution by depriving them of property they are entitled to, in this case, profits from essential diabetes drugs. The companies argue that the disclosure requirements — which only go into effect if the price of a drug increases by more than a specified amount each year — are so onerous that they will be necessarily required to keep their increases limited to a certain amount, which they refer to as an “effective cap.”

The Legislature, however, argues that pharmaceutical companies receiving less money for their drugs does not automatically constitute an improper “taking” of property, and reiterates that its purpose in enacting the law is to provide policymakers and consumers with more information about the costs of diabetes drugs.

The health fund addresses the “taking” argument in its proposed opposition to the request for a preliminary injunction, saying that the Department of Health and Human Services has yet to establish what information manufacturers are required to submit and that the “mere enactment” of the legislation does not work as a “taking.”

“A rule that trade-secret protection over some category of business information forever deprived the government of the ability to require public disclosure without paying compensation would preclude many forms of necessary health and safety regulation,” the health fund argues.

In addition to agreeing with the Legislature that the law is not preempted by federal patent law, the health fund also argues that the legislation is not preempted by federal patent law, saying that if it was, it would “call into question many commonplace state regulations.” The health fund suggested that the court “reject plaintiffs’ attempts to turn federal patent law into a deregulatory blunderbuss.’

The industry’s “vision of a federalized and constitutionally-mandated regime of trade-secret protection is without precedent and would endanger many common state and federal regulations,” the health fund states in their proposed brief.

The pharmaceutical groups, in their reply to arguments made by both the attorney general’s office and the Legislature, were biting. They said that the attorney general’s office “offers no serious defense of the Act as written” and that the Legislature makes a “torturous interpretation of the law” that “conflicts with the plain statutory text.”

The pharmaceutical industry urges the court to “rule on the statute the Legislature enacted, not the one they wish they enacted.”

“It is the Legislature’s job, not the Court’s, to fix the statute’s constitutional flaws,” they say.

They argue that there is no way to get around the “unambiguous, draconian requirements” mandated by the law.

“Furthermore, both the Legislature and the attorney general are surpassingly vague about such a hypothetical confidentiality agreement or regulation,” they say. “This haziness is both unsurprising and significant, because the plain text of SB 539 presents formidable obstacles.”

What happens Tuesday

The court denied a motion on Friday by the Legislature that would have allowed the Tuesday hearing to not only be a hearing on whether to temporarily halt implementation of the law but also be the final hearing on the merits of the case. The judge wrote that consolidating the two hearings would “impose undue prejudice” on the two pharmaceutical lobbying groups by not giving them enough time to fully present their arguments before the court.

That means the parties will only argue about whether the state should be allowed to proceed with the implementation of the law for now, including imminently publishing a list of essential diabetes drugs that will be subject to the new law, or whether they should have to pause all regulatory activities while the issue works its way through the court system.

Still, the Legislature has asked the court to decide in favor of one side or the other without going to a full trial, what’s known as “summary judgment.” Though a hearing date has not yet been set, the pharmaceutical groups have asked the court to allow time for both sides to submit additional arguments on an expedited schedule before Thanksgiving.

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