United States: Guest Post – Innovator Liability Flunks The Dormant Commerce Clause

Last Updated: July 20 2018
Article by James Beck

Here's another guest post on the Dormant Commerce Clause by our guest guru on that subject, Dick Dean over at Tucker Ellis. He reports on another possible use for the Dormant Commerce Clause that could provide a win for the our side in an innovator liability situation. As always our guest bloggers deserve 100% of the credit, and any blame, for their postings.

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On April 25, 2018 this blog advised " Don't Sleep on the Dormant Commerce Clause." It was right. That post discussed a Fourth Circuit case involving a drug pricing regulation attempt by the State of Maryland. Since then, two other Circuit court decisions have followed; it's the Dormant Commerce Clause gone wild. And both decisions involve subject matter areas of direct interest to readers of this blog.

In Daniels Sharpsmart, Inc. v. Smith, 889 F.3d 608 (9th Cir. 2018), the Ninth Circuit upheld a District Court decision which invoked the Dormant Commerce Clause to strike down the enforcement of a California regulation beyond the state's border. Daniels was an Illinois-based corporation that made systems for the disposal of biohazardous medical products including waste syringes and blood collection devices. It also transported and treated medical waste. It had a medical waste treatment facility in Fresno, as well as others in several different states. California's Medical Waste Management Act (CMWMA) required that California-generated medical waste must be incinerated. And if medical waste was transported out-of-state, it was required to be "consigned" to a waste treatment facility "permitted" in the "recovery state." As of 2014, there were no incinerators within California to treat Daniels' biohazardous medical waste (why that is the case is not discussed in the decision), and so Daniels transported that waste to other states to have it incinerated. Eventually, Daniels shipped that waste to Kentucky and Indiana, where that waste was treated by methods other than incineration consistent with the regulations in those states. In Kentucky, the waste was treated by a method called autoclave; in Indiana, the method was "thermal deactivation." Both treatment methods are less expensive than incineration.

California regulators took the position that biohazardous medical waste originating in California had to be incinerated in Indiana and Kentucky, even though the regulations and laws of other states permitted an alternative method. To that end, the regulators proposed daily fines against Daniels for failure to do so. Daniels filed a complaint in the Eastern District of California arguing that state officials had violated the Dormant Commerce Clause by its extraterritorial application of the MWMA. The District Court granted Daniels' motion for a preliminary injunction and in a short, focused decision, the Ninth Circuit affirmed. It characterized the regulation as "an attempt to reach beyond the borders of California and control transactions that occur wholly outside of the State after the material in question . . . has been removed from the State." Id. at *4. Attempts at direct regulation of out-of-state conduct have generally been struck down without further inquiry. See Brown-Forman Distillers Corp. v. N.Y. State Liquor Auth., 476 U.S. 573, 579 (1986); and Healy v. Beer Inst., 491 U.S. 324, 336 (1989). Laws neutral on their face, but which have an impermissible protectionist purpose and effect, have also been struck down. But where there is no obvious protectionist purpose and a state law has only incidental impact on interstate commerce, such laws are subject to a more lenient standard of review. They are usually upheld unless the burden they impose on interstate commerce exceeds their local benefits. Pike v. Bruce Church, Inc., 397 U.S. 137, 144–46 (1970).

Such a standard was employed in Garber v. Menendez, 888 F.3d 839 (6th Cir. 2018). The case involved Ohio's tolling statute, which stops the statute of limitations from running when the defendant is out-of-state. O.R.C. 2305.15. This statute had been construed by the Supreme Court in Bendix Autolite Corp. v. Midwesco Enterprises, Inc., 486 U.S. 888 (1988). There, in a commercial dispute between corporations, the Supreme Court struck down the tolling statute noting:

The State may not withdraw such defenses [i.e., statutes of limitation] on conditions repugnant to the Commerce Clause. Where a State denies ordinary legal defenses or like privileges to out-of-state persons or corporations engaged in commerce, the state law will be reviewed under the Commerce Clause to determine where the denial is discriminatory on its face or an impermissible burden on commerce.

Id. at 893.

Innovator liability, like the tolling statute, withdraws the legal defense of lack of product exposure so it neatly fits the language of Bendix (more later on that issue). In Bendix, the Supreme Court struck down the tolling statute under the Commerce Clause because Ohio could not justify its statute as a means of protecting its residents given the provisions of the Ohio long-arm statute. It did not engage in any detailed discussion of the impact on commerce—almost assuming one from the statute. Concurring in the result only, Justice Scalia noted that applying the Pike balancing factors "is more like judging whether a particular line is longer than a particular rock is heavy." Id. at 897 (Scalia, J., concurring). He wrote that he would not know how to do such a balancing.

In Garber, the District Court and the Sixth Circuit took very different views of Bendix. The District Court, confronted with same statute held to violate the Dormant Commerce Clause in Bendix, not surprisingly reached the same result. But the Sixth Circuit distinguished Bendix, finding that the statute forced out-of-state companies like Midwesco to face liability forever as a cost of doing business across state lines and noting the Supreme Court's application of the Pike test in that context. It viewed the transaction in Garber, which involved one patient suing one doctor (who had left the state), as yielding a different result under the Commerce Clause with there being no demonstrable effect on the same. In the absence of a record establishing such an effect—there was no such record apparent in Bendix—the challenge failed.

Putting the facts of Garber aside, Bendix clearly remains good law. Defenses cannot be withdrawn in a way "repugnant" to the commerce clause. Is there an impact on commerce from the largest state in the country (population wise) radically changing product exposure rules? At an elementary level, if drug companies are going to have to defend and pay settlements and judgments on products made by other companies in California, that will have a dramatic impact on drug pricing throughout the country. The difference between the District Court and the Sixth Circuit here is one of what is in the record. It would not take a particularly high powered economist to establish such a record in regard to the impact of innovator liability.

The Dormant Commerce Clause has been used to invalidate state registration statutes. See here and here. So it is not surprising that in addition to the argument that innovator liability may be precluded by lack of personal jurisdiction (see here and here), there is also a Dormant Commerce Clause argument in regard to innovator liability. Once again—don't sleep on the Dormant Commerce Clause.

This article is presented for informational purposes only and is not intended to constitute legal advice.

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