K-S Pharmacies, Inc. v. American Home Products Corp.

• Decision Date: 08 May 1992
• Docket Number: No. 91-3227,K-S,91-3227
• Citation: 962 F.2d 728
• Parties: , 1992-1 Trade Cases P 69,812 PHARMACIES, INC., et al., Plaintiffs-Appellees, v. AMERICAN HOME PRODUCTS CORPORATION, Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 728

962 F.2d 728

60 USLW 2717, 1992-1 Trade Cases P 69,812

K-S PHARMACIES, INC., et al., Plaintiffs-Appellees, v. AMERICAN HOME PRODUCTS CORPORATION, Defendant-Appellant.

No. 91-3227.

United States Court of Appeals, Seventh Circuit.

Argued April 9, 1992.

Decided May 8, 1992.

Jane A. Naughton, David A. Melnick (argued), Milwaukee, Wis., for plaintiffs-appellees.

Scott W. Hansen, Brian D. Trexell, Reinhart, Boerner, Vandeuren, Norris & Rieselbach, Milwaukee, Wis., William J. Ruane (argued), American Home Products Corp., New York City, for defendant-appellant.

Andrew J. Pincus, Kenneth J. Jurek, Alan E. Untereiner (argued), Mayer, Brown & Platt, Bruce J. Brennan, Loretta E. Chi, Pharmaceutical Manufacturers Ass'n., Washington, D.C., for amicus curiae.

Before FLAUM, EASTERBROOK, and KANNE, Circuit Judges.

EASTERBROOK, Circuit Judge.

Since 1976 Wisconsin has forbidden price discrimination in wholesale transactions in prescription drugs. Wis.Stat. § 100.31(2) provides:

Every seller shall offer drugs from the list of therapeutically equivalent drugs published by the federal food and drug administration to every purchaser in this state, with all rights and privileges offered or accorded by the seller to the most favored purchaser, including purchase prices for similar volume purchases, rebates, free merchandise, samples and similar trade concessions. Nothing in this subsection prohibits the giving of a discount for volume purchases.

A "seller" is a person who supplies drugs for resale, § 100.31(1)(c), and a "drug" is any substance covered by § 503(b) of the federal Food, Drug, and Cosmetic Act, § 100.31(1)(a). Purchasers may obtain treble damages for price discrimination, § 100.31(3), which also may be prosecuted as a misdemeanor, § 100.26(1). Apparently the statute has been either completely effective or completely ignored, for ours is the initial suit seeking enforcement.

Three Wisconsin pharmacies and a trade association commenced this suit in state court, contending that American Home Products Corporation (AHPC) gave other customers lower prices on the same or smaller volumes of the same drugs. AHPC removed the case to federal court under the diversity jurisdiction and moved to dismiss the complaint, asserting that § 100.31 violates the Constitution in two ways: it regulates the prices of sales in interstate commerce, and it is too vague. The district court denied this motion. It certified (and we accepted) an interlocutory appeal under 28 U.S.C. § 1292(b). ¹

No state may require sellers to charge the same price within its borders as they charge elsewhere. Such statutes, the Supreme Court has held, assert extraterritorial jurisdiction of a kind denied to states by the "negative" or "dormant" commerce clause. Healy v. Beer Institute, Inc., 491 U.S. 324, 109 S.Ct. 2491, 105 L.Ed.2d 275 (1989); Brown-Forman Distillers Corp. v. New York State Liquor Authority, 476 U.S. 573, 106 S.Ct. 2080, 90 L.Ed.2d 552 (1986). Any statute of the form "charge in this state the same price you charge outside it" carries the implied command: "Charge outside this state the same price you charge inside it." This latter, implied (but inseparable) command, the Court held, is a forbidden attempt to exercise extraterritorial power.

Section 100.31 does not distinguish between prices in Wisconsin and those in Oregon or Venezuela; AHPC contends that § 100.31 is unconstitutional because charging a particular price in Wisconsin constrains its actions in Alaska. The district court disagreed on statutory rather than constitutional grounds. It read § 100.31(2) to apply to sales within Wisconsin. So long as a seller charges the same price to all pharmacies in Wisconsin, it may do as it pleases in Minnesota or Micronesia.

AHPC says that the district judge misunderstood the statute. Our independent reading, see Salve Regina College v. Russell, --- U.S. ----, 111 S.Ct. 1217, 113 L.Ed.2d 190 (1991), matches that of the district judge, however. Section 100.31(2) says that the seller shall offer "to every purchaser in this state" the same price afforded to "the most favored purchaser". One staple in the interpretation of federal law is that statutes presumptively govern only conduct in the United States. E.g., EEOC v. Arabian American Oil Co., --- U.S. ----, 111 S.Ct. 1227, 1230, 113 L.Ed.2d 274 (1991) (collecting cases). Congress has the power to cast its net more widely but must say so. States lack any comparable power to reach outside their borders, making the presumption of exclusive domestic application even stronger.

What sense would it make to read a state law to affect out-of-state prices, when the upshot is invalidity? True, a federal court may not slice and dice a state law to "save" it; we must apply the Constitution to the law the state enacted and not attribute to the state a law we could have written to avoid the problem. American Booksellers Ass'n v. Hudnut, 771 F.2d 323, 332-34 (7th Cir.1985), affirmed without opinion, 475 U.S. 1001, 106 S.Ct. 1172, 89 L.Ed.2d 291 (1986). But we may interpret the law. Frisby v. Schultz, 487 U.S. 474, 483, 108 S.Ct. 2495, 2501, 101 L.Ed.2d 420 (1988). When interpreting state laws, federal courts use the same principles as state courts do. AHPC does not contend that the Supreme Court of Wisconsin reads its legislation to apply outside its borders. We could not find a parallel to Arabian American Oil in Wisconsin law, but neither could we find a case in which the Supreme Court of Wisconsin rejected that principle of construction. When dealing with laws having extraterritorial potential, such as tax legislation, it has endeavored to conform the legislation to limits on state power. See Consolidated Freightways Corp. v. Wisconsin Department of Revenue, 164 Wis.2d 764, 477 N.W.2d 44 (1991). It is all but certain that the Supreme Court of Wisconsin, if given the chance, would interpret "most favored purchaser" to mean "most favored purchaser in Wisconsin." Plaintiffs concede that § 100.31(2) does not apply to "favored" purchases out of state even when transshipment to Wisconsin follows. A pharmacy with operations in Wisconsin and Illinois may order and pay for drugs in Illinois at prices lower than those offered in Wisconsin, shipping the drugs into Wisconsin for resale (even, plaintiffs said, instructing the seller to deliver the drugs directly to Wisconsin). Perhaps plaintiffs have conceded too much; after the abolition of the original package doctrine, see Michelin Tire Corp. v. Wages, 423 U.S. 276, 96 S.Ct. 535, 46 L.Ed.2d 495 (1976), states may regulate transactions that wind up within their borders. No matter. It is enough that "the most favored purchaser" in § 100.31(2) does not refer to sales outside Wisconsin for resale outside Wisconsin.

Nothing remains for analysis under the balancing procedure of Pike v. Bruce Church, Inc., 397 U.S. 137, 90 S.Ct. 844, 25 L.Ed.2d 174 (1970). The dormant commerce clause does not call for proof of a law's benefits, after the fashion of substantive due process, whenever the subject is trade. On the contrary, legislation regulating economic affairs is within public power unless the rules are so silly that a justification cannot even be imagined. United States Railroad Retirement Board v. Fritz, 449 U.S. 166, 179, 101 S.Ct. 453, 461, 66 L.Ed.2d 368 (1980); Vance v. Bradley, 440 U.S. 93, 110-12, 99 S.Ct. 939, 949-50, 59 L.Ed.2d 171 (1979); Usery v. Turner Elkhorn Mining Co., 428 U.S. 1, 96 S.Ct. 2882, 49 L.Ed.2d 752 (1976); Northside Sanitary Landfill, Inc. v. Indianapolis, 902 F.2d 521 (7th Cir.1990). Laws forbidding price discrimination have plausible justifications. A legislature might believe that a seller would reduce prices to all customers rather than abandon discounts. Economists do not share that view, thinking it more likely that the firms will curtail discounting. When the cost of a bargain for a single customer is a lower price for all, the seller may think it best to stick with the higher price. See Roger D. Blair & David L. Kaserman, Antitrust Economics 258-79 (1985); Herbert Hovenkamp, Economics and Federal Antitrust Law 338-54 (1985). In recent years the Supreme Court has adopted this view. E.g., Great Atlantic & Pacific Tea Co. v. FTC, 440 U.S. 69, 80, 99 S.Ct. 925, 933, 59 L.Ed.2d 153 (1979). Accord, United States Department of Justice, Report on the Robinson-Patman Act (1977). But the constitutional powers of states do not follow the leadership of the American Economics Association. Amanda Acquisition Corp. v. Universal Foods Corp., 877 F.2d 496, 502, 505-09 (7th Cir.1989).

Courts demand more than hypothetical rationality of statutes only when the laws create a differential burden on interstate commerce. Is a person located outside the state's border worse off than one in the legislating state but otherwise similarly situated? Are interstate sales at a disadvantage relative to intrastate sales? Sellers located in Wisconsin are no better off on account of § 100.31(2) than are sellers elsewhere. All must use the same price throughout Wisconsin and may sell elsewhere at whatever price the traffic will bear. AHPC contends that Wisconsin's law has some extraterritorial effects because a price set in Milwaukee must be used in Superior; and the price in Superior will be used just across the border in Duluth, Minnesota, which is part of the same market. If Minnesota, too, forbids domestic price discrimination, the price in Duluth propagates to Minneapolis. This is a recycled argument. It has been made to, and rejected by, the Supreme Court. Maryland forbade all price discrimination in the sale of petroleum products within its borders. The Court thought a commerce clause challenge to the law worth exactly one footnote:

Appellants argue that Maryland has actually regulated beyond its boundaries, pointing to the...