Walgreen Co. v. Rullan

• Decision Date: 22 April 2005
• Docket Number: No. 03-2542.,03-2542.
• Citation: 405 F.3d 50
• Parties: WALGREEN CO., Walgreen of San Patricio, and Walgreen of Puerto Rico, Plaintiffs, Appellants, v. John V. RULLAN, Secretary of the Puerto Rico Health Department, Defendant, Appellee.
• Court: U.S. Court of Appeals — First Circuit

405 F.3d 50

WALGREEN CO., Walgreen of San Patricio, and Walgreen of Puerto Rico, Plaintiffs, Appellants, v. John V. RULLAN, Secretary of the Puerto Rico Health Department, Defendant, Appellee.

No. 03-2542.

United States Court of Appeals, First Circuit.

Heard May 7, 2004.

Decided April 22, 2005.

Henry C. Dinger, P.C., with whom Stephen D. Poss, P.C. and Goodwin Procter, LLP were on brief, for appellants.

Camelia Fernández-Romeu, with whom Roberto J. Sánchez-Ramos, Puerto Rico Department of Justice, Office of the Solicitor General, was on brief, for appellee.

Before BOUDIN, Chief Judge, LIPEZ and HOWARD, Circuit Judges.

HOWARD, Circuit Judge.

Walgreen Co., Walgreen of San Patricio, and Walgreen of Puerto Rico (collectively, Walgreen) sued John V. Rullan, the Secretary of the Puerto Rico Health Department (Secretary), under 42 U.S.C. § 1983, challenging the constitutionality of a Commonwealth of Puerto Rico statute requiring that all pharmacies seeking to open or relocate within the Commonwealth obtain a "certificate of necessity and convenience." 24 L.P.R.A. § 334 et. seq. Walgreen asserts that this statute is unconstitutional because it impermissibly discriminates against or excessively burdens interstate commerce and violates due process. The district court rejected these arguments. Because we conclude that the statute impermissibly discriminates against interstate commerce, we reverse.

I. Background

In 1974, Congress passed the National Health Planning and Resources Development Act. See Pub.L. No. 93-641, 88 Stat. 2225 (1975). This statute was designed to correct perceived imperfections in the health care market. Among its goals, the statute was intended to restrict skyrocketing health care costs and prevent the unnecessary duplication of services. See Patrick John McGinley, Beyond Health Care Reform: Reconsidering Certificate of Need Laws in a Managed Competition System, 23 Fla. St. U.L.Rev. 141, 154-55 (1995).

To achieve these goals, Congress, inter alia, conditioned the states' receipt of certain federal funds on the enactment of "certificate of need programs." Under these programs, the states reviewed proposed health care facility construction projects and permitted projects to proceed only after a demonstration of sufficient need for the services.¹ See generally Lauretta H. Wolfson, State Regulation of Health Facility Planning: The Economic Theory and Political Realities of Certificates of Need, 4 DePaul J. Health Care L. 261 (2001).

In 1975, Puerto Rico (which is treated as a state for present purposes) responded to the federal initiative by enacting a "certificate of need" law. 24 L.P.R.A. §§ 334 et seq. (the Act). The Act provided that no person may "acquire or construct a health facility ... without having first obtained a certificate of necessity and convenience granted by the Secretary." Id. § 334a. The Act defined a certificate of necessity and convenience as a

document issued by the Secretary of Health authorizing a person to carry out any of the activities covered by [the Act], certifying that the same is necessary for the population it is to serve and that it will not unduly affect the existing services, thus contributing to the orderly and adequate development of health services in Puerto Rico.

Id. at § 334(e). The Act identified "health facilities" required to obtain a certificate, id. § 334(d), provided criteria for granting a certificate, id. § 334b, permitted the Secretary to promulgate additional certificate criteria, id. § 334j, and established administrative and judicial review procedures governing the certificate review process, id. §§ 334f-2 to 334f-14.

As originally enacted in 1975, the Act did not apply to pharmacies. Four years later, the Puerto Rico legislature amended the definition of "health care facilities" to include pharmacies. See Law No. 189 of July 29, 1979, amending 24 L.P.R.A. §§ 334 et seq. This amendment, inter alia, provided that any pharmacy in existence on October 24, 1979 was exempt from the certificate requirement. See 24 L.P.R.A. § 334g. When the amendment was enacted, over ninety-two percent of pharmacies operating in Puerto Rico were locally-owned concerns. There is no legislative history surrounding the enactment of the amendment, but the Secretary asserts that the purpose of the amendment was to encourage the location of pharmacies in underserved areas of Puerto Rico. Puerto Rico is the only jurisdiction that has applied its certificate of need law to pharmacies.

Twelve years after its enactment, Congress repealed the National Health Planning and Resources Development Act. Pub.L. No. 99-60, 100 Stat. 3743 (1986). While several states followed suit by repealing their certificate of need laws, Puerto Rico's remains in effect.

As mentioned above, the Act provides detailed procedures for the certificate approval process. The process begins with a proposed pharmacy submitting a letter advising the Health Department of its intention to file a certificate request. Within thirty days of sending this letter, the proposed pharmacy must file the formal certificate application. See 24 L.P.R.A. § 334f-3.

After the Secretary receives the application, he publishes a notice in a widely read newspaper announcing the request. See id. § 334f-6. He also notifies all "affected persons" by mail. See Regulation of the Secretary of Health No. 56, art. IV § 2(b) (1980) ("Regulation No. 56"). Among the "affected persons" are existing pharmacies located within one mile of the proposed pharmacy site. These entities then have the right to oppose the granting of a certificate to the proposed pharmacy provided that they give written notice of their opposition to the Secretary and proposed pharmacy within 15 days. Id.

Once the notification process is complete, the Secretary almost always issues the certificate if no one objects. See infra at n. 3. But if there is opposition from an "affected person," which the Secretary acknowledges is, without exception, an existing pharmacy located within one mile of the proposed pharmacy site, the Secretary assigns the case to the Health Department's Hearings Division for an administrative hearing. The hearing is often delayed to permit the parties time for discovery. At the hearing, the parties present, inter alia, expert testimony concerning the expected impact that the proposed pharmacy will have on competition in the local area. At the conclusion of the hearing, the parties submit proposed findings of fact and conclusions of law. The hearing officer then forwards a recommendation to the Secretary for final action.

In making his final determination, the Secretary considers various statutory criteria, including:

(1) the relationship between the transaction for which the certificate is requested, and the long-term service development plan, if any, of the petitioner;

(2) the present and projected need of the population which will be affected by the proposed transaction of the services to be provided thereby;

(3) the existence of alternatives to the transaction for which the certificate is requested, or the possibility of providing the proposed services in a more efficient or less costly manner than that proposed by the petitioner; and

(4) the relationship between the health system operating in the area and the proposed transaction.

24 L.P.R.A. § 334b. In addition, the Secretary considers other criteria, established by regulation, including whether the proposed pharmacy will benefit certain "unattended populations" (e.g., low-income, disabled, or elderly populations) and whether the proposed pharmacy will be located in an area that is already "saturated" by existing pharmacies. Regulation No. 56, art. V. § 1(f) & art. VI § 13(2).

After the Secretary rules on the certificate request, the losing party may ask for reconsideration. See 24 L.P.R.A. § 334f-10. The losing party may also seek judicial review in the Puerto Rico Circuit Court of Appeals and eventually in the Puerto Rico Supreme Court. See id. Typically, the judicial review process takes in excess of a year to conclude, and the Secretary's decision is often stayed during this period. Thus, even if the certificate is ultimately granted, the entire administrative and judicial process usually takes several years to complete.

II. The District Court Opinion

In the district court, Walgreen claimed that the Act, as applied to retail pharmacies, is invalid because it discriminates against or excessively burdens interstate commerce. After filing cross motions for summary judgment, the parties agreed to try the case on affidavits, depositions, and exhibits.² In a published opinion, the district court rejected Walgreen's claims. See Walgreen Co. v. Rullan, 292 F.Supp.2d 298 (D.P.R.2003).

The district court rejected Walgreen's discrimination argument because the Act requires "any local economic interest seeking to obtain a [certificate to] jump through the same bureaucratic hoops" as an out-of-Commonwealth entity and thus treats all "newcomers" evenhandedly. Id. at 313. The court also declined to find discrimination, even though all existing pharmacies were exempt when the Act was amended to include pharmacies, because "the statute made no distinction between local and national pharmacies." Id. at 315. After concluding that the Act was non-discriminatory, the court determined that the Act did not excessively burden commerce. See id. at 316-17. The court ruled that the Act imposes minimal burdens on interstate commerce because it does not prohibit out-of-Commonwealth pharmacies from entering the Puerto Rico market. See id. The court also recognized the Act's legitimate purpose of encouraging pharmacies to locate in underserved areas of Puerto Rico, though recognizing that Walgreen presented a "solid case" that the Act was not helping the Commonwealth achieve this goal. Id. at 310, 317-18. Thus, the court held that "[g]iven the Act's modest burden on interstate commerce," the ...