Second Circuit Denies En Banc Rehearing of N.Y. Law Mandating Opioid Industry Tax

In mid-November, several medical associations filed a petition for an en banc rehearing regarding the Tax Injunction Act (TIA) in connection with New York’s Opioid Stewardship Act (OSA) and the $600 million tax accompanying the OSA. The Second Circuit released an order Friday denying the petition.

The plaintiffs-appellees, Association for Accessible Medicines, Healthcare Distribution Alliance, and SpecGx LLC, originally won a decision in the Southern District of New York finding that the $600 million surcharge provided by the OSA was not a “tax” within the meaning of the TIA.

The petition said, “From there, the plaintiffs argued that the pass-through prohibition, taken alone, violated the dormant Commerce Clause and that the surcharge was unconstitutional for various reasons. “

The district court agreed and held the OSA’s exaction is a “ ‘regulatory penalty on opioid manufacturers and distributors,’ enacted as punishment for perceived misconduct,” and the surcharge was a “regulatory fee.” The state appealed and only argued that the OSA assesses an ordinary tax and thus the district court lacked jurisdiction to invalidate the surcharge after invalidating the pass-through prohibition. A panel of Second Circuit judges agreed and reversed the district court decision. 

Two questions were presented in the petition: 1) whether the panel erred in holding that the district court lost jurisdiction to rule on the severability of the OSA’s pass-through prohibition once the district court held the pass-through prohibition unconstitutional and the state chose not to defend it on appeal; and 2) whether the panel erred in holding that the OSA is an ordinary tax even though it is neither assessed nor collected like a tax and its proceeds are placed in a segregated fund earmarked to offset the costs of the opioid crisis.

First, the plaintiffs argued that the panel’s decision here was in direct conflict with the holding of Mobil-Oil, because the court held that a challenge to a pass-through prohibition is not within the TIA’s ambit even when invalidating such a provision would make the collection of the tax impossible. Here, the panel concluded that the district court lost jurisdiction to rule on severability of the pass-through prohibition once the pass-through prohibition was deemed unlawful, and the state ceased to defend it on appeal.

Second, the plaintiffs argued whether the OSA assesses a “tax” warrants a rehearing for several reasons, because it is a regulatory fee and a punitive damage: 1) it is assessed by the DOH, not a New York tax authority; 2) proceeds go into a segregated fund and not the general treasury; 3) it is assessed in a lump sum which is unheard of for a tax; 4) it is attended by a pass-through prohibition; and 5) the legislature did not call the surcharge a tax. 

Finally, the plaintiffs-appellees argued that the questions presented are exceptionally important because the Supreme Court repeatedly has emphasized that it “favor(s) clear boundaries in the interpretation of jurisdictional statutes.” The petition stated that the panel “muddies the waters” with respect to the TIA.

The plaintiffs were represented by McDermott Will & Emery, Ropes & Gray, and Kirkland & Ellis.