US Supreme Court Denies Petition of Certiorari in New York Opioid Stewardship Payment Issue

On October 04, 2021, the U.S. Supreme Court allowed the state of New York to collect a total sum of $200 million surcharge imposed on the opioid manufacturers and its distributors. Healthcare Distribution, et al. v. James, Case No. 20-1611 (cert. denied Oct. 4, 2021) The said collection has been allowed to compensate the costs borne by the state due to the deadly epidemic caused by the powerful and addictive painkilling drugs. The Court did so by denying certiorari petition in an appeal brought from a Second Circuit decision which held that opioid stewardship payment of New York, under the New York Opioid Stewardship Act (“Act”) constituted a tax and not a fee for the purposes of the Tax Injunction Act, thereby, barring federal court jurisdiction over the case.

The appeal was filed by two trade groups of drug distributors and generic drug makers and a unit of British-based pharmaceutical company Mallinckrodt Plc. The petition for certiorari was filed against the Second Circuit’s decision in Association for Accessible Medicines v. James, 974 F.3d 216 (2nd Cir. 2020), wherein the court held that the opioid stewardship payment is a tax and not a mere fee for purposes of the Tax Injunction Act, thereby depriving federal courts of jurisdiction in the case. The Tax Injunction Act is a federal law enacted in the year 1937 that prohibits federal court jurisdiction in cases seeking to “enjoin, suspend or restrain the assessment, levy or collection of any tax under State law where a plain, speedy and efficient remedy may be had in the courts of such State.” The Second Circuit’s decision overruled the district court’s decision which invalidated the entire Act.

The Second Court in coming to this conclusion, noted that (1) the funds generated by the payments were used to provide a benefit to the general public; (2) the funds were maintained by the state’s taxing authorities; (3) the legislature’s choice to not label the payment obligation a “tax” was not determinative of the issue; and (4) the fact that the payment was a fixed yearly amount rather than a percentage of sales was not relevant to the analysis. The court held that the depositing of the said payments in a special fund was not conclusive to determine the tax versus fee analysis. Instead, the assessments that are segregated from general revenues would constitute taxes for purposes of the Tax Injunction Act as long as they are expended to provide a general benefit to the public. Therefore, the court held that the use of proceeds by opioid stewardship payments to support public health programs in the New York state, was a broad and statewide purpose for the benefit of the public and were properly characterized as a tax.

The US Chamber of Commerce and the National Taxpayers Union Foundation filed separate amicus briefs before the US Supreme Court in support of petitioner’s request for certiorari. As per the briefs, the Second Court’s decision was an outlier and its definition of a “tax” for purposed of the Tax Injunction Act was overly broad. The petitioners made a similar argument and asserted that other circuits have held that when a payment is made in a segregated fund and earmarked to pay for remedial programs, such a payment falls outside the Tax Injunction Act’s scope and was thereby subject to challenge in federal court. However, the US Supreme Court denied the petition of certiorari, and therefore affirmed the decision of the Second Circuit.

The above discussed tax versus fees distinction has been created with the Tax Injunction Act which has in turn introduced another class of litigation for purposes of determining the jurisdiction of a federal court. As per Eversheds Sutherland (US) LLP, the Tax Injunction Act has created an arbitrary distinction between the tax and fees and has arbitrarily given the state legislatures the ability to draft their statutes with the purpose of avoiding federal court jurisdiction. The Tax Injunction Act along with the elimination of mandatory Supreme Court review of certain state court decision had led to a situation where states court decision in tax law matters are not being subject to federal court review.

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