Walgreen Company v. Rullan

United States Court of Appeals
For the First Circuit

No. 03-2542

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.

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF PUERTO RICO

[Hon. Héctor M. Laffitte, U.S. District Judge]

Before

Boudin, Chief Judge,

Lipez and Howard, Circuit Judges.

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.

April 22, 2005
 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).

-2-
 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

1
One of the purposes of encouraging states to enact
certificate of need programs was to limit the excessive
construction of health care facilities by physician-owned
investments. Because physicians could prescribe the use of these
newly-constructed facilities, Congress postulated that doctors were
ordering unnecessary, expensive procedures to create artificial
demand for their investments. See McGinley, supra at 154-55.

-3-
 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

-4-
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

-5-
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-

-6-
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

2
The parties state that, by asking the court to decide the
case on the paper record, they "waived" trial. This is an
inaccurate description of the procedure. By submitting the paper
record and asking the court to make findings of fact and
conclusions of law based on these materials, the parties consented
to a trial on a stipulated record. See, e.g., AIDS Action Comm. v.
MBTA, 42 F.3d 1, 5 (1st Cir. 1994).

-7-
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 "burden is clearly [not]

excessive in relation to its putative local benefits." Id. at 318

(emphasis in original).

-8-
 III. Discussion

On appeal, Walgreen renews its arguments challenging the

constitutionality of the Act as applied to retail pharmacies.

Because Walgreen appeals the district court's decision following a

bench trial, we review factual findings for clear error and

conclusions of law de novo. See Keyes v. Sec'y of the Navy, 853

F.2d 1016, 1020 (1st Cir. 1988).

The Constitution grants Congress the power to regulate

interstate commerce. See U.S. Const. art. I, § 8, cl. 3. While the

Commerce Clause's text provides only an affirmative grant of power,

for over 150 years, the Clause has been interpreted to contain a

negative aspect known as the dormant Commerce Clause. See Laurence

H. Tribe, 1 American Constitutional Law 1030 (3d ed. 2000) (citing

Cooley v. Bd. of Wardens, 53 U.S. 299, 317-20 (1852)). The dormant

Commerce Clause doctrine, which applies to Puerto Rico on the same

terms as it applies to the states, see United Egg Producers v. Dep't

of Agric. of P.R., 77 F.3d 567, 569 (1st Cir. 1996), limits the

power of states "to erect barriers against interstate trade," Lewis

v. BT Investment Managers, Inc., 447 U.S. 27, 35 (1980); see also

Doran v. Mass. Turnpike Auth., 348 F.3d 315, 318 (1st Cir. 2003).

Under the dormant Commerce Clause, if a state law has

either the purpose or effect of significantly favoring in-state

commercial interests over out-of-state interests, the law will

"routinely" be invalidated "unless the discrimination is

-9-
demonstrably justified by a valid factor unrelated to economic

protectionism." Houlton Citizens' Coalition v. Town of Houlton, 175

F.3d 178, 184 (1st Cir. 1999) (quoting West Lynn Creamery, Inc. v.

Healy, 512 U.S. 189, 192-93 (1994)). If the state law regulates in-

state and out-of-state interests evenhandedly, the statute will be

upheld "unless the burden imposed on [interstate] commerce is

clearly excessive in relation to the putative local benefits." Pike

v. Bruce Church, Inc., 397 U.S. 137, 142 (1970).

While these rules are easy to recite, their application

to a particular factual setting is often difficult. Recognizing

this difficulty, the Supreme Court has cautioned that the dormant

Commerce Clause inquiry should be undertaken by "eschew[ing]

formalism for a sensitive, case-by-case analysis of purposes and

effects." West Lynn Creamery, 512 U.S. at 201. With these

principles in mind, we consider whether Puerto Rico's certificate

of need law, as applied to retail pharmacies, discriminates against

interstate commerce.

On its face, the Act applies neutrally. All commercial

interests wishing to open or relocate a pharmacy in Puerto Rico must

obtain the same certificate no matter their place of origin. But

viewed more critically and in light of the Secretary's enforcement

of the Act, the Act discriminates against interstate commerce by

permitting the Secretary to block a new pharmacy from locating in

-10-
its desired location simply because of the adverse competitive

effects that the new pharmacy will have on existing pharmacies.

As set forth above, when the Puerto Rico legislature

amended the Act in 1979 to include pharmacies as covered "health

care facilities," it exempted all existing pharmacies from the

certificate requirement. 24 L.P.R.A. § 334g. Of the pharmacies

operating in Puerto Rico at this time, ninety-two percent were

locally owned. Thus, the Act, as amended, excused an almost

entirely local class of pharmacies from the certificate requirement.

Cf. Pac. Northwest Venison Producers v. Smitch, 20 F.3d 1008, 1013

(9th Cir. 1994) (recognizing that "grandfather clause" exempting in-

state interests can indicate discriminatory nature of statute)

(citing Raymond Motor Transp., Inc. v. Rice, 434 U.S. 429, 447

(1978)).

What's more (again as set forth above) this group of

existing pharmacies not only was excused from the certificate

requirement but also has been permitted to wield substantial

influence in the enforcement of the certificate requirement against

proposed new pharmacies. The Secretary acknowledges that, unless

an existing pharmacy objects to a certificate request, he almost

invariably issues the certificate. Yet when there is an objection,

he begins the costly and time-consuming administrative and judicial

procedures established by the Act and frequently declines to issue

requested certificates at the conclusion of the process.

-11-
 Thus, in practice, the Act permits an existing pharmacy

to object simply because it fears additional competition. And this

practice is not only within the letter of the Act, it is within its

spirit as well. The Act provides that the Secretary may deny a

certificate if a new pharmacy will "unduly affect existing

services." 24 L.P.R.A. § 334(e). Moreover, the regulations

enforcing the Act direct the Secretary to reject a new pharmacy's

request if the proposed location is already "saturated" with

existing pharmacies. Regulation No. 56, art. VI § 13(2). The law

is thus protectionist both de jure and de facto.

This protectionist regime has had discriminatory effects.

While the Secretary has rejected virtually no unopposed

applications,3 twenty-three percent of opposed applications have

been denied. The negative effects on out-of-Commonwealth applicants

have been particularly pronounced. Over fifty percent of out-of-

Commonwealth entities have been forced to undergo the entire

administrative process compared to less than twenty-five percent of

local applicants. Moreover, of those applicants forced to endure

the hearing process, the Secretary has granted certificates to

ninety percent of the local applicants but only to fifty-eight

percent of out-of-Commonwealth applicants. In 1979, ninety-two

percent of pharmacies were under local ownership, and in 2001,

3
Out of the 337 unopposed applications, only one has been
rejected.

-12-
ninety-four percent of pharmacies were locally owned. The

statistical evidence thus strongly indicates that the Act, as

applied by the Secretary, has limited competition in favor of the

predominantly local group of existing pharmacies.

The Supreme Court has invalidated, on dormant Commerce

Clause grounds, regulatory schemes that permit a state to deny an

operating license on the basis that the opening of a new facility

in a particular location will cause undue competition for existing

facilities.4 See H.P. Hood & Sons, Inc. v. DuMond, 336 U.S. 525,

545 (1948) (invalidating state agency's refusal to grant a license

for a milk producer to operate in a desired locality because the

relevant market was "already adequately served"); Buck v.

Kuykendall, 267 U.S. 307, 314-16 (1925) (invalidating a rule that

a state could deny an interstate transporter a certificate of

necessity and convenience to use state roads because the "area is

already being adequately served"); George W. Bush & Sons Co. v.

Malloy, 267 U.S. 317, 318 (1925) (similar); see also Medigen of Ky.

4
This is not to say that there are no instances in which a
state could justify a certificate of need law that restricts
competition, see, e.g., Panhandle E. Pipe Line Co. v. Mich. Pub.
Serv. Comm'n, 341 U.S. 329, 333-34 (1951); Am. Motor Sales Corp. v.
Div. of Motor Vehicles, 592 F.2d 219, 222-23 (4th Cir. 1979);
however, certificate of need laws which deter competition simply to
benefit those entities already operating within a state are not
legitimate exercises of state power, see Philadelphia v. New
Jersey, 437 U.S. 617, 624 (1978) (stating that laws which have a
disproportionately negative impact on out-of-state businesses and
serve only to promote "economic protectionism" are "per se"
invalid).

-13-
v. Pub. Serv. Comm'n of W. Va., 787 F. Supp. 590, 598 (S.D. W. Va.

1991) (collecting cases invalidating various certificate of

convenience and necessity schemes because they discriminate against

interstate commerce), aff'd 985 F.2d 164 (4th Cir. 1993). A court

has also struck down, on dormant Commerce Clause grounds, a law

which gave in-state interests the ability to manipulate a facially

neutral regulatory scheme to establish advantages over out-of-state

interests. See McNeilus Truck & Mfg. v. Ohio, 226 F.3d 429, 442-43

(6th Cir. 2000) (holding that facially neutral scheme which gave

established local interests the ability to block licensing of out-

of-state entities by refusing to contract with them had the effect

of discriminating against interstate commerce).

The Act, insofar as it applies to pharmacies, suffers from

both of these infirmities. It permits the Secretary to deny a

proposed pharmacy market access at its desired location simply to

limit competition. Further, the Secretary invokes this authority

only upon the urging of a member of the largely local group of

existing pharmacies, thereby permitting a predominantly local group

to manipulate the regulatory scheme for its own advantage. For

these reasons, the Act discriminates against commerce by permitting

established pharmacies "to retard, burden or constrict the flow of

. . . commerce for their own economic advantage." See Hood, 336

U.S. at 665.

-14-
 The Secretary advances several arguments defending the

Act. First, he claims that the Act does not burden commerce

sufficiently to trigger the dormant Commerce Clause doctrine because

it does not bar any out-of-Commonwealth pharmacy from operating in

Puerto Rico. He contends that the Act is permissible because every

pharmacy can open somewhere on the island.

This argument takes too narrow a view of the kind of

restrictions that affect the flow of commerce. Laws may implicate

the Commerce Clause if they ban a business from establishing

operations in only one part of a state, even though the rest of the

state remains open. See Dean Milk Co. v. Madison, 340 U.S. 349,

354-56 (1951) (holding invalid an ordinance which bars certain milk

producers from selling milk within city limits); accord Fort Gratiot

Sanitary Landfill, Inc. v. Mich. Dep't of Natural Resources, 504

U.S. 353, 361 (1993) ("[O]ur prior cases teach that a State may not

avoid the strictures of the Commerce Clause by curtailing the

movement of articles of commerce through subdivisions of the State,

rather than through the State itself."). By permitting the

Secretary to bar the opening of a new pharmacy in its desired

location because of the competitive effects on existing pharmacies,

the Act limits the parts of Puerto Rico which are open to new retail

pharmacies. This burden on commerce is sufficient to trigger the

Commerce Clause scrutiny.5

5
That the Act regulates the ownership of local businesses
rather than the flow of goods into the Commonwealth does not affect

-15-
 Contrary to the Secretary's suggestion, the Act also

cannot be defended on the ground that eats all newcomers equally

and thus does not discriminate because every pharmacy seeking to

open or relocate within Puerto Rico must obtain a certificate.

While it is true, as the Secretary states, that a statute is

consonant with the dormant Commerce Clause so long as it "leaves all

comers with equal access to the local market," see Houlton Citizens'

Coalition, 175 F.3d at 188, this principle has no application here.

In Houlton Citizens' Coalition, the plaintiff challenged

the city's award of a contract providing the exclusive right to

process the city's municipal waste. Id. at 181-82. We rejected a

dormant Commerce Clause challenge to the awarding of the contract

because "in-state and out-of-state bidders [were] allowed to compete

freely on a level playing field" as the bidding process did not

favor any particular interest. Id. at 188. But unlike the bidding

process at issue Houlton Citizens' Coalition, the Act provides

different "playing fields" for in and out-of-state interests. While

the Act treats "newcomers" equally, it gives an on-going competitive

advantage to the predominantly local group of existing pharmacies.

24 L.P.R.A. § 334g. In this crucial respect, the Act is dissimilar

to the regulatory conduct challenged in Houlton Citizens' Coalition,

this conclusion. See Lewis, 447 U.S. at 38-39; see also Yamaha v.
Jim's Motorcycle, Inc., --F.3d--, 2005 WL 628111 (4th Cir. Mar.
28, 2005) (invalidating, on dormant Commerce Clause grounds, state
law which regulated the ownership of local motorcycle franchises to
prevent excessive competition with existing franchises).

-16-
and is akin to laws which courts have invalidated because they

discriminate against out-of-state entities and some in-state

entities in order to favor a subset of in-state interests. See C&A

Carbone, Inc. v. Clarkstown, 511 U.S. 383, 391 (1994) ("The

ordinance is no less discriminatory because in-state or in-town

processors are also covered by the prohibition."); Dean Milk Co.,

340 U.S. at 354 n.4 (holding that it is "immaterial that Wisconsin

milk from outside the Madison area is subjected to the same

proscription as that moving in interstate commerce"); Cloverland-

Green Spring Dairies, Inc. v. Penn. Milk Mktg. Bd., 298 F.3d 201,

214 (3d Cir. 2002) (noting that a statute may be invalid under the

dormant Commerce Clause "if it favors only a single or finite set

of businesses") (internal citations and quotations omitted).

In a variant on the Secretary's theme that "the Act treats

all newcomers equally," the Secretary emphasizes that all

"newcomers" must file an application for a certificate, even though

only the opposed pharmacies must go through "the whole nine yards"

of the administrative process. This argument misconceives the

fundamental flaw in the Act. The Act and accompanying regulations

permit the Secretary to reject an application on the ground that a

particular area of Puerto Rico is saturated with existing

pharmacies. The result of this authority is that the Secretary

protects the mostly local group of existing pharmacies from

competitive pressure. That the Secretary subjects all newcomers

-17-
to this discriminatory scheme does not ameliorate the constitutional

infirmity.

Our conclusion is also unaffected by the fact that a few

of the existing pharmacies when the Act was passed (and now) are

owned by out-of-Commonwealth interests. Holding otherwise would be

tantamount to saying that a favored group must be entirely in-state

for a law to have a discriminatory effect on commerce. The

Secretary cites no authority for this proposition, and our precedent

suggests otherwise.

In Nat'l Revenue Corp. v. Violet, 807 F.2d 285 (1st Cir.

1986), we considered a dormant Commerce Clause challenge to a Rhode

Island statute providing that only members of the Rhode Island bar

could engage in third-party debt collection. Rhode Island defended

the law by arguing that it applied evenhandedly because it excluded

all debt collection companies from operating within its borders.

Id. at 290. We rejected this argument because the statute

"effectively bars out-of-staters from offering a commercial service

. . . and confers the right to provide th[e] service . . . upon a

class largely composed of Rhode Island citizens" (i.e., members of

the Rhode Island bar). Id. Even though some members of the Rhode

Island bar were from outside of Rhode Island,6 we concluded that the

statute discriminated against commerce because it favored a class

6
States are not permitted to limit bar entry to their own
citizens. See Supreme Court of N.H. v. Piper, 470 U.S. 274, 283
(1985).

-18-
comprised mostly of Rhode Island interests. See Nat'l Revenue, 807

F.2d at 290. So too here. While a few out-of-Commonwealth

pharmacies benefit from the Act, the vast majority of favored

pharmacies are local concerns.

Finally, we disagree with the Secretary's suggestion that

this case is controlled by Exxon Corp. v. Governor of Md., 437 U.S.

117 (1978). In Exxon, the Court considered the validity of a

Maryland statute prohibiting refiners of petroleum from operating

retail service stations within Maryland. Id. at 120. The Court

rejected the refiners' dormant Commerce Clause challenge because the

statute did not affect the right of only out-of-state entities to

compete in the Maryland market; rather, all independent dealers (in

and out-of-state) were permitted to compete and all refiners were

excluded. See id. at 127. As the Court explained: "While the

refiners will no longer enjoy their same status in the Maryland

market, in-state independent dealers will have no competitive

advantage over out-of-state dealers. The fact that the burden of

a state regulation falls on some interstate companies does not, by

itself, establish discrimination against interstate commerce." Id.

at 127.

This case is distinguishable because, as we have

explained, the Act favors the largely local group of established

pharmacies over similarly-situated out-of-Commonwealth pharmacies

seeking to open new stores. Unlike Exxon, where the Court expressed

-19-
confidence that the only result of the statute would be to "cause

some business to shift from one interstate supplier to another," the

statistics in this case strongly suggest that the Act helps to

perpetuate local dominance of the Puerto Rico pharmacy market. Id.

at 128; see also supra at 12-13. The Act does not burden a

particular firm, or subgroup of firms, but rather affects every

pharmacy seeking to open in an area of Puerto Rico where an

established pharmacy already operates.

We thus find that, on balance, the Act, though facially

neutral, discriminates against interstate commerce. This

conclusion, however, does not end our inquiry. "When discrimination

against commerce . . . is demonstrated, the burden falls on the

State to justify it both in terms of the local benefits flowing from

the statute and the unavailability of nondiscriminatory alternatives

adequate to preserve the local interest at stake." Hunt v. Wash.

Apple Adver Comm'n, 432 U.S. 333, 353 (1977). The only

justification offered by the Secretary for the Act is that it "seeks

to encourage in-state and out-of-state [interests] alike to

establish pharmacies in [underserved] geographical areas."

There is no dispute that the Commonwealth has a legitimate

interest in encouraging pharmacies to locate in all parts of Puerto

Rico. But, as the parties' experts testified, the certificate

requirement cannot reasonably be thought to advance this purpose.

Pharmacies seek to operate in areas where they can turn a profit.

-20-
The refusal to grant a proposed pharmacy market entry at its desired

location will not encourage the proposed pharmacy to relocate to an

underserved area (unless the government provides other incentives

for it to do so). Presumably areas are underserved because

pharmacies have determined that these locations are unlikely to be

profitable. For this reason, the denial of a certificate request

is likely to lead a pharmacy to seek to open in another potentially

profitable (and therefore probably already served) area or to

withdraw from the Puerto Rico market entirely. As the Fourth

Circuit explained in a similar case, "the goal of providing

universal service at reasonable rates may well be a legitimate state

purpose, but restricting market entry does not serve that purpose."

Medigen of Ky., Inc. v. Pub. Serv. Comm'n of W. Va., 985 F.2d 164,

167 (4th Cir. 1993) (invalidating, on dormant Commerce Clause

grounds, a statute requiring transporters of medical waste to obtain

a certificate of necessity and convenience and authorizing the state

agency to deny such certificates if "existing services . . . [are]

reasonably efficient and adequate").

IV. Conclusion

For the foregoing reasons, 24 L.P.R.A. §§ 334 et seq., as

enforced by the Secretary of Health for the issuing of certificates

of necessity and convenience to retail pharmacies, is invalid under

the dormant Commerce Clause. Accordingly, we reverse the district

-21-
court's judgment and remand for further proceedings consistent with

this opinion.

-22-