# United Stat es Court of Appeals For the First C ircuit

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, 2005-2- HOWARD, Circuit Judge . Walgreen Co., Wal green of San Patricio, and Walgreen of Puerto Rico (collectively, Walgreen) sued John V. Rullan, the Secretary of the Puerto Rico Health Department (Secretary), un der 42 U.S.C. § 1983, challenging the constitutionality of a Commonwealth of Puerto Rico statute req uiring that all pharmacies seeking to open or relocate wi thi n the Commonwealth obtain a "certificate of necess ity a nd convenience." 24 L.P.R.A. § 334 et. seq . Wa lgreen asserts that this statute is unconstitutional because it impermissibly discriminates against or excessively burdens interstate commerce andviolates d ue process. The district court rejected these arguments. Because we conclude that the statute imp ermi ssibly 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, BeyondHealth Care Reform: Reconsidering Certificate of Need Laws in a Managed Competition System , 23 Fla. St. U. L. Rev. 141, 154-55 (1995).1 One of the purpose s 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-constructedfacilities, Congress postulated that doctors were ordering unnecessary, expensive procedures to create artificial demand for their investments. See McGinley, supra at 154-55. -3- 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

re view edproposed health care facility construction projects and permittedprojects to proceed only after a demonstration of sufficient need for the services. 1 Se e 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

docume nt 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, t h us contributing to the orderly and adequate-4- development of health services in Puerto Rico. Id. at § 334(e). The Act identified "health facilities" required to obtain a cer tif icate, id. § 334(d), provided criteria for granting a certificate, id. § 334b, permitted the Secretary to promulgate additional certificate criteria, id. §334j , and establishedadministrative 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. 1 89 of Ju ly 29, 1979, amending 24 L.P.R.A. §§ 334 et seq. This amendment, inter alia , provided that any pharmacy in exi stence on October 24, 1979 was exempt from the certifi cat e 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 Plann ing an d Resources Development Act. Pub. L. No. 99-60, 100 Stat. 3743 (1986). While several states followed-5-

suit by repealing th eir 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 proposedpharmacy submittin g 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 wi del y read newspaper announcing the request . See id. § 334f-6. He also notifies all "affect e d persons" by mail. See Regulation of the Secretary of Health No. 56, art. IV § 2(b) (1 980) ("Regulation No. 56"). Among the "affectedpersons" are existing pharmacies located within one mile of the proposedpharmacy 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 Se cret ary assigns the case to the Health Department's Hearings-6-

Divis ion for an administrative hearing. The hearing is ofte n delayedto permit the parties time for discovery. At the hearing, the parties present, inter alia , expert test imon y concerning the expectedimpact 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 th e transaction for which the certificate is requested, and the lon g-t erm service development plan, if any, of the petitioner; (2) the present and projected need of the populatio n w hich will be affected by the proposedtransaction of the services to be provided thereby; ( 3) the existence of alternatives to th e transaction for which the certificate is requested, or the possibility of providing the proposed services in a more efficient or less costly manner tha n t hat proposed by the petitioner; and (4) the relationship between the health syste mo perating in the area and the proposed transaction. 24 L.P.R.A. § 334b. In addition, the Sec retary considers other criteria, established by regulation, including whether the proposed pharmacy will benefit certain "unattended populations" (e.g., low-2 The parties state that, by asking the court to dec ide the

case on the paper record, they "waived " trial. This is an inaccurate description of the procedure. By submitting the paper recordand asking the court to make findings of fact and conclusions of law basedon 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- income, disabled, or elderly populations) and whether the proposed pharmacy will be located in an area that is already "saturated" by existing pharmacie s . 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. § 334f10. The losin g party may also seek judicial review in the Puerto Rico C ircuit Court of Appeals and eventually in the Puerto Rico Supreme Court. See id. Typica lly, th e 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 a dmin istrative and judicial process usually takes several years to complete. II. The District Court Opinion In the district court, Walgreen claimed that the Act, as appliedto retail p harma cies, is invalid because it discriminates against or excessively burdens interst ate c ommerce. After filing

cross motions for summary judgment, the parties agreed to try th e

case on affidavits, depositions, and exhibi t s. 2 In a published-8-

opinion, the distric t court rejected Walgreen's claims. See Walgreen Co. v. Rullan , 292 F. Supp. 2d 298 (D.P.R. 2003).

The district c ourt rejected Walgreen's discrimination

a rgument because the Act requires "any local economic interest seeking to obtain a [certificate to] jump throug h the s ame bureaucratic hoops" as an out-of-Commonwealth entity andthus treats all "newcomers" evenhandedly. Id. at 313. The court also declined to find discrimination, ev e n though all existing pharmacies were exempt when the Act was amendedto include pharmacies, because "the statute made no distinction between local andnational pharmacies." Id. at 315. After concluding that the Act was non-discriminatory, the court determined that the Act did no t ex cessively 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, th e co urt 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).-9- III. Discussion On appeal, Walgreen renews its arguments challenging the constitutional ity o f the Act as applied to retail pharmacies. Because Walgreen appeals the district court's decision following a bench trial, we review fac t ual findings for clear error and

con clusions of law de novo . See Keyes v. Sec'y of the Navy , 85 3 F.2d 1016, 1020 (1st Cir. 1988).

The Constitution grants Congress the p ower t o 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 in terpreted 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), lim i ts the power of states "to erect barriers against interstate trade," Lewis

v. BT Inves tmen t 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 dor mant Commerce Clause, if a state law has either the purpose or effect of significantly favoring in-st ate commercial interests over out-of-state interests, the law will

" routinely" be invalidated "unless the discrimination is-10-

demonstrably justified by a valid factor unrelated to economic protectionism." Houlton Citizens' Coalition v. Town of Houlton , 175 F.3d178, 184 (1st Cir. 1999) (quoting West Lynn Creamery, Inc. v. Healy , 512 U.S. 189, 192-93 (1994)). If the state law regulates instate and out-of-state interests evenhandedly, the statute will be upheld"unless the burden impose d 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 p articul ar factual setting is often difficult. Recognizing this difficulty, the Supreme Court has c a utioned that the dormant Commerce Clause inquiry should be u ndertaken by "eschew[ing] formalis mfor a sensitive, case-by-case analysis of purposes and effects." West Lynn Creamery , 512 U.S. at 201. W i th these principles in mind, we consider whether Puerto Rico 's ce rtificate of needlaw, as applied to retail pharmacies, discriminates against interstate commerce.

On its face, the Act ap p lies neutrally. All commercial interests wishing to open or relocate a pharmacy in Puerto Rico must obtain the same cert ificate no matter their place of origin. But viewedmore critically andin light of the Secretary's enforcement of the Act, th e Act d iscriminates against interstate commerce by permitti ng the Secretary to block a new pharmacy from locating in-11-

its desired location simply because of t h e adverse competitive effects that the new pharmacy will have on existing pharmacies.

As set forth above, when the Puerto Rico leg i slature

am ended t he Act in 1979 to include pharmacies as covered "health

care facilities," it exempte d all existing pharmacies from the certificate requirement. 24 L.P.R.A. § 334g. Of the pharmacies operating in Puerto Ri c o at this time, ninety-two percent were locally owned. Th us, 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 instate interests can indicate discriminatory nature of statute) (cit ing Ray mond 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 excu sed f rom the certificate requirement but also has been permitted to wield substantial influence in the enforcement of the certificate requirement against pro posednew pharmacies. The Secretary acknowledges that, unl es s

an existing pharmacy objects to a certifi cate 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.3 Ou t of the 337 unopposed applications, only one has bee n

rejected. -12-

Thus, in practi ce, t he 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 provide s that the Secretary may deny a certificate if a new pharmacy will "unduly affec t existing services." 24 L.P.R.A. § 334(e). Moreover, the regulations enforcing the Act direct the Secreta ry to reject a new pharmacy's request if the pro p osed 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 applicat i ons, 3 twenty-three percent of opposed applications have been denied. The negative effects on out-of-Commonwealth applicants have been particularly pronounced. Over fifty perc e nt of out-ofCommonwealth entities have been forced to undergo t he entire administrative process compared to less than twenty-five percent of local applicants. Moreover, of those appli c ants forced to endure the hearing process, the Secretary has granted c e rtificates to ninety percent of the local applicants but only to fifty-eight percent of out-o f-C ommonwealth applicants. In 1979, ninety-two percent o f pharmacies were under local ownership, and in 2001,4 This is not to say that there are no instances in which a

state could justify a c ert ificate 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 w ith in a state are not legit imat e exercises of state power, see Philadelphia v. New Jersey , 437 U.S. 617, 624 (1978) (st ating 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- ninety-four percent of pha rmacie s were locally owned. The statistical evidence thus stro ngly indicates that the Act, as appliedby the Sec retary, has limited competition in favor of the predominantly local group of existing pharmacies.

The Supreme Court has invalida ted, o n dormant Commerce Clause gro unds, r egulatory schemes that permit a state to deny an operating license on the basi s th at the opening of a new facility in a particular location will cause undue competition for existing fa c ilities. 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 opera te in a d esired locality because the relevant market was "already adequately ser ved"); Buck v. Kuykendall , 2 6 7 U.S. 307, 314-16 (1925) (invalidating a rule that

a state could deny an interstate tra nsporte r a certificate of necessity and convenience to use state roads becaus e the " area is already being ade quately served"); George W. Bush & Sons Co. v. Malloy , 267 U.S. 317, 318 (1925) (similar); see also Medigen of Ky.-14-

v. Pub. Serv. Comm'n of W. Va. , 787 F. Supp. 590, 598 (S.D. W. Va. 1991) (collecting cases invalidating var i ous certificate of convenience and necessity schemes because they discriminate against interstate commerce), aff'd985 F.2d164 (4th Cir. 1993). A court has also struck dow n, on d ormant 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 establishedlocal interests the ability to block licensing of outof-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 bot h of these infirmities. It permits the Secretary to deny a proposedphar m acy market access at its desired location simply to limit competition. Further, the Secr etary invokes this authority only upon the ur g ing 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 advant age. F or these reasons, the Act discriminates against commerce by permitting establishedpharmacies "to retard, burden or constrict the flow of

. . . commerce for their own economic ad v antage." See Hood , 336 U.S. at 665.5 That the Act regulates the ownership of local busine sse s

rather than the flow of goods into the Commonwealth does not affect -15- T he Secretary advances several arguments defending the Act. First, he claims that the Act does not bur den 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 C laus e 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 Resour ces , 50 4 U.S. 353, 361 (1993) ("[O]ur prior cases teach that a State may not avoid the strictures of the Commerce Clause by curtailing th e movement of articles of commerce through subdivisions of the State, rather than through the State itself."). B y 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. Thi s burde n on commerce is sufficient to trigger the Commerce Clause scrutiny. 5this 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 regulatedthe ownership of local motorcycle franchises to prevent excessive competition with existing franchises). -16- Contrary to the Secretary's suggestion, the Act also cannot be defended on the grou nd that eats all newcomers equally andth us does not discriminate because every pharmacy seeking to open or relocate within P uerto Rico must obtain a certificate. While it is true, as the Secretary states, that a statute i s 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 o f a con tract providing the exclusive right to process the city's municipal waste. Id. at 181-82. We rejected a dormant Commerce Clau s e challenge to the awarding of the contract because "in-state andout-of-state bidders [were] allowed to compete freely on a level playing field" as the bidding process di d not favor any particular interest. Id. at 188. But unlike the bidding process at issue Houlton Citizens' Coalition , the A ct 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 ,-17-

an d is ak in to laws which courts have invalidated because they discriminate aga i nst 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 les s dis criminatory because in-state or in-town processors are also covered by the pr o hibition."); Dean Milk Co. , 340 U.S. at 354 n.4 (holding that it is "immaterial that Wisconsin milk from outside the Madi son are a is subjected to the same proscription as that moving i n interstate commerce"); CloverlandGreen Spring Dairies, Inc. v. Penn. Milk Mktg. B d. , 298 F.3d 201, 214 (3d Cir. 2002) (noting that a statute may be invalidunder the dormant Commerce Clau se " 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 equall y," th e 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 argumen t 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 e xisti ng pharmacies. The result of this authorit y is that the Secretary protects the mostly local group of existing pharma cies from competitive pressure. That the Secretary subjects al l newcomers6 States ar e not permitted to limit bar entry to their own

citizens. See Supreme Court of N.H. v. Piper , 470 U.S. 27 4 , 283 (1985). -18- 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 w hen the A ct was passed (and now) are ownedby out-of-Commonwealth interests. Holding otherwise would be tantamount to saying that a favoredgroup must be entirelyin-state for a law to have a discriminatory effect on comm erce. 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 considereda dormant Commerce Clause challenge to a Rhode Islandstatute providing that only members of the Rhode Islandbar couldengage in third-party debt collection. Rhode Island defended the law by arguing that it applied evenhandedly because it excluded all debt colle c tion companies from operating within its borders. Id. at 290. We rejected this argument becau se the statute "effectively bars out-of-staters fromoffering a commercial service

. . . and co nfers the right to provide th[e] service . . . upon a class largely composed of Rhode Islandcitizens" (i.e., members of the Rhode Island bar). Id. Even though some members of the Rhode Islandbar were from outside of Rhode Island, 6 we concludedthat the statute discrimi nated against commerce because it favored a class-19-

comprised mostly of Rhode Island interests. See Nat'l Revenue , 807 F.2dat 290. So too here. While a few o ut-of-Commonwealth pharmacies benefit fromthe Ac t, 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 (1 978). I n Exxon , the Court considered the validity of a Marylands ta tute prohibiting refiners of petroleum from operating retail ser vice stat ions within Maryland. Id. at 120. The Court rejectedthe refiners' dormant Commerce Clause challenge because the st atute d id not affect the right of only out-of-state entities to compete in the Maryland market; rather, all independent dealers (in andout-of-state) were permitted to comp e te and all refiners were

e xcluded. See id. at 127. As the Court explained: "While t h e refiners will no longer enjoy their same status in the Maryland

mar ket, in-state independent dealers will have no competitiv e advantage over out-of-state dealers. The fact that the bu rden of

a state regulation falls on some interstate companies does not, by itself, establish discrimination against interstate commerce." Id. at 127. Th is case is distinguishable because, as we have explained, the Act favors the largely lo cal gro up of established pharmacies over similarly-situated o ut-of-Commonwealth pharmacies seeking to open new stores. Unlike Exxon , where the Court expressed-20-

confide nce that the only result of the statute would be to "cause

some business to shift from one interstate supplier to another," the stat istics in this case strongly suggest that the Act help s t o perpetuate local dominance of the Puerto Rico pharmacy market. Id. at 128; see also supra at 12-13. The Ac t does not burden a particular firm, or subgroup of firms, but r athe r affects every pharmacy seeking to open in an area of Puerto Ri c o where an established pharmacy already operates.

We thus find that, on balance, the Act, though facially neutral, discriminates against in t erstate commerce. This conclusion, however, does not end our inquiry. "When discrimination again st commerce . . . is demonstrated, the burden falls on the State to justify it both in terms of the local benefits flowing from the statute andthe unavailability of nondiscriminatory alternatives adequate to p rese rve the local interest at stake." Hunt v. Wash. Apple Adver Comm'n , 432 U.S. 333, 353 (1977). The o nl y justification offered by the Secretary for the Act is that it "seeks to encourage in-state and out-of-state [in teres ts] 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' expe r ts testified, the certificate requirement cannot reasonably be th ought to advance this purpose. Pharmacies seek to operate in areas where they can tur n a profit.-21-

The refusal to grant a proposed pharmacy market entry at its desired location will not encourage the proposed pharmacy to relocate to an underservedarea (unless the government provi de s other incentives for it to do so). Presumably areas are underserved bec aus e pharmacies have determined that these locations are unlikely to be profitable. For this reason, the den ial of a certificate request is likely to lead a pharmacy to seek to open in another potentially p rofitable (and therefore probably already served) area or t o withdraw from the Puerto R ico mar ket 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 Clau s e grounds, a statute requiring transporters of medical waste to obtain

a certificate of necessity and convenience andauthorizing 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 enforcedby the Secretary of Health for the issuing of certificates of necessity and convenience to retail pharmacies, is invalidunder the dormant Commerce Clause. Accordingly, we reverse the district-22-

court's judgment and remand for further proceedings consistent with this opinion.