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 Fernndez-Romeu, with whom Roberto J. Snchez-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.
8

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.

10

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.

11

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.

12

In making his final determination, the Secretary considers various statutory

criteria, including:
13

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

14

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

15

(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

16

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

17

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).

18

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

19

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).

20

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).
III. Discussion
21

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).

22

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, 12 How. 299,
13 L.Ed. 996 (1900)). 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, 100 S.Ct. 2009, 64 L.Ed.2d 702
(1980); see also Doran v. Mass. Turnpike Auth., 348 F.3d 315, 318 (1st
Cir.2003).

23

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

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. 186, 192-93,
114 S.Ct. 2205, 129 L.Ed.2d 157 (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, 90 S.Ct.
844, 25 L.Ed.2d 174 (1970).
24

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, 114 S.Ct. 2205. With these
principles in mind, we consider whether Puerto Rico's certificate of need law,
as applied to retail pharmacies, discriminates against interstate commerce.

25

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

26

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, 98 S.Ct. 787, 54 L.Ed.2d 664 (1978)).

27

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 timeconsuming administrative and judicial procedures established by the Act and
frequently declines to issue requested certificates at the conclusion of the
process.
28

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.

29

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-ofCommonwealth 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,
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.

30

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, 69 S.Ct. 657, 93 L.Ed. 865 (1949) (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, 45 S.Ct. 324, 69 L.Ed. 623 (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. Maloy, 267 U.S.
317, 318, 45 S.Ct. 326, 69 L.Ed. 627 (1925) (similar); see also Medigen of Ky.
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).
31

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 H P Hood & Sons, 336 U.S. at 533, 69 S.Ct. 657.

32

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.

33

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, 71 S.Ct. 295, 95 L.Ed. 329 (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, 112 S.Ct. 2019, 119 L.Ed.2d 139 (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

34

Contrary to the Secretary's suggestion, the Act also cannot be defended on the
ground that it treats 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.

35

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-ofstate 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, and is akin to
laws which courts have invalidated because they discriminate against out-ofstate 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, 114 S.Ct.
1677, 128 L.Ed.2d 399 (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, 71 S.Ct. 295 (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"); CloverlandGreen 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).

36

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 to this discriminatory scheme does not ameliorate the constitutional

infirmity.
37

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-ofCommonwealth 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.

38

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 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.

39

Finally, we disagree with the Secretary's suggestion that this case is controlled
by Exxon Corp. v. Governor of Md., 437 U.S. 117, 98 S.Ct. 2207, 57 L.Ed.2d
91 (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, 98 S.Ct. 2207.

40

This case is distinguishable because, as we have explained, the Act favors the
largely local group of established pharmacies over similarly-situated out-ofCommonwealth pharmacies seeking to open new stores. Unlike Exxon, where
the Court expressed 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, 98 S.Ct. 2207; 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.
41

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, 97 S.Ct. 2434, 53 L.Ed.2d 383 (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."

42

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. 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
43

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

Notes:
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 physicianowned investments. Because physicians could prescribe the use of these newlyconstructed facilities, Congress postulated that doctors were ordering
unnecessary, expensive procedures to create artificial demand for their
investmentsSee McGinley, supra at 154-55.

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 recordSee, e.g., AIDS Action Comm. v. MBTA, 42 F.3d 1, 5 (1st
Cir.1994).

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

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, 71 S.Ct. 777, 95
L.Ed. 993 (1951); Am. Motors 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, 98 S.Ct. 2531, 57 L.Ed.2d 475 (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).

That the Act regulates the ownership of local businesses rather than the flow of
goods into the Commonwealth does not affect this conclusionSee Lewis, 447
U.S. at 38-39, 100 S.Ct. 2009; see also Yamaha v. Jim's Motorcycle, Inc., 401
F.3d 560, 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).

States are not permitted to limit bar entry to their own citizensSee Supreme

Court of N.H. v. Piper, 470 U.S. 274, 283, 105 S.Ct. 1272, 84 L.Ed.2d 205
(1985).