Pre-enforcement Excessive Fines Challenges to IRA §5000D Excise Tax Are Barred by the Anti-Injunction and Declaratory Judgment Acts; Voluntariness of Medicare Drug Price Negotiations Reaffirmed

Pre-enforcement Excessive Fines Challenges to IRA §5000D Excise Tax Are Barred by the Anti-Injunction and Declaratory Judgment Acts; Voluntariness of Medicare Drug Price Negotiations Reaffirmed

Introduction

In Novartis Pharmaceuticals Corp. v. Secretary United States Department of Health and Human Services, the United States Court of Appeals for the Third Circuit (Judge Hardiman writing for the court, joined by Judges Phipps and Freeman) affirmed summary judgment for the government on Novartis’s constitutional challenges to the Inflation Reduction Act’s Medicare Drug Price Negotiation Program. The decision, issued September 11, 2025, addresses three constitutional theories:

  • Eighth Amendment: an Excessive Fines challenge to the Inflation Reduction Act’s “designated drug” excise tax, 26 U.S.C. § 5000D;
  • Fifth Amendment: a Takings Clause challenge to the Program’s price-setting framework; and
  • First Amendment: a compelled speech challenge based on the Program’s “negotiation” structure and publication of “maximum fair prices.”

The court’s most consequential new holding is procedural: pre-enforcement Eighth Amendment challenges to the § 5000D excise tax are barred by both the Tax Anti-Injunction Act (AIA), 26 U.S.C. § 7421(a), and the Declaratory Judgment Act’s federal tax exception, 28 U.S.C. § 2201(a). On the merits of the Takings and First Amendment theories, the court held those claims foreclosed by its recent precedential decision in Bristol Myers Squibb v. Secretary of HHS (3d Cir. Sept. 4, 2025). The panel also clarifies standing and party alignment in tax-related litigation by joining the Treasury and IRS on appeal under Federal Rule of Civil Procedure 21 after the IRS adopted self-reporting regulations during the lawsuit.

Background and Parties

Congress enacted the Inflation Reduction Act of 2022 to control rapidly escalating federal spending on prescription drugs. The Act established the Drug Price Negotiation Program for Medicare Parts B and D, directing the Centers for Medicare & Medicaid Services (CMS), an agency within HHS, to negotiate “maximum fair prices” (MFPs) for selected high-expenditure drugs. The statute prescribes price ceilings tied to market benchmarks and obliges manufacturers of selected drugs to enter agreements to negotiate and to provide Medicare beneficiaries access at the negotiated price.

To enforce participation, Congress enacted a powerful daily excise tax, codified at 26 U.S.C. § 5000D, that applies when a manufacturer continues marketing a selected drug across the domestic market while refusing to execute the Program’s agreement. At the same time, the statute and CMS guidance preserve what the Third Circuit has characterized as a voluntary participation structure: manufacturers may avoid the excise tax entirely by exiting related Medicare and Medicaid discount/rebate agreements, which suspends the tax. CMS has declared it will grant “good-cause” terminations on 30 days’ notice to effectuate that exit.

CMS selected Novartis’s drug Entresto for the initial 2026 price year, and Novartis signed the required agreement and addendum. Novartis nonetheless filed suit in the District of New Jersey against HHS, CMS, and their leadership (later joined by the Treasury and the IRS), asserting constitutional violations and seeking declaratory and injunctive relief. The district court granted summary judgment to the government. Novartis appealed.

Summary of the Opinion

  • Standing and joinder: Novartis had standing to raise its Eighth Amendment challenge. CMS’s statutory duty to collect and transmit information necessary to compute § 5000D liability contributed to the alleged injury, and relief against CMS would reduce the risk of harm. To eliminate any doubt after the IRS issued self-reporting regulations during the litigation, the court joined the Treasury and IRS under Rule 21 on appeal.
  • Anti-Injunction Act and Declaratory Judgment Act: The court held that Novartis’s pre-enforcement Eighth Amendment claim is barred. The § 5000D exaction is a “tax” for AIA purposes because Congress labeled it as such, and Novartis’s requested relief would restrain its assessment and collection. The Williams Packing exception does not apply because success on the merits is not certain. The Declaratory Judgment Act’s federal tax exception independently bars declaratory relief.
  • Takings Clause: The claim fails under Bristol Myers Squibb (3d Cir. 2025), which held the Program does not effect an unconstitutional taking because participation—including accepting an MFP—is voluntary given the statutory and regulatory “exit” architecture.
  • First Amendment: The compelled speech claim fails under Bristol Myers Squibb, which held the Program primarily regulates conduct, not speech, and does not compel manufacturers to endorse the government’s views.
  • Disposition: The Third Circuit affirmed the district court’s judgment in full.

Analysis

Precedents Cited and Their Influence

  • National Federation of Independent Business v. Sebelius (2012): The court relied on NFIB’s distinction between the Anti-Injunction Act’s statutory “tax” classification and the Constitution’s taxing-power analysis. For the AIA, Congress’s “tax” label controls how the AIA applies, even if a levy might not be a tax for constitutional purposes. This supported treating § 5000D as a “tax” within § 7421(a).
  • Bailey v. George (1922) and Child Labor Tax Case (Bailey v. Drexel Furniture Co.) (1922): The court invoked the pairing to illustrate that an exaction may be treated as a “tax” for AIA purposes (Bailey v. George), even where the Supreme Court later holds it unconstitutional under the taxing power (Drexel).
  • CIC Services, LLC v. IRS (2021): Novartis analogized its suit to CIC, which permitted a pre-enforcement challenge to an IRS reporting notice backed by tax penalties. The Third Circuit distinguished CIC on three grounds central to CIC’s reasoning: (1) the plaintiff there targeted a reporting rule that imposed independent compliance costs, (2) the tax penalty was several steps removed from the challenged rule, and (3) criminal penalties made pre-enforcement review practically necessary. By contrast, Novartis’s requested injunction and declaration ran at the assessment and collection of the § 5000D tax itself.
  • Bob Jones University v. Simon (1974): The court cited Bob Jones to emphasize that the Declaratory Judgment Act’s federal tax exception is at least as broad as the AIA, barring declaratory relief “with respect to federal taxes.”
  • Enochs v. Williams Packing & Navigation Co. (1962): This carveout to the AIA allows injunctions only when there is certainty of success on the merits and irreparable injury. The panel held Novartis could not meet the “certainty” prong, referencing the Supreme Court’s reservation in Browning-Ferris about whether the Excessive Fines Clause extends to purely civil penalties unconnected to criminal conduct.
  • Browning-Ferris Industries v. Kelco Disposal (1989): Cited to highlight the unresolved scope of the Excessive Fines Clause in the civil context, undermining “certainty” under Williams Packing.
  • Massachusetts v. EPA (2007) and FDA v. Alliance for Hippocratic Medicine (2024): Used to frame redressability—relief that reduces risk of future harm to some extent suffices—and to support joining proper parties to ensure that relief would redress the injury.
  • Diamond Alternative Energy, LLC v. EPA (2025): Cited in the redressability analysis to reinforce that partial risk reduction can satisfy redressability.
  • Bristol Myers Squibb v. Secretary of HHS (3d Cir. Sept. 4, 2025): The controlling in-circuit authority on both Takings and First Amendment challenges to the Program. It also recognized the statutory architecture that makes participation “voluntary” by allowing manufacturers to exit related Medicare and Medicaid programs and thereby suspend the § 5000D tax.
  • AstraZeneca Pharms. LP v. Secretary U.S. Dep’t of HHS (3d Cir. 2025): Provided background on Medicare Part B and Part D operations relevant to the Program’s structure.

Legal Reasoning

1) Standing and Party Joinder

The government’s redressability defense emphasized that the IRS/Treasury, not CMS, assesses and collects the § 5000D tax. The panel rejected that narrow view. By statute, CMS must collect and share with Treasury the information necessary to determine whether the tax applies. CMS also stated it refers non-signatory manufacturers to the IRS. Because an injunction directed at CMS would stop that information flow and thus reduce the risk of assessment to some extent, redressability was satisfied.

The court then strengthened the fit between the defendants and the requested relief by adding the Treasury and IRS as parties under Federal Rule of Civil Procedure 21—on appeal—after the IRS adopted self-reporting regulations during the case. Citing Balgowan (3d Cir.), Silbaugh (9th Cir.), and Swan (D.C. Cir.), the court used Rule 21’s flexibility to cure party-alignment issues where the joined agencies had notice and participation would not prejudice them. This procedural move underscores appellate courts’ authority to align parties to ensure Article III requirements are met when agency roles crystallize mid-litigation.

2) Anti-Injunction Act (AIA) Bar to the Eighth Amendment Claim

The AIA prohibits any suit “for the purpose of restraining the assessment or collection of any tax.” The court found both prerequisites satisfied:

  • Tax classification: For AIA purposes, Congress’s label controls unless Congress provides otherwise. The excise is labeled a “tax” repeatedly in § 5000D. Following NFIB and Bailey, the court held the label is dispositive for the AIA even if the exaction might be analyzed differently for other constitutional purposes.
  • Purpose to restrain: Applying CIC Services, the court looked to the objective aim of the requested relief. Novartis asked the court to declare the “excise tax” unconstitutional under the Excessive Fines Clause and to enjoin CMS from “forcing” participation—relief that would prevent CMS from gathering and transmitting the information that triggers and calibrates the tax, and thereby would restrain assessment and collection. Unlike CIC, where the plaintiff challenged a reporting rule that imposed standalone burdens and was several steps removed from any tax, Novartis’s claim targeted the tax’s operation itself.

The court rejected the argument that Congress’s supposed expectation that § 5000D would raise little or no revenue takes the case outside the AIA. The AIA draws no distinction between revenue-raising and regulatory taxes; textual coverage is what matters.

Nor did the Williams Packing exception apply. The panel declined to find “certainty of success” on the Excessive Fines merits, pointing to the Supreme Court’s open question in Browning-Ferris about whether the Clause governs purely civil penalties disconnected from criminal conduct. Under Williams Packing’s deferential standard, uncertainty at that level defeats the exception.

3) Declaratory Judgment Act (DJA) Bar

The DJA independently bars declaratory relief “with respect to Federal taxes.” Because Novartis asked the court to declare the § 5000D “excise tax” unconstitutional, the DJA’s federal tax exception directly applied. Bob Jones confirms the DJA’s tax bar is at least as broad as the AIA.

4) Takings Clause (Fifth Amendment)

Bristol Myers Squibb controls within the Third Circuit. There, the court held that the Program does not effect a taking because it conditions participation in voluntary federal benefit programs on accepting a statutorily cabined price—backed by a genuine exit pathway. Specifically:

  • Section 5000D(c) suspends the excise tax when manufacturers terminate participation in key Medicare/Medicaid arrangements (Medicare Coverage Gap Discount Program, Manufacturer Discount Program, and Medicaid Drug Rebate Program).
  • CMS has “good cause” authority to grant 30-day termination requests for those agreements, which it has committed to do, allowing manufacturers to avoid incurring the tax while exiting the government-benefit ecosystem.

Given this voluntariness and the negotiated nature of MFPs within statutory ceilings, no compensable taking occurs. Novartis’s Takings claim therefore fails as a matter of binding circuit precedent.

5) First Amendment (Compelled Speech)

Bristol Myers Squibb likewise forecloses the compelled speech theory. The Program regulates conduct—agreeing to supply a drug at or below a negotiated MFP to Medicare beneficiaries—not the expression of a message or viewpoint. Signing an agreement to an MFP and the statute’s use of the term “maximum fair price” do not compel manufacturers to espouse the government’s normative framing, and publication of the MFP and CMS’s explanation is government speech, not compelled private speech. The First Amendment claim thus fails.

Impact and Forward-Looking Implications

  • Pre-enforcement Excessive Fines litigation is blocked in the Third Circuit: The central practical effect is to channel Eighth Amendment challenges to § 5000D into post-payment refund suits (or other non-AIA-barred postures), rather than pre-enforcement injunction actions. Plaintiffs seeking to contest § 5000D must either incur and pay the tax and pursue a refund action or identify a challenge that fits CIC Services’ narrow lane (which this opinion suggests will be difficult where the relief would impede the tax’s assessment or collection).
  • Congress’s “tax” label matters for AIA purposes: Regulated entities cannot avoid the AIA by arguing an exaction is “really” a penalty or that it was not intended to raise revenue. If Congress labeled the exaction a “tax,” courts will generally treat it as such for AIA/DJA jurisdictional bars.
  • Voluntariness framework solidifies: Together with Bristol Myers Squibb, this case cements, within the Third Circuit, the view that participation in the Program is voluntary due to a statutory “escape hatch.” That posture undermines Takings and compelled speech challenges and will likely influence district courts across the circuit disposing of similar claims.
  • Party alignment in evolving regulatory suits: The court’s use of Rule 21 to join Treasury and IRS on appeal after the IRS issued self-reporting rules is a noteworthy procedural signal. Litigants should anticipate that courts may cure party and redressability issues midstream when agency roles develop during litigation.
  • Limited avenues for challenging CMS decisions: The statute itself forecloses judicial review of many core Program choices (e.g., drug selections, pricing decisions) in 42 U.S.C. § 1320f-7. Combined with AIA/DJA constraints, manufacturers’ pre-enforcement litigation routes are narrow.
  • Strategic implications for manufacturers: Companies considering constitutional challenges must weigh the realistic prospect that pre-enforcement relief will be unavailable in the Third Circuit and that maintaining market participation without signing the agreement risks substantial daily excise liabilities that cannot be enjoined preemptively. The practical alternative—exit and re-entry—remains available but entails business and coverage tradeoffs.

Complex Concepts Simplified

  • Anti-Injunction Act (AIA): A federal statute that prevents courts from stopping the IRS from assessing or collecting a tax before it happens. It forces taxpayers to use post-payment remedies (like refund suits) unless a narrow exception applies.
  • Declaratory Judgment Act (DJA) Tax Exception: Even when courts can generally issue declarations of the parties’ rights, the DJA carves out an exception for federal tax matters, preventing declaratory judgments “with respect to Federal taxes.”
  • “Tax” versus “Penalty” for AIA purposes: For the AIA, what matters is how Congress labels the exaction in the statute. If Congress calls it a “tax,” courts normally treat it as a tax for AIA purposes even if constitutional analysis might treat it differently in other contexts.
  • Williams Packing Exception: A narrow exception to the AIA that permits an injunction if the taxpayer will suffer irreparable injury and it is certain the taxpayer will win on the merits. “Certain” means virtually no doubt under the most favorable view of facts and law.
  • CIC Services Path: Pre-enforcement challenges to IRS rules can proceed when the suit targets a regulatory obligation (like a reporting duty) that imposes its own non-tax burdens and where the requested relief would not restrain tax assessment or collection.
  • Takings Clause in Benefit Programs: Conditions on participation in voluntary government benefit schemes generally do not effect takings. When a regulated party has a genuine option to decline participation (or to exit), price or compliance obligations attached to participation are not “takings” of property.
  • Compelled Speech: The First Amendment forbids the government from forcing private parties to convey a message or endorse a viewpoint. Regulations primarily directing conduct (like selling at a set price) ordinarily do not compel speech, even if compliance involves signing agreements or the government publishes information about the regulated transaction.
  • Maximum Fair Price (MFP): The negotiated price under the Program that applies to a selected drug for a given year, subject to statutory ceilings derived from market benchmarks and the drug’s age on the market.

Conclusion

The Third Circuit’s opinion in Novartis v. Secretary HHS sets a clear procedural boundary around constitutional attacks on the Inflation Reduction Act’s designated-drug excise tax: pre-enforcement Excessive Fines claims are barred by the Anti-Injunction Act and the Declaratory Judgment Act. The court also reaffirmed, through binding circuit precedent, that the Drug Price Negotiation Program neither takes property nor compels speech because participation is voluntary and the regulations principally direct conduct, not expression.

Two themes emerge. First, Congress’s “tax” label in § 5000D carries decisive weight for AIA/DJA analysis, regardless of the exaction’s regulatory character or anticipated revenue. Second, the statutory architecture—including CMS’s “good cause” termination authority and § 5000D(c)’s suspension mechanism—preserves a voluntary choice for manufacturers, foreclosing Takings and compelled speech theories within the circuit. As a practical matter, future challengers must prepare for post-payment pathways or different litigation postures if they hope to test the § 5000D excise on Eighth Amendment grounds. In this way, Novartis consolidates the Third Circuit’s approach to the IRA’s negotiation regime and will shape the trajectory of drug-pricing litigation going forward.

Case Details

Year: 2025
Court: Court of Appeals for the Third Circuit

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