9th Cir.: Medicaid drug discount contracts enforceable by providers

The Ninth Circuit held that federally-funded clinics may enforce federal prescription-drug discount agreements as third-party beneficiaries.

The court held that third-party enforcement was consistent with the purposes of the federal “Section 340B” program, even though its authorizing statute creates no private right of action. Specifically, the court stated that it could see no purpose for the agreements other than to secure discounts for the clinics. The court also held that administrative dispute-resolution procedures did not preclude the suit, because the clinics were not able to initiate those procedures. Finally, the court held that the case did not require administrative expertise such that primary jurisdiction lay with the Department of Health and Human Services (DHHS). County of Santa Clara v. Astra USA Inc., --- F.3d ---, 2008 WL 3916268 (9th Cir. Aug. 27, 2008) (No. 06-16471).

 

          Although it concerns the rights of providers, this is an important victory in light of the reluctance of some courts to recognize third-party contract rights in relation to public benefit programs, and the view of some courts that the absence of a statutory right of action precludes a contract claim. It also appears to narrow the Ninth Circuit's presumption against third-party enforcement of government contracts. For more on third-party contract claims, see Rochelle Bobroff  & Harper Jean Tobin, Third-Party Beneficiary Claims: Recent Cases Against Private Parties and Local Agencies, Clearinghouse Review July/August 2008.

 

          Under the 340B program, 42 U.S.C. § 256b, manufacturers enter a standard Pharmaceutical Pricing Agreement (PPA) with the government to provide drugs at a discount as a condition of participation in Medicaid. Santa Clara County and a number of county-operated clinics sued the major drug companies, claiming they had been systematically overcharged in violation of the PPA. The defendants argued: (1) the PAA did not show a “clear intent” to benefit plaintiffs, because no provision in the contract expressly gave them the right to sue; (2) third-party enforcement was precluded by DHHS’s procedures for informal dispute resolution; (3) third-party enforcement is inconsistent with Congress’s intent because (as Santa Clara conceded) the 340B statute did not create a private right of action; and (4) primary jurisdiction should rest with DHHS because of its expertise. The court rejected each argument.

 

          The court stated it would not address whether state or federal contract law governed, since the parties had not addressed it and the federal interest in the 340B program was clear enough for jurisdiction. Though leaving this question open, the court analyzed the PPA under federal common law.

 

          The Ninth Circuit employs a presumption against third-party beneficiary status in government contracts. Klamath Waters Users Protective Ass’n v. Patterson, 204 F.3d 1206 (9th Cir. 1999) (third parties “may not enforce absent a clear intent to the contrary”). However, the court stated that this “clear intent” rule does not require an express right to sue in the contract, because this “would read the distinction between incidental and intended beneficiaries out of the common law of contracts.” So long as there is a clear intent that the party be benefitted, “the right to sue inheres in one’s status as an intended beneficiary.”

 

          The court found a clear intent to benefit the clinics in the PPA’s text, purpose and history. Manufacturers “undertook a specific responsibility to” clinics under the PPA, which sets forth “an unambiguous, concrete limitation on how much the Manufacturers may charge [them].” Indeed, the panel said it was “unable to discern any substantial purpose of the PPA other than to grant eligible covered entities a discount on covered drugs.” This was distinguishable from the passing references to benefitted parties in cases such as Klamath. Additionally, while the broad goal of § 256b was to provide drugs to as many patients for as little federal cost as possible, “the legislative history makes plain that Congress intended to accomplish this objective by enabling covered entities [i.e., clinics] to obtain discounted prices on covered drugs through the PPAs.”

 

          The defendants pointed to D’Amato v. Wisconsin Gas Co., 760 F.2d 1474 (7th Cir. 1985), which held that the Rehabilitation Act’s administrative remedies precluded third-party enforcement of federal contract provisions required by that Act. The court distinguished D’Amato on four grounds: (1) the D’Amato court found that the plaintiffs were not intended beneficiaries; (2) unlike § 503 of the Rehabilitation Act, § 256b “says nothing about covered entities’ remedies, whether judicial or administrative”; (3) the present suit would not conflict with DHHS’s informal dispute resolution process, since clinics are unable to initiate that process; and (4) the regulations providing for the dispute resolution process expressly leave open “other remedies” provided by law.

 

          The court also rejected the argument that private enforcement would be an “end-run” around the statutory scheme because the 340B statute creates no private right of action. This argument was accepted in D’Amato and Grochowski v. Phoenix Constr., 318 F.3d 80 (2d Cir. 2003) (absence of cause of action under Davis-Bacon Act precluded contract claims). The panel here stated that common law remedies will not be displaced by statute unless a statutory purpose to do so is evident. “Assuming Grochowski was correctly decided, the cases is clearly inapposite on its own terms,” because it relied on the presence of express remedies in the Davis-Bacon Act. By contrast, § 256b does not expressly provide any remedies to clinics. Since the only other remedies for violations by manufacturers can be invoked only by the Department and not by clinics, there is no indication that Congress intended to preclude common law remedies, which help further the program’s goals.

 

          Finally, the court found the primary jurisdiction doctrine inapplicable. This is a prudential doctrine, applicable when a case presents an issue of first impression or “a particularly complicated issue that Congress has committed to a regulatory agency.”  The court found “nothing ‘particularly complicated’” about the contract claim here, nor any “far-reaching question that ‘requires expertise or uniformity in administration.’” In a footnote, the court added that “DHHS’s regulatory authority does not extend to the federal common law of contract, so we have no occasion to defer to the agency’s expertise” on the third-party beneficiary issue. Accordingly, the court reversed the district court’s dismissal and remanded.