Photo of Stephen McConnell

Okay, that’s a klutzy title. The football obsession doesn’t leave us until the morning after the Super Bowl. But the Iggles have been ignominiously bounced from the NFL playoffs, so the Supreme Court oral arguments have been our favorite spectator sport over the last week. One involved the continuing saga of the Anna Nicole Smith case. Who would’ve thought that case would outlive her? And yet, the case we paid the most attention to was Astra, USA v. Santa Clara County. The issue in that case is whether federal courts may confer a private right to sue for breach of contract on third-party beneficiaries of a government contract when the statute mandating the contract contains no private right of action. Are you excited yet? Ready to break out the chips and beer? Ready to wave that foam #1 finger?
Federal law imposes ceilings on prices that drug manufacturers may charge for prescription medicines that are sold to certain health care facilities providing services to the poor (“340B entities”). Federal law also, as a condition of participating in state Medicaid programs, requires drug manufacturers to enter into contracts with HHS. These contracts are called Pharmaceutical Pricing Agreements (“PPAs”). Under the PPAs, drug manufacturers agree to provide discounted prices to the 340B health care providers and entities. If HHS believes that a manufacturer is not complying with the requirements, the PPA authorizes HHS to initiate an informal dispute resolution process. Neither the federal laws nor the PPA provide for a 340B entity, or any third-party beneficiary of the agreement, to enforce the price ceiling.
In this case, Santa Clara County brought suit on behalf of numerous 340B entities, alleging that the drug companies were not complying with the price ceilings. The claim was not brought under the federal statute, because everybody agreed that the federal statute did not provide for a private right of action. Instead, the County pursued a third-party beneficiary breach of contract claim. The district court dismissed the third-party beneficiary breach of contract claim because neither the statute nor the pricing agreement reflected an intent to provide private parties the right to sue to enforce the pricing requirements.
And then the Ninth Circuit entered the picture. The Ninth Circuit reversed and held that federal common law permits a third-party beneficiary, such as a 340B entity, to bring a breach of contract action to enforce the statutory drug pricing provisions incorporated into the agreements. The case was remanded and a discovery dispute ensued. The plaintiff filed an interlocutory appeal to the Ninth Circuit, which invited HHS to file an amicus brief. Sometimes you get more than you ask for. The government brief stated that “it never imagined that a 340B entity could bring a third-party beneficiary lawsuit” and that such a lawsuit would confer “rights never intended” by the pricing agreements. Did that rather clear expression of government intent change the Ninth Circuit’s mind? No, it did not. Instead, the Ninth Circuit simply reissued its earlier decision, changing it only to open up discovery. Strangely, the Ninth Circuit did not discuss HHS’s position that permitting a private right of action would disrupt the statutory scheme. 588 F.3d 1237 (9th Cir. 2009).
Why are we interested in this rather Byzantine set of facts with an almost-as-Byzantine procedural posture? We’ve written often about various ways in which plaintiffs attempt to bring actions alleging violations of the FDCA even though there is clearly no private right of action under that statute. Here, for example. Most courts reject those efforts. But every once in a while a court will flout Congressional intent and permit such an action to go forward. For example, the recent Bausch abomination seized upon negligence per se as a basis for a plaintiff cause of action to proceed. Talk about waving a finger (though not number 1) at Congressional intent and Buckman.
So while Astra, USA is more different-from than similar-to our sort of case, it is interesting to see what happens to a plaintiff that uses a clever way (here, third-party beneficiary contract theory) to circumvent Congressional intent. It should come as no surprise that we agree with the position of the pharmaceutical companies in the case, as well as the government amicus, that unless Congress intends to create a private right of action, a cause of action does not exist and the courts may not create one. Because Congress didn’t decide to create a private cause of action to allow the 340B entities to enforce the statutory price ceilings via damage suits, the federal courts cannot create such a right. Congress expected HHS to exercise judgment in enforcing price ceilings. To permit third party beneficiaries to sue drug companies for alleged overpricing would run afoul of the requirement that only Congress can authorize private enforcement of the Public Health Service Act.
The lawyer for the pharmaceutical companies barely got a minute into her presentation before Justice Sotamayor asked why this wasn’t a straight contract case. The lawyer made the point that contracting parties “had no discretion to confer Article III power on courts to enforce an act of Congress.” Justices Kennedy and Breyer seemed concerned as to whether, absent the contract theory, there was any remedy. The answer is that yes, there is a regulatory remedy.
The government amicus lawyer went next, arguing that this was “not an ordinary contract and it does not transform the 340B program from a regulatory scheme into a contractual one.” The government lawyer also made the point that “[t]his isn’t a negotiated agreement.” The PPA contracts merely repeat the terms of the statute. Signing such a contract serves to “mark entry into the regulatory scheme” and it “would be very odd then to say that the entire area is regulated by breach of contract law rather than by the hundreds of pages of regulations and statutory provisions that govern the providers’ rights here.” The government lawyer also addressed the problem of individual actions disrupting the federal scheme: “if you start permitting covered entities to bring suit, this is essentially a preemption question, but you then have 50 different State regimes, State court regimes, put onto, grafted onto, the Medicaid rebate requirements.” Sound familiar? You noticed that “preemption” word, right?
The lawyer for Santa Clara County argued that normal contract laws should apply to the case. Justice Scalia pounced on that thought: “but the third-party beneficiary has rights under the normal contract only when the parties intend him to have rights…. And I have trouble finding that intent here.” Interestingly, Justice Sotomayor seemed to agree that the contract manifested no intent that third parties could enforce the price ceiling. Justice Alito asked whether it was possible for the parties to intend that third parties benefit, but not that they be able to sue. The answer? “Yes.” [Narrow-grounds-of-opinion alert.]
Justice Breyer asked the County lawyer to address two major questions: “One of them is Congress, in the statute it incorporated here, didn’t want a private person to be able to enforce it. And the second one is it is going to create a mess.” Chief Justice Roberts elaborated on the “mess” point, pointing out that a private right of action puts “an awful lot of power and authority in the hands of one beneficiary and one lawyer saying — all they have to do if filing a suit saying, look, we get a hundred doses of Lipitor from this program, we think we should get less. And if they win, the whole country’s — the pricing of Lipitor under this program has changed…. That strikes me as an argument in favor of leaving the enforcement with the Secretary.” Chief Justice Roberts later observed that a lot of the County’s argument came from “the earlier world of implied right of action jurisprudence that has changed dramatically in the last 30 years.”
It’s impossible to predict what the Supreme Court will do, but perhaps Justice Ginsburg summarized where the Court is likely headed: “Congress has not provided for a private right of action to enforce the terms of the statute. The contract embodies the terms of the statute. So it would be passing strange if Congress, as we now read Congress, says we want private parties out of this, this is to be between the agency and the manufacturer, to say the exact same result, the same aim can be achieved through this third-party beneficiary route.” As indicated above, it’s possible the Court will go off on narrow grounds, and we’ll get something on whether there was an intention to benefit third-parties, or an intention to permit certain specific avenues of enforcement by third parties. But it is also possible we’ll get something broader on why parties should not be able to do an end-run around Congressional decisions not to create a private right of action. Something along those lines could make us third-party beneficiaries of some very nice language.