Ninth Circuit Decision Potentially Impacts Pharmaceutical Manufacturer Liability in Putative Class Action

October 8, 2008

In a surprising and likely controversial decision regarding so-called “Section 340B covered entities,” the U.S. Court of Appeals for the Ninth Circuit in County of Santa Clara v. Astra U.S.A., Inc. recently reversed the U.S. District Court for the Northern District of California’s dismissal of a complaint under Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim.  Applying federal common law of contracts, the court held “that the covered entities are intended direct beneficiaries of these agreements and thus have a right to enforce the agreements’ discount provisions against the Manufacturers and sue them for reimbursement of excess payment,” a controversial stance in the absence of a contractual right to sue or statutory private right of action.

Under § 602 of the Veterans Health Care Act of 1992, Pub. L. No. 102-585, section 340B entities, also known as federally funded medical clinics, may purchase prescription drugs at a discount from drug manufacturers under a standardized agreement – called a Pharmaceutical Pricing Agreement (“PPA”) – between the federal government and drug companies.  The Ninth Circuit court pointed out that the intent underlying § 602 is to “require a manufacturer to extend the same price reduction to a covered entity for a drug or biological as is provided under the Medicaid outpatient drug rebate program.”  Joint Explanatory Statement on H.R. 5193, 138, reprinted in 2002 U.S.C.C.A.N. 4186, 4211. 

In this case, Santa Clara County alleged that it was overcharged for drugs in violation of a PPA.  The Ninth Circuit court reasoned that “[p]ermitting covered entities to sue as intended beneficiaries of the PPA is  . . . wholly compatible with the Section 340B program’s objectives.”  And later, “the section 340B program was created to give covered entities discounts so they could ‘stretch scarce Federal resources as far as possible, reaching more eligible patients and providing more comprehensive services.’”

In its decision, the Ninth Circuit court also found that covered entities who are direct beneficiaries of a PPA may enforce the manufacturers’ ceiling price obligations under the federal common law of contracts and that although the statute mandating the PPA does not create a federal private cause of action, allowing the county’s contract claim to go forward is consistent with Congress’ intent in enacting the legislative scheme.  The Ninth Circuit concluded that the case lies within the conventional competence of the courts and is not within the primary jurisdiction of the Department of Health and Human Services because it does not present a far-reaching question that requires expertise or uniformity in administration. 

By Serafina E. Lobsenz & Jeffrey N. Wasserstein

Categories: Drug Development