D.C. Circuit Sides with Manufacturers in Latest 340B Contract Pharmacy Case

May 31, 2024By Sophia R. Gaulkin & Alan M. Kirschenbaum

Last week, the United States Court of Appeals for the District of Columbia ruled that Section 340B of the Public Health Service Act does not prohibit pharmaceutical manufacturers from imposing conditions on the distribution of discounted drugs to covered entities in the program.  In United Therapeutics Corporation v. Carole Johnson, et al./Novartis Pharmaceuticals v. Carole Johnson (consolidated cases), the Court found that the conditions set by Novartis and United Therapeutics on covered entities did not violate the 340B statute, although more restrictive conditions could violate the law.

The 340B statute requires drug manufacturers to sell certain drugs at discounted ceiling prices to covered entities, which are defined by statute to include certain types of safety net hospitals, health centers, and clinics receiving federal grants.  Initially, drug manufacturers were required to offer these discounts only to the in-house pharmacies of covered entities.  In 2010, the Health Resources and Services Administration (HRSA) authorized covered entities to contract with an unlimited number of retail pharmacies to fill prescriptions for their patients.  Over the ensuing years, drug manufacturers argued that extensive networks of contract pharmacies led to diversion of 340B drugs to non-340B patients, excessive profits to contract pharmacies, and abuses of the system at manufacturers’ expense.   The issue came to a head in 2021, when HRSA threatened enforcement against manufacturers who tried to limit shipments of their 340B drugs to covered entity’s in-house pharmacy and a single contract pharmacy.  A number of drug companies sued to enjoin enforcement.  We have blogged about this controversy in previous posts (see e.g., here and here).

Novartis and United Therapeutics Corporation sued in the D.C. District Court and won, prompting a government appeal to the D.C. Circuit.  In affirming the District Court’s ruling, the D.C. Circuit held that the 340B statute does not prohibit manufacturers from limiting distribution of discounted drugs via contractual terms.  The Court concluded that the 340B statute requires manufacturers to “offer” to sell covered drugs to covered entities at or below a specified “price,” but is silent about delivery.  The Court reasoned that this silence allows sellers to enforce certain delivery conditions, stating that “this silence preserves—rather than abrogates—the ability of sellers to impose at least some delivery conditions.”

However, the D.C. Circuit’s decision only addressed the specific conditions imposed by Novartis and United Therapeutics.  The Court found that the 340B statute’s requirement that manufacturers make an “offer” means at least a bona fide offer, and that “some conditions may be onerous enough to effectively increase the contract ‘price,’ thus perhaps nudging it above the statutory ceiling” such that it violates the 340B statute.  The Court was “confident” that the courts can adjudicate questions regarding what conditions would violate the 340B statute, should they arise in other cases.

The D.C. Circuit joins the Third Circuit, which decided in favor of manufacturers on similar grounds (see here).  Other drug manufacturers are awaiting a decision in a pending Seventh Circuit case.  If the Seventh Circuit reaches a different conclusion than the Third Circuit and D.C. Circuit, this circuit split would create a high likelihood that the issue would go to the Supreme Court.  Manufacturers have won this most recent battle, but whether they will win the war will depend on the rulings of other appellate courts and whether the Supreme Court will grant certiorari.

Drug manufacturers must also contend with the growing number of states seeking to prohibit drug manufacturers from imposing restrictions on 340B contract pharmacies.  Six states have enacted contract pharmacy protections into law: Kansas, Maryland, Mississippi, and West Virginia in 2024, Louisiana in 2023, and Arkansas in 2021.  Bills are pending in other states, including Missouri and New York.  We recently wrote about the Eighth Circuit’s decision to uphold the Arkansas law against a constitutional challenge brought by the Pharmaceutical Research and Manufacturers Association (PhRMA) (see here).  There, the Court held that the Arkansas law was not preempted by the 340B statute or the Federal Food, Drug, and Cosmetic Act.  This decision may encourage more state-level efforts to adopt similar laws.  To the extent states successfully enact and defend their contract pharmacy protection laws, drug manufacturers’ victories against HRSA in federal courts, including the recent D.C. Court decision, may be rendered inconsequential.