Where the federal government contracted with private corporations to create drug price reductions for certain organizations, may third-party beneficiaries of the agreements sue for violations of the agreements despite the lack of explicit federal statutory authority to do so?
Congress enacted Section 602 of the Veterans Health Care Act (“Act”) in 1992 in order to provide relief to certain federally funded organizations for the cost of prescription drugs. The Act requires the federal government and drug manufacturers to enter into pricing agreements which set price ceilings for the drugs. The County of Santa Clara and several other third-party beneficiaries of the pricing agreement (collectively “Santa Clara”) filed suit against several drug manufacturers (“Manufacturers”) under the Act, alleging that the Manufacturers had overcharged them for prescription drugs. The District Court for the Northern District of California dismissed Santa Clara’s claim, but the Ninth Circuit reinstated the claim, holding that third-party beneficiaries of the Act have the right to sue for violations of the Act. The Manufacturers subsequently appealed the ruling to the Supreme Court on the grounds that, because there was no federal statutory right of action, Santa Clara lacked standing to sue. The Supreme Court’s decision will affect the rights of third-party beneficiaries of a federal contract, states’ rights to make decisions regarding prescription drugs, and the litigation burden of companies that contract with the federal government.
Questions as Framed for the Court by the Parties
In the absence of a private right of action to enforce a statute, do federal courts have the federal common law authority to confer a private right of action simply because the statutory requirement sought to be enforced is embodied in a contract?
In 1992, Congress enacted Section 602 of the Veterans Health Care Act (“Act”), which is entitled “Limitations on Prices of Drugs Purchased by Covered Entities.” Congress partly designed the Act to provide lower prices on prescription drugs for certain federally-funded health care clinics. The prices are set as the average manufacturer price for the drug for the quarter, reduced by a certain percentage. The Secretary of Health and Human Services (“Secretary”) determines the maximum price that the manufacturer may charge the qualified clinics by looking at the proprietary sales and pricing information of the manufacturer. The Secretary enters into agreements, known as Pharmaceutical Pricing Agreements or PPAs, with each drug manufacturer to determine the price at which the government will sell the drugs.
The County of Santa Clara and several county-operated medical facilities (collectively “Santa Clara”) filed a class action against a number of drug manufacturers (“Manufacturers”) alleging that the Manufacturers overcharged Santa Clara for prescription drugs. The claim was based on a 2003 report of the Office of the Inspector General (“OIG”) of the Department of Health and Human Services (“HHS”) which stated that the Manufacturers overcharged Santa Clara $6.1 million in pharmaceutical sales for the one-year period ending September 1999. Another report by the OIG stated that during September 2002, the Manufacturers overcharged Santa Clara $41.1 million. Although the report was later withdrawn for errors, the OIG retained its general finding that HHS had not properly overseen the pricing and sale of the drugs. A final OIG report stated that the Manufacturers had overcharged Santa Clara $3.9 million in June 2005.
Santa Clara brought a claim under the California False Claims Act and the California Unfair Competition Law in California state court. The Manufacturers defended on the grounds that the PPA and HHS guidelines refer cases to informal dispute resolution by the Secretary, and therefore third parties may not directly sue for violations of the Act. Santa Clara claimed that it was an intended beneficiary of the PPAs and had the right to sue for enforcement.
The Manufacturers removed to federal district court in the Northern District of California and filed a motion to dismiss. The Northern District of California granted the Manufacturers’ motion, but gave leave to Santa Clara to amend its complaint. Santa Clara subsequently filed an amended complaint that alleged violation of the PPAs, breach of the implied covenant of good faith and fair dealing, quantum meruit, and negligence. The district court again dismissed the complaint for failure to state a claim for which relief can be granted. Santa Clara then appealed to the Ninth Circuit for the violation of the PPAs only, and the Ninth Circuit reversed the district court’s ruling, concluding that Santa Clara had a right under federal contract law to sue for enforcement of the PPAs. The Ninth Circuit held that because Santa Clara was an intended beneficiary of the PPAs, they were entitled to reimbursement of the excess payments. The Manufacturers appealed the Ninth Circuit decision, and the Supreme Court granted certiorari to determine whether a third-party beneficiary may sue a private defendant for violation of a government contract when the statute granting the benefit does not expressly include the right to sue.
Astra USA, Inc. and other drug manufacturers (“Manufacturers”) argue that entities that qualify for the reduced-price drugs under the 340B Act do not have an express or implied private right of action to enforce the 340B Act. The Manufacturers contend that Congress did not intend for private parties to have a cause of action to enforce the 340B Act and that congressional intent should control. The County of Santa Clara (“Santa Clara”), on the other hand, argues that §256B(a)(1) clearly requires an enforceable contract between the Secretary of Health and Human Services (“Secretary”) and the drug manufacturers, and that the contract creates a private cause of action for beneficiaries of the contract.
The Manufacturers argue that it is a well-settled principle that courts may not grant private parties the right to sue to enforce federal statutes unless Congress explicitly or implicitly grants the right in the federal statute. The Manufacturers state that Congress, not the courts, controls the availability of remedies for violations of the statute. Moreover,the Manufacturers argue that because Congress did not grant private parties a private right of action, the courts, by granting a private right of action, would be extending the statute’s authority without Congress’s permission. The Manufacturers state that judicial power to infer a private right of action from congressional intent is especially limited in this context because the 340B Act is Spending Clause legislation. Finally, the Manufacturers state that the statute’s language clearly does not confer a private right of action.
Alternatively, Santa Clara argues that Congress intended for private parties to have an implied right of action when Congress enacts a statute that mandates a contract and when the case law clearly supports the proposition that intended third-party beneficiaries to those contracts have a cause of action. Santa Clara cites Int'l Ass'n of Machinists v. Central Airlines, Inc., 372 U.S. 682 (1963), for the proposition that when Congress creates a statute that mandates a contract which statutorily requires certain contract terms, Congress intends for private parties to have an implied right of action to enforce the contract. Santa Clarafurther asserts that 340B entities are intended third-party beneficiaries. Hence, Santa Clara claims that intended third-party beneficiaries are able to sue to enforce the contract if the contract was made for the third party’s benefit. Santa Clarathus concludes that because the 340B entities are intended third-party beneficiaries, a statutory intent to sue is either shown or unnecessary.
Whether Santa Clara’s Suit is a Private Right of Action or Breach of Contract Claim
The Manufacturers argue that Santa Clara’s argument is an implied right of action claim, not a breach of contract claim. The Manufacturers state that Santa Clara’s claim is an implied right of action claim because the source of the contractual breach is violating the ceiling price requirements of the 340B Act. The Manufacturers thus argue that the allegedly breached contractual term is the violation of a statutorily-required contractual term. Because the statute requires the ceiling price, the Manufacturers conclude that Santa Clara’s claim is properly classified as an implied right of action under the 340B Act.
Additionally, the Manufacturers argue that congressional intent controls over the contracting parties’ intentions. Citing Univ. Research Ass'n, Inc. v. Coutu, 450 U.S. 754 (1981), the Manufacturers contend that when a private party tries to enforce a statutory right, the key question is whether Congress intended for private parties to enforce the statutory right, not whether the contracting parties intended for the contracting parties to enforce the contract. Finally, the Manufacturers contend that a plaintiff may not get around the congressional intent requirement by pleading the suit as a breach of contract claim.
Santa Clara counters by contending that the private-right-of-action cases are not relevant when Congress mandates a contract to enforce the statute. Santa Claraargues that a private right of action would only be necessary if the statute simply required drug manufacturers to sell at the ceiling price. By requiring a private right of action, Santa Clara argues that the Manufacturers’ interpretation of the statute ignores the fact that the statute requires a contract. Because statutes should be interpreted to bring meaning to all of its provisions, Santa Clara concludes that the Manufacturers’ interpretation of the statute is erroneous.
The Manufacturers also argue that because the contract’s ceiling price is set by the statute, it is indistinguishable between enforcing the contract and enforcing the statute. Because they are indistinguishable, the Manufacturers contend that third-party beneficiary suits are in direct conflict with congressional intent and that congressional intent should control.
Santa Clara argues that private rights of action for enforcing the statute are distinguishable from actions enforcing the contract because if 340B entities had a private right of action enforcing the statute, they could sue not only to enforce the contract terms but also to force manufacturers to sign the agreements. This distinction is important because some drug manufacturers have not signed the agreements and the 340B entities cannot compel those drug manufacturers to sign those agreements.
Private Right of Action Enforcement Effects
The Manufacturers argue that allowing private right of actions would hinder the Secretary’s ability to regulate and implement the 340B Act and the Medicaid Act. The Manufacturers contend that they have discretion regarding pricing methodology and could be unfairly punished if subject to private suits because the agencies regulating their business lack guidance.
However, Santa Clara argues that the lawsuits assist enforcement of the 340B Act and do not impede it. Santa Clara argues that they are suing to enforce an existing contractual term as opposed to imposing an additional or different term. Santa Clara also contends that courts are the proper forum to adjudicate this dispute despite the lack of guidance provided by the regulatory agencies. Santa Clara argues that courts have adjudicated those issues before and should have no problem adjudicating similar issues now.
By contrast, the Manufacturers state that Congress gave the Secretary the enforcement power and refused to give that enforcement power to private parties. Santa Clara argues that because the Secretary does not review manufacturers’ methods and assumptions regarding ceiling prices, the Secretary is unable to enforce the contracts. Additionally, because whistleblowers are the only other enforcement mechanism, Santa Clara argues that third-party beneficiaries should be allowed to enforce the contracts.
The Manufacturers argue that another negative effect of allowing private suits is that it would conflict with the Medicaid Act’s requirement that the Secretary ensure confidentiality of drug manufacturers’ pricing and drug sales information because private rights of actions would necessarily require discovery. Alternatively, Santa Clara counters by claiming that the necessary evidence to prove their claim requires data that is not covered by the confidentiality agreement. Additionally, Santa Clara asserts that the confidentiality agreement is not applicable in court litigation.
The Supreme Court’s decision in this case will determine whether a health care provider can sue a drug company for violation of the drug company’s government contract, where the health care provider is a third-party beneficiary of the contract but does not have an express statutory right to sue for such violations. The decision might increase the litigation for companies contracting with the federal government, and will also affect the rights of third-party beneficiaries of a government contract and the right of states to enforce federal drug pricing agreements.
Consequences for American Companies that Contract with the Federal Government
The United States Chamber of Commerce (“Chamber”) contends that a ruling in favor of the County of Santa Clara would be costly for companies that contract with the federal government. The Chamber argues that judicial recognition of a right of action would increase litigation costs due to extensive discovery. The Chamber asserts that the heightened costs of litigation along with uncertainty in business transactions could lead companies to make costly settlements in order to avoid litigation. The effects of such costs, the Chamber claims, will either be absorbed by corporate shareholders or passed on to consumers.
On the other hand, a group of federal courts professors argues that the current mechanisms available for resolving pricing disputes have failed, and companies are thus able to overcharge for their drugs without impunity. Thus, the professors argue that a ruling in favor of Santa Clara would enable injured parties to sue for relief. They contend that this relief would protect those in need of the drugs, and protect the taxpayers that indirectly fund the system. According to the professors, the impact on affected corporations would be an increase in transparency and accountability, a desirable and necessary result.
Consequences for Third-Party Contract Beneficiaries
AARP and National Senior Citizens Law Center (“NSCLC”) argue that third-party beneficiaries of contracts should be able to enforce contracts against private providers regardless of whether there is a federal statutory cause of action. They assert that a ruling in favor of Santa Clara would allow states to develop a legal framework to protect their residents, regardless of a federal statutory authorization. In this way, AARP and NSCLC contend that the rights of third-party beneficiaries would be protected by a ruling in favor of Santa Clara.
The Pharmaceutical Research and Manufacturers of America (“PhRMA”) counters that third-party beneficiary rights would not change if the court ruled in favor of the Manufacturers because under the federal common law, third-party beneficiaries already do not have a private right of action. Hence, PhRMA asserts that courts must limit the remedies available to third parties to those which Congress intended.
Effect on States
Kansas and 3 other states (“States”) argue that states have an important role in the Medicaid program. The States claim that Medicaid and the Veterans Health Care Act are instances of cooperative federalism, in which states and the federal government must work together for the success of the program. According to the States, a ruling in favor of Santa Clara would allow state entities to continue to have a hand in the operation of a program that is beneficial to the state.
On the other hand, PhRMA argues that Congress delegated the authority for drug pricing arrangements to the Department of Health and Human Services (“HHS”), and that Congress’s decision should merit respect. PhRMA contends that Congress has the authority to delegate drug pricing decisions to HHS because HHS has the technical understanding to make pricing decisions based on the need of the organizations that get the drugs. PhRMA claims that states have an interest in reducing the price of drugs, and hence, a decision in favor of Santa Clara would alter the congressional scheme and undermine HHS’s ability to make determinations of the drug prices.
The Supreme Court’s decision in this case will determine whether third-party beneficiaries to a federal prescription-drug-pricing contract have a private right of action to sue the drug manufacturers. The Supreme Court will have to determine whether there must be a federal statutory cause of action in order for a third party to sue on the contract. The County of Santa Clara argues that it has the right to sue because its rights were violated by the alleged failure of the drug manufacturers to honor the drug pricing agreements. Various drug manufacturers argue that the third parties may not sue, but must refer the case to the informal dispute resolution mechanisms referred to in Section 602 of the Veterans Health Care Act. The Court’s decision will likely affect third-party beneficiaries seeking to sue on a contract, American companies that contract with the government, and states’ rights to regulate prescription drugs within their borders.