Searching over 5,500,000 cases.

Buy This Entire Record For $7.95

Official citation and/or docket number and footnotes (if any) for this case available with purchase.

Learn more about what you receive with purchase of this case.

County of Santa Clara v. Astra USA


December 9, 2009


Appeal from the United States District Court for the Northern District of California D.C. No. CV-05-03740-WHA William H. Alsup, District Judge, Presiding.

The opinion of the court was delivered by: Raymond C. Fisher, Circuit Judge



Argued and Submitted March 11, 2008 -- San Francisco, California

Before: Stephen Reinhardt, Barry G. Silverman and Raymond C. Fisher, Circuit Judges.*fn2

Opinion by Judge Fisher

Certain federally funded medical clinics -- so-called "Section 340B covered entities" -- are able to purchase prescription drugs at a discount from drug manufacturers under a standardized agreement between the federal government and the drug companies. During 2003, for example, these covered entities spent $3.4 billion on outpatient prescription drugs. They claim in this lawsuit that they have been overcharged for those drugs in violation of pharmaceutical pricing agreements between the Secretary of Health and Human Services ("Secretary") and the drug manufacturer defendants-appellees ("Manufacturers"). Applying the federal common law of contracts, we hold that the covered entities are intended direct beneficiaries of these agreements and thus have the right to enforce the agreements' discount provisions against the Manufacturers and sue them for reimbursement of excess payments. We have jurisdiction under 28 U.S.C. § 1291, and reverse the district court's dismissal of the complaint under Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim.


In part to "enable . . . certain Federally-funded clinics to obtain lower prices on the drugs that they provide to their patients," see H.R. Rep. No. 102-384(II), at 7 (1992), Congress enacted Section 602 of the Veterans Health Care Act of 1992, Pub. L. No. 102-585, 106 Stat. 4943, 4967. That provision, entitled "Limitations on Prices of Drugs Purchased by Covered Entities," requires the Secretary of Health and Human Services to: enter into an agreement with each manufacturer of covered drugs under which the amount required to be paid . . . to the manufacturer for covered drugs . . . purchased by a covered entity . . . does not exceed an amount equal to the average manufacturer price for the drug under [§ 1396r-8(k)(1)] in the preceding calendar quarter, reduced by [a] rebate percentage described in [§ 256b(a)(2)].

42 U.S.C. § 256b(a)(1).*fn4 This drug discounting program is commonly known as the "Section 340B program," tracing back to its original location within the Public Health Service Act.*fn5 The program is managed by the Health Resources and Services Administration ("HRSA"), a subdivision of the Department of Health and Human Services ("DHHS"). See Statement of Organizations, Functions, and Delegations of Authority, 58 Fed. Reg. 19,137-02 (Apr. 12, 1993). In accordance with statute, the Secretary entered into a standard Pharmaceutical Pricing Agreement ("PPA") with each of the Manufacturers.

One of the Manufacturers' principal obligations under the PPA is "to charge covered entities a price . . . that does not exceed . . . the [average manufacturer price] for the covered outpatient drug reported . . . to the Secretary in accordance with the Manufacturer's responsibilities under [§ 1396r-8(b)(3)], reduced by the rebate percentage." See PPA § II(a).*fn6 The PPA defines "average manufacturer price," "covered entity," "manufacturer" and "rebate percentage" to "have the meanings specified in [§§ 256b and 1396r-8], as interpreted and applied herein." See PPA §§ I(a)-(o). Also known as the "ceiling price," the maximum price that covered entities may be charged under the PPA is calculated using proprietary sales and pricing information the Manufacturers disclose only to the Secretary.

The genesis of the present appeal is a putative class action filed in California state court by the county of Santa Clara and a number of county-operated medical facilities ("Santa Clara"), which are covered entities within the meaning of § 256b(a)(4) and PPA § I(e). Relying chiefly on reports published by DHHS's Office of the Inspector General ("OIG"), Santa Clara alleged that the Manufacturers have systematically overcharged its medical facilities, and all similarly situated covered entities, for covered drugs. OIG's March 2003 report estimated that overcharges during the one-year period ending September 1999 totaled $6.1 million. Its June 2004 report, which was withdrawn in October 2004 because of "problems with the underlying data," concluded that covered entities overpaid $41.1 million in the month of September 2002. In October 2005, OIG confirmed that its June 2004 calculation was erroneous because the Centers for Medicare and Medicaid Services had provided it with comparison "ceiling prices from the wrong timeframe." OIG did not retreat, however, from its other, more general findings that HRSA was not adequately overseeing the Section 340B program and that "HRSA lacks the oversight mechanisms and authority to ensure that [covered] entities pay at or below the . . . ceiling price." The October 2005 report also "introduce[d] new concerns" that "systemic problems with the accuracy and reliability" of the government's pricing data could interfere with HRSA's ability to monitor the Section 340B program. Finally, a 2006 OIG report estimated that covered entities overpaid $3.9 million in June 2005 alone.

Santa Clara initially brought claims under the California False Claims Act and California Unfair Competition Law in state court. After the Manufacturers removed the action to federal district court, Santa Clara amended its complaint for the first time. The district court granted the Manufacturers' motion to dismiss, but with leave to amend. Santa Clara's second amended complaint, now including claims for breach of the PPA, breach of the implied covenant of good faith and fair dealing, negligence and quantum meruit, fared no better than the first. The district court granted the Manufacturers' second motion to dismiss and denied as futile Santa Clara's subsequent motion for leave to file a third amended complaint. Santa Clara appeals only the district court's rejection of its PPA breach of contract claim on a third party beneficiary theory.


"We review de novo the district court's dismissal of a complaint for failure to state a claim under Rule 12(b)(6)." Vasquez v. Los Angeles County, 487 F.3d 1246, 1249 (9th Cir. 2007). The interpretation of a contract is a mixed question of law and fact that we review de novo. Klamath Water Users Protective Ass'n v. Patterson, 204 F.3d 1206, 1210 (9th Cir. 1999).


We agree with Santa Clara that covered entities are intended direct beneficiaries of the PPA and have the right as third parties to bring claims for breach of that contract. We also conclude that allowing such suits under the PPA is consistent with Congress' intent in enacting the Section 340B program, even though the statute itself does not create a federal private cause of action. Finally, we reject the Manufacturers' argument that primary jurisdiction is appropriate.


Federal law controls the interpretation of the PPA, which is a "contract[] entered into pursuant to federal law and to which the government is a party," Smith v. Cent. Ariz. Water Conservation Dist., 418 F.3d 1028, 1034 (9th Cir. 2005), and which expressly provides that it "shall be construed in accordance with Federal common law," see PPA § VII(g).*fn7 "For guidance, we may look to general principles for interpreting contracts." Kennewick Irrigation Dist. v. United States, 880 F.2d 1018, 1032 (9th Cir. 1989). Among these principles, we interpret every part of a written contract with reference to the whole and give terms their ordinary meaning unless a contrary intent appears. See Klamath, 204 F.3d at 1210. When possible, we ascertain the intent of the parties from the contract itself. See id.

Under the federal common law of contracts, "[b]efore a third party can recover under a contract, it must show that the contract was made for its direct benefit -- that it is an intended beneficiary of the contract." Id. (emphasis added). "A promisor owes a duty of performance to any intended beneficiary of the promise, and 'the intended beneficiary may enforce the duty'" by suing as a third party beneficiary of the contract, whereas an "incidental beneficiary acquires 'no right against the promisor.'" Id. at 1211 n.2 (quoting Restatement (Second) of Contracts §§ 304, 315 (1979)). To qualify as an intended beneficiary, the third party "must show that the contract reflects the express or implied intention of the parties to the contract to benefit the third party." Id. at 1211 (citing Montana v. United States, 124 F.3d 1269, 1273 (Fed. Cir. 1997)). Although intended beneficiaries "need not be specifically or individually identified in the contract," they still must "fall within a class clearly intended by the parties to benefit from the contract." Id.

Demonstrating third-party beneficiary status in the context of a government contract is a comparatively difficult task. See Smith, 418 F.3d at 1035; Kremen v. Cohen, 337 F.3d 1024, 1029 (9th Cir. 2003) (explaining that a "more stringent test applies"). We have explained that "[p]arties that benefit from a government contract are generally assumed to be incidental beneficiaries," rather than intended ones, and so "may not enforce the contract absent a clear intent to the contrary." See Orff v. United States, 358 F.3d 1137, 1145 (9th Cir. 2004), aff'd on other grounds, 545 U.S. 596 (2005) (quoting Klamath, 204 F.3d at 1211). This "clear intent" hurdle is not satisfied by a contract's recitation of interested constituencies, Klamath, 204 F.3d at 1212, "[v]ague, hortatory pronouncements," id., "statement[s] of purpose," Smith, 418 F.3d at 1037, "explicit reference to a third party," Orff, 358 F.3d at 1145, or even a showing that the contract "operates to the [third parties'] benefit and was entered into with [them] 'in mind,'" id. at 1147. Rather, we examine the "precise language of the contract for a 'clear intent' to rebut the presumption that the [third parties] are merely incidental beneficiaries." Id. at 1147 n.5.

Having done this analysis, we are persuaded that covered entities are intended beneficiaries of the PPA and, accordingly, that Santa Clara has stated a breach of contract claim on a third party beneficiary theory. At the outset, we reject the suggestion that the availability of a third party contract claim is conditioned on the contract's inclusion of a provision expressly granting the third party the right to sue. Any intended beneficiary has the right to enforce the obligor's duty of performance; the right to sue inheres in one's status as an intended beneficiary. See Klamath, 204 F.2d at 1211 n.2; see also Far W. Fed. Bank, S.B. v. Office of Thrift Supervision-Director, 119 F.3d 1358, 1363 (9th Cir. 1997) ("[A] third party who is an intended beneficiary of a contract may sue to enforce the contract or to obtain an appropriate remedy for breach."); Restatement (Second) of Contracts § 304 (1981). To require additionally of intended beneficiaries that the contract by its terms provide for third party enforcement would read the distinction between incidental and intended beneficiaries out of the federal common law of contracts. See United States v. City of Los Angeles, 288 F.3d 391, 403-04 (9th Cir. 2002) ("[W]e allowed intended third-party beneficiaries to sue . . . and did not allow incidental third-party beneficiaries to sue."); Restatement (Second) of Contracts § 302 (1981). In disavowing any absolute requirement that the contract expressly provide for third party enforcement, we reaffirm Klamath's "clear intent" principle with respect to intended beneficiary status. We simply clarify that if the plaintiff is an intended beneficiary - with Klamath and progeny setting forth the requisite showing - then the third party contract claim may go forward.*fn8 Only when the plaintiff would qualify solely as an incidental beneficiary of the government contract is it necessary to have an express, specific statement of the promisor's contractual liability to that third party (such as by an express right-to-sue clause). See Smith, 418 F.3d at 1038; Montana, 124 F.3d at 1273 & n.6; Restatement (Second) of Contracts § 313(2) & cmt. a (1981).

We hold that the parties to the PPA clearly intended to grant covered entities enforceable rights as intended beneficiaries of that agreement. See Kremen, 337 F.3d at 1029. In determining this central question of the parties' intent, we look at the contract's "text and purpose," Smith, 418 F.3d at 1034, "[e]xamin[ing] . . . the contract as a whole," Klamath, 204 F.3d at 1212. We also weigh the "circumstances of the transaction," Far West, 119 F.3d at 1364, which, when a contract is mandated by a federal statute, includes the "governing statute and its purpose," Sec'y of State for Def. v. Trimble Navigation Ltd., 484 F.3d 700, 706 (4th Cir. 2007) (internal quotation marks omitted); see also Rendleman v. Bowen, 860 F.2d 1537, 1541-42 (9th Cir. 1988).

In acceding to the PPA, the Manufacturers undertook a specific responsibility to the covered entities: "Pursuant to [§ 256b], the Manufacturer agrees . . . . to charge covered entities a price for each unit of the drug that does not exceed" the ceiling price of that drug. See PPA § II(a) (emphasis added). Smith, Kremen, Orff and Klamath -- all of which rejected plaintiffs' claims to be intended beneficaries -- are distinguishable on this ground alone.*fn9 There is a stark contrast between "recitation of constituencies," "explanatory recitals" of purpose and references to individuals that the contracting parties had "in mind" -- all insufficient to "prove [the plaintiffs'] intended beneficiary status" -- and the terms at issue here.

See Smith, 418 F.3d at 1037; Orff, 358 F.3d at 1147; Klamath, 204 F.3d at 1212.

Section II(a) of the PPA sets forth an unambiguous, concrete limitation on how much the Manufacturers may charge the covered entities.*fn10 Other provisions of the PPA explain how to calculate the ceiling price, see PPA §§ I(a), (b), (l), identify who is eligible to receive the discounted price, see PPA §§ I(e), III(a), and require the parties to maintain records relevant to those matters, see §§ PPA II(c)-(f), III(b)-(c). Upon a fair reading of the PPA, we are unable to discern any substantial purpose of the PPA other than to grant eligible covered entities a discount on covered drugs. We are therefore persuaded that the PPA, on its face, was clearly intended to benefit the covered entities directly.

Consideration of § 256b, the "governing statute" specifying the PPA's terms, and its purposes reinforces this interpretation. See Trimble Navigation, 484 F.3d at 706. (The PPA itself provides that "ambiguities shall be interpreted in the manner which best effectuates the statutory scheme." See PPA § VII(g).) Section II(a) of the PPA closely tracks Section 602 of the Veterans Health Care Act of 1992, which was enacted 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 Cong. Rec. S17890, 1992 U.S.C.C.A.N. 4186, 4211. Its purpose was "to enable . . . certain Federally-funded clinics [i.e., covered entities] to obtain lower prices on the drugs that they provide to their patients" by prohibiting "Medicaid matching funds [from being] available for State spending on [a manufacturer's covered drugs] unless the manufacturer enters into, and complies with, an agreement . . . under which these protected purchasers [e.g., covered entities] would pay the same amount for a covered outpatient drug that Medicaid pays." H.R. Rep. No. 102-384(II), at 7-8 (1992) (emphasis added). "In giving these 'covered entities' access to price reductions the Committee intends to enable these entities to stretch scarce Federal resources as far as possible, reaching more eligible patients and providing more comprehensive services." Id. at 12 (emphasis added). Thus, although we agree with the Manufacturers that § 256b's general purpose is to "conserve federal resources so as to reach as many eligible patients as possible," the legislative history makes plain that Congress intended to accomplish this objective by enabling covered entities (and other "protected" purchasers, a revealing choice of words) to obtain discounted prices on covered drugs through the PPAs.*fn11

Relying on D'Amato v. Wisconsin Gas Co., 760 F.2d 1474 (7th Cir. 1985), the Manufacturers contend that the PPA's provision of an "elective" or "informal" dispute resolution process means the parties intended to preclude third party enforcement of the contract by the covered entities. Sections IV(a), (b) and (d) of the PPA allow manufacturers to refer certain disputes they have with covered entities to the Secretary to conduct an investigation. If the Secretary then finds that the covered entity is in violation, he may impose monetary liability or remove the entity from the list of eligible entities.*fn12 Conversely, if the Secretary believes a manufacturer has overcharged covered entities, he may initiate an "informal dispute resolution process," which could result in the covered entities being reimbursed and the manufacturer's PPA being terminated. See PPA § IV(c). The Manufacturers also cite DHHS's regulations, which, apart from the PPA, establish a "voluntary process for the resolution of certain disputes between manufacturers and covered entities concerning compliance with the provisions" of § 256b. See Manufacturer Audit Guidelines and Dispute Resolution Process, 61 Fed. Reg. 65,406-01, 65,411-13 (Dec. 12, 1996). This process is also voluntary: "Covered entities or manufacturers are not required to enter this informal process for resolution of disputes . . . ." Id. at 65,411.

D'Amato does not support the Manufacturers' argument. There, the plaintiffs attempted to bring suit as third party beneficiaries of affirmative action provisions whose inclusion in procurement contracts was required by Section 503 of the Rehabilitation Act of 1973. As a threshold matter, the contracts themselves suggested that the plaintiffs were not intended beneficiaries; they were "not directed at the handicapped in any way but instead focus[ed] exclusively on the government-contractor relationship." D'Amato, 760 F.2d at 1479. The court found further support for its conclusion that the disabled were not intended beneficiaries in Section 503 and its implementing regulations, which established an administrative remedy for any "handicapped individual [who] believe[d] any contractor has failed . . . to comply" with the affirmative action provisions and emphasized the resolution of disputes "by informal means, including conciliation[] and persuasion." See id. at 1477 n.1, 1481-82 (citing 29 U.S.C. § 793(b) and 41 C.F.R. § 60-741.28(a) (1984)).

We perceive four material differences between the contract and statute in D'Amato and those here. First, as discussed above, the PPA sets forth the contracting parties' clear intent to directly benefit the covered entities. Cf. id. at 1479-80. Second, § 256b says nothing about the covered entities' remedies, whether judicial or administrative. Cf. id. at 1481 ("The statutory grant of one remedy . . . without mention of any other . . . implies that Congress intended to bar other remedies.") (emphasis added). Third, allowing covered entities to bring suit as third party beneficiaries would not conflict with the PPA's informal dispute resolution process, given that the entities themselves are unable to initiate that process.*fn13 Last, the voluntary administrative dispute resolution procedure created by DHHS's regulations expressly leaves open resort to "other remedies which may be available under applicable principles of law." See 61 Fed. Reg. at 65,412; see also id. at 65,411 ("[Covered] entities are only encouraged to participate in the process before seeking other remedies."). In sum, neither the PPA nor § 256b establishes an exclusive "elaborate administrative procedure," D'Amato, 760 F.2d at 1482, that -- were such a procedure to exist -- would signal the parties' intent to deny covered entities the right to enforce the PPA through litigation as intended beneficiaries.

The Manufacturers' remaining arguments against the covered entities' intended beneficiary status are no more convincing. First, they contend it is "illogical" that the United States and the Manufacturers would have intended to expose themselves to suit by the large number of covered entities, about 13,000 reported as of this writing.*fn14 The breadth and indefiniteness of a class of beneficiaries is entitled to some weight in negating the inference of intended beneficiary status. See Price v. Pierce, 823 F.2d 1114, 1121 (7th Cir. 1987) (commenting that parties would not likely have intended that "almost every lower-income person in the United States" could enforce the contract). But numbers alone are not determinative. For example, in Hook v. State of Ariz., Dep't of Corr., 972 F.2d 1012, 1014-15 (9th Cir. 1992), we recognized all inmates of the Arizona prison system as intended beneficiaries of a consent decree regulating mail policies. Similarly in this case, covered entities constitute a narrow, well-defined class, not at all akin to members of the public at large. See § 256b(a)(4) (defining "covered entity"); PPA § III(a) (making available list of eligible covered entities), § IV(b) (procedure for challenging eligibility of covered entities).

We are also unmoved by the Manufacturers' protest that they "surely would not have agreed to subject themselves to a large number of lawsuits that could undermine the confidentiality" of pricing data through discovery, given the PPA's inclusion of a confidentiality provision.*fn15 The confidentiality provision itself, however, contemplates that such information could well be subject to disclosure for purposes of enforcing the PPA's discount pricing requirements beyond any actions the Secretary might initiate. Section V(a) specifies that information disclosed to the Secretary by the Manufacturers, "except as otherwise required by law, will not be disclosed by the Secretary or his designee in a form which reveals the Manufacturer, except as necessary to carry out the provisions of [§ 256b] and to permit review by the [OIG]." (Emphasis added.) As the italicized phrases highlight, the confidentiality provision anticipates that disclosures could be required other than to or by the Secretary. A district court's discovery order compelling the production of documents would be a disclosure "required by law"; and it would be the manufacturer, not the Secretary, disclosing the information. To the extent a drug company would rightly be concerned about sensitive pricing information, district courts routinely enter protective orders to prevent the undue disclosure of commercially sensitive information. See Fed. R. Civ. P. 26(c); Phillips ex rel. Estates of Byrd v. Gen. Motors Corp., 307 F.3d 1206, 1210-12 (9th Cir. 2002). Thus we are unwilling to read the PPA's confidentiality proviso as negating third party covered entities' right to enforce the discount pricing requirements themselves.


Although we conclude that covered entities are intended beneficiaries of the PPA, and so would ordinarily be entitled to bring suit to enforce it, the Manufacturers urge that this is not the usual intended beneficiary case and that permitting third party enforcement of the PPA would conflict with Congress' intent in creating the Section 340B program.*fn16 In this vein, they point to Santa Clara's concession before the district court that there is no private federal cause of action under § 256b.*fn17 See generally Alexander v. Sandoval, 532 U.S. 275 (2001).

Because Congress did not provide a statutory remedy, the Manufacturers argue, it necessarily did not intend to allow covered entities to make an "end-run" around the statutory scheme by pursuing contractual remedies under the federal common law.

The starting point of this argument is the truism that federal common law, of which the federal common law of contracts forms a part, "is 'subject to the paramount authority of Congress.'" City of Milwaukee v. Illinois & Michigan, 451 U.S. 304, 313 (1981) (quoting New Jersey v. New York, 283 U.S. 336, 348 (1931)). We presume that Congress legislates with the expectation that the principles of the federal common law "will apply except 'when a statutory purpose to the contrary is evident.'" Astoria Fed. Savings & Loan Ass'n v. Solimino, 501 U.S. 104, 108 (1991) (quoting Isbrandtsen Co. v. Johnson, 343 U.S. 779, 783 (1952)). However, when Congress "speak[s] directly" to a question addressed by the federal common law, it may displace it even without "affirmatively proscrib[ing]" its use. United States v. Texas, 507 U.S. 529, 534 (1993); see also Gardiner v. Sea-Land Service, Inc., 786 F.2d 943, 947 (9th Cir. 1986). "In evaluating the displacement issue, courts must assess the scope of the legislation and whether the legislative scheme addresses the problem formerly governed by federal common law." Gardiner, 786 F.2d at 947.*fn18 The Manufacturers, relying almost exclusively on Grochowski v. Phoenix Constr., 318 F.3d 80 (2d Cir. 2003), contend that § 256b does just that and, therefore, to allow covered entities to enforce the PPA as a matter of contract would be inconsistent with Congress' choice of remedies.

In Grochowski, the Second Circuit did not permit the plaintiffs to bring suit as third party beneficiaries of a contract between the contractor defendants and New York City's public housing authority. See 318 F.3d at 83. Under the Davis-Bacon Act, 40 U.S.C. § 3141, all construction contracts for federally funded projects must include the following provision: "[t]he Contractor shall pay to all laborers . . . not less than the wages prevailing in the locality of the Project, as predetermined by the Secretary of Labor of the United States." Id. (first alteration in original). Exercising his authority under 40 U.S.C. § 3145 to "prescribe reasonable regulations for contractors" subject to the Davis-Bacon Act, the Secretary of Labor established an administrative remedial scheme. See id. at 85; Chan v. City of New York, 1 F.3d 96, 102 (2d Cir. 1993) (citing 29 C.F.R. §§ 1.8, 5.6(a)(3), 5.11). Given these administrative remedies, and the absence of an explicit private cause of action, Grochowski concluded that the "plaintiffs['] efforts to bring their claims as state common-law [contract] claims [were] clearly an impermissible 'end run'" around congressional intent as to the availability of remedies under the Davis-Bacon Act. 318 F.3d at 86.

Assuming Grochowski was correctly decided, the case is clearly inapposite on its own terms.*fn19 Its analytical underpinning was the "'elemental canon' of statutory construction that where a statute expressly provides a remedy, 'courts must be especially reluctant to provide additional remedies.'" Id. at 85 (quoting Karahalios v. Nat'l Fed'n of Employees, Local 1263, 489 U.S. 527, 533 (1989)) (emphasis added). Here, § 256b does not "expressly provide" any remedies to covered entities.*fn20 And unlike the Davis-Bacon Act, § 256b is silent about the agency's power to promulgate regulations against manufacturers with the force of law. Cf. § 256b(a)(5)(A)(ii) ("The Secretary shall establish a mechanism to ensure that covered entities comply . . . .") (emphasis added). Although the Secretary may terminate the PPA with a manufacturer for a violation of its provisions, this remedy is a matter of contract, not statute. See PPA § VI(c). Reflecting this paucity of statutory authority, DHHS's regulations establish only an informal, nonexclusive dispute resolution process, in which neither covered entities nor manufacturers are required to participate. See 61 Fed. Reg. at 65,411. Nothing in the statute suggests that Congress intended that DHHS create a substitute, administrative remedial scheme for covered entities to invoke against manufacturers. Thus, there is nothing "additional" about the federal common law contract remedy that the covered entities could invoke as intended beneficiaries of the PPA. Cf. Golt v. United States, 186 F.3d 1158, 1164 (9th Cir. 1999) (holding that Civil Service Reform Act, which expressly created exclusive administrative remedy, abrogated remedies under federal common law).

Permitting covered entities to sue as intended beneficiaries of the PPA is therefore wholly compatible with the Section 340B program's objectives. Cf. Trimble Navigation, 484 F.3d at 707 ("[R]ecognition of third-party beneficiary status in a contract made under a statutory scheme must accord with that scheme . . . ."); Restatement (Second) of Contracts § 313(1) (1981) (limiting application of third party beneficiary doctrine when it "would contravene the policy of the law authorizing the contract or prescribing remedies for its breach"). As we have explained, 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." H.R. Rep. No. 102-384(II), at 12 (1992). Federal common law contract remedies are one way of ensuring that drug companies comply with their obligations under the program and provide those discounts. See Price, 823 F.2d at 1121 (observing that it "seemed more sensible" to permit third parties to sue as intended beneficiaries than to "place the entire burden of enforcement" on the government).


Finally, we decline at this time to invoke the doctrine of primary jurisdiction, which would require that Santa Clara's contract claim be stayed or dismissed without prejudice pending its referral to the Secretary for agency resolution. The doctrine of primary jurisdiction "is a prudential doctrine under which courts may, under appropriate circumstances, determine that the initial decisionmaking responsibility should be performed by the relevant agency rather than the courts." Syntek Semiconductor Co., Ltd. v. Microchip Tech. Inc., 307 F.3d 775, 780 (9th Cir. 2002). "[P]rimary jurisdiction is properly invoked when a claim is cognizable in federal court but requires resolution of an issue of first impression, or of a particularly complicated issue that Congress has committed to a regulatory agency." Id. (quoting Brown v. MCI WorldCom Network Servs., Inc., 277 F.3d 1166, 1172 (9th Cir. 2002)). The doctrine does not require that all claims touching on an agency's expertise first be decided by the agency, however. See id. "The particular agency deferred to must be one that Congress has vested with the authority to regulate an industry or activity such that it would be inconsistent with the statutory scheme to deny the agency's power to resolve the issues in question." United States v. Culliton, 328 F.3d 1074, 1082 (9th Cir. 2003) (internal quotation marks omitted). To determine whether primary jurisdiction should be applied, we have "employed such factors as (1) the need to resolve an issue that (2) has been placed by Congress within the jurisdiction of an administrative body having regulatory authority (3) pursuant to a statute that subjects an industry or activity to a comprehensive regulatory authority that (4) requires expertise or uniformity in administration." Syntek, 307 F.3d at 781.

In determining whether to invoke primary jurisdiction, we also consider the procedural posture of the case. At the motion to dismiss stage, we apply a standard derived from Rule 12(b)(6) jurisprudence: whether the complaint plausibly asserts a claim that would not implicate the doctrine. See Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949 (2009) (requiring that a complaint be facially plausible to survive a motion to dismiss); Davel Commc'ns, Inc. v. Quest Corp., 460 F.3d 1075, 1088 (9th Cir. 2006) (noting that the Rule 12(b)(6) standard governs a primary jurisdiction claim). Having been advised of the Secretary's views, we conclude that Santa Clara's complaint does not require referral under this standard.*fn21 At this stage, the nature of the breaches Santa Clara will seek to prove is unclear, but the Secretary has indicated that at least some possible disputes could be resolved by a court without DHHS's expertise. Thus, we decline to invoke primary jurisdiction at this time, but leave open the possibility that the district court may decide after further factual development that referral to the Secretary is appropriate.


As intended direct beneficiaries of the PPA, covered entities may enforce the Manufacturers' ceiling price obligations under the federal common law of contracts. Although the statute mandating the PPA does not create a federal private cause of action, allowing Santa Clara's contract claim to go forward is consistent with Congress' intent in enacting the legislative scheme. Because that claim could plausibly be adjudicated without DHHS's expertise, invoking primary jurisdiction is not appropriate at this time.


Buy This Entire Record For $7.95

Official citation and/or docket number and footnotes (if any) for this case available with purchase.

Learn more about what you receive with purchase of this case.