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
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 ...