Argument recap: Challenge to suits on drug price limits

By Kevin Russell
on Jan 20, 2011 at 11:24 am

Disclosure: I participated in a moot court for counsel for the petitioners.

The case involves a complicated federal statutory regime under which Congress directed the Secretary of the Department of Health and Human Services (HHS) to enter into contracts with major drug companies that participate in the federal Medicaid program.  Among other things, Congress directed that the contracts put price caps on drugs sold to so-called “340B entities,” which are largely public hospitals and community health centers that focus on serving the poor.  The statute itself does not expressly allow 340B entities to sue drug companies for violating this promise.  But in response to a series of government reports finding that the drug companies were not complying with the price ceilings, a California county brought suit on behalf of numerous 340B entities in California, alleging not a violation of the statute but breach of the contract between federal government and the drug companies.

Ordinarily, only the parties to a contract can sue each other for breach of the agreement.  But the common law has long allowed contract enforcement suits by some so-called “third-party beneficiaries.”  The Ninth Circuit held that although the federal statute did not give 340B entities a right to sue drug companies, the 340B entities were nonetheless “intended third-party beneficiaries” entitled to sue to enforce the contract.  The Court granted cert. on the question whether such third-party beneficiary suits can proceed when Congress has declined to create a statutory cause of action for the beneficiaries.

On Wednesday, however, few members of the Court seemed inclined to answer that particular question, which could have broad implications far beyond the enforcement of this statute.  The petitioner drug companies were represented by Lisa Blatt of Arnold and Porter (who, with this argument, has argued more cases at the Court than any other living woman in private practice).  Blatt began by arguing that because this suit was indistinguishable from a suit to enforce the statute, the Court should apply the same strict standards it uses to decide whether Congress impliedly created a private right of action under the statute itself.  Otherwise, she argued, third-party beneficiary suits could be used as an end run around the Court’s modern move to require Congress to expressly authorize private suits if it intends them.

But after some push-back from Justice Sotomayor, Blatt offered an alternative route – with fewer jurisprudential consequences –to the same result.  Looking at all available evidence, she argued, neither Congress nor the Secretary intended to authorize third-party beneficiary suits.  And if that is true, the plaintiffs would lose even under their own contract law theory.  Much of the rest of Blatt’s arguments focused on questions seemingly relevant to that argument – how this particular statutory regime worked, what alternative remedies Congress may have provided 340B entities who believe they are being overcharged, and how disruptive private suits would be to the Medicaid regime.

Arguing for the United States in support of the drug companies, Assistant to the Solicitor General Ginger Anders took another approach.  She argued that the relationship between the Government and the drug companies should not be treated as an ordinary contractual arrangement, subject to ordinary contract enforcement actions (which might include third-party beneficiary suits).  Instead, she argued, the regime was at its essence no different than if Congress had simply directed HHS to issue regulations regarding the prices drug companies participating in the Medicaid program could charge 340B entities.  And because Congress provided no statutory right to enforce the statute (or the regulation-like contract provisions), the plaintiffs’ suit should be disallowed.

Anders soon came under questioning regarding how to square that argument with the Government’s position in another case in the lower courts, in which a number of states have filed suit to enforce a related Medicaid program that requires drug companies to agree, in their Medicaid contracts, to give states rebates on drug costs.  The United States has taken the position that those suits are fine.  How is that any different than allowing counties to bring these suits, several Justices wanted to know.  Anders explained that the state suits were brought under state laws (not federal contract law) and that states cooperate with the federal government in operating the Medicaid program in a way that counties and private 340B entities do not.

David Frederick of Kellogg Huber represented Santa Clara County.  He began his argument by focusing on an answer Blatt had given in her argument.  Blatt had, Frederick said, acknowledged that if a contract contained provisions that were not directly required by the federal statute, a third-party suit to enforce the non-statutory provision of the contract could be permissible because it would not be tantamount to enforcing the statute without a statutory private right of action.  The drug companies thus conceded, he argued, that the Medicaid agreement was a contract (contrary to the Government’s view), that ordinary contract rules apply to it, and that third-party beneficiary suits are part of those ordinary contract rules.

This prompted an extended discussion with Justice Scalia and others about the common law standard for allowing a third-party beneficiary to sue to enforce a contract.  Frederick emphasized that under the common law, the test is objective (so it makes no difference that the Secretary of HHS and the drug companies now insist that they did not intend to allow third-party suits).  But he acknowledged, in questioning from Justice Alito, that if the statute had expressly precluded a private claim under the statute, third-party contract suits also would be precluded.  His argument turned, he said, on the fact that the statute was silent.  And in prior cases, he argued, the Court had allowed enforcement of statutory rights through third-party beneficiary contract suits.

The Chief Justice noted that many of the third-party beneficiary cases on which Frederick were decided in “an earlier world of implied right of action jurisprudence that has changed dramatically in the last 30 years.”  Justice Ginsburg further stated that given that the contractual provisions at issue simply restate the requirements of the statute, “it would be passing strange” if Congress intended to preclude a third-party suit directly under the statute but to permit one under contract law.

In the end, it seemed likely that the Court will focus on the question of whether Congress intended to permit private suits under this particular statute (and, in all likelihood, it looked like a majority of the Court would conclude that it did not).  It further seems likely that this conclusion will lead the Court to reverse the Ninth Circuit on narrow grounds, perhaps even simply finding that the Ninth Circuit misapplied third-party beneficiary contract law rather than deciding the broader question whether third-party suits can ever be brought to enforce statutory rights embodied in a federal contract.