County of Santa Clara v. Astra Usa, Inc.

• Decision Date: 27 August 2008
• Docket Number: No. 06-16471.,06-16471.
• Citation: 540 F.3d 1094
• Parties: COUNTY OF SANTA CLARA, Plaintiff-Appellant, v. ASTRA USA, INC.; AstraZeneca Pharmaceuticals LP; Aventis Pharmaceuticals, Inc.; Bayer Corporation; Bristol-Myers Squibb Company; Pfizer, Inc.; Schering-Plough Corporation TAP Pharmaceutical Products, Inc.; Zenecca Inc.; ZLB Behring LLC; SmithKline Beecham Corporation; SmithKline Beecham Corporation, dba GlaxoSmithKline; Wyeth, Inc.; Wyeth Pharmaceuticals, Inc., Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

540 F.3d 1094

COUNTY OF SANTA CLARA, Plaintiff-Appellant, v. ASTRA USA, INC.; AstraZeneca Pharmaceuticals LP; Aventis Pharmaceuticals, Inc.; Bayer Corporation; Bristol-Myers Squibb Company; Pfizer, Inc.; Schering-Plough Corporation TAP Pharmaceutical Products, Inc.; Zenecca Inc.; ZLB Behring LLC; SmithKline Beecham Corporation; SmithKline Beecham Corporation, dba GlaxoSmithKline; Wyeth, Inc.; Wyeth Pharmaceuticals, Inc., Defendants-Appellees.

No. 06-16471.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted March 11, 2008.

Filed August 27, 2008.

Patrick J. Coughlin, Sanford Svetcov (argued), Jeffrey W. Lawrence, Jacqueline E. Mottek, Aelish M. Baig and Jennie Lee Anderson, Coughlin Stoia Geller Rudman & Robbins LLP, San Francisco, CA; Ann Miller Ravel, Cheryl A. Stevens and Tamara Lange, Santa Clara County Counsel's Office, San Jose, CA; Steve W. Berman and Douglas C. McDermott, Hagens Berman Sobol Shapiro LLP, Seattle, WA, for plaintiff-appellant County of Santa Clara.

Robert S. Litt (argued), Jeffrey L. Handwerker and Sharon Douglass Mayo, Arnold & Porter LLP, Washington, D.C., for defendants-appellees Astra USA, Inc., AstraZeneca Pharmaceuticals, LP and Zeneca Inc.; Alicia J. Donahue and Sara Romano, Shook, Hardy & Bacon LLP, San Francisco, CA, for defendants-appellees Aventis Pharmaceuticals, Inc. and ZLB Behring LLC; Timothy T. Scott, Geoffrey M. Ezgar and Paul Yanosy, Sidley Austin LLP, San Francisco, CA, for defendant-appellee Bayer Corporation; Paul J. Riehle and Matthew A. Fischer, Sedgwick Detert Moran & Arnold LLP, San Francisco, CA, for defendant-appellee Bristol-Myers Squibb Company; Federick G. Herold, Valerie M. Wagner and Philip Barilovits, Dechert LLP, Palo Alto, CA, for defendant-appellee SmithKline Beecham Corporation; Molly M. Lane and Tera Heinz, Morgan, Lewis & Bockius LLP, San Francisco, CA, for defendant-appellee Pfizer Inc.; Kirke M. Hasson and Colin T.

Kemp, Pillsbury Winthrop Shaw Pittman LLP, San Francisco, CA, for defendant-appellee Schering-Plough Corporation; Peter N. Larson, Jones Day, San Francisco, CA, for defendant-appellee TAP Pharmaceutical Products, Inc.; Fletcher Alford, Gordon & Rees, LLP, San Francisco, CA, for defendants-appellees Wyeth, Inc. and Wyeth Pharmaceuticals Inc.

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

Before: STEPHEN REINHARDT, MELVIN BRUNETTI and RAYMOND C. FISHER, Circuit Judges.

FISHER, Circuit Judge:

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.

BACKGROUND¹

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).² This drug discounting program is commonly known as the "Section 340B program," tracing back to its original location within the Public Health Service Act.³ The program is managed by the Health Resources and Serivces 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).⁴ 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.

STANDARD OF REVIEW

"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).

DISCUSSION

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.

I.

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).⁵ "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...