County of Santa Clara V.astra USA, Inc.

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
COUNTY OF SANTA CLARA, 
Plaintiff-Appellant,
v.
ASTRA USA, INC.; ASTRAZENECA
PHARMACEUTICALS LP; AVENTIS
PHARMACEUTICALS, INC.; BAYER
CORPORATION; BRISTOL-MYERS No. 06-16471
SQUIBB COMPANY; PFIZER, INC.;
SCHERING-PLOUGH CORPORATION  D.C. No.
CV-05-03740-WHA
TAP PHARMACEUTICAL PRODUCTS,
OPINION
INC.; ZENECCA INC.; ZLB BEHRING
LLC; SMITHKLINE BEECHAM
CORPORATION; SMITHKLINE
BEECHAM CORPORATION, dba
GlaxoSmithKline; WYETH, INC.;
WYETH PHARMACEUTICALS, INC.,
Defendants-Appellees.

Appeal from the United States District Court
for the Northern District of California
William H. Alsup, District Judge, Presiding
Argued and Submitted
March 11, 2008—San Francisco, California
Filed August 27, 2008
Before: Stephen Reinhardt, Melvin Brunetti and
Raymond C. Fisher, Circuit Judges.
Opinion by Judge Fisher
11761
11764 COUNTY OF SANTA CLARA v. ASTRA USA
COUNSEL
Patrick J. Coughlin, Sanford Svetcov (argued), Jeffrey W.
Lawrence, Jacqueline E. Mottek, Aelish M. Baig and Jennie
COUNTY OF SANTA CLARA v. ASTRA USA 11765
Lee Anderson, Coughlin Stoia Geller Rudman & Robbins
LLP, San Francisco, California; Ann Miller Ravel and Cheryl
A. Stevens, Santa Clara County Counsel’s Office, San Jose,
California; Steve W. Berman and Douglas C. McDermott,
Hagens Berman Sobol Shapiro LLP, Seattle, Washington, 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 Pharma-
ceuticals, LP and Zeneca Inc.; Alicia J. Donahue and Sara
Romano, Shook, Hardy & Bacon LLP, San Francisco, Cali-
fornia, for defendants-appellees Aventis Pharmaceuticals, Inc.
and ZLB Behring LLC; Timothy T. Scott, Geoffrey M. Ezgar
and Paul Yanosy, Sidley Austin LLP, San Francisco, Califor-
nia, for defendant-appellee Bayer Corporation; Paul J. Riehle
and Matthew A. Fischer, Sedgwick Detert Moran & Arnold
LLP, San Francisco, California, for defendant-appellee
Bristol-Myers Squibb Company; Federick G. Herold, Valerie
M. Wagner and Philip Barilovits, Dechert LLP, Palo Alto,
California, for defendant-appellee SmithKline Beecham Cor-
poration; Molly M. Lane and Tera Heinz, Morgan, Lewis &
Bockius LLP, San Francisco, California, for defendant-
appellee Pfizer Inc.; Kirke M. Hasson and Colin T. Kemp,
Pillsbury Winthrop Shaw Pittman LLP, San Francisco, Cali-
fornia, for defendant-appellee Schering-Plough Corporation;
Peter N. Larson, Jones Day, San Francisco, California, for
defendant-appellee TAP Pharmaceutical Products, Inc.;
Fletcher Alford, Gordon & Rees, LLP, San Francisco, Cali-
fornia, for defendants-appellees Wyeth, Inc. and Wyeth Phar-
maceuticals Inc.
OPINION
FISHER, Circuit Judge:
Certain federally funded medical clinics — so-called “Sec-
tion 340B covered entities” — are able to purchase prescrip-
11766 COUNTY OF SANTA CLARA v. ASTRA USA
tion 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 con-
tracts, 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 Man-
ufacturers and sue them for reimbursement of excess pay-
ments. 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), Con-
gress enacted Section 602 of the Veterans Health Care Act of
1992, Pub. L. No. 102-585, 106 Stat. 4943, 4967. That provi-
sion, 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
1
Because this is an appeal from an order granting a motion to dismiss,
we accept all facts alleged as true and construe them in the light most
favorable to the plaintiff. See Karam v. City of Burbank, 352 F.3d 1188,
1192 (9th Cir. 2003).
COUNTY OF SANTA CLARA v. ASTRA USA 11767
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
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 accor-
dance with statute, the Secretary entered into a standard Phar-
maceutical 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
2
Hereinafter, all citations are to Title 42 of the United States Code
unless otherwise noted.
3
Section 602 of the Veterans Health Care Act of 1992 added a new Sec-
tion 340B to Part D of Title III of the Public Health Service Act. See 106
Stat. at 4967. The Public Health Service Act is itself codified at Chapter
6A of Title 42 of the United States Code. See National Institutes of Health
Revitalization Act of 1993 § 2008(i)(1)-(2), Pub. L. No. 103-43, 107 Stat.
122, 212-13.
4
The PPA establishes different discounts for other classes of drugs that
are not relevant here. See PPA §§ II(b)-(c).
11768 COUNTY OF SANTA CLARA v. ASTRA USA
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 pub-
lished by DHHS’s Office of the Inspector General (“OIG”),
Santa Clara alleged that the Manufacturers have systemati-
cally overcharged its medical facilities, and all similarly situ-
ated 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 cal-
culation 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, how-
ever, 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 con-
cerns” that “systemic problems with the accuracy and reliabil-
ity” 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’
COUNTY OF SANTA CLARA v. ASTRA USA 11769
motion to dismiss, but with leave to amend. Santa Clara’s sec-
ond 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 subse-
quent 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 the-
ory.
STANDARD OF REVIEW
“We review de novo the district court’s dismissal of a com-
plaint 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 con-
sistent with Congress’ intent in enacting the Section 340B
program, even though the statute itself does not create a fed-
eral private cause of action. Finally, we reject the Manufactur-
ers’ argument that primary jurisdiction is appropriate.
I.
[1] 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.
11770 COUNTY OF SANTA CLARA v. ASTRA USA
2005), and which expressly provides that it “shall be con-
strued 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.
[2] Under the federal common law of contracts, “[b]efore
a third party can recover under a contract, it must show that
5
“[F]ederal jurisdiction cannot be created by contract,” of course, and
we have an independent obligation to scrutinize our jurisdiction. ARCO
Envtl. Remediation, L.L.C. v. Dep’t of Health & Envtl. Quality of Mont.,
213 F.3d 1108, 1117 n.11 (9th Cir. 2000) (internal quotation marks omit-
ted). Here, regardless of whether federal or state law creates the cause of
action underlying Santa Clara’s contract claim — a question we will not
reach out to resolve because the complaint is ambiguous, neither party has
briefed the issue and the precedent is famously obscure, see, e.g., Empire
Healthchoice Assur., Inc. v. McVeigh, 547 U.S. 677 (2006); Boyle v.
United Tech. Corp., 487 U.S. 500, 506-07 & n.3 (1988); Jackson Transit
Auth. v. Local Div. 1285, Amalgamated Transit Union, 457 U.S. 15, 20-23
(1982); Miree v. DeKalb County, 433 U.S. 25, 29-31 & n.3 (1977) — it
“necessarily raise[s] a stated federal issue, actually disputed and substan-
tial, which a federal forum may entertain without disturbing any congres-
sionally approved balance of federal and state judicial responsibilities,”
and so was properly heard by the district court in the exercise of its 28
U.S.C. § 1331 federal question jurisdiction. See Grable & Sons Metal
Prod., Inc. v. Darue Eng’g & Mfg., 545 U.S. 308, 314 (2005). Santa Clara
seeks enforcement of an obligation created by a nationwide federal con-
tract whose terms are mandated by federal statute and which must be inter-
preted according to federal law. Its claim plainly “implicate[s] the
government’s . . . interests” in the uniform administration of the Section
340B program and the parties’ compliance with federal law. See Smith,
418 F.3d at 1034; Almond v. Capital Prop., Inc., 212 F.3d 20, 22-24 (1st
Cir. 2000); Price v. Pierce, 823 F.2d 1114, 1119-21 (7th Cir. 1987); Eat-
mon v. Bristol Steel & Iron Works, Inc., 769 F.2d 1503, 1516-17 (11th Cir.
1985); see also Flick v. Liberty Mut. Fire Ins. Co., 205 F.3d 386, 390 (9th
Cir. 2000).
COUNTY OF SANTA CLARA v. ASTRA USA 11771
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 ben-
eficiary 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 con-
tract 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 specifi-
cally or individually identified in the contract,” they still must
“fall within a class clearly intended by the parties to benefit
from the contract.” Id.[3] Demonstrating third-party beneficiary status in the con-
text 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 inci-
dental 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 pronounce-
ments,” 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 lan-
guage of the contract for a ‘clear intent’ to rebut the presump-
tion that the [third parties] are merely incidental
beneficiaries.” Id. at 1147 n.5.
11772 COUNTY OF SANTA CLARA v. ASTRA USA
[4] Having done this analysis, we are persuaded that cov-
ered 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 con-
tract claim is conditioned on the contract’s inclusion of a pro-
vision 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 Super-
vision 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 beneficia-
ries to sue . . . and did not allow incidental third-party benefi-
ciaries to sue.”); Restatement (Second) of Contracts § 302
(1981). In disavowing any absolute requirement that the con-
tract expressly provide for third party enforcement, we reaf-
firm 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 prog-
eny setting forth the requisite showing — then the third party
contract claim may go forward.6 Only when the plaintiff
6
The Manufacturers suggest that US Ecology, Inc. v. United States, 245
F.3d 1352 (Fed. Cir. 2001), is to the contrary. Not so. The Federal Circuit
declined to allow third party beneficiary enforcement of the contract
because there was no “evidence of an intent by the federal government to
benefit” the plaintiffs. Id. at 1357; see also id. at 1356 (“It is undisputed
that the evidence contains no statement by the federal government that it
intended for the alleged contract to benefit any third party.”). US Ecology
COUNTY OF SANTA CLARA v. ASTRA USA 11773
would qualify solely as an incidental beneficiary of the gov-
ernment 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; Restate-
ment (Second) of Contracts § 313(2) & cmt. a (1981).
[5] We hold that the parties to the PPA clearly intended to
grant covered entities enforceable rights as intended benefi-
ciaries 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 con-
tract 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).
[6] 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.7 There is a stark contrast
reaffirmed the principle stated in the text. “In order to create rights in a
third party, ‘the contract must reflect[ ] the express or implied intention of
the parties to benefit the third party.’ ” Id. at 1356 (quoting Montana, 124
F.3d at 1273) (alteration in original). “One way” — but by no means the
exclusive one — of ascertaining whether the parties had such an intent is
to ask whether the contract expressly “confer[s] a right” to performance
on third parties. See id. (emphasis added).
7
Cf. Smith, 418 F.3d at 1036-37 (agreement simply “specifie[d] that the
government’s obligation . . . is subject to . . . federal law,” confirmed
11774 COUNTY OF SANTA CLARA v. ASTRA USA
between “recitation of constituencies,” “explanatory recitals”
of purpose and references to individuals that the contracting
parties had “in mind” — all insufficient to “prove [the plain-
tiffs’] 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 Manu-
facturers may charge the covered entities.8 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 dis-
counted 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 cov-
ered drugs. We are therefore persuaded that the PPA, on its
face, was clearly intended to benefit the covered entities
directly.
[7] Consideration of § 256b, the “governing statute” speci-
fying the PPA’s terms, and its purposes reinforces this inter-
pretation. See Trimble Navigation, 484 F.3d at 706. (The PPA
water district’s “agree[ment] to abide by the terms of . . . subcontracts”
and otherwise amounted to “hortatory statement[s] of purpose”); Kremen,
337 F.3d at 1029 (agreement only articulated defendant’s responsibility to
effectively, efficiently and timely to manage Internet domain name regis-
tration system); Orff, 358 F.3d at 1145-46 (agreement “ma[de] reference”
to the plaintiffs only in context of setting forth “conditions precedent” that
they had to satisfy); Klamath, 204 F.3d at 1211-12 (agreement “grant[ed]
discretion to the United States . . . to enforce the Contract by taking con-
trol of the Dam” and “preserve[d] the United States’ ultimate control over
the Dam”).
8
Although the PPA does not state in so many words that it was entered
into “for the benefit” of the covered entities, see Far West, 119 F.3d at1364 n.2, we have never conditioned our analysis of intended beneficiary
status on formalistic recitals. Cf. United States v. FMC Corp., 531 F.3d
813, 822 (9th Cir. 2008) (“[A] contract can use whatever terms the parties
wish to express their agreement.”).
COUNTY OF SANTA CLARA v. ASTRA USA 11775
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 pro-
vided 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 enti-
ties] 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 manufactur-
er’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 Com-
mittee 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 Manufac-
turers 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.9
Relying on D’Amato v. Wisconsin Gas Co., 760 F.2d 1474(7th Cir. 1985), the Manufacturers contend that the PPA’s
9
Protected purchasers also include the Department of Veterans Affairs,
the Department of Defense, the Public Health Service and the Indian
Health Service. See Veterans Health Care Act of 1992 § 603(a), Pub. L.
No. 102-585, 106 Stat. 4943, 4972 (codified at 38 U.S.C. § 8126(b)); H.R.
Rep. No. 102-384(II), at 7-8.
11776 COUNTY OF SANTA CLARA v. ASTRA USA
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 cer-
tain 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 liabil-
ity or remove the entity from the list of eligible entities.10
Conversely, if the Secretary believes a manufacturer has over-
charged 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 termi-
nated. 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 manu-
facturers 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 ben-
eficiaries 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 con-
tracts themselves suggested that the plaintiffs were not
10
The informal dispute resolution remedies against the covered entities
run through the Secretary, who has the power to “establish a mechanism
to ensure that covered entities comply” with the Section 340B program’s
requirements and sanction them for noncompliance. See
§ 256b(a)(5)(A)(ii), (D). We construe these PPA provisions as simply
restating the covered entities’ statutory obligations, because as a matter of
federal common law, even a third party beneficiary “cannot be bound to
a contract it did not sign.” See Comer v. Micor, Inc., 436 F.3d 1098, 1102
(9th Cir. 2006).
COUNTY OF SANTA CLARA v. ASTRA USA 11777
intended beneficiaries; they were “not directed at the handi-
capped 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. Sec-
ond, § 256b says nothing about the covered entities’ remedies,
whether judicial or administrative. Cf. id. at 1481 (“The statu-
tory 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 enti-
ties themselves are unable to initiate that process.11 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
11
Cf. FMC Corp., 531 F.3d at 823 (declining to recognize intended ben-
eficiary status because that would “grant a broader range of dispute-
resolving rights to [third parties] than to the [contracting] parties,” who
were required to exhaust the contract’s “prescribed dispute resolution
mechanisms” before bringing suit). By contrast, the PPA provides that its
informal dispute resolution process will not “preclude the Manufacturer or
the Secretary from exercising such other remedies as may be available by
law.” See PPA § IV(e).
11778 COUNTY OF SANTA CLARA v. ASTRA USA
process before seeking other remedies.”). In sum, neither the
PPA nor § 256b establishes an exclusive “elaborate adminis-
trative 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 cov-
ered entities’ intended beneficiary status are no more convinc-
ing. First, they contend it is “illogical” that the United States
and the Manufacturers would have intended to expose them-
selves to suit by the large number of covered entities, about
13,000 reported as of this writing.12 The breadth and indefi-
niteness 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) (com-
menting that parties would not likely have intended that “al-
most every lower-income person in the United States” could
enforce the contract). But numbers alone are not determina-
tive. 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 beneficia-
ries 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) (mak-
ing available list of eligible covered entities), § IV(b) (proce-
dure 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 confiden-
tiality” of pricing data through discovery, given the PPA’s
inclusion of a confidentiality provision.13 The confidentiality
12
See Department of Health and Human Services, Office of Pharmacy
Affairs, Growth of 340B Covered Entity Sites From 01/1998 to Present,
http://opanet.hrsa.gov/opa/Report/StatisticalReport.aspx.
13
This argument is problematic for another, more pragmatic reason,
which is that the PPA was not a conventionally negotiated contract. Pre-
COUNTY OF SANTA CLARA v. ASTRA USA 11779
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 infor-
mation disclosed to the Secretary by the Manufacturers, “ex-
cept as otherwise required by law, will not be disclosed by the
Secretary or his designee in a form which reveals the Manu-
facturer, 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 disclo-
sure “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 infor-
mation. 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 confidential-
ity proviso as negating third party covered entities’ right to
enforce the discount pricing requirements themselves.
sumably, the Manufacturers would have preferred not to give covered
entities any discount at all, but they faced an overwhelmingly powerful
incentive to accept the PPA. Eligibility for a number of substantial federal
healthcare programs is conditioned on having an effective § 256b agree-
ment with the Secretary. See § 1396r-8(a)(1), (a)(5)(A); see generally
Joint Explanatory Statement on H.R. 5193, 138 Cong. Rec. S17890, 1992
U.S.C.C.A.N. 4186, 4211 (explaining that § 256b makes the “use of fed-
eral matching funds for payment for a covered outpatient drug [by State
Medicaid programs] . . . contingent on . . . a manufacturer’s entering into
[ ] an agreement . . . under which the manufacturer agrees to provide
rebates or discounts to” covered entities).
11780 COUNTY OF SANTA CLARA v. ASTRA USA
II.
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 Con-
gress’ intent in creating the Section 340B program.14 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.15 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.
[8] 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 con-
trary 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 Con-
gress “speak[s] directly” to a question addressed by the fed-
eral common law, it may displace it even without
14
Although this argument was raised for the first time in the Manufac-
turers’ reply to Santa Clara’s opposition to its motion to dismiss and the
district court did not address it, we will pass on the merits here. The issue
is one of law and has been fully briefed by both parties. See Pocatello
Educ. Ass’n v. Heideman, 504 F.3d 1053, 1060 n.5 (9th Cir. 2007); Bibeau
v. Pac. Northwest Research Foundation Inc., 188 F.3d 1105, 1111 n.5 (9th
Cir. 1999).
15
Santa Clara has not pursued this matter on appeal, so we assume with-
out deciding that § 256b does not create a private cause of action.
COUNTY OF SANTA CLARA v. ASTRA USA 11781
“affirmatively proscrib[ing]” its use. United States v. Texas,
507 U.S. 529, 534 (1993); see also Gardiner v. Sea-Land Ser-
vice, 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.” Gardi-
ner, 786 F.2d at 947.16 The Manufacturers, relying almost
exclusively on Grochowski v. Phoenix Constr., 318 F.3d 80(2d Cir. 2003), contend that § 256b does just that and, there-
fore, 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 plain-
tiffs to bring suit as third party beneficiaries of a contract
between the contractor defendants and New York City’s pub-
lic 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 provi-
sion: “[t]he Contractor shall pay to all laborers . . . not less
than the wages prevailing in the locality of the Project, as pre-
determined 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 con-
tractors” subject to the Davis-Bacon Act, the Secretary of
16
This is a different and less demanding inquiry than that used to evalu-
ate whether a federal statute preempts a state-law cause of action, see City
of Milwaukee, 451 U.S. at 316-17; cf. Medtronic, Inc. v. Lohr, 518 U.S.
470, 485 (1996), or whether a federal statute’s comprehensive remedial
scheme impliedly displaces a more general federal private cause of action
such as 42 U.S.C. § 1983, see Middlesex County Sewerage Auth. v. Nat’l
Sea Clammers Ass’n, 453 U.S. 1, 20-21 (1981); Flores v. Arizona, 516
F.3d 1140, 1174-75 (9th Cir. 2008). See generally Resolution Trust Corp.
v. Frates, 52 F.3d 295, 296-97 (10th Cir. 1995) (explaining difference
between preemption of state law and supersession of the federal common
law). We conclude that § 256b does not abrogate the cause of action ordi-
narily provided by the federal common law of contracts; thus it does not
preempt a state-law contract cause of action, if that indeed is how Santa
Clara’s claim should be characterized. See supra note 5.
11782 COUNTY OF SANTA CLARA v. ASTRA USA
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 admin-
istrative 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 congres-
sional intent as to the availability of remedies under the
Davis-Bacon Act. 318 F.3d at 86.
[9] Assuming Grochowski was correctly decided, the case
is clearly inapposite on its own terms.17 Its analytical under-
pinning 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.18 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 mecha-
nism 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). Reflect-
ing this paucity of statutory authority, DHHS’s regulations
17
Because the Grochowski plaintiffs’ contract claims were based on
state law, not federal law, it is puzzling that the majority did not frame its
analysis in terms of whether Congress intended to preempt those claims.
See, e.g., Grochowski, 318 F.3d at 90-91 (Lynch, J. dissenting); Cox v.
NAP Constr. Co., Inc., 10 N.Y.3d 592, 603-07 (N.Y. 2008).
18
Section 256b does provide a number of remedies against covered enti-
ties. See, e.g., § 256b(a)(5)(C) (“A covered entity shall permit the Secre-
tary and [manufacturers] . . . to audit . . . records of the entity that directly
pertain to the entity’s compliance” with the program.); (a)(5)(D) (“If the
Secretary finds . . . that a covered entity is in violation . . . the covered
entity shall be liable . . . .”).
COUNTY OF SANTA CLARA v. ASTRA USA 11783
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. Noth-
ing in the statute suggests that Congress intended that DHHS
create a substitute, administrative remedial scheme for cov-
ered 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 rem-
edy, abrogated remedies under federal common law).
[10] Permitting covered entities to sue as intended benefi-
ciaries 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 sta-
tus 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 benefi-
ciary 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 ser-
vices.” 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 pro-
gram 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).
III.
[11] Finally, we hold that the doctrine of primary jurisdic-
tion does not require that Santa Clara’s contract claim be
11784 COUNTY OF SANTA CLARA v. ASTRA USA
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 rel-
evant 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) (inter-
nal quotation marks omitted). To determine whether primary
jurisdiction should be applied, we have “employed such fac-
tors 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 sub-
jects an industry or activity to a comprehensive regulatory
authority that (4) requires expertise or uniformity in adminis-
tration.” Syntek, 307 F.3d at 781.
[12] In our view, there is nothing “particularly complicat-
ed” about Santa Clara’s contract claim on the merits.19 Santa
Clara alleges that the Manufacturers did not comply with their
19
Although the issue of whether covered entities are entitled to sue as
third party beneficiaries of the PPA is by no means straightforward,
DHHS’s regulatory authority does not extend to the federal common law
of contracts, so we have no occasion to defer to the agency’s expertise in
deciding this appeal.
COUNTY OF SANTA CLARA v. ASTRA USA 11785
obligation under the PPA to charge covered entities a price
that “does not exceed . . . the [average manufacturer price] for
the [covered 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) (emphasis added). Contrary to the Manufacturers’ sug-
gestion, resolution of this claim presents no “far-reaching
question that ‘requires expertise or uniformity in administra-
tion.’ ” Cf. Brown, 277 F.3d at 1172. The PPA is drafted, for
instance, so that covered entities are entitled only to the aver-
age manufacturer price reported to the Secretary; they cannot
claim that the reported figure was itself somehow erroneous.20
Moreover, when a covered entity sues a manufacturer for fail-
ing to comply with its ceiling price obligations under the
PPA, but “ ‘does not seek to impose any additional or con-
trary obligations[,] [it] is merely enforcing the existing rebate
program responsibilities and does not inject any more varia-
tion than if the Department of Justice brought suit.’ ” See gen-
erally Massachusetts v. Mylan Labs., 357 F. Supp. 2d 314,
329 (D. Mass. 2005) (quoting amicus brief of the United
States filed in suit brought by states to enforce Medicaid State
Rebate Agreement).21 We do not understand Santa Clara’s
complaint as taking issue with the agency’s established guid-
ance for calculating prices under § 1396r-8, so we conclude
that its contract claim does not implicate DHHS’s primary
jurisdiction.
20
We do not decide whether the PPA’s “reporting” limitation is consis-
tent with § 256b(a)(1)’s requirements for pharmaceutical purchasing
agreements.
21
The relationship between states and manufacturers under the Medicaid
State Rebate Agreement is roughly analogous to that between covered
entities and manufacturers under the PPA. Neither party requested that the
district court or we seek the views of the Secretary of Health and Human
Services as amicus curiae.
11786 COUNTY OF SANTA CLARA v. ASTRA USA
CONCLUSION
As intended direct beneficiaries of the PPA, covered enti-
ties may enforce the Manufacturers’ ceiling price obligations
under the federal common law of contracts. Although the stat-
ute 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 it lies within the conventional competence
of the courts, that claim is not within the primary jurisdiction
of DHHS.
REVERSED and REMANDED.