March 29, 2011

Today the Supreme Court issued one decision, described below, of interest to the business community.

• Federal Contractors—Private Rights of Action—Third-Party Beneficiaries

Federal Contractors—Private Rights of Action—Third-Party Beneficiaries

Astra USA, Inc. v. Santa Clara County, No. 09-1273 (previously discussed in the September 28, 2010 Docket Report).

Section 340B of the Public Health Services Act, 42 U.S.C. § 256b, requires manufacturers of Medicaid-covered outpatient drugs to enter into contracts with the Secretary of Health and Human Services (HHS). These contracts incorporate a statutory price ceiling on drugs sold to certain healthcare providers. But neither the Public Health Service Act nor any other law gives those healthcare providers an express or implied private right of action to enforce the price cap. Today, in Astra USA, Inc. v. County of Santa Clara, No. 09-1273, the Supreme Court held that healthcare providers may not sue to enforce the price cap as third-party beneficiaries of the HHS contracts.

The decision is significant for many federal contractors. Numerous statutes impose terms on federal contracts that are presumably designed to benefit the public or third parties, usually without establishing a private statutory cause of action. Prior to this case, six circuit courts of appeals (including the court below) had indicated that non-parties might be able to enforce such contracts against private contractors on a third-party beneficiary theory. Today’s decision restricts that theory of enforcement.

The case arose when Santa Clara County, California, and its county-operated medical facilities filed a putative class action against numerous major drug manufacturers, claiming that the manufacturers had charged them more than the statutory maximum price. The Ninth Circuit allowed the suit to proceed, holding that the plaintiffs, though lacking a statutory right of action, could sue as directly intended third-party beneficiaries under the federal common law of contracts.

In a unanimous opinion by Justice Ginsburg, the Supreme Court reversed. The Court noted that a non-party is entitled to the benefit of a contract only if the contracting parties so intend. But the Court found no evidence of that intent in contracts that simply incorporated statutorily required terms. Because the contracts were non-negotiable and merely recorded the manufacturers’ agreement to comply with the statute, the Court viewed the manufacturers’ statutory and contractual obligations as one and the same. Permitting non-parties to enforce the contracts, the Court reasoned, would render meaningless Congress’s restriction on private suits to enforce the statute. (The Court reserved the question whether a contracting agency could deliberately authorize third-party suits to enforce a government contract.)

The Court also rejected arguments that third-party beneficiary suits were necessary to improve enforcement of the statute and to spread the burden of that enforcement beyond HHS. By failing to provide a private right of action, the Court observed, Congress had chosen to centralize enforcement in the government, and indeed had recently provided additional enforcement powers to HHS.

Justice Kagan did not participate in the case.

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