Where a Federal Statute is Silent, Do Third-Party Beneficiaries of a Government Contract Have a Right to Sue?

Preview of Supreme Court Cases, Vol. 4, p. 170, January 2011

U of Texas Law, Public Law Research Paper No. 327

5 Pages Posted: 6 Feb 2013

Date Written: January 7, 2011

Abstract

This article previews the issues and arguments in the Supreme Court’s 2010-11 Term case, Astra USA, Inc. v. Country of Santa Clara, Cal. Santa Clara County brought a class action in California federal court on behalf of public health care providers and other similar entities against a number of pharmaceutical companies, alleging that these companies violated the law by charging more than the ceiling price under the federal Public Health Service Act. Provisions of this Act impose ceilings on the prices that drug manufacturers may charge for prescription medicines sold to specified health care facilities. As a condition for participating in Medicaid, drug manufacturers are required to enter into contracts with the Secretary of Health and Human Services to abide by the Act’s pricing restrictions.

In this appeal, the Supreme Court will consider whether so-called third-party beneficiaries of a government contract ― in this case, the California public health care providers ― have a private right of action under the federal common law of contracts to enforce the Act’s pricing requirements, even though the federal statute contains no express or implied right of action to sue. The issue is whether federal courts may confer a private right to sue for breach of contract on third-party beneficiaries of a government contract, pursuant to federal common law, when the statute mandating the contract contains no express or implied right of action.

How the Supreme Court resolves this Astra appeal will largely turn on which characterization of the litigation the Court endorses. If, as the defendants argue, the Court views this appeal as involving a statutory implied-right-action case, then the Court’s deliberations may be brief, given the pre-disposition of the Court to disfavor implied rights of action. However, if as the County suggests, the case instead involves the rights of a third-party beneficiary to sue for breach of contract, then the Court’s problem is more complex. At the outset, the Court is faced with the task of properly characterizing the issue at stake.

Another possible outcome in this appeal is that the Supreme Court may determine, after briefing and argument, that the Court improvidently granted certiorari in this case. Hence, the Court’s task is further complicated by the presence of the United States as an amicus on behalf of the Respondents. The government has distanced itself from and rejected the Respondents’ reliance on the implied-right-of-action theory of the case. Instead, the government points to the March 2010 enactment of the Patient Protection and Affordable Care Act, Pub. L. No. 111-148, 124 Stat. 119, which made significant changes to the 340B program. Among several changes, this new legislation directs the Department of Health and Human Services to institute a comprehensive administrative process to adjudicate and remedy violations of the pricing requirements. This legislation applies to drug purchases after January 1, 2010. In the government’s view, these new statutory provisions provide the exclusive remedy for 340B entity claims that they have been overcharged. The United States contends that this statutory enactment will preclude future third-party breach-of-contract claims presented in this case.

The County has aptly pointed out that if the United States is correct that the remedy HHS creates for sales after January 1, 2010 is exclusive, then this severely limits the importance of the question presented and arguably warrants the Court to dismiss the certiorari petition as improvidently granted. However, the county points out that whether the new amendments will preclude future breach-of-contract claims is not presented to the Court, nor do the amendments apply to over-pricing claims before January 2010.

Finally, the usual array of amici representing business interests, such as the United States Chamber of Commerce and the Washington Legal Foundation, have aligned to support the Astra defendants, noting that the federal government enters into millions of contracts pursuant to statutory authorization. They contend that to uphold a finding of a third-party beneficiary common law right to sue, without express statutory authority, would compromise the certainty of contracts and undermine business relationships with the government.

Keywords: Federal statutes, liability, third-party beneficiaries, Astra v. Santa Clara County, Patient Protection and Affordable Care Act, Public Health Services Act, ceiling charges for pharmaceuticals

Suggested Citation

Mullenix, Linda S., Where a Federal Statute is Silent, Do Third-Party Beneficiaries of a Government Contract Have a Right to Sue? (January 7, 2011). Preview of Supreme Court Cases, Vol. 4, p. 170, January 2011; U of Texas Law, Public Law Research Paper No. 327. Available at SSRN: https://ssrn.com/abstract=2212311

Linda S. Mullenix (Contact Author)

University of Texas School of Law ( email )

727 East Dean Keeton Street
Austin, TX 78705
United States
512-232-1375 (Phone)

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