NO. 09-1273

In the Supreme Court of the United StatesIn the Supreme Court of the United StatesIn the Supreme Court of the United StatesIn the Supreme Court of the United StatesIn the Supreme Court of the United States

ASTRA USA, INC., ET AL.,Petitioners,

v.

COUNTY OF SANTA CLARA, ON BEHALF OF ITSELF

AND ALL OTHERS SIMILARLY SITUATED, Respondent.

On Writ of Certiorari to the United StatesCourt of Appeals for the Ninth Circuit

BRIEF FOR KANSAS, ARIZONA, MISSOURI, WESTVIRGINIA AND THE DISTRICT OF COLUMBIA

AS AMICI CURIAE IN SUPPORT OF RESPONDENT

Becker Gallagher · Cincinnati, OH · Washington, D.C. · 800.890.5001

December 20, 2010

STEVE SIX

ATTORNEY GENERAL OF KANSAS

STEPHEN R. MCALLISTER

SOLICITOR GENERAL OF KANSAS

COUNSEL OF RECORD

120 S.W. 10TH ST., 2ND FLOOR

TOPEKA, KS 66612(785) 296-2215stevermac@fastmail.fm

Counsel for Amici Curiae

[Additional counsel listedinside front cover]

Terry GoddardAttorney General of Arizona1275 W. WashingtonPhoenix, AZ 85007

Chris KosterAttorney General of MissouriSupreme Court Building207 West High StreetJefferson City, MO 65101

Darrell V. McGraw, Jr.West Virginia Attorney GeneralOffice of the Attorney GeneralState Capitol, Room 26-ECharleston, WV 25305

Peter J. NicklesAttorney General forthe District of Columbia441 4th Street, NWSuite 1145SWashington, DC 20001

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QUESTION PRESENTED

Whether, when Congress implements aspects of theMedicaid and Section 340B programs by directing theSecretary of Health and Human Services to enter intocontracts with drug manufacturers, the breach of sucha contract is actionable by the intended third-partybeneficiaries of the contract—such as the States, localgovernments, or health care providers—on whosebehalf Congress specifically directed the Secretary toenter the contract?

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TABLE OF CONTENTSPage

QUESTION PRESENTED . . . . . . . . . . . . . . . . . . . . i

TABLE OF CONTENTS . . . . . . . . . . . . . . . . . . . . . ii

TABLE OF AUTHORITIES . . . . . . . . . . . . . . . . . . iv

INTEREST OF THE AMICI STATES . . . . . . . . . . 1

STATEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

SUMMARY OF ARGUMENT . . . . . . . . . . . . . . . . . 7

ARGUMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

I. As Congress Has Always Intended, The StatesPlay A Prominent Role In The MedicaidProgram, Including Pursuit Of False ClaimsAnd Fraud Through Third-Party BeneficiaryBreach of Contract Suits. . . . . . . . . . . . . . . . . 11

A. Medicaid Is A Unique Instance OfCooperative Federalism. . . . . . . . . . . . . . . 11

B. Medicaid Fraud By Drug Manufacturers IsA Serious Problem. . . . . . . . . . . . . . . . . . . . 13

C. For Decades—Just As Congress Intended—The States Have Played A Leading Role InInvestigating and Prosecuting False ClaimsAnd Medicaid Fraud, Including Suits AsThird-Party Beneficiaries To EnforceFederal Contracts. . . . . . . . . . . . . . . . . . . . 18

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II. This Contract Case Falls Well Within TheVenerable Common Law Doctrine AllowingIntended Third-Party Beneficiaries To Sue ForBreach Of Contract, And This Suit FurthersThe Goals Of Congress For The Medicaid and340B Programs. . . . . . . . . . . . . . . . . . . . . . . . . 23

A. Under Well-Established Anglo-AmericanLaw And The Court’s Own Cases, IntendedThird-Party Beneficiaries May Sue ToEnforce Contracts. . . . . . . . . . . . . . . . . . . . 23

B. This Is A Breach Of Contract Case. . . . . . . 26

C. The States And The 340B Entities ShareThe Same Interests In Remedying Breachesof the Medicaid Rebate Agreement and thePPAs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

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TABLE OF AUTHORITIES

CASES Page

Alexander v. Sandoval,532 U.S. 275 (2001) . . . . . . . . . . . . . . . . . . . . . 26

Arthur Andersen LLP v. Carlisle,556 U.S. __, 129 S. Ct. 1896 (2009) . . . . . . . . . 23

Beck v. Prupis,529 U.S. 494 (2000) . . . . . . . . . . . . . . . . . . . . . 21

Connecticut Dept. of Social Services v. Leavitt,428 F.3d 138 (2d Cir. 2005) . . . . . . . . . . . . . . . 12

Dutton v. Poole,(1677) 83 Eng. Rep. 523 (K.B.), aff’d (1679) 83Eng. Rep. 156 (Ex. Ch.) . . . . . . . . . . . . . . . . . . 23

Harris v. McRae,448 U.S. 297 (1980) . . . . . . . . . . . . . . . . . . 11, 12

In re Pharm. Indus. Avg. Wholesale Price Litig.,No. 01-cv-12257-PBS (D. Mass. filed Apr. 5,2004) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

Int’l Assoc. of Machinists, AFL-CIO v. CentralAirlines, Inc.,372 U.S. 682 (1963) . . . . . . . . . . . . . . . . . . . . . 27

Jackson Transit Auth. v. Local Div. 1285,457 U.S. 15 (1982) . . . . . . . . . . . . . . . . . . . . . . 27

Massachusetts, et al. v. Mylan Laboratories, et al.,357 F. Supp. 2d 314 (D. Mass. 2005) . . . . . passim

v

Mobil Oil Exploration and Producing Southeast,Inc. v. United States,530 U.S. 604 (2000) . . . . . . . . . . . . . . . . . . 21, 28

Nevada ex rel. Steinke v. Merck & Co.,432 F. Supp. 2d 1082 (D. Nev. 2006) . . . . . . . . 26

Pharm. Research & Mfrs. of America v. Walsh, 538 U.S. 644 (2003) . . . . . . . . . . . . . . . . . . . . . 11

Priebe & Sons, Inc. v. United States, 332 U.S. 407 (1947) . . . . . . . . . . . . . . . . . . . . . 29

Schermerhorne v. Vanderheyden,1 Johns. Rep. 140 (N.Y. Sup. 1806) (per curiam) . 23

United States v. Seckinger,397 U.S. 203 (1970) . . . . . . . . . . . . . . . . . . 27, 28

United States, et al. v. Wyeth,No. 06-11724-DPW (D. Mass.) . . . . . . . . . 1, 2, 24

STATUTES

31 U.S.C. § 3729(a)(1), (2) . . . . . . . . . . . . . . . . . . . 26

42 U.S.C. § 256b(a)(1) . . . . . . . . . . . . . . . . . . 4, 6, 27

42 U.S.C. § 1396 . . . . . . . . . . . . . . . . . . . . . . . . . . 12

42 U.S.C. § 1396a . . . . . . . . . . . . . . . . . . . . . . . . . 12

42 U.S.C. § 1396a(a)-(b) . . . . . . . . . . . . . . . . . . . . 12

42 U.S.C § 1396(a)(61) . . . . . . . . . . . . . . . . . . . . . 18

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42 U.S.C. § 1396r-8(c)(1)(A)(ii) . . . . . . . . . . . . . . . 30

42 U.S.C. § 1396r-8(c)(1)(B) . . . . . . . . . . . . . . . . . 30

42 U.S.C. § 1396r-8(c)(1)(C)(i) . . . . . . . . . . . . . . . 14

42 U.S.C. § 1396r-8(c)(3)(B) . . . . . . . . . . . . . . . . . 30

Public Health Services Act § 340B . . . . . . . . . passim

Pub. L. No. 95-142 . . . . . . . . . . . . . . . . . . . . . . 13, 18

OTHER MATERIALS

21 R. Lord, Williston on Contracts § 57:19, (4th ed.2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

DOJ Press Release, Assistant Attorney GeneralTony West Speaks at Press ConferenceAnnouncing Major Settlements withPharmaceutical Manufacturers (Dec. 7, 2010),http://www.justice.gov/civil/opa/pr/speeches/2010/civ-speech-101207.html . . . . . . . . . . . . . 17

H.R. Rep. No. 102-384(II) (1992) . . . . . . . . . . . . . 32

Letter from Public Hospital Pharmacy Coalitionand National Association of Community HealthCenters to Centers for Medicare and MedicaidServices at 2 (Feb. 17, 2006), http://www.nachc.org /client/documents/ issues-advocacy/policy-library/medicare-medicaid-policy-updates/340B-PDP_Contracting.pdf . . . . . . . . . . . . . . . . . . . 32

Letter from Sen. Charles Grassley to HHS at 1(Sept.1, 2005) (“A drug pricing violation under

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the Medicaid rebate program attributable tooverstated ‘best price’ may also signal aviolation under the 340B program.”), availableat www.drugdiscountmonitor.com/members/HRSA_Letter.pdf. . . . . . . . . . . . . . . . . . . . . . . 30

Merck Settles For $649 Million for Failure to PayMedicaid Rebates (Feb. 8, 2008), http://www.namfcu.net/press/merck-settles-for-649-million-for-failure-to-pay-medicaid-rebates/ . . . . . . . . 14

NAMFCU Press Release, AstraZeneca To Pay $520Million to settle Claims of Off-Label DrugMarketing (April 27, 2010), http://www.namfcu.net/press/astrazeneca-to-pay-520-million-to-settle-claims-of-off-label-drug-marketing/ . . . 16

NAMFCU Press Release, Aventis Pharmaceutical,Inc. resolves allegations for misreporting BestPrices for Azmacort, Nasacort and Nasacort AQ(June 5, 2009), http://www.namfcu.net/press/aventis-pharmaceutical-inc/). . . . . . . . . . . . . . 14

NAMFCU Press Release, Bristol-Myers SquibbSettles For $389 Million to Resolve MedicaidPharmaceutical Pricing and MarketingAllegations (July 15, 2008), http://www.namfcu.net/press/bristol-myers-squibb-settles-for-389-million/. . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

NAMFCU Press Release, Four PharmaceuticalCompanies Agree to Pay $124 Million forAlleged Submission of False Claims to Medicaid(Oct. 19, 2009), http://www.namfcu.net/press/four-pharmaceutical-companies-agree-to-pay-

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124-million-for-alleged-submission-of-false-claims-to-medicaid/ . . . . . . . . . . . . . . . . . . . . . 16

NAMFCU Press Release, Pfizer Inc to Pay $2.3Billion in Historic Settlement (Sept. 2, 2009),http://www.namfcu.net/ press/pfizer-inc-to-pay-2-3-billion-in-historic-settlement/ . . . . . . . . . . 15

NAMFCU Press Release, Pharmaceutical CompanyPays $42.5 Million To Resolve FraudAllegations (Mar. 16, 2010), http://www.namfcu.net/press/pharmaceutical-company-pays-42-5-million-to-resolve-fraud-allegations/ . . . . . . . . 16

OIG, Medicaid Drug Rebates — Sales toRepackagers Excluded from Best PriceDeterminations, A-06-00-00056, at 4 (Mar. 2001)http://oig.hhs.gov/oas/reports/region6/60000056.pdf. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

Restatement (Second) of Contracts §304 (1981) . . 6

Restatement (Second) of Contracts § 313(1) . . . . 27

www.namfcu.net . . . . . . . . . . . . . . . . . . . . . . . . . 2, 3

www.namfcu.net/about-us/about-mfcu . . . . . . . . 18

www.namfcu.net/about-us/what-is-medicaid-fraud . 19

www.namfcu.net/resources/medicaid-fraud-reports-newsletters/2010-publications/10MarApr.pdf (atp. 1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

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www.nlj.com (“DOJ settles with threepharmaceutical companies for $421 million overinflated drug prices”) (Dec. 7, 2010) . . . . . . . 4, 5

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INTEREST OF THE AMICI STATES

Medicaid is a perhaps unique example ofcooperative federalism. Under this massive andimportant program, the federal government and theStates are engaged in a joint enterprise in which bothsovereigns participate significantly and directly. ForMedicaid to function, both sovereigns make significantfinancial commitments, and both partners playimportant administrative and oversight roles.

1. Because of the States’ significant partnershipwith the United States in funding, implementing, andadministering the Medicaid and related programs, theStates have a direct and substantial interest in thequestion presented in this case. Like the Respondentin this case, the States can and have brought breach ofcontract claims against drug manufacturers on thelegal ground that the States are intended third-partybeneficiaries of at least some agreements between theSecretary of Health and Human Services (hereinafter“the Secretary” or “HHS”) and drug manufacturers.

For instance, the States have brought suit seekingto enforce the Medicaid Rebate Agreement againstdrug manufacturers that breached that contract byfalsely reporting the manufacturers’ average and bestprices. Like the 340B program at issue in this case,payments under the Rebate Agreement depend onmanufacturers’ average and best prices, and theStates’ claims in such cases largely mirror the claimthe Respondent makes in this case.

Indeed, approximately 35 states have joined thefederal government in such a suit in federal court inMassachusetts. See, e.g., United States, et al. v. Wyeth,

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No. 06-11724-DPW (D. Mass.). A primary legal theoryof the States in Wyeth is that the States are intendedthird-party beneficiaries to the Rebate Agreement.The Rebate Agreement clearly states that theSecretary enters the contract “on behalf of [HHS] andall States and the District of Columbia (except to theextent that they have in force an Individual StateAgreement).” Joint Appendix (hereinafter “J.A.”) 69.The States certainly view themselves to be intendedthird-party beneficiaries of the RebateAgreement—indeed to hold otherwise would make theprovision for States to enter their own rebateagreements with manufacturers nonsensical—and theStates would be very unpleasantly surprised by acontrary conclusion.

2. Furthermore, the States are the primaryenforcers of many aspects of the Medicaid statutes andregulations. In 1977, Congress authorized the Statesto have a Medicaid Fraud Control Unit (“MFCU”), andmany states have had MFCUs since 1978. Seewww.namfcu.net. Since Congress made MFCUsMandatory in 1993, every state and the District ofColumbia has such an investigative and prosecutorialenforcement unit, except North Dakota which receiveda waiver from HHS and does not have a MFCU. The50 MFCUs generally are located within the offices ofstate attorneys general (in 43 states), although sixstates and the District of Columbia locate their MFCUelsewhere in state government.

The MFCUs have the authority to investigate andprosecute claims against those who overchargeMedicaid programs, as well as authority to pursueMedicaid provider fraud generally. MFCUs areintended to operate like a “strike force”, with

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investigators, auditors and attorneys working togetherto uncover, investigate and prosecute Medicaid fraud.Such investigations certainly can lead and have led tothe discovery of pricing fraud by drug manufacturersproviding drugs to Medicaid programs. Indeed, theState MFCUs have joined in prosecuting a number ofsuch cases over the years, sometimes involving tensand even hundreds of millions of dollars. The Statesand their MFCUs stand ready and willing toinvestigate and prosecute such cases as appropriate.

There is a National Association of Medicaid FraudControl Units, founded in 1978, to provide a forum forsharing of information concerning Medicaid fraud, toimprove the quality of Medicaid fraud investigationsand prosecutions, and to provide technical assistanceto members. All 50 State MFCUs are members of thisassociation, which is headquartered in Washington,D.C., at the offices of the National Association ofAttorneys General. The association is staffed by anExecutive Director and other administrative staff. Seewww.namfcu.net.

Ultimately, any objective look at the history andevolution of Medicaid makes clear several facts thatdemonstrate the prominent and important role thatthe States play in this area: (1) Medicaid involvessubstantial expenditures of both federal and Statefunds; (2) the federal government establishes many ofthe rules and regulations for Medicaid, but the Statesadminister and implement Medicaid on the ground ona day-to-day basis; and (3) throughout Medicaid’shistory, the States have played a primary role ininvestigating, policing, and prosecuting Medicaidfraud, precisely because the federal government long

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has recognized that it is not able to do so alone for avariety of reasons.

Thus, the States have very direct financial andpragmatic interests in important legal questionsregarding the Medicaid program, including the third-party beneficiary question in this case.

STATEMENT

1. To ensure that public hospitals, communityhealth centers, and others serving indigent patientspay the lower prescription drug prices often availableto Medicaid, Congress directed the Secretary to enteran “agreement” with drug manufacturers to limit “theamount required to be paid” for drugs purchased by“covered” entities. 42 U.S.C. §256b(a)(1) (“PublicHealth Services Act §340B”). Under the 340Bprogram, the petitioners in this case all signed whatare referred to as Pharmaceutical Pricing Agreements(“PPAs”) with the Secretary. Each such contractincludes a promise from the manufacturer to “charge[340B] entities a price” that, for non-generic drugs, isnormally no higher than the manufacturer’s Best Price(“BP”) in the marketplace.

Unfortunately, significant evidence suggests thatnot all drug manufacturers have always accuratelyreported their prices for various Medicaid programpurposes. Indeed, just recently, in what is known asan “average wholesale price” fraud case, the UnitedStates Department of Justice “reached settlementstotaling $421 million with a trio of pharmaceuticalcompanies that reported falsely inflated drug pricesused to set government health care reimbursementrates.” See www.nlj.com (“DOJ settles with three

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pharmaceutical companies for $421 million overinflated drug prices”) (Dec. 7, 2010). Indeed, theserecent settlements were reported as “part of more than$5 billion that the Justice Department’s Civil Divisionand U.S. Attorney’s offices have recovered in healthcare fraud cases since January 2009.” Id.

2. In this case, Respondent County of Santa Clarabecame aware that drug manufacturers such as thepetitioners had misreported their drug prices inviolation of the PPAs the manufacturers signed underthe 340B program. As a result, Respondent broughtthis suit on behalf of its 340B hospital and clinics anda class of similarly situated entities. Respondentrelied on several legal theories in its complaint andamended complaints, but the only claim before thisCourt is Respondent’s claim that 340B covered entitiesare intended third-party beneficiaries of the PPAs, andas such have the right to sue under federal law for thepetitioners’ breaches of those contracts.

2.a. The district court found that 340B “coveredentities” are intended third-party beneficiaries underthe PPAs, because the whole purpose of the PPAs is tohave the manufacturers provide price discounts to340B entities, which “suggests that Congress intendedto benefit them [the 340B entities] directly.” Appendixto the Petition for a Writ of Certiorari (hereinafter“Pet. App.”) 117a. The district court nonethelessdismissed Respondent’s claim on the ground thatneither the relevant statutes nor the PPAs expresslyauthorize intended third-party beneficiaries to bringbreach of contract claims. Id.

2.b. Following an initial appeal in which the courtof appeals reversed the district court’s dismissal of

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Respondent’s third-party beneficiary claim, on remandthe district court entered a protective order at therequest of petitioners during a discovery dispute.Respondent then took an interlocutory appeal. In thatappeal, the court of appeals withdrew the mandate forits previous decision and reissued its original decisionwith little modification.

In its reissued opinion, the court of appeals,“[a]pplying the federal common law of contracts,” heldthat 340B entities “are intended direct beneficiaries of[the PPAs].” Pet. App. 31a. (Petitioners notably do nottake issue with that holding in this Court.) The courtof appeals, however, rejected the district court’sholding that such 340B entities needed expressauthorization to bring suit for breach of contract.Instead, the court pointed out that “the right to sueinheres in one’s status as an intended beneficiary.” Id.39a (citing Restatement (Second) of Contracts §304(1981) (“Restatement”) (“A promise in a contractcreates a duty in the promisor to any intendedbeneficiary to perform the promise, and the intendedbeneficiary may enforce the duty.”)).

The court of appeals also rejected petitioners’argument that Respondent could not sue to enforce thePPAs unless the courts found that Respondent had animplied statutory right of action to enforce §256b. Pet.App. 50a-55a. Respondent conceded below that it hadno such implied statutory right of action, and the courtof appeals accepted that concession for purposes of itsopinion, id. at 50a & n. 15, as should this Court.

The court of appeals concluded that the absence ofan implied statutory right of action was irrelevant tothe question whether an intended third-party

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beneficiary can bring suit to enforce the PPAs.Instead, the court of appeals pointed out that therelevant question is whether Congress has displacedthe otherwise generally applicable “federal commonlaw contract remedy that the covered entities couldinvoke as intended beneficiaries of the [PPAs].” Id. at54a. Finding nothing in the Medicaid statutes toindicate congressional intent to preclude thistraditional common law remedy, the court of appealsrejected petitioners’ argument, and held that intendedthird-party beneficiary suits are “wholly compatiblewith the Section 340B program’s objectives.” Id. at55a.

SUMMARY OF ARGUMENT

I.A. Medicaid is a perhaps unique example ofcooperative federalism, one in which the States inmany respects play a primary or co-equal role, and nota subservient or secondary role. The States pay asignificant portion of all Medicaid costs, and all States(but one that obtained a waiver from HHS) haveestablished active and successful Medicaid FraudControl Units (MFCUs), precisely for the purpose ofinvestigating and prosecuting false claims madeagainst Medicaid programs, as well as Medicaidprovider fraud in general.

I.B. Unfortunately, it is documented beyonddispute that fraud against the Medicaid program is aserious and ongoing problem, one that has costtaxpayers billions of dollars. Certainly, that has beenthe case with regard to prescription drugs, the sales ofwhich can be worth a fortune to their manufacturers.When the prices the Medicaid program ultimately paysfor prescription drugs depend on accurate price

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reporting by manufacturers, the manufacturers’opportunity to profit from reporting inflatedprices—and thus their incentives to be less thancandid—are great, often to the tune of tens or evenhundreds of millions of dollars, even on a monthlybasis or for a single prescription drug. For example,recent settlements between the State MFCUs, thefederal government, and drug manufacturers over thekind of pricing allegations at issue in this case easilytotal more than $1 billion, as described in detail below.

I.C. Thus, for decades—just as Congressintended—the States have been active investigatorsand prosecutors of Medicaid fraud. Indeed, the Stateshave played that role at the express command ofCongress, as well as at the encouragement of, and incooperation with, HHS and the Secretary. Since atleast 1977, Congress has made it clear that the federalgovernment alone could not shoulder the burden ofbeing the sole investigator and prosecutor of Medicaidfraud.

II.A. Under the Court’s longstanding and well-settled precedent, the intended third-partybeneficiaries of federal contracts have the traditionalcommon law right to sue for breach of contract. Thatright is well-grounded in federal common lawspecifically, as well as the common law of contractsgenerally, where it has been recognized as thestandard for well over 300 years.

The States have relied precisely on their intendedthird-party beneficiary status—for example under thestate Medicaid Rebate Agreements (see J.A. 69)—tosue for breach of contract. Indeed, the States havedone so in the very context of prescription drug

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manufacturers misreporting their drug prices byinflating those prices to the detriment of the Statesand their Medicaid programs. Such intended third-party beneficiary enforcement is fully consistent withthe intent of Congress under the Medicaid and 340Bprograms. Congress and HHS have always relied andcounted upon fraud investigation and prosecutionsupport from the States and other intended third-partybeneficiaries of Medicaid programs. Indeed, such jointand cooperative enforcement responsibilities are asmuch a hallmark of the Medicaid program as thefederal/state sharing of the funding, implementation,and administration of Medicaid generally.

II.B. This case simply is not an implied statutoryright of action case. As this Court has recognized, animplied statutory right of action claim and a breach ofcontract claim in a setting like this are analyticallyand logically distinct claims, with each based on adifferent legal foundation and history. Furthermore,in this Court the petitioners do not challenge theconsistent lower court holdings in this case thatRespondent and the class it represents are in factintended third-party beneficiaries of the PPAs.Furthermore, Respondent conceded below andacknowledges in this Court that it is not making anyclaim of an implied statutory right of action, and thecourt of appeals correctly assumed for purposes of itsdecision that no such claim was raised.

Allowing intended third-party beneficiaries to bringbreach of contract claims in no way opens the door toend runs around the stringent standards forrecognizing implied statutory rights of action. Rather,it will be the unusual case—of which the States submitMedicaid and Section 340B are the prime and perhaps

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only examples—in which there is both (1) a federalcontract like the state Rebate Agreement or the PPAsand (2) a federal statutory scheme so overtly andintricately intertwined with such contracts. Perhapsthere are other examples, but the vast, vast majorityof federal statutory schemes do not require and relyupon federal contracts to implement the statutorydirectives.

II.C. Both the States and 340B entities share thesame interest in enforcing manufacturers’ obligationsunder their Medicaid and 340B contracts. Third-partybeneficiary suits provide States with an effectivemeans to remedy manufacturers’ breaches of thoseobligations; States also benefit when 340B entitiesdiscover and prove violations of the PPAs, because themanufacturers’ breaches also violate the state RebateAgreement.

The petitioners concede that the States’ and 340Bentities’ interests are wholly aligned when it comes tobest-price manipulation by manufacturers, a practicethat unfortunately is demonstrably widespread. Anyhypothetical conflict between the interests of theStates and 340B entities in enforcing manufacturers’contracts is purely speculative and, indeed, seemsquite unlikely ever to develop given the kinds of price-manipulation cases that actually have been litigated.Importantly, the States benefit when 340B entitiesreceive the full price discounts to which thoseproviders are entitled, because the State dollars spentreimbursing the 340B entities for drugs provided tothe States’ indigent populations accomplish more goodand serve more citizens in need.

*****

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At bottom, the state Medicaid Rebate Agreementand the PPAs at issue in this case present an unusualsituation that both (1) merits recognition of thetraditional common law right of intended third-partybeneficiaries to sue for breach of contract and (2) doesnot open the door to claims by innumerable third partybeneficiaries who do not have an implied statutoryright of action.

ARGUMENT

I. As Congress Has Always Intended, The StatesPlay A Prominent Role In The MedicaidProgram, Including Pursuit Of False ClaimsAnd Fraud Through Third-Party BeneficiaryBreach of Contract Suits.

A. Medicaid Is A Unique Instance OfCooperative Federalism.

Medicaid and the related 340B program are part ofa unique “system of cooperative federalism,” Harris v.McRae, 448 U.S. 297, 301 (1980), where “the twogovernments [federal and state] are pursuing commonpurposes.” Pharm. Research & Mfrs. of America v.Walsh, 538 U.S. 644, 666 (2003). Indeed, in general,the Medicaid program—as reflected in the relevantstatutes and agreements such as the state RebateAgreement and the PPAs that the Secretaryenters—involves a unique level of close cooperationbetween the federal government and the States, eachof which foots a significant portion of the costs of theprogram, and each of which shoulders a substantialshare of the implementation, administration, andenforcement duties.

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The cooperative federal-state frameworkunderscores the notion that the States are intendedthird party beneficiaries of contracts entered into ontheir behalf by the Secretary under the Medicaidprogram. Since Medicaid’s inception, the States andthe federal government both have been responsible forsymbiotic and coequal roles in the Medicaid system.In fact, although both the States and the federalgovernment fund Medicaid, the States have primaryauthority to design and administer their Medicaidprograms, with HHS playing a secondaryadministrative role. 42 U.S.C. § 1396 et seq.;Connecticut Dept. of Social Services v. Leavitt, 428F.3d 138, 141 (2d Cir. 2005).

A state’s Medicaid program must first be approvedby HHS after meeting certain federal requirements.42 U.S.C. § 1396a(a)-(b). But, in the end, a state’sparticipation in Medicaid is optional. Harris, 448 U.S.at 301. Only after a state has made the policy decisionto create a state Medicaid program does the federalgovernment have any responsibility to or authorityover that state’s Medicaid operations. And, of course,only after HHS’s approval is a state eligible for partialfederal reimbursement of its Medicaid expenses. 42U.S.C. § 1396a.

Just as two companies might agree to poolresources for the benefit of each, here the decision ofthe federal government and the States to enter intothe Medicaid program as a joint enterprise creates acommon interest in the effective and efficientadministration of the program. This shared authorityand interest, with the States developing andimplementing their own Medicaid plans subject toultimate federal approval before funding flows to the

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state, makes the States truly equal partners with thefederal government in the Medicaid context. In sucha joint enterprise, there is no question that actionstaken by one partner must necessarily have intendedbenefits or effects on the other partner, especiallywhen the issue is the price Medicaid programs are topay drug manufacturers.

B. Medicaid Fraud By Drug Manufacturers IsA Serious Problem.

Since at least 1977, when it enacted the Medicare-Medicaid Fraud and Abuse Amendments, Pub. L. No.95-142, Congress has recognized that Medicaid fraudin general is an extremely serious problem, one thatlikely costs taxpayers billions of dollars annually.Medicaid fraud has taken many forms, from themundane (e.g., using snippets of papers clips for rootcanal posts instead of proper stainless steel posts, seewww.namfcu.net/resources/medicaid-fraud-reports-newsletters/2010-publications/10MarApr.pdf at p. 1),to massive schemes worth billions of dollars.

Drug manufacturers have been a significant part ofthe problem. In recent years alone, the State MFCUsand the federal government have joined forces tocollect well more than $1 billion in settlements fromdrug manufacturers for the very type of price reportingfraud at issue in this case. Manufacturers repeatedlyand substantially have underpaid Medicaid rebates toStates by failing to give Medicaid programs the benefitof their actual “best price” in the marketplace forbrand-name drugs. Under the Rebate Agreement, justas under the Medicaid statute, “best price” means “thelowest price available from the manufacturer duringthe rebate period to any wholesaler, retailer, provider,

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1 Merck Settles For $649 Million for Failure to Pay MedicaidRebates (Feb. 8, 2008), http://www.namfcu.net/press/merck-settles-for-649-million-for-failure-to-pay-medicaid-rebates/.

2 NAMFCU Press Release, Aventis Pharmaceutical, Inc. resolvesallegations for misreporting Best Prices for Azmacort, Nasacortand Nasacort AQ (June 5, 2009), http://www.namfcu.net/press/aventis-pharmaceutical-inc/).

3 NAMFCU Press Release, Bristol-Myers Squibb Settles For $389Million to Resolve Medicaid Pharmaceutical Pricing andMarketing Allegations (July 15, 2008), http://www.namfcu.net/press/bristol-myers-squibb-settles-for-389-million/.

health maintenance organization, nonprofit entity, orgovernmental entity within the United States in themarketplace,” (with certain exceptions), and “shall beinclusive of cash discounts, free goods that arecontingent on any purchase requirement, volumediscounts, and rebates.” 42 U.S.C. § 1396r-8(c)(1)(C)(i); see Rebate Agreement § I(d) (J.A. 70-71).

Because a single, low-priced sale can establish amanufacturer’s best price nationwide and thus requiremillions of dollars in additional Medicaid rebates toStates, manufacturers’ incentives to misreport bestprices are great. Thus, Merck paid $649 million inpart to resolve best-price misreporting claimsconcerning Vioxx, Zocor, and Pepcid.1 Aventis agreedto pay $95.5 million to resolve allegations that it“knowingly misreported best prices for the steroid-based anti-inflammatory nasal sprays Azmacort,Nasacort and Nasacort AQ.”2 And Bristol-MyersSquibb similarly agreed to pay $389 million to resolveallegations of “[r]eporting inflated prices for variousprescription drugs” and “[p]aying illegal remunerationto physicians, health care providers, and pharmaciesto induce them to purchase” their drugs.3 See also

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4 See, e.g., id.

5 NAMFCU Press Release, Pfizer Inc to Pay $2.3 Billion inHistoric Settlement (Sept. 2, 2009), http://www.namfcu.net/press/pfizer-inc-to-pay-2-3-billion-in-historic-settlement/.

Respondent’s Br. 8-11 (describing certain of these andother settlements and guilty pleas resulting from best-price manipulation schemes).

Each of these settlements, as well as thosediscussed below, resulted from a qui tam case filed bya whistleblower. Representatives from a number ofState MFCUs / Attorneys General offices thenparticipated in the ensuing investigations andsettlement negotiations on behalf of the settlingStates.4

In addition to best-price manipulation schemes,manufacturers also have engaged in other profitableyet illegal practices such as off-label marketing,making false statements about a drug to inducephysicians to prescribe it, improperly classifying theirdrugs to lower the Medicaid rebate due, andmisreporting their average wholesale prices.

For example, in the largest settlement in history ina health-care fraud matter, Pfizer agreed to pleadguilty and pay $2.3 billion to resolve criminal and civilallegations that it defrauded the States and the federalgovernment by generating illegal revenues through“off-labeling marketing campaigns that improperlypromoted numerous drugs that Pfizer manufactures,”including “Bextra, Geodon, Lyrica, Zyvox, Aricept,Celebrex, Lipitor, Norvasc, Relpax, Viagra, Zithromax,Zoloft and Zyrtec.”5 AstraZeneca similarly agreed topay $520 million “to settle allegations it engaged in an

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6 NAMFCU Press Release, AstraZeneca To Pay $520 Million tosettle Claims of Off-Label Drug Marketing (April 27, 2010),http://www.namfcu.net/press/astrazeneca-to-pay-520-million-to-settle-claims-of-off-label-drug-marketing/.

7 NAMFCU Press Release, Four Pharmaceutical Companies Agreeto Pay $124 Million for Alleged Submission of False Claims toMedicaid (Oct. 19, 2009), http://www.namfcu.net/press/four-pharmaceutical-companies-agree-to-pay-124-million-for-alleged-submission-of-false-claims-to-medicaid/.

8 NAMFCU Press Release, Pharmaceutical Company Pays $42.5Million To Resolve Fraud Allegations (Mar. 16, 2010),http://www.namfcu.net/press/pharmaceutical-company-pays-42-5-million-to-resolve-fraud-allegations/

off-label marketing campaign that improperlypromoted the antipsychotic drug, Seroquel,” in part bymaking “illegal payments to physicians, paying theirway to travel to resort locations to ‘advise’ AstraZenecaabout marketing messages for unapproved uses.”6

Four manufacturers agreed to pay $124 millionbased on allegations they had “sold innovator [i.e.,brand-name] drugs that were manufactured by othercompanies and had classified those drugs as non-innovator drugs for Medicaid rebate purposes,” thus“underpa[ying] their rebate obligations to the MedicaidProgram.”7 Alpharma agreed to pay $42.5 million “tosettle allegations of causing false or fraudulent claims. . . to be submitted to the Medicaid program . . . .”8

And, just recently, three manufacturers agreed topay $421 million to resolve claims that they illegallyreported inflated “average wholesale prices” that“allowed drug companies to create an incentive for thepurchase of their drugs, since buyers could pay thedrug companies one price and obtain government

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9 DOJ Press Release, Assistant Attorney General Tony WestSpeaks at Press Conference Announcing Major Settlements withPharmaceutical Manufacturers (Dec . 7 , 2010) ,http://www.justice.gov/civil/opa/pr/speeches/2010/civ-speech-101207.html

10 Id. To be clear, the average wholesale price (unlike averagemanufacturer price) does not play a role in determining Medicaidrebates or 340B drug discounts. But, like the numerous otherschemes detailed, it illustrates the multifarious means thatmanufacturers have devised to profit illegally from Medicaid andrelated programs.

payment at an inflated price and pocket thedifference—essentially a kickback scheme funded bytaxpayer dollars.”9 As an Assistant United StatesAttorney colorfully explained, “this practice within thepharmaceutical industry was widespread—so much sothat instead of Average Wholesale Price, ‘AWP,’ it wasjokingly said, really stood for: ‘Ain’t What’s Paid.’”10

The preceding examples are by no meansexhaustive. As they and other settlementsdemonstrate, Medicaid fraud schemes are myriad andwidespread. Such schemes also can be very difficult todetect, as illustrated by the fact that fraud cases oftenhave been initiated by insiders (whistleblowers) whohave come forward with information that State andfederal authorities otherwise might never havediscovered.

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C. For Decades—Just As CongressIntended—The States Have Played ALeading Role In Investigating andProsecuting False Claims And MedicaidFraud, Including Suits As Third-PartyBeneficiaries To Enforce FederalContracts.

Shortly after Congress passed the Medicare-Medicaid Fraud and Abuse Amendments of 1977, Pub.L. No. 95-142, seventeen states created MFCUs asauthorized by the 1977 legislation. In 1993, Congressmandated that all states establish MFCUs. 42 U.S.C.§ 1396(a)(61). As of 1995, all states (but North Dakota,which obtained a waiver from HHS) and the District ofColumbia had MFCUs in place.

With considerable federal funding, and annualreporting and certification requirements through HHS,the MFCUs work closely and collectively with theUnited States to combat and deter Medicaid fraudthrough wide-ranging investigations and prosecutionsof both civil and criminal cases. A general descriptionof the MFCUs and their history can be found atwww.namfcu.net/about-us/about-mfcu, website of theNational Association of Medicaid Fraud Units,established in 1978 and headquartered in the offices ofthe National Association of Attorneys General inWashington, D.C.

The State MFCUs have been active and successfulover the past 30 years in rooting out and punishing allsorts of Medicaid fraud across the nation. “TheMFCUs have prosecuted individual providers such asphysicians, dentists, and mental health professionals.In addition, the Units have also prosecuted fraud in

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numerous segments of the health care industry, suchas hospitals, nursing homes, home health careagencies, medical transportation companies,pharmacies, durable medical equipment companies,pharmaceutical manufacturers and medical clinics.”www.namfcu.net/about-us/what-is-medicaid-fraud(emphasis added).

In some cases, the States have pursued claims asintended third-party beneficiaries of the RebateAgreement. For example, in Massachusetts, et al. v.Mylan Laboratories, et al., 357 F. Supp. 2d 314 (D.Mass. 2005), the Commonwealth of Massachusettssued drug manufacturers for (1) fraudulently inflatingWholesale Acquisition Cost prices (causing the State tooverpay pharmacies and other providers of genericprescription drugs) and, most directly relevant to thiscase, (2) reporting false “best prices” to the Secretaryto decrease the amounts owed to the States under theRebate Agreement.

For the Rebate Agreement claims, Massachusettsalleged (1) that the States are intended third-partybeneficiaries to the rebate agreement and thus have atraditional common law claim for breach of contract,and (2) that the States have an implied statutory rightof action under the relevant federal statutes governingthe rebate agreement. The district court dismissed theimplied right of action claim, as follows: “Here, becausethe statute unambiguously gives the Secretary thepower to terminate the Rebate Agreement, renew itand impose federal penalties for false or untimelyfilings, I conclude that the states do not have a remedyunder the statute. This is not the end of the analysis,however, because the statute also requires the Secretaryto enter into the Rebate Agreement on behalf of the state

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and is silent on the scope of the available contractualremedies.” 357 F. Supp. 2d at 326 (emphasis added).

Indeed, the district court went on to consider anduphold the States’ claim as intended third-partybeneficiaries of the Rebate Agreement. Noting thatthe Rebate Agreement was “signed by themanufacturers and the Secretary,” the court pointedout that in “applying federal common law” a court“may look to the Restatement of Contracts forguidance regarding when a third-party beneficiarymay sue.” 357 F. Supp. 2d at 326. Observing that theRestatement expressly endorses the rights of intendedthird-party beneficiaries to sue for breach of contract,and noting that the key question is the “intent of theparties” to the contract, id., the court turned to theRebate Agreement. The Court correctly and pointedlyobserved that “the Rebate Agreement begins with thestatement: ‘The Secretary, on behalf of theDepartment of Health and Human Services and allStates and the District of Columbia . . . [shall enter theagreement].” Id. at 327 (emphasis original).

Like this case, the drug manufacturers argued thatwhere there is no implied statutory right of action,there cannot be an intended third-party beneficiaryclaim, but the district court rejected that assertion,relying on the:

well-established propositions that “[w]hen theUnited States enters into contract relations, itsrights and duties therein are governed generallyby the law applicable to contracts betweenprivate individuals,” and that when Congressuses language with a settled meaning atcommon law, Congress “presumably knows and

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adopts the cluster of ideas that were attached toeach borrowed word in the body of learning fromwhich it was taken and the meaning its use willconvey to the judicial mind unless otherwiseinstructed. In such case, absence of contrarydirection may be taken as satisfaction withwidely accepted definitions, not as a departurefrom them.”

357 F. Supp. 2d at 327-28 (citing and quoting MobilOil Exploration, Producing S.E., Inc. v. United States,530 U.S. 604, 607 (2000), and Beck v. Prupis, 529 U.S.494, 500-01 (2000)).

According to the district court, “[t]hese two lines ofcase law together establish the rule that a beneficiaryto a federal contract has the right to enforce anagreement imposing duties on a person contractingwith the government so long as this is consistent withthe statutory scheme, and not an end-run on it.” 357F. Supp. 2d at 328. Applying that standard to thestate Rebate Agreement, the district court easilyconcluded that the “Best Prices Statute and the RebateAgreement demonstrate a clearly expressed intent onbehalf of the signatories to benefit the states byproviding them with rebates. Medicaid is a unique‘system of cooperative federalism,’ where the ‘twogovernments are pursuing common purposes.’” Id.(internal citations omitted). The court thenacknowledged that the Rebate Agreements “do notexpressly provide a contract remedy to a state,”although they do provide an “alternative disputeresolution” mechanism if the States provide incorrectinformation to the manufacturers. Id.

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Ultimately, recognizing that the third-partybeneficiary question under the Rebate Agreement “isan issue of first impression” and that “the contract isambiguous,” the Court noted that “the RebateAgreement instructs the Court to construe it in amanner which ‘best effectuates’ the statutory scheme.”357 F. Supp. 2d at 328. The court then held that“[p]ermitting the states to sue as third-party intendedbeneficiar[ies] would advance the congressionalobjectives of reducing Medicaid drug costs.” Id.Importantly, the Court recognized that the “closecooperation” between the federal government and theStates under Medicaid “differentiates those caseswhich decline to find third-party beneficiary status inprivate individuals” and, “[i]ndeed, in its amicus brief,HHS stated that it would invite the states to join asplaintiffs in any litigation involving breach ofcontract.” Id.

Furthermore, the district court’s thoughtful opinionin Mylan Laboratories—recognizing the validity ofthird-party beneficiary claims by the State—providesa roadmap for properly analyzing and resolving thiscase. Following that map, which is based entirely ondecisions of this Court as well as particular attentionto the language of the Rebate Agreement, leadsinexorably to the conclusion that intended third-partybeneficiaries should be permitted to bring breach ofcontract claims in the context of the Medicaid andclosely-related 340B programs.

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II. This Contract Case Falls Well Within TheVenerable Common Law Doctrine AllowingIntended Third-Party Beneficiaries To SueFor Breach Of Contract, And This SuitFurthers The Goals Of Congress For TheMedicaid and 340B Programs.

A. Under Well-Established Anglo-AmericanLaw And The Court’s Own Cases, IntendedThird-Party Beneficiaries May Sue ToEnforce Contracts.

The common law has recognized third-partybeneficiary claims since at least the 1600s. See, e.g.,Dutton v. Poole, (1677) 83 Eng. Rep. 523 (K.B.), aff’d(1679) 83 Eng. Rep. 156 (Ex. Ch.). American courtshave recognized third-party beneficiary claims since atleast the early 1800s. See, e.g., Schermerhorne v.Vanderheyden, 1 Johns. Rep. 140 (N.Y. Sup. 1806) (percuriam) (“[W]here one person makes a promise toanother for the benefit of a third person, that thirdperson may maintain an action on such promise. Thiswas the doctrine of the King’s Bench [citing Duttonand] . . . . [t]he same principle has . . . been repeatedlysanctioned by the decisions of the English courts.”);Arthur Andersen LLP v. Carlisle, 556 U.S. ___, 129 S.Ct. 1896, 1902 (2009) (“‘traditional principles’ of statelaw allow a contract to be enforced by or againstnonparties to the contract through . . . ‘third-partybeneficiary theories’”) (quoting 21 R. Lord, Williston onContracts § 57:19, p. 183 (4th ed.2001)).

Importantly, this Court has long and in severaldifferent contexts recognized that intended third-partybeneficiaries may have the right to sue for breach ofcontract. See Respondent’s Br. 31-32 (citing and

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discussing third-party beneficiary cases of this Courtdating back to the 19th century). Pursuant to thesetraditional contract law principles, intended third-party beneficiaries should be permitted to enforcegovernment contracts such as the PPAs at issue in thiscase and the state Rebate Agreements.

Indeed, HHS generally has welcomed the States tojoin as plaintiffs in litigation involving claims forbreach of the Rebate Agreement. In United States, etal. v. Wyeth, No. 06-11724-DPW (D. Mass.), more than30 States now have intervened as parties in a suitagainst Wyeth for reporting false and inflated pricesfor particular prescription drugs for purposes of therebate program. Both the Mylan Laboratories case,discussed above at 19-21, and the Wyeth casedemonstrate that the States can and will bringsignificant third-party beneficiary breach of contractclaims against drug manufacturers. Consequently,absent clear indication that Congress intended topreclude such suits, the Court should be loathe to stripthe States of this important enforcement authoritywhich is well-grounded in traditional common lawcontract principles.

As noted above at 19-21, in the Mylan Laboratoriescase, the district court held that States may sue asintended third-party beneficiaries to enforce theprovision in the Medicaid Rebate Agreement requiringmanufacturers to provide rebates to States. See 357 F.Supp. 2d at 328-29. The court first determined that “abeneficiary to a federal contract has the right toenforce an agreement imposing duties on a personcontracting with the government so long as this isconsistent with the statutory scheme, and not an end-run on it,” and concluded that “[p]ermitting the states

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to sue as third-party intended beneficiary wouldadvance congressional objectives of reducing Medicaiddrug costs.” Id. The court relied in part on theSecretary’s assertion, in an amicus brief filed inanother case in Massachusetts, that, “to the ‘extentthat a state sues a drug manufacturer that failed tocalculate its best price obligations in accordance withthe Rebate Agreement or CMS guidance — but doesnot seek to impose any additional or contraryobligations — the state is merely enforcing the existingrebate program responsibilities and does not inject anymore variation than if the Department of Justicebrought suit.’” Id. at 329 (quoting U.S. Amicus Br. at17, In re Pharm. Indus. Avg. Wholesale Price Litig.,No. 01-cv-12257-PBS (D. Mass. filed Apr. 5, 2004)).

The same reasoning is equally applicable to suits by340B entities, where the third-party beneficiarycontract action is based on the same statutory andcontractual best-price standard applicable to theMedicaid Rebate Agreement. In contrast—and ofgrave concern to the States—a ruling that 340Bentities may not sue as intended third-partybeneficiaries would doubtless be invoked by drugmanufacturers to argue that the States cannot enforcethe Rebate Agreement as intended third-partybeneficiaries.

An intended third-party beneficiary breach ofcontract action is an efficient and effective means forthe States to ensure that they receive the full Medicaidrebates to which they are entitled—just as 340Bentities can use such an action to obtain the full pricediscounts to which they are entitled. The standardsfor breach of contract actions are settled andstraightforward, making such actions a valuable tool

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in the States’ enforcement arsenal. Unlike state andfederal false claims or other fraud statutes, breach ofcontract actions do not require the plaintiff to provethe defendant’s scienter. See, e.g., Nevada ex rel.Steinke v. Merck & Co., 432 F. Supp. 2d 1082, 1087 (D.Nev. 2006) (Nevada False Claims Act requires “theknowing presentation of what is known to be false,”thus precluding liability “through mere negligence”)(internal quotation marks omitted); 31 U.S.C.§ 3729(a)(1), (2) (requiring proof that a defendant“knowingly” made a false claim). For a variety ofreasons, breach of contract actions are an importantenforcement tool for the States in their efforts tocombat Medicaid fraud.

B. This Is A Breach Of Contract Case.

The fundamental error that petitioners and theiramici in this case—though not the United States,which raises very different arguments—invite thisCourt to make is to view the enforcement of the PPAs(and by implication other agreements that exist in theMedicaid context, such as the very important stateRebate Agreement that the Secretary expressly enters“on behalf of the States”), as raising the questionwhether Respondent has an implied statutory right ofaction to sue. In this context, however, breach ofcontract claims and implied statutory right of actionclaims are analytically distinct.

The PPAs are contracts, and are enforceableaccording to traditional contract law principles. Thelaw of implied statutory rights of action and cases suchas Alexander v. Sandoval, 532 U.S. 275 (2001), arethus irrelevant to the proper analysis. Charging 340Bentities prices in excess of the ceiling price, or rebating

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to the States less money than the States are due as aresult of inaccurate best-price reporting is, pure andsimple, a breach of contract; it is not a claim thatarises by implication or otherwise under the Medicaidstatutes or Section 340B, a point which the court ofappeals correctly assumed below.

This Court has made clear in numerous cases thatfederal contracts entered into pursuant to statutorydirection—even federal contracts expresslyincorporating statutory requirements—do notthemselves become “statutory” in nature; instead, theyremain contracts, to be interpreted as such and subjectto breach of contract claims. See, e.g., Jackson TransitAuth. v. Local Div. 1285, 457 U.S. 15, 21 (1982)(treating the enforcement of a statutorily directedagreement as a matter of contract law, not an impliedstatutory right of action); United States v. Seckinger,397 U.S. 203, 209–10 & n.13 (1970) (contracts enteredpursuant to statutory authority are enforced ascontracts); Int’l Assoc. of Machinists, AFL-CIO v.Central Airlines, Inc., 372 U.S. 682, 691–93 (1963)(holding that a collective-bargaining contract enteredinto pursuant to statutory command is enforceable asa contract); see also RESTATEMENT (SECOND) OFCONTRACTS § 313(1) (“The [third-party beneficiary]rules stated in this Chapter apply to contracts with agovernment or governmental agency except to theextent that application would contravene the policy ofthe law authorizing the contract or prescribingremedies for its breach.”).

The fact that § 256b(a)(1) directs the Secretary toenter into contracts with drug manufacturers does notstrip the PPAs of their status as contracts undertraditional federal common law. See, e.g., Central

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Airlines, Inc., 372 U.S. at 693 (a contract enteredpursuant to statutory directive is enforceable as acontract). Nor does the inclusion of statutoryprovisions in a federal contract transform a breach ofcontract claim into a matter of statutory enforcement.See, e.g., Mobil Oil Exploration and ProducingSoutheast, Inc. v. United States, 530 U.S. 604, 614(2000) (government contracts are enforced according tocontract law principles, and not as an impliedstatutory right of action, even when the contractsincorporate portions of federal statutes).

That is not to say that congressional authorizationor directives to enter federal contracts is irrelevant.The statutory directive matters as an indication thatthe federal interest in such contracts is strong and, asa result, courts should interpret such contracts as amatter of federal common law, and not, for example, byresort to the law of any particular state. See, e.g.,Seckinger, 397 U.S. at 209–10 & n.13 (contract mustbe interpreted as a matter of federal common lawbecause “the contract was entered into pursuant toauthority conferred by federal statute.”) (citationsomitted). Statutory authorization, however, does notturn all such federal contracts into additionalstatutory provisions, and does not require that suchcontracts be subjected to implied statutory right ofaction analysis. That is the error of petitioner andmost of its amici (the United States notably does notendorse that error).

This case involves a breach of contract claim, andonly such a claim. Thus, it is proper for federal courtsto look to general principles of contract law todetermine, as a matter of traditional common law, theappropriate rule for third-party beneficiary claims

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under the PPAs. See Priebe & Sons, Inc. v. UnitedStates, 332 U.S. 407, 411 (1947) (“It is customary,when Congress has not adopted a different standard,to apply to the construction of government contractsthe principles of general contract law.”).

The Court should rely only on contract lawprinciples to resolve the question whether Respondentmay pursue this case, and not be led astray bypetitioner’s arguments about other irrelevantdoctrines. Once the focus is properly restored to thecontract law basis for Respondent’s claim, the issuesare plain: (1) For breach of the PPAs, may an intendedthird-party beneficiary bring suit? and (2) If so, isRespondent such an intended third-party beneficiary?The answer to both questions is a resounding yes, andRespondent’s suit should proceed.

C. The States And The 340B Entities ShareThe Same Interests In RemedyingBreaches of the Medicaid RebateAgreement and the PPAs.

States, like 340B entities, have a strong interest inthe recognition of a third-party breach of contractaction. Whether brought by States or 340B entities,breach of contract actions seek to apply the same best-price standard under which manufacturers arerequired to calculate both their Medicaid rebates toStates and discounted prices to 340B entities.Importantly, where suits by 340B entities reveal thatmanufacturers have overcharged for covered drugs byinflating their best prices, States will benefit frombeing able to use those revelations to seek the best-price Medicaid rebates to which the States were

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11 Cf. Letter from Sen. Charles Grassley to HHS at 1 (Sept.1,2005) (“A drug pricing violation under the Medicaid rebateprogram attributable to overstated ‘best price’ may also signal aviolation under the 340B program.”), available atwww.drugdiscountmonitor.com/members/HRSA_Letter.pdf.

12 See 42 U.S.C. §1396r-8(c)(1)(A)(ii), (c)(1)(B) (providing that theminimum rebate for a brand-name drug is AMP less 15.1 percent).For other drugs (e.g., generics), the minimum rebate is AMP less11 percent. See 42 U.S.C. § 1396r-8(c)(3)(B).

13 As shown above, manufacturers have manipulated theiraverage wholesale price, but that average plays no role in the

entitled, but which they did not receive.11 Intendedthird-party beneficiary claims by the States and 340Bentities thus are complementary of each other andfurther Congress’s intent.

1. Relying on an argument that the United Statesmade to the court below but which, with good reason,the United States does not repeat in this Court,petitioners claim that, in cases where a state rebate isnot based on a manufacturer’s best price, a reductionin average manufacturer price (AMP) may cause stateMedicaid rebates to decline at the same time that340B price discounts would increase. See Pet. Br. 40-41.12 Petitioners suggest that this gives States anincentive in litigation to argue for higher AMPs, andfor 340B entities to argue for lower AMPs, thusputting manufacturers at risk of “conflictingobligations.” Id. at 40.

Petitioners’ claim is speculative and meritless.Neither the petitioners here, nor the United Statesbelow, identified any instance of AMP manipulation bydrug manufacturers to deprive States of Medicaidrebates.13 Nor can they point to even a single example

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calculation of the discounts due to 340B entities and so providesno support for petitioners’ claim that States and 340B entitieshave conflicting interests. See supra note 10.

14 For example, in 2001, the HHS Inspector General found thatfive manufacturers improperly excluded from their best-pricecalculations low-price sales on 11 drugs to three healthmaintenance organizations that repackaged and resold the drugsunder a private label; as a result, those manufacturers underpaidthe $165 million in rebates owed to the States for a one-yearperiod by nearly half, causing “the Medicaid drug rebate program[to] los[e] $80.7 million.” OIG, Medicaid Drug Rebates — Sales toRepackagers Excluded from Best Price Determinations, A-06-00-00056, at 4 (Mar. 2001)http://oig.hhs.gov/oas/reports/region6/60000056.pdf.

among the numerous false claims act suits against andsettlements with drug manufacturers in which AMPmanipulation was the basis of the fraudulent scheme.

To the contrary, many of those suits involved best-price manipulation, see supra pp.14-15; Respondent’sBr. 8-11, a situation in which petitioners concede thatthe States’ and the 340B entities’ interests are whollyaligned. See Pet. Br. 41. Indeed, it is readily apparentfrom the history of such suits that best-pricemanipulation is both easier to accomplish and far morelucrative than AMP manipulation. Because a singlelow-price sale can establish the best price nationwide,that factor can have a dramatic impact on both stateMedicaid rebates and 340B drug price discounts.14

Even if manufacturers were to engage in AMPmanipulation, any hypothetical divergent interestsbetween the States and the 340B entities would be noreason to deny either—or both—a breach of contractaction in the far more lucrative and thus far morelikely context of best-price manipulation.

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15 Letter from Public Hospital Pharmacy Coalition and NationalAssociation of Community Health Centers to Centers for Medicareand Medicaid Services at 2 (Feb. 17, 2006), http://www.nachc.org/client/documents/issues-advocacy/policy-library/medicare-medicaid-policy-updates/340B-PDP_Contracting.pdf

2. Finally, both the States and the 340B entitiesbenefit when the latter receive the full price discountsto which they are entitled. States rely on 340Bentities to provide services to indigent state citizens.“Although 340B hospitals constitute less than 5percent of all hospitals in the United States, theyprovide over 25 percent of the uncompensated healthcare for Americans.”15 As the House reportaccompanying the bill that became section 340Bexplained, the purpose of the statute was “to enable”340B entities “to obtain lower prices on the drugs thatthey provide to their patients,” thus “reaching moreeligible patients and providing more comprehensiveservices.” H.R. Rep. No. 102-384(II), at 7, 12 (1992).

States plainly benefit when 340B entities receivethe full price discounts to which they are entitled. Themore medical care 340B hospitals can provide withtheir limited resources and state reimbursement, thefurther state Medicaid budgets will go in serving theStates’ neediest citizens. Ultimately, allowing theStates and the 340B entities alike to rely ontraditional common law remedies available to intendedthird-party beneficiaries furthers the goals ofCongress. Such actions will inure to the benefit ofstate Medicaid programs, 340B entities, and, mostimportantly, the poor and indigent persons that thesecooperative programs exist to serve.

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CONCLUSION

The judgment of the court of appeals should beaffirmed.

Respectfully submitted,

STEVE SIX ATTORNEY GENERAL OF KANSASSTEPHEN R. MCALLISTER SOLICITOR GENERAL OF KANSAS COUNSEL OF RECORD120 S.W. 10TH ST., 2ND FLOORTOPEKA, KS 66612(785) 296-2215(stevermac@fastmail.fm)

December 20, 2010