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.; D.C. No.

SCHERING-PLOUGH CORPORATION  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
COUNSEL

Patrick J. Coughlin, Sanford Svetcov (argued), Jeffrey W.

Lawrence, Jacqueline E. Mottek, Aelish M. Baig and Jennie

11764 COUNTY OF SANTA CLARA v. ASTRA USA
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 Pharmaceuticals, LP and Zeneca Inc.; Alicia J. Donahue and Sara

Romano, Shook, Hardy & Bacon LLP, San Francisco, California, for defendants-appellees Aventis Pharmaceuticals, Inc.

and ZLB Behring LLC; Timothy T. Scott, Geoffrey M. Ezgar

and Paul Yanosy, Sidley Austin LLP, San Francisco, California, 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 Corporation; Molly M. Lane and Tera Heinz, Morgan, Lewis &

Bockius LLP, San Francisco, California, for defendantappellee Pfizer Inc.; Kirke M. Hasson and Colin T. Kemp,

Pillsbury Winthrop Shaw Pittman LLP, San Francisco, California, 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, California, for defendants-appellees Wyeth, Inc. and Wyeth Pharmaceuticals Inc. 

OPINION

FISHER, Circuit Judge: 

Certain federally funded medical clinics — so-called “Section 340B covered entities” — are able to purchase prescripCOUNTY OF SANTA CLARA v. ASTRA USA 11765
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 contracts, we hold that the covered entities are intended direct

beneficiaries of these agreements and thus have the right to

enforce the agreements’ discount provisions against the Manufacturers and sue them for reimbursement of excess payments. We have jurisdiction under 28 U.S.C. § 1291, and

reverse the district court’s dismissal of the complaint under

Federal Rule of Civil Procedure 12(b)(6) for failure to state a

claim.

BACKGROUND1

In part to “enable . . . certain Federally-funded clinics to

obtain lower prices on the drugs that they provide to their

patients,” see H.R. Rep. No. 102-384(II), at 7 (1992), Congress enacted Section 602 of the Veterans Health Care Act of

1992, Pub. L. No. 102-585, 106 Stat. 4943, 4967. That provision, entitled “Limitations on Prices of Drugs Purchased by

Covered Entities,” requires the Secretary of Health and

Human Services to:

enter into an agreement with each manufacturer of

covered drugs under which the amount required to

be paid . . . to the manufacturer for covered drugs . . .

purchased by a covered entity . . . does not exceed

1Because 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). 

11766 COUNTY OF SANTA CLARA v. ASTRA USA
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 accordance with statute, the Secretary entered into a standard Pharmaceutical Pricing Agreement (“PPA”) with each of the

Manufacturers. 

One of the Manufacturers’ principal obligations under the

PPA is “to charge covered entities a price . . . that does not

exceed . . . the [average manufacturer price] for the covered

outpatient drug reported . . . to the Secretary in accordance

with the Manufacturer’s responsibilities under [§ 1396r8(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

2Hereinafter, all citations are to Title 42 of the United States Code

unless otherwise noted. 

3Section 602 of the Veterans Health Care Act of 1992 added a new Section 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. 

4The PPA establishes different discounts for other classes of drugs that

are not relevant here. See PPA §§ II(b)-(c). 

COUNTY OF SANTA CLARA v. ASTRA USA 11767
be charged under the PPA is calculated using proprietary sales

and pricing information the Manufacturers disclose only to

the Secretary.

The genesis of the present appeal is a putative class action

filed in California state court by the county of Santa Clara and

a number of county-operated medical facilities (“Santa

Clara”), which are covered entities within the meaning of

§ 256b(a)(4) and PPA § I(e). Relying chiefly on reports published by DHHS’s Office of the Inspector General (“OIG”),

Santa Clara alleged that the Manufacturers have systematically overcharged its medical facilities, and all similarly situated covered entities, for covered drugs. OIG’s March 2003

report estimated that overcharges during the one-year period

ending September 1999 totaled $6.1 million. Its June 2004

report, which was withdrawn in October 2004 because of

“problems with the underlying data,” concluded that covered

entities overpaid $41.1 million in the month of September

2002. In October 2005, OIG confirmed that its June 2004 calculation was erroneous because the Centers for Medicare and

Medicaid Services had provided it with comparison “ceiling

prices from the wrong timeframe.” OIG did not retreat, however, from its other, more general findings that HRSA was not

adequately overseeing the Section 340B program and that

“HRSA lacks the oversight mechanisms and authority to

ensure that [covered] entities pay at or below the . . . ceiling

price.” The October 2005 report also “introduce[d] new concerns” that “systemic problems with the accuracy and reliability” of the government’s pricing data could interfere with

HRSA’s ability to monitor the Section 340B program.

Finally, a 2006 OIG report estimated that covered entities

overpaid $3.9 million in June 2005 alone. 

Santa Clara initially brought claims under the California

False Claims Act and California Unfair Competition Law in

state court. After the Manufacturers removed the action to

federal district court, Santa Clara amended its complaint for

the first time. The district court granted the Manufacturers’

11768 COUNTY OF SANTA CLARA v. ASTRA USA
motion to dismiss, but with leave to amend. Santa Clara’s second amended complaint, now including claims for breach of

the PPA, breach of the implied covenant of good faith and fair

dealing, negligence and quantum meruit, fared no better than

the first. The district court granted the Manufacturers’ second

motion to dismiss and denied as futile Santa Clara’s subsequent motion for leave to file a third amended complaint.

Santa Clara appeals only the district court’s rejection of its

PPA breach of contract claim on a third party beneficiary theory.

STANDARD OF REVIEW

“We review de novo the district court’s dismissal of a complaint for failure to state a claim under Rule 12(b)(6).”

Vasquez v. Los Angeles County, 487 F.3d 1246, 1249 (9th Cir.

2007). The interpretation of a contract is a mixed question of

law and fact that we review de novo. Klamath Water Users

Protective Ass’n v. Patterson, 204 F.3d 1206, 1210 (9th Cir.

1999).

DISCUSSION

We agree with Santa Clara that covered entities are

intended direct beneficiaries of the PPA and have the right as

third parties to bring claims for breach of that contract. We

also conclude that allowing such suits under the PPA is consistent with Congress’ intent in enacting the Section 340B

program, even though the statute itself does not create a federal private cause of action. Finally, we reject the Manufacturers’ argument that primary jurisdiction is appropriate.

I.

[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.

COUNTY OF SANTA CLARA v. ASTRA USA 11769
2005), and which expressly provides that it “shall be construed in accordance with Federal common law,” see PPA

§ VII(g).5“For guidance, we may look to general principles

for interpreting contracts.” Kennewick Irrigation Dist. v.

United States, 880 F.2d 1018, 1032 (9th Cir. 1989). Among

these principles, we interpret every part of a written contract

with reference to the whole and give terms their ordinary

meaning unless a contrary intent appears. See Klamath, 204

F.3d at 1210. When possible, we ascertain the intent of the

parties from the contract itself. See id.

[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 omitted). 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 substantial, which a federal forum may entertain without disturbing any congressionally 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 contract whose terms are mandated by federal statute and which must be interpreted 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); Eatmon 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). 

11770 COUNTY OF SANTA CLARA v. ASTRA USA
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 beneficiary 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 contract 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 specifically 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 context 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 incidental 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 pronouncements,” 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 language of the contract for a ‘clear intent’ to rebut the presumption that the [third parties] are merely incidental

beneficiaries.” Id. at 1147 n.5. 

COUNTY OF SANTA CLARA v. ASTRA USA 11771
[4] Having done this analysis, we are persuaded that covered 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 contract claim is conditioned on the contract’s inclusion of a provision 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 Supervision 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 beneficiaries to sue . . . and did not allow incidental third-party beneficiaries to sue.”); Restatement (Second) of Contracts § 302

(1981). In disavowing any absolute requirement that the contract expressly provide for third party enforcement, we reaffirm 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 progeny setting forth the requisite showing — then the third party

contract claim may go forward.6 Only when the plaintiff

6The 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

11772 COUNTY OF SANTA CLARA v. ASTRA USA
would qualify solely as an incidental beneficiary of the government 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; Restatement (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 beneficiaries 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 contract 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). 

7Cf. Smith, 418 F.3d at 1036-37 (agreement simply “specifie[d] that the

government’s obligation . . . is subject to . . . federal law,” confirmed

COUNTY OF SANTA CLARA v. ASTRA USA 11773
between “recitation of constituencies,” “explanatory recitals”

of purpose and references to individuals that the contracting

parties had “in mind” — all insufficient to “prove [the plaintiffs’] 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 Manufacturers 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 discounted 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 covered 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” specifying the PPA’s terms, and its purposes reinforces this interpretation. 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 registration 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 control of the Dam” and “preserve[d] the United States’ ultimate control over

the Dam”).

8Although 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 at

1364 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.”). 

11774 COUNTY OF SANTA CLARA v. ASTRA USA
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 provided 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 entities] 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 manufacturer’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 Committee 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 Manufacturers 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

9Protected 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. 

COUNTY OF SANTA CLARA v. ASTRA USA 11775
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 certain 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 liability or remove the entity from the list of eligible entities.10

Conversely, if the Secretary believes a manufacturer has overcharged 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 terminated. 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 manufacturers 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 beneficiaries 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 contracts themselves suggested that the plaintiffs were not

10The 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). 

11776 COUNTY OF SANTA CLARA v. ASTRA USA
intended beneficiaries; they were “not directed at the handicapped 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. Second, § 256b says nothing about the covered entities’ remedies,

whether judicial or administrative. Cf. id. at 1481 (“The statutory 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 entities 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

11Cf. FMC Corp., 531 F.3d at 823 (declining to recognize intended beneficiary status because that would “grant a broader range of disputeresolving 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). 

COUNTY OF SANTA CLARA v. ASTRA USA 11777
process before seeking other remedies.”). In sum, neither the

PPA nor § 256b establishes an exclusive “elaborate administrative 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 covered entities’ intended beneficiary status are no more convincing. First, they contend it is “illogical” that the United States

and the Manufacturers would have intended to expose themselves to suit by the large number of covered entities, about

13,000 reported as of this writing.12 The breadth and indefiniteness 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) (commenting that parties would not likely have intended that “almost every lower-income person in the United States” could

enforce the contract). But numbers alone are not determinative. 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 beneficiaries 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) (making available list of eligible covered entities), § IV(b) (procedure 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 confidentiality” of pricing data through discovery, given the PPA’s

inclusion of a confidentiality provision.13 The confidentiality

12See 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. 

13This argument is problematic for another, more pragmatic reason,

which is that the PPA was not a conventionally negotiated contract. Pre11778 COUNTY OF SANTA CLARA v. ASTRA USA
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 information disclosed to the Secretary by the Manufacturers, “except as otherwise required by law, will not be disclosed by the

Secretary or his designee in a form which reveals the Manufacturer, 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 disclosure “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 information. 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 confidentiality 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 agreement 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 federal 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). 

COUNTY OF SANTA CLARA v. ASTRA USA 11779
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 Congress’ 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 contrary 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 Congress “speak[s] directly” to a question addressed by the federal common law, it may displace it even without

14Although this argument was raised for the first time in the Manufacturers’ 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). 

15Santa Clara has not pursued this matter on appeal, so we assume without deciding that § 256b does not create a private cause of action. 

11780 COUNTY OF SANTA CLARA v. ASTRA USA
“affirmatively proscrib[ing]” its use. United States v. Texas,

507 U.S. 529, 534 (1993); see also Gardiner v. Sea-Land Service, 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.” Gardiner, 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, therefore, 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 plaintiffs to bring suit as third party beneficiaries of a contract

between the contractor defendants and New York City’s public housing authority. See 318 F.3d at 83. Under the DavisBacon Act, 40 U.S.C. § 3141, all construction contracts for

federally funded projects must include the following provision: “[t]he Contractor shall pay to all laborers . . . not less

than the wages prevailing in the locality of the Project, as predetermined 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 contractors” subject to the Davis-Bacon Act, the Secretary of

16This is a different and less demanding inquiry than that used to evaluate 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 ordinarily 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. 

COUNTY OF SANTA CLARA v. ASTRA USA 11781
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 administrative 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 congressional 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 underpinning 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 mechanism 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). Reflecting this paucity of statutory authority, DHHS’s regulations

17Because 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). 

18Section 256b does provide a number of remedies against covered entities. See, e.g., § 256b(a)(5)(C) (“A covered entity shall permit the Secretary 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 . . . .”). 

11782 COUNTY OF SANTA CLARA v. ASTRA USA
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. Nothing in the statute suggests that Congress intended that DHHS

create a substitute, administrative remedial scheme for covered 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 remedy, abrogated remedies under federal common law). 

[10] Permitting covered entities to sue as intended beneficiaries 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 status 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 beneficiary 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 services.” 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 program 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 jurisdiction does not require that Santa Clara’s contract claim be

COUNTY OF SANTA CLARA v. ASTRA USA 11783
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 relevant 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) (internal quotation marks omitted). To determine whether primary

jurisdiction should be applied, we have “employed such factors 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 subjects an industry or activity to a comprehensive regulatory

authority that (4) requires expertise or uniformity in administration.” Syntek, 307 F.3d at 781. 

[12] In our view, there is nothing “particularly complicated” about Santa Clara’s contract claim on the merits.19 Santa

Clara alleges that the Manufacturers did not comply with their

19Although 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. 

11784 COUNTY OF SANTA CLARA v. ASTRA USA
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 [§ 1396r8(b)(3)] . . . reduced by the rebate percentage.” See PPA

§ II(a) (emphasis added). Contrary to the Manufacturers’ suggestion, resolution of this claim presents no “far-reaching

question that ‘requires expertise or uniformity in administration.’ ” Cf. Brown, 277 F.3d at 1172. The PPA is drafted, for

instance, so that covered entities are entitled only to the average 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 failing to comply with its ceiling price obligations under the

PPA, but “ ‘does not seek to impose any additional or contrary obligations[,] [it] is merely enforcing the existing rebate

program responsibilities and does not inject any more variation than if the Department of Justice brought suit.’ ” See generally 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 guidance for calculating prices under § 1396r-8, so we conclude

that its contract claim does not implicate DHHS’s primary

jurisdiction. 

20We do not decide whether the PPA’s “reporting” limitation is consistent with § 256b(a)(1)’s requirements for pharmaceutical purchasing

agreements. 

21The 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. 

COUNTY OF SANTA CLARA v. ASTRA USA 11785
CONCLUSION

As intended direct beneficiaries of the PPA, covered entities may enforce the Manufacturers’ ceiling price obligations

under the federal common law of contracts. Although the statute 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.

11786 COUNTY OF SANTA CLARA v. ASTRA USA