Source: https://www.povertylaw.org/clearinghouse/fpmd/chapter5/section3
Timestamp: 2019-04-25 03:49:08+00:00

Document:
Contract claims based on third-party beneficiary status have been successful in Medicaid and Medicare, housing, and prisoner cases.5 Nevertheless, such claims generally fail when either the contract contains and express provision disavowing an intention to confer third-party rights or when applicable state law utilizes a presumption on behalf of housing residents with well established rights to reside at the property and those brought by applicants for housing benefits.
Most recently, the Supreme Court rejected a third-party beneficiary claim brought by a county to enforce drug price limits set forth in contracts between pharmaceutical companies and the federal government, suggesting that the federal courts are unlikely to be receptive to such claims when the federal government asserts exclusive authority to enforce the contract.6 Astra USA, Incorporated v. Santa Clara County concerned Section 350B of the Public Health Services Act, which imposes limits on the prices drug manufacturers may charge certain health facilities, generally those serving low-income patients. To participate in sales to such entities, the Health Resources and Services Administration, an entity within the federal Department of Health and Human Services, requires the drug makers to enter into standard Pharmaceutical Pricing Agreements which set forth the statutorily-prescribed pricing limits. Santa Clara County conceded that there was no private right of action to enforce the statutes containing price ceilings, but argued that it was a third-party beneficiary to these Agreements. The Supreme Court rejected the claim, holding that the Agreements were not subject to negotiation, contained only terms required by the statute, and that, as a result, a third-party beneficiary claim was no different than a private right of action. The Court acknowledged that the Health Resources and Services Administration had lacked the oversight and authority to enforce these Agreements, but that Congress responded by affording the Health Resources and Services Administration alternative mechanisms for enforcement, including audits, dispute resolution procedures and refund and civil penalty systems.
(1) The rules stated in this Chapter apply to contracts with a government or governmental agency except to the extent that application would contravene the policy of the law authorizing the contract or prescribing remedies for its breach.
Injunctive relief is available to remedy contract violations harming intended third-party beneficiaries. Sections 357, 365 and 366 of the Restatement (Second) make clear that both negative and mandatory injunctions (in the form of “forbearance”) are authorized as relief in third party beneficiary actions.
1. For a discussion of suits against state actors under 42 U.S.C. § 1983, see Chapters 5.1.A and 5.1.B.
2. Such contract actions should not be confused with the analogous, but separate, claim that one’s client is the third-party beneficiary of various provisions of a federal statute, such as the Medicaid Act, enacted pursuant to Congress’ spending power under the Commerce Clause. Some courts have suggested that such statutes create a relationship between the federal and state governments that is akin to a contract. See e.g., Pharmaceutical Research and Manufacturers of America v. Walsh, 538 U.S. 644, 683 (2003) (Thomas, J., concurring).
3. Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937 (2009); Bell Atlantic Corporation v. Twombly, 550 U.S. 554 (2007).
4. See Zaborowski v. Hospitality Care Center of Hermitage, Incorporated, 60 Pa. D. & C.4th 474, 499 n. 19 (Pa. Comm. Pl. 2002). The plaintiff did not submit a copy of the provider agreement, and this may have contributed to the court’s conclusion that the complaint did not adequately allege that the state intended the resident to be a beneficiary of the provider agreement.
5. See Rochelle Bobroff & Harper Jean Tobin, Third-Party Beneficiary Claims: Recent Cases Against Private Parties and Local Agencies, 42 Clearinghouse Review 99 (Jul.-Aug. 2008); Steve Hitov & Gill Deford, The Impact of Privatization on Litigation, 35 Clearinghouse Review 590 (Jan.-Feb. 2002); see also Nordbye v. BRCP/GM Ellington, 266 P.3d 92, 95-97 (Or. Ct. App. 2011) (holding former tenants could enforce rent and use restrictions in extended low-income housing commitment).
6. Astra USA, Incorporated v. Santa Clara County, 131 S. Ct. 1342 (2001).
7. Restatement (Second) of Contracts § 302, Reporter’s Note (1981) (cases from forty states citing or adopting Section 302). The advocate will have to determine whether applicable state law adopts the Restatement. If not, further research is necessary to determine the applicable legal standard.
8. Restatement (Second) of Contracts § 302.
9. Nelson Construction v. United States, 79 Fed. Cl. 81, 95 (Ct. Cl. 2007); Fort Lincoln Civic Association. v. Fort Lincoln New Town Corporation, 944 A.2d 1055, 1064 (D.C. 2008).
10. One court has suggested that if Section 8 tenants are not the intended beneficiaries of a contract between HUD and a private landlord, then “the legitimacy of the multi-billion dollar Section 8 program is placed in grave doubt.” Holbrook v. Pitt, 643 F.2d 1261, 1271 (7th Cir. 1981). A similar conclusion was reached in the Medicaid context. Smith v. Chattanooga Medical Investors, Incorporated, 62 S.W.3d 178 (Tenn. Ct. App. 2001). Thus, the fact that one of the parties to the contract, although not the one being sued, is a government entity, certainly does not foreclose an enforcement action against the private entity, and may in some circumstances even facilitate it.
11. Bowhead Information Technology Services v. Catapult Technology, Limited, 377 F. Supp. 166, 171 (D.D.C. 2005) (citing Nortel Networks, Incorporated v. Gold and Appel Transfer, S. A., 298 F. Supp. 2d 81, 90 (D.D.C. 2004) (citing R. A. Weaver and Associates v. Haas and Haynie Corporation, 663 F.2d 168, 175 (D.C. Cir. 1980)); see also Restatement 2d of Contracts § 308 (“It is not essential to the creation of a right in an intended beneficiary that he be identified when a contract containing the promise is made.”); County of Santa Clara v. Astra USA, Incorporated, 540 F.3d 1094, 1101 (9th Cir. 2008) (third parties need not point to “a provision expressly granting the third party the right to sue”). The expression of intent to benefit the third-party beneficiary may be implied in the contract so long as the intent is unequivocally to benefit the third parties directly. Heroth v. Kingdom of Saudi Arabia, 565 F. Supp. 2d 59, 65 (D.D.C. 2008), aff’d, 2009 U.S. App. LEXIS 9631 (D.C. Cir. Apr. 24, 2009); Fort Lincoln, 944 A.2d at 1064.
12. Flexfab v. United States, 424 F.3d 1254, 1260 (Fed. Cir. 2005) (internal citations omitted).
13. Rathke v. Corrections Corporation of America, 153 P.3d 303 (Alaska 2007); Smallwood v. Central Peninsula General Hospital, 151 P.3d 319 (Alaska 2006).
14. Ogunde v. Prison Health Services, Incorporated, 645 S.E.2d 520, 526 (Va. 2007).
15. Smith v. Chattanooga Medical Investors, Incorporated, 62 S.W.3d 178, 186 (Tenn. Ct. App. 2001).
16. Brown v. Sun Healthcare Group, Incorporated, 476 F. Supp. 2d 848, 853 (E.D. Tenn. 2007); Brogdon v. National Healthcare Corporation, 103 F. Supp. 2d 1322, 1334 (N.D. Ga. 2000).
17. Smallwood, 151 P.3d at 325. See also Holbrook v. Pitt, 643 F.2d 1261, 1271 (7th Cir. 1981).
18. See, e.g., Deborah Zalesne, Enforcing the Contract at All (Social) Costs: The Boundary Between Private Contract Law and the Public Interest, 11 Tex. Wesleyan L. Rev. 579, 603-04 (2005) (criticizing contrary cases); Michele Estrin Gilman, Legal Accountability in an Era of Privatized Welfare, 89 Cal. L. Rev. 569, 636 (2001); Robert S. Adelson, Third Party Beneficiary and Implied Rights of Action Analysis: The Fiction of One Governmental Intent, 94 Yale L. J.875, 879 nn. 21, 24 (1985); see also Restatement (Second) of Contracts § 313 cmt. A (1981) (noting “excessive financial burden” as a chief reason for limiting claims under third-party contracts).
19. See Beckett v. Air Line Pilots Association, 995 F.2d 280, 289 (D.C. Cir. 1993); Schuerman v. United States, 30 Fed. Cl. 420, 429 (1994) (“The scope of section 313 is limited and applies only to suits for consequential damages”).
20. See, e.g., Kremen v. Cohen, 337 F.3d 1024 (9th Cir. 2003) (interpreting § 313 to apply to all claims under government contracts and holding that no third-party claim lies under a government contract unless the contract shows an intention to grant the third-party enforceable rights); Briggs v. Oklahoma ex rel. Department of Human Services, 472 F. Supp. 2d 1288, 1293 (W.D. Okla. 2007) (invoking § 313 to reject a parent’s claim against a nonprofit that contracted to provide court advocates in family court cases); Fort Lincoln Civic Association, Incorporated. v. Fort Lincoln New Town Corporation, 944 A.2d 1055, 1065 (D.C. 2008) (invoking § 313 to reject residents’ claims under urban redevelopment contract).
21. Jama v. U.S. Immigration and Naturalization Service, 334 F. Supp.2d 662, 687 (D.N.J. 2004) ((following Nguyen v. U.S. Catholic Conference, 719 F.2d 52 (3d Cir. 1983)).
22. Flexfab, LLC v. United States, 62 Fed. Cl. 139, 147 (2004), aff’d, 424 F.3d 1254 (Fed. Cir. 2005) (following Schuerman v. United States, 30 Fed. Cl. 420 (1994), and Montana v. United States, 124 F.3d 1269, 1273 (Fed. Cir. 1997)). But see Fort Lincoln, 944 A.2d at 1068 (acknowledging Montana’s repudiation of “intent to give a right” test, but nevertheless construing it to require “reasonable reliance” on an “intention to confer a right”).
23. See, e.g., Zalesne, supra note 493, at 603-4; Justin Massey, Applying the Third Party Beneficiary Theory of Contracts to Enforce Clean Water Act § 404 Permits: A California Case Study, 18 Journal of Enviromental Law and Litigation 129, 142-43 (2003); Adelson, supra note 493, at 879 n. 21.
24. Restatement (Second) of Contracts § 313.
25. Restatement (Second) of Contracts § 313 illus. 1-6.
26. See, e.g., County of Santa Clara v. Astra USA, Incorporated, 540 F.3d 1094, 1103 (9th Cir. 2008).
27. See Womhoener Pressen v. Ceres Marine Terminals, Incorporated, 5 F.3d 734, 743 (4th Cir. 1993) (“It is sufficient [for third-party beneficiary analysis] that the terms express a clear intent to extend benefits to a well-defined class of readily identifiable persons”) (emphasis in original) (citations omitted); King v. Employers National Insurance Company, 928 F.2d 1438, 1442 (5th Cir. 1991) (third-party beneficiary status arises where contract “confer[s] specific benefits” on third party); Beverly v. Macy, 702 F.2d 931, 942 (11th Cir. 1983) (holding that policyholders were intended beneficiaries of government contract with insurance company “because the obligation referred to a specific class of individuals clearly contemplated by the contract and identifiable at the time the obligation arose”); Kawa v. United States, 86 Fed. Cl. 575, 588 (Fed. Cl. 2009) (“The intended beneficiary need not be specifically or individually identified in the contract, but must fall within a class clearly identified to be benefited thereby.”) (quoting Montana, 124 F.3d at 1273).
28. See e.g., Anderson v. D.C. Housing Authority, 923 A.2d 853, 863 (D.C. 2007); Kirby v. Richmond Redevelopment and Housing Authority, No. 3:04-791, 2005 WL 5864797, at *6 (E.D. Va. 2005); Dewakuku v. Martinez, 271 F.3d 1031 (Fed. Cir. 2001); Moore v. Gaither, 767 A.2d 278 (D.C. 2001); Garreaux v. United States, 544 F. Supp. 2d 885, 895 (D.S.D. 2008).
29. See, e.g., Richards v. City of New York, 433 F. Supp. 2d 404, 430 (S.D.N.Y. 2006); Johnson v. City of Detroit, 319 F. Supp. 2d 756 (E.D. Mich. 2004); Wallace v. Chicago Housing Authority, 298 F. Supp. 2d 710, 723–24 (N.D. Ill. 2003); 5th Bedford Pines Apartments Limited. v. Brandon, 262 F. Supp. 2d 1369, 1377–78 (N.D. Ga. 2003).
30. Miree v. Dekalb County, 433 U.S. 25, 31 (1977); see also Audio Odyssey, Limited v. United States, 255 F.3d 512, 520-521 (8th Cir. 2001). Compare, e.g., Owens v. Haas, 601 F.2d 1242, 1249–50 (2d Cir. 1979) (third-party claim by federal prisoner against county officers, for injuries he suffered after a transfer to county custody under federal contract, implicates federal duty to protect prisoners), with Smith v. Correctional Corporation of America, 19 Fed. App. 318, 320 (6th Cir. 2001) (no federal jurisdiction over contract claim by District of Columbia prisoner against private operator based on contract with District).
31. See Bobroff & Tobin, supra note 5, at 101-102.
32. Wallace v. Chicago Housing Authority, 298 F. Supp. 2d 710, 723–24 (N.D. Ill. 2003).
33. Compare, e.g., In re Telluride Global Development Limited Liability Company, 380 B.R. 585, 594 (10th Cir. 2007) (question of fact under Colorado law), with Basic Capital Management v. Dynex Commercial, Incorporated, 254 S.W.3d 508, 516 (Tex. Ct. App. 2008) (question of law), and AgGrow Oils, Limited Liability Corporation v. National Union Fire Insurance Company, 420 F.3d 751, 755 (8th Cir. 2005) (question of law in North Dakota), and Flexfab, 424 F.3d at 1259 (mixed question). See also Restatement (Second) of Contracts § 212(2) (interpretation of contracts is a question of law except where “it depends on the credibility of extrinsic evidence or on a choice among reasonable inferences to be drawn from extrinsic evidence”).
34. Smallwood v. Central Peninsula General Hospital, 151 P.3d 319, 325 (Alaska 2006).
35. See Rathke v. Corrections Corporation of America, 153 P.3d 303 (Alaska 2007); Ogunde v. Prison Health Services, Incorporated, 645 S.E.2d 520 (Va. 2007); Brown v. Sun Healthcare Group, Incorporated, 476 F. Supp. 2d 848, 853 (E.D. Tenn. 2007).

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