Background
The Section 340B Drug Pricing Program, enacted in 1992, requires pharmaceutical manufacturers participating in Medicaid to provide discounted outpatient drugs to eligible “covered entities”—primarily federally qualified health centers, family planning clinics, and other safety-net providers serving low-income and rural patients. In 1996, the Health Resources and Services Administration issued guidance permitting covered entities lacking in-house pharmacies to contract with a single outside pharmacy to dispense discounted drugs. In 2010, HRSA significantly expanded this model, allowing covered entities to contract with unlimited outside pharmacies, resulting in a dramatic increase in contract pharmacy usage.
Concerned that contract pharmacies were profiting from discounts rather than merely dispensing medications, several manufacturers adopted policies restricting covered entities’ use of contract pharmacies. In December 2020, HHS issued an advisory opinion stating that manufacturers must deliver Section 340B drugs to contract pharmacies acting as covered entity agents. The Third Circuit and D.C. Circuit subsequently rejected this advisory opinion, holding that the Section 340B statute itself does not require manufacturers to deliver discounted drugs to unlimited contract pharmacies. Following these federal court decisions, states began enacting legislation to address the issue.
Louisiana enacted Act 358 in 2023, prohibiting manufacturers and distributors from denying, restricting, or interfering with covered entities’ acquisition or delivery of Section 340B drugs through contract pharmacies. Violations constitute breaches of Louisiana’s Unfair Trade Practices and Consumer Protection Law, exposing manufacturers to investigative demands, remedies, and penalties. AbbVie, Inc., AstraZeneca Pharmaceuticals, L.P., and the Pharmaceutical Research and Manufacturers of America sued Louisiana’s Attorney General, asserting federal preemption, unconstitutional takings, Contracts Clause violations, and vagueness.
The Court’s Holding
The Fifth Circuit affirmed the district court’s grant of summary judgment for Louisiana on all claims. The court, applying the presumption against preemption in areas of traditional state police power, held that Act 358 is not preempted by Section 340B because federal law leaves drug distribution logistics and the role of pharmacies to state regulation. The court noted that while Section 340B comprehensively regulates drug pricing, eligibility criteria, and anti-diversion measures, it is conspicuously silent on delivery methods and contract pharmacy arrangements—the precise subjects addressed by Act 358.
The court rejected the manufacturers’ field preemption argument, holding that Congress did not intend to occupy the field of pharmacy regulation and drug distribution. Critically, the court distinguished between federal agency authority and state police power, reasoning that the Third and D.C. Circuits’ holdings that HHS lacks statutory authority to mandate contract pharmacy delivery says nothing about state authority. A federal agency’s lack of power does not convert congressional silence into an implicit prohibition on state regulation; doing so would invert the presumption against preemption by treating federal silence as a ceiling on state power rather than an invitation for state supplementation.
The court also rejected conflict preemption, finding no genuine conflict because Act 358 and Section 340B operate in separate enforcement spheres: HHS enforces federal pricing and diversion rules through covered entities, while Louisiana’s statute addresses delivery logistics. The court further rejected constitutional challenges under the Takings Clause, Contracts Clause, and vagueness doctrine, affirming Louisiana’s authority to regulate pharmaceutical manufacturers’ conduct as an exercise of consumer protection authority within traditional state police powers.
Key Takeaways
- Act 358 is not preempted by Section 340B despite federal law addressing the same program, because Congress left delivery logistics and contract pharmacy regulation to the states.
- Federal agency decisions declining to mandate certain conduct do not limit state police powers in areas Congress left unaddressed in the federal statutory scheme.
- States retain authority to regulate pharmacy operations and pharmaceutical distribution as traditional matters of state consumer protection and public health, even when those regulations affect federal program participants.
- Pharmaceutical manufacturers cannot invoke federal program participation as a shield against state consumer protection laws addressing distribution conduct that federal law does not regulate.
Why It Matters
This decision preserves state authority to regulate pharmaceutical conduct affecting vulnerable patient populations, ensuring that manufacturers cannot use contractual restrictions to undermine Congress’s intent in creating the Section 340B Program. By holding that federal silence on delivery logistics permits rather than prohibits state regulation, the court prevents a significant gap in enforcement. Federal courts and agencies have declined to require contract pharmacy delivery; this decision ensures states may step in to protect the program’s beneficiaries through their historic police powers.
The ruling carries broader federalism implications for state-federal regulatory relationships. It establishes that states may impose requirements on federal program participants in areas of traditional state authority—here, pharmacy regulation and consumer protection—without triggering preemption, even when federal agencies have declined similar mandates. This approach respects both the presumption against preemption and the division of regulatory authority between sovereigns, signaling that congressional silence in comprehensive federal schemes does not foreclose state supplementation in traditionally state-regulated domains.