On February 9, the U.S. Court of Appeals for the Fifth Circuit upheld Louisiana’s state law protecting 340B contract pharmacy arrangements for health centers, hospitals, and other 340B covered entities. In doing so, the court reaffirmed its prior ruling regarding a similar Mississippi law, holding that such state laws operate in harmony with, and not in opposition to, the federal 340B drug discount statute.

The decision represents a significant development in the continuing nationwide litigation over state efforts to protect 340B contract pharmacy relationships.

Drug manufacturers have filed a series of lawsuits challenging similar state laws nationwide. While several district court opinions have questioned aspects of these laws, the Fifth and Eighth Circuits have rejected manufacturers’ challenges. These rulings may increase the significance of alternative strategies manufacturers are pursuing to restrict covered entities’ participation in the 340B program.

Background on 340B and Contract Pharmacies

The federal 340B drug discount statute, 42 U.S.C. § 256b, requires drug manufacturers participating in Medicaid to provide discounted prescription drugs to safety net providers, known as “covered entities.” Many of these entities rely on contract pharmacy arrangements to dispense 340B drugs to their patients.

In 2023 and 2024, the Third and D.C. Circuits upheld that drug manufacturers’ may impose certain delivery limitations on 340B drugs to contract pharmacies.  In response, several states enacted legislation prohibiting manufacturers from restricting covered entities’ use of contract pharmacies, including Louisiana whose law was challenged by two manufacturers and the Pharmaceutical Research and Manufacturers of America (PhRMA).

The Fifth Circuit’s Analysis

In a per curiam opinion last fall, the Fifth Circuit rejected similar manufacturer challenges to Mississippi’s comparable law. In evaluating Louisiana’s statute, the Fifth Circuit took note of both the prior Third and D.C. Circuit rulings as well as its own ruling regarding the Mississippi law, declaring that its ruling regarding the validity of the Mississippi law also “controls here.”

The court rejected the manufacturers’ arguments on multiple grounds:

1. Federal Preemption: The court held that the federal 340B statute does not preempt Louisiana’s law, concluding that the state statute complements the federal framework rather than conflicts with it.
2. Takings Clause: The manufacturers argued that the law effected an unconstitutional taking of property without due process under the Fifth Amendment. The court rejected this claim, finding no compensable taking.
3. Contracts Clause: The court also rejected the contention that the statute violates the U.S. Constitution’s Contracts Clause by impermissibly interfering with interstate contractual relationships.
4. Vagueness: Finally, the court found that the statute was not unconstitutionally vague.

In sum, the Fifth Circuit reaffirmed that states may enact legislation protecting contract pharmacy arrangements without violating federal law or constitutional limitations.

Implications and Next Steps

While states continue to enact, and manufacturers continue to bring suits challenging, similar state laws across the country, that the Fifth Circuit—an appellate court with a reputation for a conservative, pro-industry slant—has now twice rejected such challenges deals a blow to manufacturers national strategy to create a split in opinion regarding state law 340 contract pharmacy protections among the Circuit Courts to then bring to the U.S. Supreme Court. Indeed, if one includes the Third and D.C. Circuits, the Eighth and Fifth Circuits now reflect four appellate courts upholding such laws, and none rejecting them.

However, manufacturers continue to seek to prevent the passage of such state law protections and continue to pursue legal challenges when states enact such laws. In the past year and a half, manufacturers have sought to convert 340B discounts from up-front discounts to rebates, first with an unsuccessful push to implement such changes unilaterally, and more recently through a rebate pilot model announced and then withdrawn by the Health Resources and Services Administration (HRSA). Manufacturers may see, with some justification, that should HRSA ultimately approve a rebate model for 340B pricing, the manufacturers could claim that such a regulation does preempt state laws where those state laws may conflict.

The legal and regulatory landscape surrounding the 340B program remains dynamic. Health centers, hospitals, state primary care associations, and other 340B stakeholders should remain actively involved in the developments regarding the 340B drug discount statute at the state and federal levels.

Our team will continue to monitor developments in 340B litigation and policy and is available to assist clients in assessing the impact of these evolving legal frameworks on their operations and compliance strategies.