Novartis Pharmaceuticals Corporation v. Carole Johnson

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued October 24, 2022 Decided May 21, 2024
No. 21-5299
NOVARTIS PHARMACEUTICALS CORPORATION,
APPELLEE
v.
CAROLE JOHNSON, IN HER OFFICIAL CAPACITY AS
ADMINISTRATOR, HEALTH RESOURCES AND SERVICE
ADMINISTRATION AND XAVIER BECERRA, IN HIS OFFICIAL
CAPACITY AS SECRETARY, UNITED STATES DEPARTMENT OF
HEALTH AND HUMAN SERVICES,
APPELLANTS
Consolidated with 21-5304
Appeals from the United States District Court
for the District of Columbia
(No. 1:21-cv-01479)
(No. 1:21-cv-01686)
Daniel J. Aguilar, Attorney, U.S. Department of Justice,
argued the cause for appellants. With him on the briefs were
Brian M. Boynton, Principal Deputy Assistant Attorney

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General, Sarah E. Harrington, Deputy Assistant Attorney
General, and Alisa B. Klein, Attorney.
William B. Schultz and Margaret M. Dotzel were on the
brief for amici curiae American Hospital Association, et al. in
support of appellants.
William Tong, Attorney General, Office of the Attorney
General for the State of Connecticut, Clare Kindall, Solicitor
General at the time the brief was filed, Leslie Rutledge,
Attorney General, Office of the Attorney General for the State
of Arkansas, Philip J. Weiser, Attorney General, Office of the
Attorney General for the State of Colorado, Kathleen Jennings,
Attorney General, Office of the Attorney General for the State
of Delaware, Karl A. Racine, Attorney General, Office of the
Attorney General for the District of Columbia, Holly T.
Shikada, Attorney General, Office of the Attorney General for
the State of Hawaii, Kwame Raoul, Attorney General, Office
of the Attorney General for the State of Illinois, Derek Schmidt,
Attorney General, Office of the Attorney General for the State
of Kansas, Jeff Landry, Attorney General, Office of the
Attorney General for the State of Louisiana, Aaron M. Frey,
Attorney General, Office of the Attorney General for the State
of Maine, Brian E. Frosh, Attorney General, Office of the
Attorney General for the State of Maryland, Maura Healey,
Attorney General, Office of the Attorney General for the
Commonwealth of Massachusetts, Dana Nessel, Attorney
General, Office of the Attorney General for the State of
Michigan, Keith Ellison, Attorney General, Office of the
Attorney General for the State of Minnesota, Lynn Fitch,
Attorney General, Office of the Attorney General for the State
of Mississippi, Douglas J. Peterson, Attorney General, Office
of the Attorney General for the State of Nebraska, Aaron D.
Ford, Attorney General, Office of the Attorney General for the
State of Nevada, Matthew J. Platkin, Attorney General, Office

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of the Attorney General for the State of New Jersey, Hector
Balderas, Attorney General, Office of the Attorney General for
the State of New Mexico, Joshua H. Stein, Attorney General,
Office of the Attorney General for the State of North Carolina,
Ellen F. Rosenblum, Attorney General, Office of the Attorney
General for the State of Oregon, Josh Shapiro, Attorney
General, Office of the Attorney General for the
Commonwealth of Pennsylvania, Peter F. Neronha, Attorney
General, Office of the Attorney General for the State of Rhode
Island, Sean D. Reyes, Attorney General, Office of the
Attorney General for the State of Utah, Thomas J. Donovan,
Jr., Attorney General at the time the brief was filed, Office of
the Attorney General for the State of Vermont, were on the
brief for amici curiae States of Connecticut, et al. in support of
appellants. Robert L. Marconi, Assistant Attorney General,
Office of the Attorney General for the State of Connecticut
entered an appearance.
Matthew Sidney Freedus and Ronald S. Connelly were on
the brief for amici curiae National Association of Community
Health Centers and Ryan White Clinics for 340B Access in
support of appellants.
Catherine E. Stetson argued the cause for appellee
Novartis Pharmaceuticals Corporation. With her on the brief
were Susan M. Cook, Danielle Desaulniers Stempel, and Dana
A. Raphael.
Philip J. Perry argued the cause for appellee United
Therapeutics Corporation. With him on the brief were Andrew
D. Prins, Gregory B. in den Berken, and Joseph E. Begun.
William J. Trunk was on the brief for amicus curiae
Pharmaceutical Research and Manufacturers of America in
support of appellees.

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Paul J. Zidlicky and Eric D. McArthur were on the brief
for amicus curiae Kalderos, Inc. in support of appellees.
William A. Sarraille was on the brief for amicus curiae
Johnson & Johnson Health Care Systems, Inc in support of
appellee United Therapeutics Corporation.
Before: KATSAS, RAO, and CHILDS, Circuit Judges.
Opinion for the Court by Circuit Judge KATSAS.
KATSAS, Circuit Judge: Section 340B of the Public Health
Service Act requires drug manufacturers to sell certain drugs at
discounted prices to select healthcare providers. To facilitate
the distribution of these drugs, the providers often contract with
outside pharmacies. According to drug manufacturers, these
partnerships have left the section 340B program vulnerable to
abuse—at great cost to the manufacturers. In response, the
manufacturers have imposed their own contractual terms on
providers, such as limits on the number of pharmacies to which
they will make shipments. The government contends that these
restrictions violate the statute. The district court held that
section 340B does not prohibit manufacturers from limiting the
distribution of discounted drugs by contract. We agree.
I
A
As a condition of participating in Medicare Part B and
Medicaid, section 340B requires drug manufacturers to sell
certain drugs to covered entities at bargain prices. Covered
entities—such as healthcare providers serving low-income
patients—benefit through insurance reimbursements that
exceed the marked-down cost of the drugs.

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Congress enacted section 340B in 1992 amendments to the
Public Health Service Act. Pub. L. No. 102-585, § 602, 106
Stat. 4943, 4967–71. In March 2010, the Affordable Care Act
expanded the list of covered entities eligible to participate in
the program and added several new provisions aimed at
improving compliance with program requirements. Pub. L.
No. 111-148, tit. VII, §§ 7101–02, 124 Stat. 119, 821–27.
Section 340B requires manufacturers to enter into standard
agreements with the Secretary of Health and Human Services
“under which the amount required to be paid … to the
manufacturer for covered outpatient drugs … purchased by a
covered entity … does not exceed an amount” known as the
“ceiling price.” 42 U.S.C. § 256b(a)(1). As amended by the
Affordable Care Act, section 340B further provides that each
standard agreement “shall require that the manufacturer offer
each covered entity covered outpatient drugs for purchase at or
below the applicable ceiling price if such drug is made
available to any other purchaser at any price.” Id. The ceiling
price is fixed by a statutory formula strikingly generous to
purchasers. See id. § 256b(a)(2); see also id. § 1396r-8(c). In
some instances, it can be as low as a penny per unit. See 340B
Drug Pricing Program Ceiling Price and Manufacturer Civil
Monetary Penalties Regulation, 82 Fed. Reg. 1210, 1211 (Jan.
5, 2017).
Since 1992, Congress has limited the section 340B
program in three important ways. First, the statute defines
“covered entity” to mean only healthcare providers that fit
within narrow categories such as black lung clinics, rural
referral centers, and hospitals that primarily serve low-income
patients. 42 U.S.C. § 256b(a)(4). Second, the statute prohibits
“diversion,” which occurs when covered entities “resell or
otherwise transfer the drug to a person who is not a patient of
the entity.” Id. § 256b(a)(5)(B). Third, the statute prohibits

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covered entities from receiving the section 340B discount on
drugs also subject to a Medicaid rebate. Id. § 256b(a)(5)(A)(i).
Section 340B provides for audits of covered entities to
ensure program compliance. The Secretary or manufacturers
may initiate an audit. 42 U.S.C. § 256b(a)(5)(C). If the
Secretary finds that a covered entity engaged in diversion or
accepted duplicate discounts, the manufacturer may recover
damages from the covered entity in administrative proceedings.
Id. § 256b(a)(5)(D). The Secretary also may impose further
penalties for intentional or systematic diversion. Id.
§ 256b(d)(2)(B)(v).
The Secretary lacks rulemaking authority over the section
340B program. Nonetheless, the Health Resources and
Services Administration, which administers the program for
the Secretary, has issued guidance documents interpreting and
implementing the scheme. Three of them address the
distribution of drugs from manufacturers to covered entities.
1994 Guidance. HRSA’s initial guidance stated that a
covered entity may use a “purchasing agent.” Final Notice
Regarding Section 602 of the Veterans Health Care Act of 1992
Entity Guidelines, 59 Fed. Reg. 25,110, 25,113 (May 13,
1994). According to the guidance, manufacturers may ship
discounted drugs to this agent, which then must ship them to
the covered entity for dispensing to patients. See id. HRSA
opined that manufacturers may not “single out covered
entities” for “restrictive conditions” such as “minimum
purchase amounts.” Id. But it said that manufacturers, in their
contracts with covered entities, may “include provisions that
address customary business practice, request standard
information, or include other appropriate contract provisions.”
Id. at 25,114.

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1996 Guidance. This guidance acknowledged that section
340B “is silent as to permissible drug distribution systems,” but
it nonetheless sought to fill “gaps in the legislation” and
thereby “move the program forward.” Notice Regarding
Section 602 of the Veterans Health Care Act of 1992; Contract
Pharmacy Services, 61 Fed. Reg. 43,549, 43,549–50 (Aug. 23,
1996). HRSA recognized that many covered entities use
outside pharmacies to distribute drugs to their patients. Id. at
43,550. To accommodate them, HRSA stated that a covered
entity without an in-house pharmacy may contract with a single
outside pharmacy to dispense drugs at a single location. Id. at
43,555. A commentor suggested that covered entities “should
be permitted to contract with more than one” pharmacy, id. at
43,551, but HRSA maintained the “limitation of one pharmacy
contractor per entity,” id. at 43,555. And it stressed that a
covered entity, in directing shipments to its contract pharmacy,
must retain title to the drugs and thus “be responsible” for any
diversion or duplicate discounts. Id. at 43,553.
2010 Guidance. Fourteen years later, HRSA swerved. It
opined that covered entities may contract with an unlimited
number of outside pharmacies and may do so regardless of
whether the entities have in-house pharmacies. Notice
Regarding 340B Drug Pricing Program—Contract Pharmacy
Services, 75 Fed. Reg. 10,272, 10,272–73 (Mar. 5, 2010). The
agency reasoned that contract pharmacies enable covered
entities to “create wider patient access by having more
inclusive arrangements in their communities.” Id. at 10,273.
HRSA reiterated its view that each covered entity must
maintain title to and responsibility for the drugs, id. at 10,277,
and must “maintain auditable records sufficient to demonstrate
continued compliance with 340B requirements,” id. at 10,274.
The 2010 Guidance prompted a significant expansion in
the section 340B program. According to the Government

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Accountability Office, the number of covered entities
participating in the program increased from about 9,700 to
13,000 between 2010 and 2019. GAO Report No. 20-212,
340B Drug Discount Program: Oversight of the Intersection
with the Medicaid Drug Rebate Program Needs Improvement,
at 2 (2020). Yet over the same period, the number of contract
pharmacies participating in the program increased from about
1,300 to 23,000. Id. By 2017, the country’s largest chain
pharmacies—such as Walgreens and CVS—accounted for
most of this market. GAO Report No. 18-480, Drug Discount
Program: Federal Oversight of Compliance at 340B Contract
Pharmacies Needs Improvement, at 21 (2018). Covered
purchases have similarly expanded. One analyst estimates that
they jumped from roughly $6.9 billion in 2012 to $24.3 billion
by 2018. A. Fein, Exclusive: 340B Program Purchases Reach
$24.3 Billion—7%+ of the Pharma Market—as Hospitals’
Charity Care Flatlines, Drug Channels (May 14, 2019).
The mechanism for distributing covered drugs also has
evolved. While some contract pharmacies maintain separate
inventories of section 340B drugs, most fill prescriptions from
inventories that intermingle discounted and non-discounted
drugs. Only after dispensing the drugs do these pharmacies
attempt to discern whether individual customers were patients
of covered entities—in other words, whether individual
prescriptions were eligible for the discount. Many pharmacies
outsource this determination to third-party administrators, who
often receive a larger fee for every prescription deemed eligible
for the discount. Once the pharmacy or the administrator
categorizes a certain number of prescriptions as eligible, the
pharmacy places an order to replenish its section 340B
purchases. The covered entity, the pharmacy, and the third-
party administrator often divvy up the spread between the
discounted price and the higher insurance reimbursement rate.

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Each of these actors thus has a financial incentive to catalog as
many prescriptions as possible as eligible for the discount.
Manufacturers have argued that these arrangements lead to
unlawful diversion and duplicate discounts. For support, they
point to potential abuses noted in a report by the Inspector
General of HHS. See S. Wright, Off. of the Inspector Gen.,
OEI-05-13-00431, Memorandum Report: Contract Pharmacy
Arrangements in the 340B Program 9–15 (2014). As to
diversion, the concern is that pharmacies rely on manipulable
algorithms to code whether prescriptions warrant the discount.
For example, suppose a physician practices at a covered entity
and somewhere else. The physician writes a prescription for a
patient of his private practice. Yet the contract pharmacy,
connecting the physician to the covered entity, classifies the
prescription as eligible for the discount. See id. at 10. As for
duplicate discounts, the Inspector General found that some
contract pharmacies do not track and exclude 340B-eligible
prescriptions from Medicaid rebate claims, leading to
impermissible duplication. See id. at 13.
B
Novartis Pharmaceuticals Corporation and United
Therapeutics Corporation sell drugs subject to the section 340B
discount. In 2020, both companies began to limit the number
and kinds of contract pharmacies to which they would ship
orders. For covered entities that are hospitals, Novartis
planned to work only with contract pharmacies located within
40 miles of the hospital. United Therapeutics planned to work
only with contract pharmacies previously used by the covered
entity to distribute section 340B drugs during the first three
quarters of 2020. Or, if a covered entity neither used a contract
pharmacy during that period nor had an in-house pharmacy,
United Therapeutics would agree to deliver section 340B

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orders to a single contract pharmacy designated by the entity.
Additionally, it planned to require covered entities to provide
“claims data associated with all 340B contract pharmacy
orders” to a third-party platform, to facilitate efforts to police
diversion and duplicate discounts. J.A. 803. Around the same
time, other manufacturers adopted similar restrictions.
In response, HHS issued an advisory opinion stating that
section 340B requires manufacturers to deliver covered drugs
to any contract pharmacies with which a covered entity chooses
to partner. The agency reasoned that drugs shipped to any
contract pharmacy are still “purchased by” the covered entity
and thus within the plain language of the statute, regardless of
“how the covered entity chooses to distribute” the drugs. J.A.
382. HHS used vivid language to make its point that a covered
entity may choose any number of delivery locations: It said
that the “situs of delivery, be it the lunar surface, low-earth
orbit, or a neighborhood pharmacy, is irrelevant” to the
manufacturers’ statutory obligations. Id. at 383.
The District Court for the District of Delaware held that
the advisory opinion was arbitrary, in part because section
340B does not unambiguously prohibit manufacturers from
imposing distribution conditions. AstraZeneca Pharms. LP v.
Becerra, 543 F. Supp. 3d 47, 58–62 (D. Del. 2021). Two days
later, while that court was still considering what relief to afford,
HHS withdrew the opinion.
In the meantime, HRSA sent enforcement letters to
Novartis, United Therapeutics, and other large drug
manufacturers. In these letters, HRSA asserted that the
statutory duty to offer drugs to covered entities at or below the
ceiling price “is not qualified, restricted, or dependent on how
the covered entity chooses to distribute the covered outpatient
drugs.” J.A. 65 (Novartis letter) (“Nothing in the 340B statute

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grants a manufacturer the right to place conditions on its
fulfillment of its statutory obligation to offer 340B pricing on
covered outpatient drugs purchased by covered entities.”);
accord id. at 596 (United Therapeutics letter). The agency
ordered the companies to honor all contract-pharmacy
relationships and to credit covered entities for overcharges.
Novartis and United Therapeutics filed separate lawsuits
under the Administrative Procedure Act. The companies
sought vacatur of the enforcement letters, declaratory
judgments that the disputed conditions are lawful, and
injunctions barring future enforcement. On summary
judgment, the district court rejected the government’s position
that section 340B categorically prohibits manufacturers from
imposing contractual conditions on how its products may be
distributed. Novartis Pharms. Corp. v. Espinosa, 2021 WL
5161783, at *5–8 (D.D.C. Nov. 5, 2021). The court thus set
aside the enforcement letters, and it declared that the disputed
conditions do not violate section 340B “under the positions
advanced in the Violation Letters and developed in this
litigation.” Id. at *9. The court reserved for future cases the
question whether the conditions might be unlawful under some
other theory, so it declined to enjoin future enforcement. Id.
II
Familiar standards of review govern this case. Under the
APA, the district court was tasked with determining whether
HRSA’s enforcement letters were “arbitrary, capricious, an
abuse of discretion, or otherwise not in accordance with law.”
5 U.S.C. § 706(2)(A). We must do the same. Jicarilla Apache
Nation v. DOI, 613 F.3d 1112, 1118 (D.C. Cir. 2010).
The Secretary lacks rulemaking authority over the section
340B program. Two initial points follow. First, we must
consider whether the disputed conditions violate section 340B

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itself, not whether they violate agency guidance lacking the
force of law. Second, we cannot defer to HRSA’s
interpretation of section 340B under Chevron U.S.A. Inc. v.
NRDC, 467 U.S. 837 (1984), and its progeny. See United
States v. Mead Corp., 533 U.S. 218, 229–31 (2001);
Christensen v. Harris Cnty., 529 U.S. 576, 586–87 (2000).
Instead, we may follow the agency’s interpretation of the
statute only to the extent it has the “power to persuade.”
Skidmore v. Swift & Co., 323 U.S. 134, 140 (1944).
This appeal turns on whether drug manufacturers may
impose contractual conditions on how their products are
distributed to covered entities. The parties present stark
alternatives. According to HRSA, manufacturers may impose
no such conditions. Covered entities thus may insist on
delivery to an unlimited number of contract pharmacies,
regardless of their planetary or other location. For their part,
the manufacturers assert a nearly unfettered ability to impose
conditions. Among other things, they suggest that they could
(but choose not to) ship drugs only to the covered entities
themselves, thus removing contract pharmacies from the
picture entirely. Fortunately, we need only consider the
specific conditions addressed in the enforcement letters under
review. And we begin with the sweeping rationale asserted in
those letters.
III
We reject HRSA’s position that section 340B prohibits
drug manufacturers from imposing any conditions on the
distribution of discounted drugs to covered entities.
A
In pertinent part, section 340B requires manufacturers to
“offer each covered entity covered outpatient drugs for

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purchase” at or below a specified ceiling “price.” 42 U.S.C.
§ 256b(a)(1). To construe this text, we look to the ordinary
meaning of its key terms. HollyFrontier Cheyenne Refin., LLC
v. Renewable Fuels Ass’n, 141 S. Ct. 2172, 2176 (2021). Offer
means “[t]o present for acceptance or rejection.” American
Heritage Dictionary of the English Language 1255 (3d ed.
1992); accord Black’s Law Dictionary 1304 (11th ed. 2019).
Purchase means “[t]o obtain in exchange for money or its
equivalent; buy.” American Heritage Dictionary of the English
Language, supra, at 1470; accord Black’s Law Dictionary,
supra, at 1491. And price means “[t]he amount … of money
… asked for or given in exchange for something else.”
American Heritage Dictionary of the English Language, supra,
at 1437; accord Black’s Law Dictionary, supra, at 1439.
Putting these terms together, section 340B merely requires
manufacturers to propose to sell covered drugs to covered
entities at or below a specified monetary amount. Section
340B is thus silent about delivery conditions, which HRSA
itself once acknowledged. See 1996 Guidance, 61 Fed. Reg. at
43,549–50. As explained below, we think that this silence
preserves—rather than abrogates—the ability of sellers to
impose at least some delivery conditions.
To begin, in construing the term offer, we must consider
its meaning in the law of contracts. See Molzof v. United States,
502 U.S. 301, 305–06 (1992); A. Scalia & B. Garner, Reading
Law: The Interpretation of Legal Texts 320–21 (2012). And
background contract principles establish that an “offer”—like
any ensuing contract—may contain both price and non-price
terms. See, e.g., 1 Corbin on Contracts § 1.11 (2023) (defining
“offer” as “an expression by one [bargaining] party of assent to
certain definite terms” provided that the other party will
“express assent to the same terms”); see also Restatement
(Second) of Contracts § 24 cmt. a (Am. L. Inst. 1981). Indeed,
an offer often must contain some terms beyond the mere price

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to be definite enough to bind the contracting parties. See, e.g.,
Restatement (Second) of Contracts, supra, § 33 cmt. a; 1
Williston on Contracts § 4:22 (4th ed. 2023). And non-price
terms typically include provisions about the place or manner of
delivery. See, e.g., U.C.C. §§ 2-307, 2-308, 2-503 (Am. L. Inst.
& Unif. L. Comm’n 2022); 18 Williston on Contracts, supra,
§ 52:4. As a general matter, including such terms is fully
consistent with making an “offer” at a specified “price.”
Moreover, statutory silence implies that private parties
may act freely, as the Supreme Court explained in Christensen.
That case presented a question whether the Fair Labor
Standards Act prohibited employers from imposing certain
contractual conditions on employees. The government argued
that because the statute did not expressly “permit” employers
to impose the disputed conditions, they could not do so. 529
U.S. at 588. The Court said that position was “exactly
backwards.” Id. In its view, the dispositive question was
whether the FLSA prohibited the conditions at issue, see id.,
and statutory silence did not impliedly prohibit otherwise
lawful conduct, id. at 582–83. The same principle governs
here: Statutory silence implies that manufacturers may impose
distribution conditions by contract, not that they are prohibited
from doing so.
On balance, agency guidance reinforces our conclusion.
For almost three decades—between section 340B’s enactment
in 1992 and the advisory opinion in 2020—HRSA construed
the statute to allow manufacturers to insist on at least some
reasonable conditions. The 1994 Guidance stated that
manufacturers, in their contracts with covered entities, may
“include provisions that address customary business practice,
request standard information, or include other appropriate
contract provisions.” 59 Fed. Reg. at 25,114. The 1996
Guidance stated that manufacturers may limit distribution to

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one contract pharmacy per covered entity; indeed, it purported
to prohibit any more widespread distribution absent further
administrative action. 61 Fed. Reg. at 43,555. And even the
2010 Guidance, which purported to abandon that limit, did not
foreclose the possibility of other commercially reasonable
distribution conditions. We recognize that this guidance was
issued before Congress amended section 340B to require drug
manufacturers to “offer” covered drugs “for purchase” by
covered entities at or below a specified “price.” Pub. L. No.
111-148, tit. VII, § 7102, 124 Stat. at 827. But for present
purposes, that requirement is not meaningfully different from
the parallel requirement, imposed by section 340B from its
enactment, that the “price” manufacturers may charge for drugs
“purchased by a covered entity” may not exceed specified
amounts. See Pub. L. No. 102-585, § 602, 106 Stat. at 4967.
HRSA’s current position also would produce absurd
consequences. Consider United Therapeutics, which
manufactures “specialty” drugs requiring an unusual degree of
instruction and support. J.A. 540. To ensure patient safety—
and reduce its own exposure to tort liability—the company
makes these drugs available only through specialized
pharmacies or healthcare providers. If that kind of restriction
violated section 340B, the company would be compelled to
distribute these drugs in a potentially dangerous manner. Or
consider hypotheticals posited by Novartis: Suppose one
covered entity insists on delivery in red boxes to minimize its
processing costs and another insists on delivery at night when
hospitals are least busy. Of course, we would enforce statutory
text requiring such conditions. But we cannot plausibly
interpret statutory silence to subject manufacturers to whatever
delivery conditions any covered entity might find most
convenient.

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Finally, the Third Circuit has also rejected HRSA’s current
position. In Sanofi Aventis U.S. LLC v. HHS, 58 F.4th 696 (3d
Cir. 2023), that court held that because section 340B is “silent
about delivery,” HRSA erred in concluding that the statute
“requires drug makers to deliver drugs to an unlimited number
of contract pharmacies.” Id. at 703 (cleaned up). As explained
above, we agree entirely.
B
HRSA resists this conclusion on five grounds. First, it
invokes the proposition that there is no “such thing as a ‘canon
of donut holes.’” Bostock v. Clayton Cnty., 140 S. Ct. 1731,
1747 (2020). In other words, if a “general statutory rule”
applies by its terms, Congress’s “failure to speak directly” to a
covered case does not suggest a “tacit exception.” Id. But no
“general statutory rule” applies here. The requirement to
“offer” drugs at a certain “price” does not prohibit distribution
conditions, much less require the offeror to accede to any
distribution terms demanded by the offeree.
Second, HRSA invokes the statutory audit and dispute-
resolution mechanisms. But they serve to ensure compliance
with the various obligations that section 340B imposes. They
do not speak to the scope of those underlying obligations, such
as what a manufacturer must do to make the requisite “offer”
at the requisite “price.” HRSA reasons that this enforcement
scheme is carefully calibrated, which tends to suggest that it is
exclusive. See, e.g., Great-West Life & Annuity Ins. Co. v.
Knudson, 534 U.S. 204, 209 (2002). Perhaps so, but that at
most shows that section 340B establishes the precise metes and
bounds of audits and administrative adjudications. It does not
suggest that contractual limits on distribution are unlawful.
Third, HRSA cites legislative history. It notes that
Congress, in enacting section 340B, rejected a proposal that

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would have limited discounts to drugs dispensed through the
“on-site pharmacy services” of covered entities. S. Rep. No.
102-259, at 2 (1992). But failures to enact legislation “are not
reliable indicators of congressional intent.” Mead Corp. v.
Tilley, 490 U.S. 714, 723 (1989) (citing Trailmobile Co. v.
Whirls, 331 U.S. 40, 61 (1947)). And particularly so here,
given the sweeping nature of the proposed amendment, which
would have categorically prohibited the use of any contract
pharmacies. The rejection of that amendment, even if deemed
significant, hardly suggests that Congress opted for the
opposite extreme of categorically requiring manufacturers to
deal with an unlimited number of contract pharmacies.
Fourth, HRSA invokes what Justice Scalia dubbed the
“predicate-act canon,” which reads into statutes “everything
necessary” to make them “effectual.” Reading Law, supra, at
192–93 (cleaned up). Likewise, the agency invokes cases
disfavoring constructions that “would frustrate Congress’
manifest purpose,” United States v. Hayes, 555 U.S. 415, 426–
27 (2009); make a statute “devoid of reason and effect,” Great-
West Life, 534 U.S. at 217–18; or make a statute “self-
defeating,” Quarles v. United States, 139 S. Ct. 1872, 1879
(2019). But in applying the predicate-act canon, courts must
exercise caution “lest the tail of what is implied wag the dog of
what is expressly conferred.” Reading Law, supra, at 193.
And “no legislation pursues its purposes at all costs.”
Rodriguez v. United States, 480 U.S. 522, 525–26 (1987) (per
curiam). Under the section 340B scheme, therefore, wider
distribution is not necessarily better. And the more limited
distribution mechanisms used for nearly two decades, from
1992 to 2010, hardly rendered the scheme self-defeating or
ineffectual. HRSA’s generalized appeal to statutory purpose
thus provides no basis for expanding section 340B beyond the
most natural reading of its terms.

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Fifth, HRSA relies on its own extreme hypotheticals.
Suppose a manufacturer refuses to ship to any contract
pharmacy, demands to deliver drugs at its own facility, or
requires that a covered entity pick up its orders one pill at a
time. The short answer is that no such conditions are before us
in this case. The longer answer is that section 340B does
require drug manufacturers to make an “offer,” and even the
manufacturers concede that this means at least a bona fide
offer. Moreover, assessing the bona fides of an offer perhaps
can take into account the historical context of section 340B,
including the widespread use of contract pharmacies when that
provision was enacted. Furthermore, some conditions may be
onerous enough to effectively increase the contract “price,”
thus perhaps nudging it above the statutory ceiling. We are
confident that the courts can sensibly adjudicate questions like
these if they should arise in other cases. For now, we conclude
only that HRSA’s concern about unreasonable conditions fails
to justify its atextual and ahistorical position that manufacturers
may impose no distribution conditions at all.
IV
We turn now to the specific conditions at issue here. In
the enforcement letters and before the district court, HRSA
advanced a single, sweeping rationale for targeting the
conditions favored by Novartis and United Therapeutics—its
view that section 340B prohibits manufacturers from imposing
any conditions on the delivery of covered drugs to covered
entities. The district court rejected that position and then
stopped, reserving for future cases the question whether the
conditions at issue might be vulnerable based on some
narrower challenge by the agency. 2021 WL 5161783, at *9.
HRSA urges us to go farther, to provide as much certainty
as possible in our resolution of this case. That is an important

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reason for proceeding, and several other considerations
reinforce it. For one thing, on the legal questions presented, we
review the district court’s views de novo and the agency’s
views only under Skidmore. So we need not center our analysis
around the conclusions or rationale of another decisionmaker.
Moreover, HRSA does not seek to further develop any
predicate facts or to further explain its position as to the specific
conditions under review. Precisely the opposite: At oral
argument, we repeatedly asked the agency if it wanted that
opportunity, either on remand or in future proceedings. In
response, HRSA repeatedly urged us to decide the lawfulness
of the disputed conditions on their face, in this case and on the
present record. Finally, the answers are readily apparent.
Start with United Therapeutics. For each covered entity,
the company is willing to work with at least one contract
pharmacy designated or previously used by the entity. In
ordinary usage, nobody would say that this policy undermines
the bona fides of any “offer” or increases the contract “price.”
Moreover, this policy conforms to business practices that
governed section 340B sales during much of the program’s
history. And until 2010, the agency itself took the position that
a manufacturer not only could, but must, refuse to work with
more than one contract pharmacy per covered entity. As for
United Therapeutics’ further requirement that contract
pharmacies provide claims data for contract-pharmacy orders,
the 1994 Guidance itself opined that drug manufacturers may
require “standard information” from covered entities. 59 Fed.
Reg. 25,114. Likewise, the 2010 Guidance opines that covered
entities must “maintain auditable records sufficient to
demonstrate continued compliance with 340B requirements.”
75 Fed. Reg. at 10,274. And the only record evidence on this
point indicates that the burden of providing the claims data is
“minimal.” J.A. 577. We recognize that this evidence appears
in the district-court record but not the administrative record.

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However, HRSA afforded no formal adjudicatory process
before issuing the enforcement letters; it seeks no remand to
further develop a record before some administrative
adjudicator; and it urges us to address the condition on the
record currently before us.
When this case was briefed and argued, Novartis sought to
work only with contract pharmacies within 40 miles of covered
entities that were hospitals. We need not pass upon that
condition because Novartis has since abandoned it. Now,
Novartis intends to deliver section 340B drugs to a covered
entity’s in-house pharmacy or to a single contract pharmacy
designated by the covered entity. For reasons explained, that
restriction neither precludes Novartis from making a bona fide
“offer” nor increases its contract “price.” The restriction is also
consistent with historic practices under the section 340B
program. It is indistinguishable from the parallel provision
adopted by United Therapeutics. And it is indistinguishable
from the distribution conditions upheld by the Third Circuit in
Sanofi Aventis. See 58 F.4th at 701, 706.
V
In sum, we hold that section 340B does not categorically
prohibit manufacturers from imposing conditions on the
distribution of covered drugs to covered entities. We further
hold that the conditions at issue here do not violate section
340B on their face. We do not foreclose the possibility that
other, more onerous conditions might violate the statute.
Likewise, we do not foreclose the possibility that these
conditions may violate section 340B as applied in particular
circumstances—if, for example, HRSA could show that a
specific covered entity for some reason could not supply the
claims information demanded by United Therapeutics. The
district court correctly set aside the enforcement letters under

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review, while reserving the possibility of future enforcement
under theories of liability narrower than the one pressed here.
Affirmed.

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