The Fourth Circuit has affirmed a preliminary injunction barring enforcement of West Virginia’s S.B. 325, which sought to restrict how drug manufacturers implement contract pharmacy policies under the federal 340B Drug Pricing Program. In a published decision, the court held that manufacturers are likely to succeed on their claim that S.B. 325 is preempted because it impermissibly rewrites the “bargain” Congress struck with manufacturers under its spending power and interferes with the Health and Human Services’ (HHS) exclusive enforcement role.
The decision deepens a developing circuit split over whether states may dictate how manufacturers deliver 340B‑priced drugs to contract pharmacies and what data manufacturers may require as a condition of delivery. Framing 340B as a federal “contractual bargain” with private manufacturers that is not open regulatory terrain for states, the opinion could substantially limit state regulation of 340B arrangements and may invite Supreme Court review.
Background
340B operates as an additional condition layered onto the Medicaid Drug Rebate Program, both enacted under Congress’s spending power. In exchange for Medicaid market access, manufacturers agree to provide rebates to state Medicaid programs and, under 340B, to “offer” certain outpatient drugs to specified “covered entities” at discounted “ceiling prices.” Covered entities then capture margin by buying at 340B prices and receiving higher third‑party reimbursement, subject to restrictions on diversion and duplicate discounts.
Because many covered entities lack in‑house pharmacies, they have long relied on contract pharmacies. After HHS in 2010 allowed an unlimited number of contract pharmacies, 340B volumes and related revenue for covered entities and their pharmacy partners expanded sharply. Manufacturers responded with policies limiting delivery of 340B‑priced drugs to one or a small number of contract pharmacies and often conditioning broader delivery on claims or utilization data to address diversion and duplicate discounts.
HHS attempted to compel broader delivery through guidance and an advisory opinion. The Third and D.C. Circuits rejected that view, holding that the statute governs price, not delivery, and permits manufacturers to impose reasonable conditions, including limits on contract pharmacy delivery. Against this backdrop, West Virginia enacted S.B. 325, applicable only to 340B manufacturers, making it unlawful to “deny, restrict, or prohibit” delivery of 340B drugs to any 340B‑authorized location or to require claims/utilization data as a condition of delivery, backed by $50,000 penalties per violation.
Manufacturers sued and obtained a preliminary injunction. The Fourth Circuit has now affirmed.
Key Points from the Fourth Circuit’s Decision
- Spending Power “Bargain” Framing
The court grounds its analysis in spending power jurisprudence and characterizes 340B as a contractual‑style bargain: Congress offers manufacturers Medicaid access; manufacturers accept defined pricing obligations. States are not parties to this bargain and cannot rewrite its terms. - States Cannot Add New Conditions for 340B Participants
Because S.B. 325 applies only to manufacturers that opt into 340B and then imposes additional duties such as unlimited contract pharmacy delivery and restrictions on data conditions, the court likens the law to the state action invalidated in Lawrence County, where a state tried to add new conditions to a federal funding bargain. - No Presumption Against Preemption
The court refuses to apply the usual presumption against preemption, reasoning that S.B. 325 does not regulate traditional state health and safety functions. Instead, it “facially targets a federal domain” by inserting the state into a relationship defined by federal spending legislation, federal statute, and HHS enforcement. - Field and Conflict Preemption
The court concludes that Congress has effectively occupied the field of defining the 340B bargain with manufacturers. It also finds likely conflict preemption: S.B. 325 clashes with Congress’s decision to make HHS the sole enforcer of 340B and with HHS’s administrative dispute resolution and audit mechanisms. - Interference with HHS Enforcement and ADR
By requiring state officials and courts to decide whether an “offer” has been made under 340B and by forbidding manufacturers from conditioning delivery on claims/utilization data, S.B. 325 intrudes on HHS’s role in policing overcharges, diversion, and duplicate discounts and impairs manufacturers’ ability to collect data needed for HHS‑supervised audits and disputes. - Emerging Circuit Split
The opinion acknowledges a circuit split. The Fourth Circuit’s approach diverges from the Fifth and Eighth Circuits, which upheld similar laws by characterizing them as state regulation of pharmacy distribution rather than interference with the federal 340B bargain. This divergence increases the likelihood of further appellate and potential Supreme Court review. - Irreparable Harm and Equities
On the Winter factors, the court finds irreparable harm in unrecoverable financial losses from either complying with or defying S.B. 325, given substantial civil penalties and compliance costs. It holds that the balance of equities and public interest favor maintaining the status quo, particularly where S.B. 325 is likely preempted under the Supremacy Clause.
The Dissent
Judge Benjamin would have reversed the preliminary injunction and allowed S.B. 325 to take effect. The dissent criticizes the majority for relying on a Spending Clause “bargain” theory not briefed by the parties and, in its view, not grounded in existing preemption doctrine. Applying a conventional preemption framework with a strong presumption against displacing state health and safety regulation, the dissent characterizes S.B. 325 as a permissible state regulation of drug distribution and patient access in an area where 340B is silent.
Aligning with the Fifth and Eighth Circuits and multiple district courts, the dissent concludes that 340B neither occupies the field nor conflicts with state contract pharmacy rules. On irreparable harm, the dissent would find the manufacturers’ showing inadequate and would instead place substantial weight on evidence that manufacturer delivery restrictions threaten the financial viability of safety‑net and rural providers and the services funded through 340B savings.
Conclusion
Within the Fourth Circuit, the decision sends a clear signal that states may not use their police powers to re‑engineer the terms of Congress’s 340B bargain with manufacturers or overlay state enforcement schemes atop HHS’s exclusive authority. By framing 340B as a spending power contract with private entities and emphasizing both field and conflict preemption, the opinion adopts a structural approach that could shape future litigation over state efforts to regulate 340B relationships well beyond West Virginia’s S.B. 325.