Third Circuit Ruling Recognizes Due Process Claim in Favor of Drug Distributors Subjected to Quasi-Governmental Credentialing Standards

In Matrix v. NABP, the United States Court of Appeals for the Third Circuit reversed the dismissal of due process claims asserted by the plaintiff drug distributors under New Jersey common law. The court found that the National Association of Boards of Pharmacy (NABP) is a “quasi-public” association and the plaintiffs may therefore be able to show that NABP’s denial of accreditation was arbitrary and unreasonable.[1] In doing so, the court left open the potential for relief under other states’ common laws against arbitrary and unreasonable accreditation standards and the potential for federal claims to persist where state action is found. The decision ensures that due process standards are followed as a safety net against arbitrary credentialing requirements.

The case involved the adoption by OptumRx, one of the largest pharmacy benefit managers (PBM) in the country, of a network-wide requirement that all pharmacies purchase drugs solely from distributors accredited under NABP’s program. For smaller, secondary distributors, like the plaintiffs, this requirement effectively made the expensive and time-consuming credentialing process mandatory given the size of the OptumRx network. The plaintiffs’ applications for this credentialing were repeatedly denied for unclear, arbitrary reasons. While the plaintiffs were ultimately approved during the litigation, the long delay caused them substantial economic harm.

In a drug supply chain increasingly subjected to third-party credentialing standards, the Third Circuit’s ruling is a welcome relief for distributors and other supply chain participants facing a maze of credentialing and accreditation requirements that interfere with maintaining a robust competition that benefits consumers and pharmacies beyond the legal requirements.

The Third Circuit’s ruling has opened the door for other states to establish or recognize the due process rights of supply chain participants in other credentialing scenarios. With states taking more control over the anticompetitive actions of PBMs, which define pharmacy networks, the regulation of credentialing practices that impinges on the authority of state regulatory bodies, curtails fair competition by unnecessarily restricting business operations, and restricting patient access to pharmacies of their choice may become more prevalent as PBM reforms sweep across the country in the wake of the revelation of PBM abuses.

If you have any questions regarding the content of this alert, please contact Linda Clark, Health Care Controversies Team leader, at lclark@barclaydamon.com; Brad Gallagher, partner, at bgallagher@barclaydamon.com; or another member of the firm’s Health Care Controversies or Health & Human Services Providers Teams.