Health Law Daily Wrap Up, DRUGS AND BIOLOGICS—D.S.D.: 340B contract pharmacy delivery protections not preempted, avoid constitutional limits, (Aug 17, 2026)

By WK Editorial Staff

South Dakota’s 340B contract pharmacy law regulated drug delivery rather than drug pricing and therefore was not preempted by federal law, was not an unconstitutional taking, and did not violate the Commerce Clause or Contracts Clause.

The U.S. District Court for the District of South Dakota dismissed challenges brought by several pharmaceutical manufacturers and a trade association against South Dakota Senate Bill 154 (S.B. 154), concluding that the statute was neither preempted by federal law nor unconstitutional. The court determined that the manufacturers and their trade associations had standing because they alleged economic injury and restrictions on conduct they wished to pursue, including contract pharmacy limitations and data-sharing requirements. However, the court held that S.B. 154 regulated delivery of 340B drugs to covered entities and their contract pharmacies rather than drug pricing (AbbVie v. Jackley, No. 3:25-CV-03006-RAL, consolidated with Nos. 3:25-CV-03021-RAL and 4:25-CV-04156-RAL (D.S.D. Aug. 7, 2026)).

Background. Pharmaceutical manufacturers AbbVie Inc. and AstraZeneca, along with trade association Pharmaceutical Research and Manufacturers of America, challenged South Dakota’s law prohibiting restrictions on delivery of 340B drugs to contract pharmacies and limiting the circumstances in which manufacturers may require claims or utilization data from covered entities and pharmacies. They argued that the statute interfered with federal oversight mechanisms, impeded efforts to identify diversion and duplicate discounts, and effectively compelled additional discounted sales.

Preemption. The court rejected claims that federal law field preempted S.B. 154. Relying heavily on recent Eighth Circuit precedent interpreting similar state statutes, the court concluded that Congress did not address the field of 340B drug delivery. According to the court, federal law established pricing obligations and safeguards against diversion and duplicate discounts but was largely silent regarding drug delivery arrangements involving contract pharmacies. Because pharmacy regulation traditionally fell within state authority, the court found no indication that Congress intended to exclude states from regulating this area.

The manufacturers argued that S.B. 154 functioned as a price regulation. The court disagreed. It emphasized that federal law establishes the 340B pricing formula and that South Dakota’s statute neither changed that formula nor set prices. Instead, the statute limited manufacturers’ ability to restrict where discounted drugs may be delivered once covered entities purchased them. The court characterized S.B. 154 as a delivery regulation rather than a pricing measure, aligning it with similar statutes previously upheld by federal courts.

The court also rejected conflict-preemption theories. Manufacturers argued that the state law obstructed federal efforts to prevent diversion and duplicate discounts by limiting access to claims data. The court found that S.B. 154 expressly permitted data sharing when federal law required it and expressly preserved federally authorized audits of covered entities. Because the statute left intact the federal auditing and enforcement framework, the court concluded that compliance with both state and federal law was possible.

Similarly, the court rejected assertions that S.B. 154 protected or encouraged allegedly improper replenishment models used by some contract pharmacies. While the manufacturers alleged that certain replenishment practices facilitate diversion and duplicate discounts, the court noted that federal law already prohibited those practices. S.B. 154 neither authorized nor legitimized conduct forbidden under the federal program. The court viewed the manufacturers’ objections as concerns about possible abuses of the 340B system rather than conflicts created by the text of the state statute itself.

Immunity doctrine. The court likewise rejected arguments based on the intergovernmental immunity doctrine. Manufacturers contended that participation in the 340B program should be considered as federal contractors and that the state statute discriminated against them because of their relationship with the federal government. The court concluded that participation in the 340B program did not transform manufacturers into federal contractors. Instead, the statute regulated manufacturers’ own conduct within the state and did not directly regulate federal operations or impose costs on the federal government.

Constitutional claims. Turning to the Takings Clause, the court found no physical or regulatory taking. The court noted that S.B. 154 did not require manufacturers to sell additional drugs beyond those already covered by their voluntary participation in the 340B program. The statute only governed delivery arrangements after covered entities purchased drugs at federally established prices. Because participation in the 340B program was voluntary and manufacturers received access to Medicare and Medicaid markets in exchange for their participation, the court concluded that the alleged burdens did not constitute compelled takings of private property.

Commerce Clause challenges were also rejected. The court held that S.B. 154 did not discriminate against interstate commerce because it applied equally to all manufacturers and did not favor in-state competitors. The court also found no undue burden on interstate commerce, concluding that any burdens associated with compliance were outweighed by South Dakota’s interest in regulating pharmacy services and promoting access to medications for patients served by covered entities. The court further determined that the statute did not exert unconstitutional extraterritorial control because it regulated only the delivery of 340B drugs to covered entities and contract pharmacies associated with South Dakota, even if some transactions involve out-of-state entities.

Finally, the court dismissed AstraZeneca’s Contracts Clause claim and PhRMA’s state-law claim. The court found that S.B. 154 did not alter manufacturers’ federal pricing agreements because those agreements govern pricing rather than delivery logistics. The court also rejected PhRMA’s argument that the statute should be interpreted not to apply to manufacturers’ proposed contract pharmacy and data-sharing conditions, concluding that such an interpretation would effectively nullify the statute.

The court dismissed all claims without prejudice and granted the state’s motions to dismiss in the consolidated actions.

The case is No. 3:25-CV-03006-RAL.

Judge: Lange, R.

Attorneys: Hanna Eddy (Kirkland & Ellis LLP) for AbbVie Inc. Grant M. Flynn, Office of Attorney General, for Marty Jackley.

Companies: AbbVie Inc.

MainStory: TopStory CaseDecisions CMSNews DrugBiologicNews GCNNews GeneralNews PreemptionNews PrescriptionDrugNews SouthDakotaNews