A federal appeals court reinstated a lawsuit brought by Santa Clara County against drugmakers for allegedly overcharging county hospitals for prescription drugs for Medi-Cal patients, in violation of a federal law requiring discounts, The San Francisco Chronicle reports.

The ruling by the Ninth US Circuit Court of Appeals in San Francisco is the first in the nation to find that counties have the right to sue manufacturers under a 1992 law requiring companies supplying medicines to the Medicaid program - called Medi-Cal in California - to sell them to public hospitals at a specified percentage of their average nationwide price, the paper writes.

The county sued in 2005 after the US Department of Health and Human Services’ inspector general found that drugmakers had violated the price ceilings - by $3.9 million nationwide in June 2005 alone - and that the federal government was doing little to enforce the law, according to the Chron.

A federal judge in San Francisco dismissed the lawsuit, ruling that only the government, which signed the Medicaid agreements with the companies, had the right to enforce compliance. The appeals court disagreed, saying the government’s pricing contracts with manufacturers are intended to benefit counties, which can sue when the contracts are violated.

A breach-of-contract suit, though not expressly authorized by the 1992 law, is “one way of ensuring that drug companies comply with their obligations under the program and provide those discounts,” Judge Raymond Fisher said in the 3-0 ruling, the Chron writes.

The suit seeks repayment of alleged overcharges from 2001 to 2005. County Counsel Ann Ravel tells the paper the county doesn’t know how much it may have overpaid because the government and the companies keep their price agreements confidential. But she says the ruling allows the county to obtain that information and should encourage other counties to join the case.

Sanford Svetcov, the county’s lead attorney, tells the paper a local government’s ability to sue under the law is “essential…where there has been little or no government enforcement.”

Robert Litt, attorney for AstraZeneca Pharmaceuticals and chief lawyer for the manufacturers in the suit, tells the Chron the drugmakers were evaluating their next steps, but that AstraZeneca had not overcharged the county.