Opinion ID: 397836
Heading Depth: 1
Heading Rank: 1

Heading: proper applications of the access clause

Text: 13 At issue here are four fixed-price contracts for the sale of drugs negotiated in 1973 between Merck and the United States Government. Each of the contracts incorporated by reference a standard form access clause: 14 The Contractor agrees that the Comptroller General of the United States or any of his duly authorized representatives shall, until the expiration of three years after final payment under this contract, have access to and the right to examine any directly pertinent books, documents, papers and records of the Contractor involving transactions related to this contract. 15 J.A. 24. Under the access-to-records provision, such a clause is required by law to be added to all government contracts for more than $10,000 which are negotiated without advertising. 4 It is important to realize at the outset, then, that we interpret a clause in contracts entered freely by Merck, and not the validity of some administrative agency's demand for involuntary access to private business records. 16 The legislative history of the access-to-records statutes provides compelling evidence that Congress expected the General Accounting Office (GAO) to use the statutes to improve government procurement methods, and not merely to combat and deter fraud. Every circuit to examine this question has come to this conclusion, as did the lower court here, and Merck's argument to the contrary reopens a question that ought to be considered closed. Nevertheless, because the basic premise of the statutes sheds light on my disagreement with the court below, it may be useful to review Merck's contentions and explain why they lack merit. 17 Merck opposes governmental access to its records under the statutes on three main grounds. The first can be disposed of quickly. Merck claims that the GAO demand for Merck's records was prompted by the prodding of individual Senators who sought this headline-grabbing information for their own ends. 5 Speculation about Senatorial prodding or GAO's plans to leak confidential information to the media, 6 however, is irrelevant if the Comptroller General otherwise has a legitimate purpose for making the demand for access at issue here. 7 Our inquiry must focus on whether the Comptroller General's request was within the scope of his authority under the statutes. It is to that question we now turn.
18 Merck argues that GAO has no legitimate claim for access to Merck's records because GAO has not alleged any possibility of fraud, corruption, or the need to audit Merck's books. The Comptroller General is not authorized to demand access to contractor records simply to gather data for an industry-wide economic study, Merck claims, and this is said to be the aim of the GAO's demand. 8 In Merck's analysis, the access statutes were only meant to apply in situations where allegations of fraud or illegality suggested that it would be desirable to conduct an audit of a specific contract. But the access demands may not be made merely to let GAO conduct broad-ranging and ill-defined studies of the general adequacy of government procurement procedures. Merck Brief at 53. 19 This contention is not new. 9 A variety of sources are said to show that the access provision was intended solely to provide a method to discover fraudulent activities, 10 or to serve as a deterrent to improper conduct by government procurement officers, 11 or to apply only to situations in which there was reason to suspect fraud or bad faith or illegality. 12 Merck emphasizes repeatedly that Congress had a single and limited purpose, which was to protect the government from fraud and other abuses. Merck Reply Brief at 26; see id. at 4, 14, 28. (O)nly the suspicion of fraud or other improprieties could trigger the access clause, id. at 27, because the debates leave no room for doubt as to the limited anti-fraud purpose of the access statute. Id. at 29. These would be persuasive claims if they were supported by the legislative history. They grossly overstate that history, however, and it is time to dispatch the contention once and for all. 20 It is true that Representative Hardy, sponsor of the access-to-records legislation, 13 explained that his main purpose in introducing the bill was to deter improprieties in the negotiation of Government contracts. 97 Cong.Rec. 13198 (1951). Representative Hardy, however, intended the clause to do far more than combat or deter fraud. He spoke of excessive contract prices, wastefulness in the negotiation of contracts, and the need for every reasonable safeguard against waste and extravagance. Id. These comments convey concerns that go far beyond the limited anti-fraud purpose asserted by Merck. They show that Congress was particularly concerned about the general adequacy of government procurement techniques and not simply illegalities or frauds. Early in his explanation of the benefits of the access legislation, for example, Representative Hardy spelled out precisely the goal of improving procurement methods that Merck rejects: 21 Under conditions as they now exist, competitive bidding has little or no effect upon contracts which are negotiated without advertising. As a result, when a contract is being negotiated, here is a typical illustration of what usually happens: A contractor with years of experience comes to the conference table accompanied by a highly competent accountant and equally competent lawyer. The Government representative on the other side of the table will, in a great majority of cases, be at a tremendous disadvantage, from the standpoint of both training and experience, no matter how conscientious and honest he may be. So, aside from any intentional liberality on the part of the Government contracting officer, there is every chance in the world that the Government will come out on the short end of the deal. This bill would at least enable the agent of the Congress to check the transaction, both from the Government records and the contractors' books. 22 Id. (emphasis added). Representative Hardy obviously sought to improve the governmental procurement system as a whole by equalizing the relationship between more experienced contractors and government representatives, who were otherwise at a tremendous disadvantage, no matter how conscientious and honest they might be. 14 The access-to-records clause, by shedding light where none had been cast before, would reduce the number of times that the United States will come out on the short end of the deal. 23 Other statements also demonstrate the true tenor of congressional concerns. Representative Hardy continued his explanation of the access bill by suggesting two hypothetical situations to which the clause would apply. In the first, a contractor charged the government for a much greater amount of overhead than it asked under a private contract for the same work. (I)t would then obviously be desirable for the General Accounting Office to look behind the rate which had been established. Id. Should GAO find that the rates were excessive, Representative Hardy explained, it would then be able to bring the facts to the attention of contracting authorities. Id. In the second vivid example of how this authority would enable the GAO to do an effective job, Representative Hardy referred to an earlier congressional investigation into government procurement of automobile parts: 24 We found one situation where the Government was buying parts from an automobile dealer who, in turn, was getting them from a parts distributor who, in turn, was getting them from a small tool shop. Naturally, the price paid by the Government included profits upon profits and completely wasteful administrative and handling costs. It would be difficult, if not impossible, for GAO to detect such a situation without the right afforded in this bill. 25 Id. (emphasis added). There is no implication in the statements about either hypothetical that the private contractors had acted fraudulently or illegally. Representative Hardy's access legislation was designed to uncover inefficient procurement methods as well as misfeasance, and Congress expected the access clause to reveal much more than fraud. Moreover, the second example effectively refutes Merck's suggestion that the government must allege or suspect procurement abuses before the access clause can be invoked. Merck Brief at 14, 33. Representative Hardy's example is one in which it would be impossible for GAO to detect waste without the authority to examine contractor records at will. Had Congress intended GAO to use the access clause only when it had suspicions of wrongdoing, Representative Hardy would surely have spoken of the difficulty for GAO to investigate that situation rather than the ability of GAO to detect it. 26 Several exchanges in the debates which followed Representative Hardy's introduction of the access-to-records legislation also indicate that Merck's reading of that legislation is woefully narrow. When Representative Mills suggested how useful the bill might be in investigating potentially fraudulent situations, Representative Hardy responded emphatically: 27 The gentleman is right, with this exception that I think should be clearly understood, that there are a lot of other situations besides those involving fraud which might be uncovered. 28 97 Cong.Rec. 13199 (1951) (emphasis added). Representative Hardy also had the following exchange with Representative Hoffman: 29 Mr. HOFFMAN. The whole thing arises out of the belief ... that the Federal employees who negotiate these contracts are no match for the people on the other end of the deal, those who negotiate for private enterprise. It that not right? That is what gives rise to this? 30 Mr. HARDY. What is the gentleman's question? 31 Mr. HOFFMAN. This bill is based upon the thought that the Federal employees who negotiate these contracts are no match for the people who represented private corporations or individuals? 32 Mr. HARDY. I think that is one factor. 33 Id. at 13377. 34 Congress thus anticipated that the access-to-records legislation would lead to general improvement in the government's procurement system simply because it would equalize the relationship between agents of the United States and private contractors. Not surprisingly, this is also a long-standing interpretation by GAO: 35 The right of access by GAO to records of costs of production is not limited to that necessary to determine whether the contracts were performed in accordance with their terms and whether the contracting officer had been defrauded or misled in entering into the contracts. 36 115 Cong.Rec. 25801 (1969) (GAO memorandum reprinted at request of Senator Proxmire). 15 In the instant case, the Comptroller General has explained that the request for Merck's records is necessary to determine the adequacy of the protection afforded the Government by the negotiating techniques used by the procuring agencies. Memorandum and Order, Aug. 12, 1977, J.A. 509. This purpose is within the scope of his lawful authority, for it puts the access legislation to exactly the sort of use for which Congress intended it.
37 Merck's third challenge to the applicability of the access clause is based on the nature of the contracts at issue. Because these contracts are not cost-based, and were negotiated without any reference to Merck's costs, Merck argues that its cost records cannot be relevant to the prices paid by the government or directly pertinent to the negotiation or performance of the contracts. Merck Brief at 63. The United States did not ask for any cost data or estimates from Merck when it negotiated these fixed-price contracts, and Merck did not volunteer or submit any such data or estimates during the negotiations. As a result, the company says, its cost data simply do not involve transactions related to such contracts. Id. 38 This contention is deceptively appealing, but the legislative history provides no support for limiting the access-to-records clause to contracts that are cost-based or negotiated with reference to costs. It is true that the access-to-records legislation originated during the Korean War, when inflation and changes in demand for raw materials threatened to force many government contractors with fixed-price contracts into default. These pressures convinced Congress to give the president emergency authority to modify existing contracts in January, 1951, 16 and the access-to-records clause was a concomitant measure to ensure that contractors not take advantage of modifications under the emergency authority. 17 But the fact that a specific concern provides the initial impetus for the passage of reform legislation will not necessarily defeat the broader application of that legislation simply because the initial stimulus disappears. Although Congress clearly regarded contracts negotiated without advertising as extraordinary measures, often necessitated by wartime pressures, 18 Congress explicitly wanted the clause to apply to all contracts negotiated without advertising. It is a far leap from this history to the conclusion that application of the access clause depends on whether representations about costs are made during the negotiation, or to the claim that the clause may apply to cost-plus contracts but not those negotiated in other ways. See Merck Brief at 64, 72 n.28. 39 Moreover, the legislative saga of the access-to-records clause did not end with the emergency grant of wartime renegotiation authority. The January statute was limited by its terms to the duration of the national emergency declared on December 16, 1950, and was to expire in any event after eighteen months. 64 Stat. at 1258. But the present and more permanent version of the access-to-records clause was proposed by Representative Hardy in October, 1951, after he learned that procurement officers were negotiating contract modifications under the permanent procurement statutes rather than the January amendments to the First War Powers Act, in order to plug this loophole. 97 Cong.Rec. 13198 (1951). Merck argues that the temporary duration of the January legislation shows that the October legislation could not have been intended to allow generalized studies of the operation of the procurement system. Merck Brief at 26. But this argument fails to take account of the fact that the October legislation had an indefinite duration and was to apply to two permanent procurement statutes. 40 Merck's confusion about the relevance of costs to the applicability of the access clause is understandable because it can be traced to Merck's argument that the access legislation was designed merely to achieve a limited anti-fraud purpose. Were that correct, it might follow that legislation to deter fraudulent reporting of costs should not apply where no representation about costs are made at all. But the government's purpose behind this access legislation was much broader; Congress was concerned about general improvements in the procurement system. There is compelling reason to think that Congress saw as much reason to have access to cost records for contracts negotiated without regard to costs as for contracts based expressly on cost, perhaps even more. 41 This interpretation of the access legislation is hardly new. 19 Every court to hear the question has held that the access-to-records clause gives the government the right to examine cost data even when the contracts are negotiated without party representations concerning costs. Hewlett-Packard Co. v. United States, 385 F.2d 1013 (9th Cir. 1967), cert. denied, 390 U.S. 988, 88 S.Ct. 1184, 19 L.Ed.2d 1292 (1968), involved GAO efforts to examine cost data for equipment sold under several fixed-price contracts. Although production costs were not taken into consideration in negotiating the contracts in question, the court said, it was clear that the subject matter of the contracts was the procurement of described property by the government. 42 Production costs directly pertain to that subject matter, because if out of line with the contract price the contract may have been an inappropriate means of meeting this particular procurement need of the Government. While this appraisal could not affect these particular contracts, it could lead to the use of other methods of meeting future procurement needs. 43 Id. at 1016. In Eli Lilly & Co. v. Staats, 574 F.2d 904 (7th Cir.), cert. denied, 439 U.S. 959, 99 S.Ct. 362, 58 L.Ed.2d 351 (1978), the court rejected the drug company's argument to the contrary: 44 Such an interpretation might be reasonable if the statutory standard were that the information must be directly pertinent to the negotiation, but the standard is directly pertinent to the contract and plaintiff offers no reason to suppose that there would be a reason to negotiate about each item that might have a significant effect on the seller's cost or performance. Id. at 914. 20 45 The foregoing discussion also demonstrates the unpersuasiveness of Merck's arguments by analogy to other procurement acts. Merck asks that we interpret the access clause in light of the broader structure of government procurement fashioned by Congress. Merck Brief at 64. This structure includes the Renegotiation Act of 1951, Pub.L.No. 82-9, 65 Stat. 7, as amended in 1954, Pub.L.No. 83-764, 68 Stat. 1116, and the 1962 Truth-in-Negotiations Act, Pub.L.No. 87-653, 76 Stat. 528. Under the Renegotiation Act, contractors are generally required to permit audits of their books and records so that the government can detect and recover excess profits. The 1954 amendments exempted from this process those contracts involving standard commercial items, 50 U.S.C.App. §§ 1216(e)(1)(A) and (4)(B). The government concedes that the Merck contracts in this case involve standard commercial items and thus are exempt from the reporting requirements of the Renegotiation Act, and Merck argues that the access clause should be read no more broadly. Merck Brief at 67. Similarly, under the Truth-in-Negotiation Act, contractors need not submit actual or estimated cost and pricing data during the negotiation process when the contract price is based on the established catalog price for a standard commercial item sold in substantial quantities to the general public. 10 U.S.C. § 2306(f). 21 Merck argues that the products sold under the contracts at issue here are standard commercial items sold at or below the established catalog price. It urges that the cost data that Congress has held to be irrelevant under the Truth-in-Negotiation Act should be found equally irrelevant under the access-to-records clause. 46 These arguments prove too much. If the subsequent procurement legislation is of the broad sweep Merck supposes, it renders the 1951 access-to-records legislation redundant. Yet it is a canon of statutory construction that we are not to assume the redundancy of statutes, if they can be construed to be independently meaningful. 22 Furthermore, the later provisions illustrate that Congress could easily have drafted a more narrow access provision in 1951, or any later time, had it chosen to do so. See Hewlett-Packard v. United States, 385 F.2d at 1016 (if such a limited scope of examination had been intended by Congress it would have found the means to so indicate); Eli Lilly & Co. v. Staats, 574 F.2d at 916 (Since Congress in the Renegotiation Act demonstrated its ability to draft a specific exemption provision, its failure to do so in the access-to-records legislation indicates that no such exemption was intended.). 47 Most importantly, however, Merck's arguments from these unrelated procurement statutes are unconvincing because their premise is erroneous. Essentially, Merck argues that it is pointless for the United States to inquire about Merck's costs because Merck is market-oriented and sells its products to the government and the public at the same market price, thus proving that the instant contracts are ones in which the reasonableness of prices has been assured by competitive market forces. Merck Reply Brief at 41. Merck's assumptions about the market may indeed be true, but then again they may not. The situation can easily be imagined in which a number of companies do business with the government at an established catalog price, and yet in which the government is badly overcharged because an absence of truly competitive market forces permits oligopolistic pricing. 23 The fact that products are standard commercial items, or even that they are sold in substantial quantities to the public, does not necessarily determine whether the market for them is truly competitive. No single purchaser of drugs is anywhere near as large or as non-competitively situated as is the United States government. Moreover, even if the market is competitive, why should not the United States (which is probably the largest single purchaser of some of these drug items) receive a measure for quantity discounting?Recognition of this fact is singularly important. It is too little appreciated that government, in a number of ways, may often require far greater protection in the marketplace than private individuals. The manufacturer who sells to a retailer must hold down his prices or risk the possibility that the retailer will be forced out of business, thereby killing the proverbial goose with the golden eggs. Unfortunately, when government is the buyer, no such scruples need depress the prices that contractors can charge. Seldom, and almost never for financial reasons, do governments 'go out of business.' Opportunities for fraud and corruption in government contracting have long been obvious; the inherent non-corrupt, non-fraudulent disadvantages that government often has in dealing with private contractors are only beginning to be understood. The very size of government purchases, and the necessity thereof, may make the traditional marketplace shields ineffective. In this era of cost-overrun scandals, it is sometimes forgotten that Congress devised the cost-plus contract as a major reform of its procurement methods, which once depended on negotiations without regard to costs that left the government at a tremendous disadvantage vis-a-vis the private contractor. The Hardy bill was designed to reduce this inequality by providing government with data that could enhance its procurement practices, thereby fighting wastefulness as well as fraud. There is no reason to think that Congress decided the reforms should not apply simply because private contractors were so much more sophisticated than the government that they could manage to avoid discussing their costs entirely. Congress expected to protect the government in exactly the sort of situation now presented, and the district court correctly found that the access provision applies to the Merck contracts at issue here.