Opinion ID: 397836
Heading Depth: 2
Heading Rank: 2

Heading: The Focus of GAO's Request

Text: 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.