Opinion ID: 355306
Heading Depth: 1
Heading Rank: 2

Heading: The Comptroller General's Powers

Text: 53 That the Comptroller General was acting in accord with a legitimate purpose would not alone be sufficient to justify his request in the absence of a statute or contract authorizing the actions he took in requesting the information. Plaintiff's second line of offense is that the inspection sought was not authorized by the statutory or contractual language (quoted at pages 908-909 and 906-907 supra ). Those clauses gave the Comptroller General the right to examine any pertinent books, documents, papers and records of the Contractor involving transactions related to this contract. His letter tracked that language but added 54 which include, but are not limited to, (1) records of experienced costs including costs of direct materials, direct labor, overhead, and other pertinent corporate costs, (2) support for prices charged to the Government, and (3) such other information as may be necessary for use to review the reasonableness of the contract prices and the adequacy of the protection afforded the Government's interests.This language was derived from the request approved in Hewlett-packard, supra. 55 The few courts that have interpreted this language have reached differing conclusions. Judge Holder's opinion below gave the statutory language its narrowest reading, allowing the Government to obtain information only to determine Lilly's catalog prices for the purchased items, to determine whether the Government's purchase price was based on the catalog prices of items sold in substantial quantities to the general public, and to determine whether the prices paid by the Government were equal to or less than the catalog prices (App. 142a). A somewhat less restrictive interpretation was offered in Bristol Laboratories v. Staats, 428 F.Supp. 1388 (S.D.N.Y.1977). In that case, which grew out of the same set of inquiries by the Comptroller General as this case, the district court limited the Comptroller General to information that Bristol had agreed to offer: manufacturing costs (including raw and packaging materials, labor and fringe benefits, quality control and supervision); manufacturing overhead (including plant administration, production planning, warehousing, utilities and security); royalty expenses; and delivery costs. The court apparently accepted Bristol's argument that research and development, marketing and promotion, and distribution and administration costs should not be disclosed because they are too remote to the contracts and have only the most general relation, if any, to the prices charged. Id. at 1389-1390. The Bristol court's conclusions recently were accepted by Judge Bryant in Merck & Co., Inc. v. Staats, Civil Action No. 74-1447 (D.D.C. Aug. 12, 1977). 5 Although plaintiff and the Merck court both sought to read it narrowly, we view the Ninth Circuit's opinion in Hewlett-Packard Company v. United States, 385 F.2d 1013 (1967), certiorari denied, 390 U.S. 988, 88 S.Ct. 1184, 19 L.Ed.2d 1292, as taking a considerably broader view. While it is true that the district court's order affirmed by the Ninth Circuit in Hewlett-Packard went no further than declaring that the Comptroller General could examine any records relating to the cost of producing the items furnished under the contracts, the scope of the order in that case and, more importantly, the reasoning of the reviewing court do not seem to be significantly different from the Comptroller General's position here. Plaintiff's observation that the Hewlett-Packard order did not expressly include reference to costs not assigned by the firm to individual products and similar general cost and pricing information is not persuasive both because the order included overhead costs, a type of cost that is not always assignable to individual products, and because the rationale of the Ninth Circuit's opinion, which emphasized the appropriateness of inquiry into the procurement process as a whole, was not limited to disclosure of the specific costs requested by the Comptroller General in that particular case.
56 At least as applied to the pharmaceutical industry, we think that the broad reading of Hewlett-Packard is the reading most consistent with the plain meaning of the statutory language and with the legislative history. In interpreting the statutory language, as the Comptroller General contends, it is hard to imagine anything more directly related to a contract than the cost of producing the items covered by it or the matters going into the makeup of the price (Reply Br. 9). Accord, Hewlett-Packard Company v. United States, supra, at 1016. That such costs can be directly pertinent to the contract even though they are not all assigned by the company to the contract or to the product can be explained, at least as applied to contracts with pharmaceutical companies, by the fact that the manufacturing and distribution costs of individual pharmaceutical products have been estimated to constitute as little as 9 per cent of the products' sale prices. See Rucker, Public Policy Considerations and the Pricing of Prescription Drugs in the United States, 4 Int. J. Health Services 171, 173 (1974). Although it might be possible to argue in other industries that costs such as research and development have such a small impact that they are not directly pertinent to the contract and its price, research and other costs not immediately attributable to one product form such a large portion of the costs of a pharmaceutical product that their import to such a contract seems inescapable. 57 In response to plaintiff's argument that including these items would not give full effect to the limits on disclosure implied by the use of the word directly, without disputing that directness is a difficult concept to define, 6 it should be noted that costs such as research and development at the least appear to have a logical, causal and consequential relationship to a portion of the price of the products purchased by the Government. Further, contrary to plaintiff's contention, such costs are not remote within the established definitions of that term in relation to at least a portion of the price because their inclusion in the price of the product is not unforeseeable once the costs are incurred, nor is their impact on a part of the price significantly altered by any intervening cause. See generally W. Prosser, Law of Torts § 42 (4th ed. 1971). If such costs constituted a minimal share of the total price of the contract, it might be difficult to argue that these costs are directly pertinent to the price of the contract as a whole, but that issue does not seem to be presented on these facts. Thus in relation to the contract as a whole, these costs fit within the common and legal understandings of directly pertinent. The mere fact that, as plaintiff asserts, it does not or even could not allocate costs such as research and development to an individual contract does not undercut the proposition that those costs are directly pertinent to an individual contract but merely indicates that they are directly pertinent to more than one individual contract. 58 While plaintiff did not offer this Court any precise alternate manner of interpreting the phrase directly pertinent, its argument seems to limit directly pertinent to an inquiry into what issues were negotiated at the time of contracting (see, e. g., Br. 48-49). This interpretation apparently is based on the assumption that if the Government did not negotiate about an issue, it thereby considered it not to be pertinent. 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. In fact, plaintiff's proposed method of defining pertinence by analyzing what was negotiated would not serve even its interests in the long run because such a standard once adopted would simply encourage the Government to protract the negotiations by raising any conceivable issue about which it later might want information and would allow the Government to make an issue pertinent simply by introducing it in the negotiations. 59 In the final analysis, plaintiff's suggested interpretation of examining what was negotiated rests on its conclusion that Sections 2313 and 254 were designed only to uncover improprieties in the negotiation of Government contracts (Br. 43, quoting 97 Cong.Rec. 13377). However, our view of the legislative history, outlined in the following section, is that controlling fraud was not the only purpose of the legislation and that another concern of the legislators was with excessive pricing. Given this latter purpose and our view of the meaning of directly pertinent, the access-to-records clauses should be interpreted so that an item is directly pertinent to a contract if it is a significant input in the cost of the product purchased in the contract.
60 Despite its brevity, the legislative history of Sections 2313 and 254 lends support to the Comptroller General's contention that an inquiry into whether costs are excessive was intended by the drafters of those bills. The sponsor of the legislation, Congressman Hardy, made this added purpose apparent when he explained that under its new authority the GAO would find (whether) the rates (prices) were excessive and that in addition to deterring improprieties the new authority also would deter wastefulness in the negotiation of contracts. 97 Cong.Rec. 13198. Consistent with this purpose, Congressman Hardy recognized the GAO's authority to look behind the rate (price) which had been established. Id. 7 Although no emphasis need be placed upon it, it is instructive to note that the GAO's consistent interpretation of the access-to-records clauses, entitled to weight as the administrative interpretation of the statute (see J. McBride & T. Touhey, Government Contracts § 2.20) and as an interpretation voiced before Congress and not changed by it (cf. Kay v. Federal Communications Commission, 143 U.S.App.D.C. 223, 443 F.2d 638, 646 (1970)), has been that Congress intended the GAO to examine the books and records of the contractor to make certain that the Government was getting a fair deal out of negotiated contracts. Hearings on Comptroller General Reports to Congress on Audits of Defense Contracts Before a Subcommittee of the Committee on Government Operations, 89th Cong., 1st Sess. 147 (1965) (statement of Robert Keller); see id. at 44 (statement of Comptroller General Joseph Campbell); 115 Cong.Rec. 25801; J. McBride & T. Touhey, supra, § 7.140(1) (citing unpublished Comptroller General opinions). 61 Plaintiff's objections to this interpretation of the legislative history fall into two groups. The first group of objections disputes that Congress intended an inquiry into wastefulness by noting gaps in the legislation that allegedly are inconsistent with such an intent and later legislation from which the opposite intent could be inferred. Thus plaintiff argues that had Congress' concern been with wastefulness and not just fraud, it would have extended the scope of the legislation to advertised contracts as well. However, it is not illogical to assume that Congress simply felt the problem of waste was more acute in negotiated contracts (see generally Cibinic & Lasken, supra, at 387-388); in any event plaintiff's argument proves too much because it would still have some application even if as plaintiff contends Congress was only concerned with fraud. Similarly, plaintiff's argument that Congress could not have intended to inquire into wastefulness in contracts such as the one here in which the drugs were supplied to the Government at a fixed price at or below the wholesale market price (Br. 35) ignores the fact that the information sought by the Government may show that the prices it paid were nevertheless much too high. It should be noted that this same situation was present in Hewlett-Packard and not found determinative. See 385 F.2d at 1014. 62 Although plaintiff relies on subsequent history to restrict the Comptroller General's power, it is improper to resort to such materials when, as here, the relevant statutory provisions taken together plainly support the Government. Haynes v. United States, 390 U.S. 85, 87 n. 4, 88 S.Ct. 722, 19 L.Ed.2d 923; Wisconsin Cheeseman, Inc. v. United States, 388 F.2d 420, 423 (7th Cir. 1968). In any event, the failure to pass S. 2268 (94th Cong., 1st Sess.) giving the Comptroller General access to records in connection with profit studies, which plaintiff uses to argue that Congress disapproves of such power, could easily mean that Congress ultimately considered he already had sufficient inspection powers to justify requests such as the one at issue here. Cf. Red Lion Broadcasting Co. v. Federal Communications Commission, 395 U.S. 367, 382 n. 11, 89 S.Ct. 1794, 23 L.Ed.2d 371. 63 Finally, plaintiff argues that the access-to-records authority must be construed in harmony with other federal procurement laws (Br. 47), specifically the Truth-in-Negotiation Act (10 U.S.C. § 2306) and the Renegotiation Act (50 U.S.C. App. § 1216). Apparently the argument is that because the other federal procurement laws specifically exempt contracts such as the one here on the ground that they are based on established catalog prices, therefore the access-to-records clauses must be read similarly. However, even assuming that other expressions of Congress at different times have any relevance in interpreting legislation (see Benevento v. United States, 461 F.2d 1316, 1322, 198 Ct.Cl. 772 (1972), certiorari denied, 409 U.S. 1038, 93 S.Ct. 516, 34 L.Ed.2d 486), such relevance is not persuasive when as here the legislation clearly has no exemption provision. In fact, it can be argued that the proper inference to be drawn, if any, is that 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. See United States v. Columbia River-Longview Bridge Co., 99 F.2d 287, 289 (9th Cir. 1938). Although as plaintiff submits there may be some anomaly in requiring disclosure here when disclosure might not be required under other procurement statutes, it would be even more anomalous to deny this disclosure to the Government in this case, in which it has contracted for disclosure, when it is likely that the Government could compel the same disclosures from plaintiff in discovery proceedings even in litigation in which plaintiff is not a participant. See United States v. International Business Machines, 66 F.R.D. 186 (S.D.N.Y.1974). 64 Beyond these attempts to infer legislative intent, plaintiff's second type of objection seeks to prove legislative intent by relying on the discussion of the access-to-records legislation in the Congress and focusing specifically on Congressman Hoffman's insertion of the word directly into the legislation. However, plaintiff can point to no language in the legislative history to indicate that the word directly is to be given a meaning different from its normal interpretation discussed supra. In offering the amendment, Congressman Hoffman said only that his purpose was to limit the snooping that may be carried on under this bill which we do not have the votes to defeat. 97 Cong.Rec. 13377. Significantly, Congressman Hardy did not oppose the amendment and it was passed without opposition. Of course snooping was left undefined 8 and the extent to which it was to be limited was not explained. In our view the present request cannot be deemed snooping because, like the information requested in Hewlett-Packard, these costs directly pertain to, and involve transactions related to, those contracts (385 F.2d at 1015) and are therefore appropriate subjects for inspection. Thus at the very least the legislative history of Congressman Hoffman's amendment provides no basis to depart from the meaning of directly pertinent derived from an interpretation of that phrase and from an analysis of the legislative history of the legislation as a whole.C. Remaining Issues 65 Apart from the statutory wording and its legislative history, plaintiff offers three further arguments aimed at limiting or striking the Comptroller General's request. First, plaintiff argues that the access-to-records clauses must be construed narrowly to avoid conflicting with Lilly's right to privacy under the Fourth Amendment. But even assuming that the consent given by the plaintiff when the contract was signed could be deemed ineffective because the consent was required by the Government (but see United States v. Biswell,406 U.S. 311, 316, 92 S.Ct. 1593, 32 L.Ed.2d 87), the administrative law cases relied upon by plaintiff itself indicate that plaintiff's Fourth Amendment rights are protected if the requests are, as here, reasonably related to an investigation within the jurisdiction of the requesting agency. Civil Aeronautics Board v. United Airlines, 542 F.2d 394, 401-402 (7th Cir. 1976); see Equal Employment Opportunity Commission v. University of New Mexico-Albuquerque, 504 F.2d 1296, 1303 (10th Cir. 1974). 66 Related to this privacy argument is a second argument that plaintiff would suffer competitive injury upon disclosure of the requested information. However, in support of the motion of the United States for summary judgment, the first affidavit supplied by the GAO states that GAO does not intend to identify individual drug firms or specific products in any report issued to the Congress and that no information other than that pertaining to a contractor's government business would appear in a report issued by GAO or otherwise be made public. The second GAO affidavit provides in part as follows: 67 3. I (Gregory Ahart) know that GAO intends that any report made using data obtained from Lilly will be made so that identification of Lilly or its products is not reasonably possible and Lilly will be afforded a reasonable period of time before release of such report to examine and comment upon it. 68 4. I know that GAO intends to use its best efforts including resort to judicial remedies, if appropriate, to prevent the release of any data obtained from Lilly to an individual Member of Congress or to any person or agency outside GAO. 69 5. I know that GAO intends that the only request for data obtained from Lilly which would be honored by GAO would be an official written request submitted by either House of the Congress or a Chairman of a House, Senate or Joint Committee having jurisdiction over the subject matter of the proposed study and then only to the extent authorized by and directed by law. I know that GAO intends that such a request will not be honored until GAO has first notified Lilly and this Court that a request has been made. 70 6. To the best of my knowledge and belief, GAO has never honored or agreed to honor any request for confidential costs and related pricing data pertinent to specified individual drug firms or products. 71 In the court below, the Government submitted a proposed order granting it summary judgment but providing that the information obtained from plaintiff shall be held in confidence and shall not be provided or otherwise made available by the Comptroller General to any person or agency outside the General Accounting Office except as provided in two subsequent subparagraphs. The first of those subparagraphs provided that after receiving plaintiff's comments the GAO could make such data available to outsiders in such a way that any direct or indirect identification of Lilly    is not reasonably possible. The next subparagraph provided that after seven days' notice to plaintiff the Comptroller General could submit information obtained from plaintiff in response to an official written request of either House of Congress or any Congressional Committee or Joint Committee having jurisdiction over the subject matter of the GAO's pharmaceutical industry study to the extent authorized and directed by law. Therefore, it is apparent that the Government is properly cognizant of plaintiff's need for confidentiality. 72 Focusing on the contractual nature of the access-to-records clauses, plaintiff lastly relies on language in Bristol and Merck that the interpretation of any contractual provision turns on the intent and understanding of the parties involved and that it is inconceivable that a contracting firm would have understood the clause in the manner in which the Government now interprets it. See e. g., Merck, supra, mem. op. at 5. Even assuming that Lilly's understanding would be controlling, we disagree with the Bristol and Merck language, at least as applied to this case, since the contracts at issue were signed after the landmark Hewlett-Packard decision and Lilly knew that the Government's similar position was adopted there or at least is chargeable with that knowledge. See Stencel Aero Engineering Corp. v. United States, 431 U.S. 666, 674 n. 8, 97 S.Ct. 2054, 52 L.Ed.2d 665. 73 The Government's counterclaim sets forth the following demand for access to and examination of: 74     any books, documents, papers, or records of plaintiff Lilly that relate to and involve transactions relating to pricing and experienced costs including costs of direct materials, labor, overhead and other corporate costs, support for prices charged to the Government and such other necessary information which would permit his (the Comptroller General's) representatives to review the reasonableness of the contract prices provided for in the aforesaid contracts. 75 The plaintiff describes this as a request for records such as involved in Hewlett-Packard (Br. 53). The Government's brief reiterates that it seeks only the relief requested in its counterclaim (Br. 41). Therefore, the district court need not grant access to any additional documents, and no information need be produced relating to classes of costs that have no more than a de minimis impact on the price of a product purchased by the Government. In granting summary judgment for defendants on remand, the district court is directed to include the confidentiality subparagraphs contained in defendants' proposed order previously submitted below. 76 Reversed and remanded for further proceedings consistent herewith. 77