Opinion ID: 268421
Heading Depth: 2
Heading Rank: 2

Heading: anti-kickback act

Text: 15 The Tucker organization victimized Acme chiefly through the receipt of illegal kickbacks. Unknown to plaintiff, various small manufacturers in the metals field had service contracts with Tucker similar to the one he had with Acme. Under those agreements, Tucker received a minimum weekly guarantee, as well as commissions for obtaining contracts. When plaintiff, through Tucker and Norris, let subcontracts to secret clients of the two conspirators, each subcontract necessarily contained an amount to cover the fee paid to Tucker and shared by Norris. Since the pair not only prepared Acme's government contract bids, but also negotiated all its related subcontracts, they were in a splendid position to mulct their employer. 16 The subcontract let to All Metal Industries, Inc. is the most flagrant example of the Tucker-Norris extortion scheme. More is involved than the secret commissions which the two received from All Metals for enabling it to secure subcontracts from the plaintiff. In addition, Tucker, Norris, and Jack Epstein, who was a plant superintendent and minor stockholder of Acme, 11 forced All Metals to agree to pay $23,500 to them through Gunn Engineering Company, a dummy corporation. It was understood that All Metals would pass this cost on to Acme by including it in the subcontract price. All Metals actually paid $12,000 to Gunn under the agreement. When the conspirators later became fearful of exposure, they attempted to expunge all evidence of the transaction from the subcontractor's books. Through an oversight, however, they left in the cost-structure of All Metals' ultimate subcontract price to Acme the $12,000 already paid to Gunn Engineering Company (although this sum was more than offset by Tucker's waiver of certain commissions which All Metals owed him). Even after All Metals decreased its ultimate price to less than that contemplated prior to the extortion scheme, the reduced price still reflected some portion of the combined fees which All Metals had paid or agreed to pay to Tucker and Gunn. Book keeping technicalities tend to obscure this fact, but, in the final analysis, had Contract 1213 been of a cost-reimbursable nature, the Government would ultimately have borne part of the cost of the kick-backs. See findings 20 and 21. 17 The arrangements between Tucker and other firms for which he obtained subcontracts from Acme were less complex, but hardly less reprehensible. For instance, Manalapan hired Tucker in November 1952 and agreed to pay him $100 weekly as a nonrecoverable advance against commissions. As a result, Manalapan obtained a series of small purchase orders from Acme under Contract 1213 from February through July 1953. The subcontract prices hid the $1,350 in commissions and/or salaries which Manalapan paid Tucker and which Tucker shared with Norris. The conspirators entered into comparable agreements with several other subcontractors. See findings 18-25. These subcontractors knew or should have known that Tucker was Acme's agent, but the responsible officials of Acme were not aware of the double agency. 12 18 In these circumstances, the defendant claims that Acme violated the Anti-Kickback Act, 60 Stat. 37, as amended, 41 U.S.C. § 51, and that that violation authorized the Government to cancel the contract. The Anti-Kickback Act, first enacted in 1946, was significantly amended in 1960. 74 Stat. 740. Both versions retroactively prohibit the payment of any compensation or gratuity by a subcontractor to an agent, employer, or official of a higher tier subcontractor or a prime contractor with the United States. By the terms of the statute, such compensation is conclusively presumed to be included in the price ultimately paid by the Government, and the United States may bring a civil action against the prime contractor, subcontractor, or the agent to recover that amount. Along with this civil remedy, the statute provides criminal penalties against persons knowingly making or receiving prohibited payments. Under the 1946 Act, coverage is limited to government contracts on a cost-plus-a-fixed-fee or other cost reimbursable basis. 13 19 Tucker, Norris, and Jack Epstein were indicted for violation of the Anti-Kickback Act and brought to trial in the United States District Court for the Eastern District of Pennsylvania. After presentation of the Government's case, in April 1956, a defense motion for acquittal was granted on the ground that the statute did not apply to this type of contract. The district judge felt that a negotiated fixed-price contract, with a price redetermination provision permitting a retrospective or prospective increase within a narrow range, was not a cost-reimbursable contract within the meaning of the Act. The court made scathing comments as to the conduct of the accused, observed that Acme had been victimized, and recommended legislation to amend the statute to apply to this situation. Because of the uncertainty with regard to the coverage of the 1946 Act, the Comptroller General thereafter recommended to Congress that it be revised. In the Act of September 2, 1960, an amendment was adopted which retroactively broadened the coverage of the statute to include all negotiated contracts (defined to mean all contracts made without formal advertising). No other essential change was made. 74 Stat. 740, 41 U.S.C. § 51. 20 The Government first claims that it was entitled to cancel Contract 1213 for violation of the original Anti-Kickback Act. It asserts that when Congress, in 1946, provided a civil remedy entitling the Government to recover the amount of the kickback, it did not intend to alter the pre-existing common law remedy of contract cancellation. The major stumbling block is the absence, so far as we know, of any decision or comment in support of the proposition that there was such a remedy at common law. In fact, the House Report on the 1946 Act states, There is no existing statutory or other authority of law under which it may be said that the United States clearly has a right to recover the amounts of any such fees or gratuities. H.R.Rept.No. 212, 79th Cong., 1st Sess. 2 (1945). A fortiori, it is highly doubtful that there was any pre-existing right of the Government to cancel the entire contract of a prime contractor whose agents received improper kickbacks of which he was unaware. 21 In its effort to invoke a forfeiture, the most drastic civil penalty known to common law, the Government has cited only sparse collateral support. There are statements in United States v. Davio, 136 F.Supp. 423, 428 (E.D. Mich., 1955), that the Anti-Kickback Act codified the prior common law remedy. But that suit was for the recovery of amounts paid as kickbacks. Nowhere does the court hint that the Government had a pre-existing right of contract cancellation in the present circumstances. 14 Whether it was codifying an existing right or creating a new one, Congress, when it enacted the 1946 legislation, gave the Government only one civil remedy against contractors whose agents had received secret kickbacks. Had the legislature wished to provide the additional remedy of contract annulment, it could have done so. Cf. Armed Services Procurement Act of 1947, § 4, 62 Stat. 21, 23, 10 U.S.C. § 2306(b). In the absence of any statutory indication that the Government has a right to cancel the contract in this situation, it is not for the court to engraft a new and drastic remedy onto the Anti-Kickback Act. Cf. Unexcelled Chemical Corp. v. United States, 149 F.Supp. 383, 385, 137 Ct.Cl. 681, 684 (1957). 22 Furthermore, we have grave doubts about the applicability of the 1946 Act to the present contract. If it is not applicable, the Government's position must be rejected for the additional reason that in 1953 and 1954 there was no recognized federal public policy invalidating Contract 1213. Cf. Muschany v. United States, 324 U.S. 49, 66-67, 65 S.Ct. 442, 451, 89 L.Ed. 744 (1945). 15 If the 1960 anti-kickback legislation was the first provision covering Contract 1213, the improper actions which took place in 1953 hardly contravened long government practice or statutory enactments. 16 When Acme's agents received kickbacks about which plaintiff had no knowledge, it can scarcely be said that plaintiff (as distinguished from the agents) violated obvious ethical or moral standards, and that its contract with the defendant could therefore be canceled on that ground. 23 The unreported district court decision granting the motion for acquittal of Tucker, Norris, and Jack Epstein is, of course, a direct holding that the 1946 anti-kickback legislation did not cover the present contract. 17 One of the primary reasons behind the enactment of the 1960 amendment was to remove serious doubt that fixed-price contracts with redetermination clauses were included in the act's coverage. See S.Rep. No.1585, 86th Cong., 2d Sess. 2-6 (1960). While the Tenth Circuit has held that the 1946 Act covers certain contracts having price-redetermination provisions, it emphasized that the contract with which it was dealing had [n]o limitation    upon the range of redetermination or revision of prices, upward or downward. United States v. Barnard, 255 F.2d 583, 588 (C.A. 10), cert. denied, 358 U.S. 919, 79 S.Ct. 287, 3 L.Ed.2d 238 (1958). Acme's contract, however, had a limited range of upward revision. See finding 15. The applicability of the 1946 Act to Contract 1213 is thus highly questionable. 24 For these reasons, the present case is not like United States v. Mississippi Valley Generating Co., 364 U.S. 520, 81 S.Ct. 294, 5 L.Ed.2d 268 (1961). There, the dual agent violated a federal conflict-of-interest statute, 62 Stat. 703, 18 U.S.C. § 434, in the negotiation of a contract entered into with the United States. Unlike our case, the statutory provision which the agent violated was undoubtedly on the books at the time of the misconduct. Also, the statute itself provided no more than a criminal sanction. Had the Supreme Court refused to imply a civil remedy, the public [would] be forced to bear the burden of complying with the very sort of contract which the statute sought to prevent. 364 U.S. at 563, 81 S.Ct. at 316. Here, the civil remedy established by the statute enables the Government to recover any amounts it has paid out as a result of kickbacks; the public does not bear any part of the expenses illegally incurred. And most significantly, the violation in Mississippi Valley Generating Co. affected the validity of the entire transaction. In the negotiations preceding the contract, the Government was represented by a consultant who was, at the same time, associated with an investment banking company which stood to profit if the plaintiff was awarded the contract. The contract was the result of these tainted negotiations. In addition, the plaintiff itself was not altogether innocent, since it was well aware of the possible conflict of interest. 364 U.S. at 565 n. 19, 81 S.Ct. 294. The kickbacks with which we are concerned, however, were in no way related to the negotiation and execution of Contract 1213, and do not affect its validity. They were separate transactions made without the knowledge of the plaintiff, which certainly had nothing to gain by these secret dealings. The principles of Mississippi Valley Generating Co. do not require or suggest that the contract at bar could or should be canceled because of the secret receipt by Tucker-Norris of kickbacks from sub-contractors. 18