Opposition — SmithKline Corp. v. Staats

No. 80-434

In the Supreme Gourt of the Hnited States

OCTOBER TERM, 1980

SMITHKLINE CORPORATION, PETITIONER

Vv.

ELMER B. STAATS, COMPTROLLER GENERAL

OF THE UNITED STATES,

AND

UNITED STATES OF AMERICA

ON CONDITIONAL PETITION FOR A WRIT OF

CERTIORARI BEFORE JUDGMENT TO THE

UNITED STATES COURT OF APPEALS FOR

THE THIRD CIRCUIT

BRIEF FOR THE RESPONDENTS

IN OPPOSITION

WADE H. McCreg, Jr.

Solicitor General

ALICE DANIEL

Assistant Attorney General

MICHAEL KIMMEL

ROBERT KAPLAN

Altorneys.

Department of Justice

Washington, D.C. 20530

(202) 633-2217

Iu the Supreme Court of the United States

OCTOBER IJERM, |Y8U

No. 80-434

SMITHKLINE CORPORATION, PETITIONER

Vv.

ELMER B. STAATS, COMPTROLLER GENERAL

OF THE UNITED STATES,

AND

UNITED STATES OF AMERICA

ON CONDITIONAL PEIIIION FOR A WRIT OF

CERTIORARI BEFORE JUDGMENT IO THE

UNITED STATES COURT OF APPEALS FOR

THE THIRD CIRCUIT

BRIEF FOR THE RESPONDENTS

IN OPPOSITION

QUESTIONS PRESENIED

1. Whether the Comptroller General’s request for

access to petitioner’s records pursuant to 10 U.S.C.

2313(b) and 41 U.S.C. 254(c) was invalid because of the

purpose underlying the request.

2. Whether, with respect to a negotiated government

contract in which a fixed price was set on the basis of the

commercial market price and without reference to

incurred costs, the Comptroller General is authorized by

10 U.S.C. 2313(b) and 41 U.S.C. 254(c) to examine the

contractor’s records of its costs, including its unallocated

costs, where government payments under the contract are

used to detray those costs.

iil

TABLE OF CONTENTS

Page

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EC IPMIMEIID: sivnscocdsccdesnrisesesescronnsmedennabaitesdbbacsssetadipebnes 20

TABLE OF AUTHORIIIES

Cases:

Bristol Laboratories v. Staats, 620 F. 2d

17, petition for cert. pending,

No. 80-264 (filed Aug. 21, 1980) ................. 5, 6

Eli Lilly & Co. v. Staats, 574 F. 2d

904, cert. denied, 439 U.S.

DE iniscnsh akitndis soscbincsabtiiedte 4, 6, 10, 11, 14, 16, 18

Greene v. McElroy, 300 U.S. 474 wcccccccccseeeees 19

Hannah v. Larche, 363 U.S. 420 .........cccccesseeeees 19

Hewlett-Packard Co. v. United States,

385 F. 2d 1013, cert. denied,

tS RE Ippon ew 3-4, 10, 13, 16

Johnson v. Fleet Corp., 280 U.S. 320 ............06 19

McCulloch v. Sociedad Nacional de

Marineros de Honduras, 372

FT ED scnnndntinsiicelaabsinet een Mins citanilaliacebs 19

Merck & Co. v. Staats, Civil Action

No. 74-1447 (D.D.C. Aug. 12, 1977),

appeals pending, Nos. 79-1435,

79-1438 (D.C. Cir., argued Feb. I[1,

1980), conditional petition for cert.

before judgment pending, No. 80-416

(filed Sept. 16, 1980) .......ccccccsccceecs 6, 10, 11, 16

LV

Page

Cases—Continued:

Mt. Healthy City Board of Ed. v. Doyle,

A st. AIS beeansisaaseeisstassivescuneabaabebsipntin 12

New Haven Inclusion Cases, 399 U.S. 392 ....... 19

Porear ©. EFM, Bae Uc. BOR. inccccscdenseviniicnitiatn 19

FOR 'Y. LR Bae Wi BO telarisstevicsdesiminn 19

Taylor v. McElroy, 360 U.S. 709 ......ccccccccceeeeees 19

United States v. Abbott Laboratories,

FOE Bee I ern tnieivlgainciasilamminneins 6, 11

United States v. LaSalle National Bank,

GE Wits BUOW. siveisidcsdiniicindaconisteniteiaeabiansaas 12

United States v. Nixon, 418 U.S. 683 ............... 17

Washington v. Fishing Vessel Assn.,

MMT Wille GHA | secnsicctinbehddivsccnannsinscttiibtghladgupmbiebubineen 19

Youngstown Sheet & Tube Co. v. Sawyer,

FED lee SE likncctesariinaiesindisininrtnnaibaidiiitoin 17

Statutes and rule:

BD Cities. RO GUD sispdenseincisvvnssetiniasemndloneaiabedadligtn |

Be SEs I sierissncesssiancindtsintnesniaieiaaetainaeain |

UU SIE Tha. BD sscnincspsensinncdocaindaravidicsnncibiabasmbians 7, 17

Miscellaneous: |

97 Cong. Rec. (1951):

1 RIESE: sicushccsstelices~nesacvoneacslinsnonianbaitancaioummids 8

i; RIEU criascssiuinbinevesnussaqcihecndeibiindemabasaaata 8

Di: NIB TO ~cctcisnisicnctipinirnesometdtiedailindildie 8

Page

Miscellaneous—Continued:

EE scbubsiovivunscnepessbenapesmibigensadsatocenenaiinnsniian 8

RED CA TOG. ZOOS CEBGDD os ccccscvscscccevcsscccsceses 15

Hearings on Comptroller General Reports to

Congress on Audits of Defense Contracts

Before the Subcomm. on Military

Operations of the House Comm. on

Government Operations, 89th

eS een 9, 15

Hearings on Relation of Cost Data to Military

Procurement Before the Subcomm. for

Special Investigations of the House

Comm. on Armed Services, 88th

Cs BD TRIE, COON scncensccncstinteenctccccecs 14, 15

H.R. Rep. No. 791, 82d Cong., Ist Sess.

CREE sistabileadauikencscicckilieaalidacbaiasmiaaiiiilapematcanin 8, 9

S. Rep. No. 603, 82d Cong., Ist Sess.

SETI initsdaieonsinictiidohelitens cine eatedcidatieheialdiandiiliciddaiiianiaiaae 8, 9

OPINION BELOW

The opinion of the district court (Pet. App. la-2la) is

reported at 483 F. Supp. 712.

JURISDICTION

The judgment of the district court, dated January 24,

1980 (Pet. App. la), was entered on January 25, 1980

(C.A. App. 4).! On March 19, 1980 (C.A. App. 5),

petitioner filed a notice of appeal (Pet. App. 1b) to the

United States Court of Appeals for the Third Circuit, and

the case is still pending in that court (No. 80-1464). The

conditional petition for a writ of certiorari before

judgment was filed on September 18, 1980. The

jurisdiction of this Court to review the case by writ of

certiorari before final judgment of the court of appeals is

invoked under 28 U.S.C. 1254(1) and 28 U.S.C. 2101(e).

STATEMEN1

1. In 1973 and 1974, petitioner entered into three

contracts with the Defense Supply Agency of the

Department of Defense and two contracts with the

Veterans Administration for the sale of pharmaceutical

products to the government. Each of the five contracts

was a negotiated fixed-price contract in which the price

was based on petitioner’s published catalogue price for the

particular product; the total price for the contracts was

approximately $3.3 million (Pet. App. 2a, 15a n.7; C.A.

App. 47-51). As required by 10 U.S.C, 2313(b)? and 41

U.S.C. 254c),> each of the contracts contained a standard

“C.A. App.” refers to the joint appendix tiled by the parties in the

court of appeals.

2Lhis provision is applicable to the Delense Supply Agency

contracts.

‘this provision is applicable to the Veterans Administration

contracts.

2

access-to-records clause in which petitioner agreed 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” (Pet. App. 3a-4a; C.A. App. 48-53).

In May 1972, the General Accounting Office began “a

two-phase study of the economics and operations of

the pharmaceutical industry” (Pet. App. 7a). In the first

phase of the study, petitioner and five other phar-

maceutical firms agreed to permit GAO officials to visit

and inspect their facilities and operations. The companies

declined, however, to participate in the second phase of

the study, which was designed to enable GAO to examine

"the salient economic and operational aspects of the drug

industry” (ibid.). Because of the companies’ failure to

cooperate, GAO abandoned its plans for the second phase

of the study and proposed “a more modest study” based

on data to be obtained under the foregoing access-to-

records provisions (id. at 8a).

In August 1974, the Comptroller General wrote to the

six companies, including petitioner, to request access to

designated records pursuant to the access-to-records

provisions. The Comptroller General explained that the

request was part of “a review of the procurement of drugs

by agencies of the Federal Government, including the

pricing of drugs and pharmaceuticals procured under

negotiated contracts” (Pet. App. 8a-9a). To that end, the

Comptroller General sought to examine

all books, documents, papers, and other records

directly pertinent to the contracts, which include, but

are not limited to (1) records of experienced costs

3

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. |

Pet. App. 9a; C.A. App. 61.

2. Petitioner refused to comply with the Comptroller

General’s request. Instead, on February 20, 1975, it

commenced the present action in the United States

District Court for the Eastern District of Pennsylvania

seeking declaratory and injunctive relief to bar GAO from

access to its records. The United States subsequently

intervened as a defendant and filed a counterclaim to

require petitioner to allow the requested inspection (Pet.

App. la-2a, 9a).

Following discovery, the district court on January 24,

1980, granted the government’s motion for summary

judgment and denied petitioner's cross-motion (Pet. App.

la-2la). Contrary to petitioner’s contention that the

Comptroller General’s request had been prompted by the

assertedly improper purpose of “seeking information

concerning profits in the pharmaceutical industry for

dissemination to Congress and the public” (id. at 10a), the

court found, “[oJn the basis of uncontroverted depositions

and affidavits filed by the parties in connection with the

motions for summary judgment” (id. at 2a), “that GAO’s

purpose is to compare cost to price of drugs purchased

under specified contracts to determine the adequacy of the

protections afforded the government in the contract

negotiation process” (id. at 12a). Relying on the legislative

history of the access-to-records statutes and the decision

in Hewlett-Packard Co. v. United States, 385 F. 2d 1013

4

(9th Cir. 1967), cert. denied, 390 U.S. 988 (1968), the

court also concluded that the statutes were intended to

enable GAO “to determine whether * * * there have been

‘improprieties and wastefulness in the negotiation of

contracts,’ or whether * * * the contractor’s costs are ‘out

of line with the contract price’” (Pet. App. 15a-16a).

Accordingly, the court held that the Comptroller

General’s purpose “to review the reasonableness of the

contract prices and the adequacy of the protection

afforded the Government’s interests” (id. at 16a) was “a

purpose authorized by the statutes” (id. at 17a).

In addition, in view of the plain meaning of the statutes

and the Hewlett-Packard decision, the court rejected

petitioner’s argument that the access-to-records provisions

were entirely inapplicable to negotiated fixed-price

contracts in which, as here, the price was based on the

contractor’s catalogue price (Pet. App. 15a n.7).

Finally, in accordance with Hewlett-Packard and Eli

Lilly & Co. v. Staats, 574 F. 2d 904 (7th Cir.), cert.

denied, 439 U.S. 959 (1978), the court held that, at least

with respect to the pharmaceutical industry, the access

provisions are not limited to records of “the direct costs of

manufacturing the drug covered by the contract” but

include “the records of all costs which go into the makeup

of the price of the drug covered in the contract” (Pet.

App. 18a). The court recognized that the direct-cost

“limitation, in the drug industry, would defeat the

purpose of the access-to-records statutes since, as the

[cjourt in £ii Lilly pointed out, manufacturing and

distribution costs of drugs have been estimated to

constitute as little as nine percent of the product’s sale

price” (ibid.). Construing the statutes “in light of their

purpose to permit a determination as to whether costs are

‘out of line with the contract price’” (Pet. App. 18a,

quoting Hewlett-Packard Co. v. United States, supra, 385

5

F.2d at 1016), the court “agree{d] with Eli Lilly’s

reasoning that ‘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 price of the

product purchased in the contract’” (Pet. App. 18a).

Pursuant to its opinion, the district court entered

summary judgment for the government and ordered

that the Comptroller General of the United States

and his duly authorized representatives have the right

to examine all books, documents, papers, or records

directly relating to the pricing and cost of producing

items furnished by [petitioner] under the following

contracts ***, including, but not limited to,

records of experienced costs, including costs of

materials, labor, overhead, distribution, research and

development, and marketing, and such other costs as

are directly pertinent to the drugs covered in the

enumerated contracts * * *.

Pet. App. 19a. The court’s order also included “provisions

concerning the confidentiality of records, as agreed by the

parties” (ibid.).

On March 19, 1980, petitioner appealed the district

court’s judgment to the United States Court of Appeals

for the Third Circuit. That appeal is still pending; all

briefs have been submitted, but oral argument has been

deferred by the court of appeals until after the disposition

of this petition (see order of Oct. 22, 1980).

ARGUMEN1

Petitioner initially urges (Pet. 9-10, 18) that the Court

deny the government’s petition for a writ of certiorari in

Staats v. Bristol Laboratories, No. 80-264 (filed Aug. 21,

1980), which presents a related issue concerning GAO’s

access to cost records of pharmaceutical companies

6

pursuant to the access-to-records provisions required by

law. However, petitioner does not contest that there is

currently a conflict in the circuits on the construction of

the access statutes* or that a uniform interpretation of

those statutes is sufficiently important to the proper

administration of the federal procurement system to

warrant this Court’s review (see 80-264 Pet. 8-9). For the

reasons stated below (see page 18, infra) and in the

government’s petition and reply memorandum in Bristol,

we submit that the Court should decide the issue at this

time and not postpone the resolution of the existing

conflict.

In the alternative, petitioner contends that if the Court

grants the petition in Bristo/, it should also grant the

instant conditional petition for a writ of certiorari before

judgment to consider two issues that are not involved in

Bristol and do not present a conflict in the circuits.

Petitioner argues, first, that the Comptroller General’s

request for access was invalid because it was motivated by

an improper purpose, and, second, that the access-to-

records provisions are simply inapplicable and afford no

access whatever in circumstances in which, as here, nei-

ther the negotiation nor the performance of the contract

related to the contractor’s costs.> As we discuss below,

4Petitioner acknowledged in the court of appeals (SmithKline Br.

45) that there is a “square{] * * * conflict among the Circuits” in

light of Eli Lilly & Co. v. Staats, 574 F, 2d 904 (7th Cir.), cert.

denied, 439 U.S. 959 (1978), United States vy. Abbott Laboratories,

597 F. 2d 672 (7th Cir. 1979), and Bristol Laboratories v. Staats, 620

F. 2d 17 (2d Cir. 1980), petition for cert. pending, No. 80-264 (filed

Aug. 21, 1980). See also Pet. 10 n.19; Pet. App. 12a; Conditional

Petition for Certiorari Before Judgment in Merck & Co. v. Staats,

No. 80-416 (filed Sept. 16, 1980), at 9, 10.

‘Petitioner further argues (Pet. 9, 15) that the access-to-records

provisions do not encompass records of its unallocated costs

notwithstanding the fact that payments by the government pursuant

j

however, these arguments are without merit and have

been rejected by every court of appeals that has

considered them. The petition thus offers no reason to

expand the carefully drawn issue presented in Bristol to

include questions that have not divided the circuits and

are not otherwise deserving of this Court’s review, and it

falls far short of the requisite showing for certiorari before

judgment “that the case is of such imperative public

importance as to justify the deviation from normal

appellate practice and to require immediate settlement in

this Court.” Sup. Ct. R. 18. Accordingly, the conditional

petition for a writ of certiorari before judgment should be

denied.

1. Petitioner asserts (Pet. 7) that the access-to-records

provisions authorize the Comptroller General to inspect a

contractor’s records “only for narrow and _ specific

purposes. Access was permitted..to audit cost data

submitted in connection with specific negotiated con-

tracts, in order to detect fraud or, overreaching * * *.”

Notwithstanding petitioner's assertion, however, the

access provisions are not confined to discrete audits of

individual contracts in order to detect fraud and

overreaching.°

to the contract are used to defray those costs and, as petitioner

acknowledged in the court of appeals (SmithKline Br. 42-43),

“unassigned costs have an impact on the price charged for the

company’s products, in the sense that the company’s overall income

must recover both the costs directly assigned and the pooled costs

which have not been assigned.” This is the precise question presented

by the government’s petition in Bristv/. As we explain in the petition

and reply memorandum in that case, petitioner's argument represents

an erroneous construction of the access provisions and should be

rejected by. this Court. In any event, to the extent that petitioner

wishes to be heard on this issue, it should seek to participate as an

amicus curiae in Bristol rather than pursue the instant petition tor

certiorari betore judgment.

Unlike petitioner, Bristol has “agree|d| that it is obliged by the

terms of the contracts to provide access to [certain] records” (80-264

8

By their terms, the access-to-records provisions contain

no limitation of the sort advanced by petitioner. Rather,

they apply to all government contracts negotiated

pursuant to designated statutory authority. Nothing in the

language of the provisions narrows their scope to

unrelated audits of specific contracts or restricts their

objectives to the elimination of fraud and overreaching.

The legislative history of the access-to-records statutes

also refutes petitioner’s interpretation. This history has

been canvassed in the government’s petition in Bristol

(80-264 Pet. 10-11) and need not be repeated here. We

emphasize, however, Congress’s concern that “negotiated

contracts *** require close supervision and con-

trol* ** .” H.R. Rep. No. 791, 82d Cong., Ist Sess. 2

(1951); S. Rep. No. 603, 82d Cong., Ist Sess. 2 (1951).

Among other things, Congress feared that “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.” 97 Cong. Rec. 13198 (1951) (remarks of Rep.

Hardy). See also id. at 13377 (remarks of Rep. Hoffman

and Rep. Hardy). The debates contain repeated references

to the need to determine whether prices in negotiated

contracts were excessive, extravagant, or wasteful, and

Congress “clearly understood * * * that there are a lot of

other situations besides those involving fraud which might

be uncovered” (id. at 13199 (remarks of Rep. Hardy)).

For instance, as one type of “information which would be

vital in a study of a contract” (id. at 13376), Represen-

tative Hardy offered the following illustration:

Pet. App. 8a) even though, as in the instant case, GAO had not

requested the records in connection with a formal audit and had no

specific grounds to believe that traud or overreaching had occurred

with respect to the contracts.

9

Another vivid example of how this authority

would enable the GAO to do an effective job involves

a study which my Subcommittee on Government

Operations has been making on pricing practices in

the procurement of automotive parts. 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 impossi-

ble, for GAO to detect such a situation without the

right afforded in this bill.

Id. at 13198. All of these statements of congressional

intent plainly extend beyond the audit of particular

contracts to uncover fraud and belie petitioner’s con-

stricted construction of the access-to-records statutes.’

Contrary to petitioner’s argument, those courts of ap-

peals to consider the question have held that the access-

7We also note the Comptroller General’s statement to Congress

that “any abuses discovered by the General Accounting Office in

exercising the authority contained [in the bill] promptly will be

brought to the attention of the proper officials, and, if warranted, to

the attention of the Congress.” H.R. Rep. No. 791, supra, at 5;

S. Rep. No. 603, supra, at 4. As GAO subsequently explained:

[he fact that, in final analysis, we may not be able to question the

legality of particular contract transactions does not preclude our

reporting to the Congress and to the responsible administrative

agencies that such transactions are wasteful or extravagant or

that a particular contract transaction illustrates the need for an

improvement in existing procurement or management

procedures.

Hearings on Comptroller General Reports to Congress on Audits of

Defense Contracts Before the Subcomm. on Military Operations of

the House Comm. on Government Operations, 89th Cong., Ist Sess.

48 (1965) (statement of Comptroller General Campbell).

10

to-records provisions authorize the Comptroller General

to examine a contractor’s records in order to assess the

reasonableness of the price charged the government and

the adequacy of the protections afforded the government

in negotiated procurements. See Eli Lilly & Co. v. Staats,

574 F. 2d 904, 914-915 (7th Cir.), cert. denied, 439 U.S.

959 (1978); Hewlett-Packard Co. v. United States, 385

F. 2d 1013, 1016 (9th Cir. 1967), cert. denied, 390 U.S.

988 (1968); see also Merck & Co. v. Staats, Civil Action

No. 74-1447 (D.D.C. Aug. 12, 1977), slip op. 3-4 (80-416

Pet. App. 3c-4c), appeals pending, Nos. 79-1435, 79-1438

(D.C. Cir., argued Feb. 11, 1980), conditional petition for

cert. before judgment pending, No. 80-416 (filed Sept. 16,

1980). In Eli Lilly, the court expressly rejected the

argument that the access-to-records provisions “were

designed only to uncover ‘improprieties in the negotiation

of Government contracts,” concluding instead “that

controlling fraud was not the only purpose of the

legislation and that another concern of the legislators was

with excessive pricing” (574 F. 2d at 914). Similarly, the

court in Hewlett-Packard also held that the access

provisions were not limited either to audits of individuai

contracts or to suspected fraud (385 F. 2d at 1016):

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. * * *

Hewlett-Packard contends, in effect, that the sole

purpose of the examination right accorded by section

2313(b) and clause 10 of these contracts, is to enable

the Comptroller General to find out whether the

|

particular contracts which give rise to the examination

had been performed in accordance with their terms

and whether the contracting officer had been

defrauded or misled in entering into the contract.

We find nothing in the words of the statute, its

legislative history, or administrative interpretation, or

in the impact of other statutes, which supports this

view. On the contrary, it seems to us that if such a

limited scope of examination had been intended by

Congress it would have found the means to so

indicate. The term “contract” could have been given a

restricted meaning, or the scope of the permissible

examination could have been specifically limited to

lines of inquiry relevant to the legality and faithful

performance of the particular contract giving rise to

the examination.

In the present case, the district court determined, after

“resolvjing] in favor of [petitioner] any doubt concern-

ing whether there is a genuine issue of material fact”

(Pet. App. lla), that “[t]he uncontroverted factual

record * * * establishes that GAO’s purpose is to com-

pare cost to price of drugs purchased under specified

contracts to determine the adequacy of the protections

atforded the government in the contract negotiation

process” (id. at 12a; see also id. at 16a-17a).*In light of the

’ [he district court’s determination in this regard was clearly correct

and amply supported by the “uncontroverted depositions and

altidavits filed by the parties in connection with the motions for

summary judgment” (Pet. App. 2a). See, e.g., C.A. App. 58, 60-61a,

116, 123, 124-125, 202-203, 211, 231-233, 408. In addition, every court

to consider the purpose underlying the Comptroller General's

requests to the pharmaceutical companies has agreed that, at the

least, it consisted in part of the intention to review the reasonableness

of the contract prices and the adequacy of the protection afforded the

Government’s interest” (Pet. App. |6a). See United States v. Abbott

Laboratories, 597 F. 2d 672, 674 (7th Cir. 1979); Eli Lilly & Co. v.

Staats, supra, 574 F. 2d at 910; Merck & Co. v. Staats, supra, slip op.

4 (80-416 Pet. App. 4c).

12

foregoing authorities, the court’s conclusion that this was

“a purpose authorized by the statutes” (id. at 17a) is

manifestly correct.? And, since the Comptroller General’s

request was predicated on a proper purpose, it is

immaterial whether, as petitioner alleges, he was

motivated by any additional purposes that, arguendo,

would not be sufficient by themselves to sustain the

validity of the request. See, e.g., United States v. LaSalle

National Bank, 437 U.S. 298, 313-317 (1978); Mt. Healthy

City Board of Ed. v. Doyle, 429 U.S. 274, 285-287 (1977).!°

9Because the district court here correctly decided that

“GAO seeks [petitioner’s] records for the cost-price comparison

authorized by the statutes” (Pet. App. 16a), it is unnecessary in this

case “to determine, as did the Seventh Circuit in Eli Lilly, supra,

that an industry-wide public information study is an authorized

purpose for a GAO inquiry” (id. at 17a).

'0We also doubt that petitioner should be heard to question these

alleged additional purposes for GAO's request. Petitioner “concedes

that it voluntarily executed the contracts at issue in this case with full

knowledge of the access-to-records provisions contained in each

contract” (Pet. App. 10a), and the Comptroller General has now

invoked those provisions to seek access to records for a purpose

authorized by Congress. No rule of law excuses a party from

performing 4 contract because it does not approve of the other party’s

purpose in demanding performance, and petitioner should not be

allowed to inquire further into the Comptroller General’s motives.

Moreover, we disagree with petitioner's repeated characterization

that these alleged additional purposes were “improper.” Even if

petitioner were correct in arguing that the access-to-records

provisions do not authorize a GAO research study, it would not

follow that access to the records should be barred. Petitioner confuses

an “improper” motive with a motive that is perfectly legitimate but

not a sufficient ground, standing alone, for access. [here has been no

suggestion that a research study is forbidden by law or “improper” in

any similar way. The most that petitioner can say is that the

Comptroller General could not compel private parties to cooperate in

such a project. But no principle of law torbids the Comptroller

General from using, for purposes of a research study, information

lawtully obtained pursuant to some other power.

For these reasons, the decisions cited by petitioner for the

proposition that “powers granted to the Government for one

13

2. Petitioner further contends that, under the access-to-

records provisions, “GAO should be afforded access only

to data that are the subject of negotiations or are relied

upon by the government agencies responsible for

awarding the contracts” (Pet. 7) and that no “cost records

can be ‘directly pertinent’ to contracts which are not cost-

based” (id. at 14).'!! This construction of the access

provisions is untenable and has been consistently rejected.

Petitioner has pointed to nothing in the language of the

statutes or their legislative history that would justify such

a grudging interpretation of the access provisions. On the

contrary, petitioner’s construction would defeat the

congressional objective to guard against waste, ex-

travagance, and excessive pricing (see pages 8-9, supra).

Petitioner’s costs, even if neither directly the basis for the

contract price nor the subject of discussions prior to

execution of the contract, are nevertheless critical to an

assessment of the advisability of continued adherence by

the government to the negotiated procurement methods

employed here. If petitioner’s total costs are substantially

lower than the prices paid by the government, the

Comptroller General may recommend that the Depart-

ment of Defense and the Veterans Administration adopt

different procurement practices in the future. See Hewlett-

Packard Co. v. United States, supra, 385 F. 2d at 1016

(“[w]hile this appraisal could not affect these particular

contracts, it could lead to use of other methods of meeting

purpose * * * [may not be] utilized for other purposes” (Pet. 13) are

inapposite. In each of those cases, the government’s request rested on

a purpose that the court held was not authorized by the governing

statute. None of the cases involved access requested pursuant to

contract tor. a purpose sanctioned by law, and none held that an

otherwise legitimate request was rendered invalid and unenforcible

because of the asserted existence of mixed purposes.

'‘'Once again, in contrast to petitioner's position, Bristol conceded

that it was required by the access provisions to furnish certain cost

records in these circumstances (see note 6, supra).

14

future procurement needs”). And, as the court explained

in Eli Lilly & Co. v. Staats, supra, 574 F. 2d at 915, the

“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’

* * * ignores the fact that the information sought by the

Government may show that the prices it paid were

nevertheless much too high.”!2

Furthermore, petitioner’s construction is at odds with

the administrative interpretation adopted by GAO, which

is entitled to judicial deference and which Congress,

although aware of the agency’s position, has never

disapproved. See 80-264 Pet. 16-17. This issue appears to

have first been contested by Hewlett-Packard in resisting

GAO access to its cost records. See Hearings on Relation

of Cost Data to Military Procurement Before the

Subcomm. for Special Investigations of the House

Comm. on Armed Services, 88th Cong., Ist Sess. 15-23

'2This consideration is well illustrated by the testimony of GAO

General Counsel Robert Keller betore a congressional subcommittee:

The catalog prices on Government orders [under sole source

procurement for klystron tubes} frequently exceeded the

company’s current cost of production by more than 100 percent.

*_* *

[T]he prices accepted by the General Services Administration

and paid by the military services were substantially higher than

seem reasonable in relation to the contractors’ costs to

manufacture and sell aircraft tires, and the Government

experienced unnecessary costs in its procurement of these items

* * * of approximately $10.7 million [in 1960] * * *.

Hearings on Relation of Cost Data tv Military Procurement Before

the Subcomm. for Special Investigations of the House Comm. on

Armed Services, 88th Cong., Ist Sess. 7 (1963). See also pages 15-16,

infra.

15

(1963). At that time, and prior to the commencement of

litigation, GAO concluded that it was entitled to examine

cost records regardless of the scope of the original

contract negotiations and that such records were “directly

pertine~t” even though the costs of performance played

no pari in those negotiations. /d. at 21-22.

GAO’s interpretation has been presented to Congress

on several occasions and tully explained in terms of the

legislative history and purpose of the statutes and their

construction by the courts. See, e.g., Hearings on Relation

of Cost Data to Military Procurement Before the

Subcomm. for Special Investigations of the House Comm.

on Armed Services, 88th Cong., Ist Sess. (1963), at 8

(“Our experience indicates the need for careful examina-

tion into the reasonableness of accepting catalog or other

established prices for negotiated procurements * * *. The

fact that a product is listed in a manufacturer’s catalog

and offered to any customer is no assurance that

competition actually is present or that the standard

catalog price is reasonable”), 10-12 (discussing Hewlett-

Packard case), 24-25 (relation between negotiation

process and right of access); Hearings on Comptroller

General Reports to Congress on Audits of Defense

Contracts Before the Subcomm. on Military Operations

of the House Comm. on Government Operations, 89th

Cong., Ist Sess. (1965), at 45-46 (discussing Hewlett-

Packard case), 512 (statement on behalf «f Machinery &

Allied Products Institute discussing GAO’s position); 115

Cong. Rec. 25801 (1969) (GAO memorandum setting

forth the agency’s position, accepted in Hewlett-

Packard, that access “is not limited to that necessary to

determine whether the contracts were performed in

accordance with their terms and whether the contracting

otficer had been detrauded or misled in entering into the

contracts * * *, by what the parties may have considered

16

or not considered in the course of negotiations * * *,

[or] by the fact that the contract was performed by the

delivery of ‘off-the-shelf’ items not specially manufactured

for the contract’).

Finally, with the isolated exception of the now-reversed

decision of the district court in Eli Lilly (see 574 F. 2d at

920, 923, 925), petitioner’s position has been rejected by

every court to address the issue. See Eli Lilly & Co. v.

Staats, supra, 574 F. 2d at 914; Hewlett-Packard Co. v.

United States, supra, 385 F. 2d at 1014, 1016; Merck &

Co. v. Staats, supra, slip op. 2, 4 (80-416 Pet. App. 2c,

4c). See also Pet. 14 n.26; Conditional Petition for

Certiorari Before Judgment in Merck & Co. v. Staats,

supra, at 16. Even in cases of non-cost-based contracts

where negotiations over price did not occur, GAO’s

examination of the contractor’s cost records could well

“lead to the use of other methods of meeting future

procurement needs” (Hewlett-Packard Co. v. United

States, supra, 385 F. 2d at 1016). And, as the court stated

in refuting the same argument in Eli Lilly (574 F. 2d at

913, 914-915):

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” * * *.

* * * * *

[Petitioner’s] argument * * * limit[s] “directly perti-

nent” to an inquiry into what issues were negotiated

at the time of contracting * * *. [his 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

17

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 perfor-

mance.” * *

In the final analysis, [petitioner’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” * * *. How-

ever, *** controlling fraud was not the only

purpose of the legislation and * * * 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.

3. Apart from the lack of merit to its substantive

arguments, petitioner has failed to demonstrate that the

instant case warrants the extraordinary course of review

by this Court before judgment in the court of appeals. Pe-

titioner does not contend that the issues it seeks to raise

are “of such imperative public importance as to justify the

deviation from normal appellate practice and to require

immediate settlement in this Court.” Sup. Ct. R. 18.

Compare, e.g., United States v. Nixon, 418 U.S. 683

(1974); Youngstown Sheet & lube Co. v. Sawyer, 343

U.S. 579 (1952). Petitioner does assert, however, that

considerations of sound judicial administration militate in

favor of certiorari betore judgment in this case. We

disagree.

In essence, petitioner seeks to present two questions

that have not divided the courts of appeals and are not

18

otherwise appropriate for this Court’s review. Indeed, the

Court has already declined to hear these very questions in

the absence of such a conflict. See Eli Lilly & Co. v.

Staats, cert. denied, 439 U.S. 959 (1978). Petitioner has

suggested no reason for a different disposition of this case

even after decision by the court of appeals, and certainly

none that would provide sufficient grounds for cir-

cumventing that court by means of certiorari before

judgment.

Prudent judicial administration does not counsel a

contrary result. Notwithstanding petitioner’s apprehen-

sions, it is a distinct possibility, especially in light of Eli

Lilly, that the Court will never need to confront the two

issues raised here. On the other hand, if a conflict does

develop, there will be time enough then to petition for

certiorari at a poi when this Court would have the

benefit of full se ation of the courts of appeals’

divergent views.'? Moreover, insofar as petitioner wishes

to be heard on the question presented in Bristol—as to

which there is currently a conflict in the circuits—it can be

fully accommodated through the opportunity to appear as

an amicus curiae. In sum, to grant the instant petition for

certiorari before judgment, o: to deny the petition in

Bristol with the expectation of subsequently granting

certiorari in SmithKline or Merck after final judgment in

the court of appeals, would needlessly involve the Court in

the resolution of issues that plainly do not warrant review

and is umnecessary to protect petitioner’s legitimate

interests.

'SWe note that petitioner has urged the court of appeals, as one

disposition of the case, to vacate the judgment of the district court

and remand for further factual proceedings on the question of GAO's

purpose in requesting access to petitioner's records (SmithKline Br.

29-34; see also Pet. App. 10a). Ihus, even after the court of appeals

has rendered a decision, it is possible that the case would be

interlocutory in nature and therelore unsuited to review in this Court.

19

Petitioner is not aided in any way by the cases it cites

regarding certiorari before judgment (Pet. 16-17). None of

those cases concerned an attempt, as here, to interject new

and separate issues into a pending proceeding. Rather, in

each of the cited instances, the issues raised in the

respective cases were substantially identical. Moreover, on

each occasion, the decisions under review either involved

the same court of appeals, so that the circuit had already

passed upon the legal question presented in the petition

for certiorari before judgment,'* or pertained to a single

dispute and presented potentially inconsistent legal

obligations that could not be jointly fulfilled by the

parties.'> No comparable circumstances are presented in

this case, and the exceptional procedure for certiorari

before judgment is inappropriate here.!°

'4See Porter v. Dicken, 328 U.S. 252, 254 (1946), and Porter v.

Lee, 328 U.S. 246, 251 n.3 (1946); Johnson vy. Fleet Corp., 280 U.S.

320, 322-325 (1930). See also Jaylor v. McElroy, 360 U.S. 709, 709-

710 (1959), and Greene v. McElroy, 360 U.S. 474 (1959).

'SSee New Haven Inclusion Cases, 399 U.S. 392, 414, 418 (1970);

McCulloch v. Sociedad Nacional de Marineros de Honduras, 372

U.S. 10, 12 (1963). See also Washingion v. Fishing Vessel Assn., 443

U.S. 658, 671-674 (1979); Hannah v. Larche, 363 U.S. 420, 422-423 &

n.3, 428-430 (1960).

'6An analogous situation would exist here if, for example,

petitioner had filed suit in one district court to enjoin GAO’s request

and the government had brought an action in another district co art

to enforce the request; in the event the Court granted certiorari in one

of these cases after judgment in the court of appeals, it might not be

inappropriate (although it would hardly be necessary) to grant

certiorari before judgment in the other case if the litigated issues were

substantially identical and if either the two cases arose in the same

circuit or divergent decisions would impose incompatible legal duties

on the parties. In contrast, the instant petition does not implicate

these considerations in support of certiorari betore judgment.

20

CONCLUSION

The conditional petition for a writ of certiorari before

judgment should be denied.

Respectfully submitted.

WADE H. McCreg, JR.

Solicitor General

ALICE DANIEL

Assistant Attorney General

MICHAEL KIMMEL

ROBERT KAPLAN

Attorneys

NOVEMBER 1980

DOJ-1980-11