Appendix — United States v. Acme Process Equipment Co.

PAGE -

APPENDIX

an the United States Court of Gains

No. 849-57

(Decided June 11, 1965)

ACME PROCESS rabrr Hur CO., TO ITS OWN

USE, AND FOR THE USE AND ‘BENEFIT OF

NICHOLSON PRODUCTS COMPANY, STEEL

HEDDLE MANUFACTURING CO. FOLEY MA-

‘CHINE COMPANY, PATTERN "MACHINE &

FOUNDRY CORPORATION, INTRICATE MANU-’

-FACTURING COMPANY, J KOHAN, D/B/A

MANALAPAN MACHINE & WELDING WORKS,

AND PITTSBURGH NATIONAL BANK, SUCCES.

SOR TO PEOPLE’S FIRST NATIONAL BANK &

TRUST COMPANY, ASSIGNEE OF ALL METALS

INDUSTRIES, INC. v. THE UNITEDSTATES

Jack — for the plaintiff, — Dimond and

George E. Palmer of counsel. !

James F. Merow, with whom was Assistant Attorney

ere Ws angles, Senin Safeadont.

Before Cowxx, Chief 2 LaRAMOR®, — Davis

and Cottins, Judges. A

ornnon

Dam, sudge, delivered the opinion of the court:

Plaintiff's first experience as a defense contractor was to

bid on and win two negotiated Ordnunce Corps contracts,

be opinions, asd findings of Commissioner G. Murray Bernhardt. In this

case. its companion, Acme Procese Equipment Co. v. United States, Ct. CL, .

No. „ decided this day, have been most helpful. The court has borrowed

| material from both opinions, although, in some respects, our results -are

different.

210-151—66——_1

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rr?

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Nl

ene. es

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both of which soured into litigation In January 1983,

Army Ordnance awarded a contract for the manufacture of

75 mm. recoilless rifles. This project was largely subcon-

tracted, leaving for Acme only the final finishing and as-

sembly of components, and the earlier job of fashioning the:

by the Government under a separate facilities contract.

From the start, Acme ‘was beset by serious production de-

lays due to a combination of causes, among them its own in-

experience, defaults by subcontractors, and defects in some

of the government-furnished machines. Generous time ex-

tensions forgave many delinquent deliveries, but liquidated

damages were assessed on-others. After uncovering alleged

violations of statutes relating to kickbacks, contingent fees,

and conflicts of interest, Ordnance suspended work under

the contract in July 1954 and canceled it two months later in

August 1954. The purported infractions involved a clique

of unprincipled employees of Acme, aligned with a stock-

holding minor. executive of the corporation. In this suit

for breach of contract Acme denies any violations and al-

leges that the charges of malfeasance were a smokescreen to

enable the Government to cancel without cost a contract for

the production of obsolete weapons no longer needed. In

that manner, it is said, defendant hoped to avoid the heavy

cost of a termination for its own convenience. Cancellation

left Acme financially crippled, since it was unreimbursed

for much of its large investment in contract

ee een ee

to obtain settlement.

The Government major defense still ia that Acme is G-

titled to no recovery because it violated certain statutes and

‘covenants (concerning contingent fees, kickbacks, false.

claims, and conflicts of interest). Should each of these ab-

solute defenses be rejected, the plaintiff has requested us to

Shan the tradi based on wpe raid of restitution, rather

is court. Tn addition to ite objection to thia n af elisa,

pee rienced cin rar edi tama

‘eg lsck of standing to sue on behalf of its suboontractors. ‘The

1a" —

* No. 588-50, eupre, fa. 1, involves the other contract. — Pr

wy

3

defendant also argues that, since plaintiff itself -was respon-

sible for delays, it is not entitled to recover delay-damages,

and the contracting officer’s assessment of liquidated dam-

ages was proper. Finally, Acme urges its right to in-

terest on amounts due, on the ground that the Govern-

ment’s actions constituted a taking within the Fifth Amend-

ment. We consider each of these aspects of the case.*

*

I, CANCELLATION

A. COVENANT AGAINST CONTINGENT FEES,

The defendant contends that it validly canceled the con-

tract in the summer of 1954 because (1) Acme misrepre-

sented and concealed its employment of a part-time agent

to secure government contracts; and (2) such an arrange-

ment violated the covenant against contingent fees.

For many years prior to the events with which we are con-

cerned, Acme enjoyed some prestige as a manufacturer of

case, like No. 538-59, was tried and the Commissioner’s report filed

defore the decision of the Supreme Court in United States v. Carlo Bianchi 4

., 873 U.S. 700 (1963), Neither party has preserved an objection to the

receipt of de novo evidence, and we therefore need not concern ourself with that

peobiem, Stein Bros. Mfg. Co. y fa eae any see drapery —

July 12, 1968, 387 F. 24 861, and Gecisions in that line.

It fs impossible to ascertain whether the written contract superseded the

vrior informal agreement.

/

4 .

Tucker was to be paid a weekly minimum salary of $150,

which would be increased to five percent of his weekly gross

sales up to $10,000 (i. e., sales by Acme under contracts ob-

tained through him), plus three percent of such weekly gross

sales in excess of $10,000. Minimum salaries paid prior to

any sales by Tucker were to be deducted, later, from the ex-

cess of his commissions over his minimum weekly guarantee.

The result was that the guaranteed weekly salary was a non-

recoverable advance against commissions; Acme could, how-

ever, cancel the contract if commissions failed to cover the

minimum salary guarantee. Norris and Tucker also entered

into an agreement with each other that Norris would

receive fifty percent of any fees paid Tucker by his other

clients for enabling them to obtain subcontracts from Acme.

Piaintiff was unaware of this latter arrangement.

Tucker shortly produced a deluge of inquiries, bid pro-

posals, and invitations from both commercial and -

merit ‘sources. Among these were the invitattons to bid on

the contract at bar (Contract 1213), as well as the agreement

(Contract 8580) which is the subject matter of the other suit,

No. 538-59.

On October 23, 1952, Acme submitted its original bid for

Contract 1213 to the Philadelphia Ordnance District. The

bid form contained a provision requiring the contractor to

represent whether it had or had not (boxes were supplied

after each of the alternatives for inserting a mark to denote

the correct fact) “employed or retained a company or person

(other than a full time employee) to solicit or secure this

contraet.” In its October 23rd bid, James S. Norris, as Gen-

eral Manager of the Defense Work Department,” certified

that plaintiff had not retained such a person. Under a re-

vised proposal, dated December 10, 1952, and also signed by

Norris, plaintiff made a directly contrary representation.

On December 18, 1952, however, Acme once again reversed its

position. Joshua Epstein, président of Acme, executed

government form entitled “Contractor’s Statement of Con-

tingent or Other Fees”, in which he, either accidentally or

deliberately, filled in one of the two alternative boxes to

indicate that Acme had not retained a part-time employee to

secure the contract. This representation was invarrect, since

A

5

plaintiff had, in early October, hired Tucker on a part-time

basis to solicit government contracts.

We assume, for this part of the case, that these misrepre-

sentations, or the substance of the Acme-Tucker contingent

fee arrangement, or both, breached the contract. But the

crucial point is that the defendant, after obtaining knowledge

of ti facts, waited until over a year later before canceling

the agreement. Could an election to cancel be delayed for

such a time? We hold not. In our view, an election to

annul the contract had to be made with reasonable prompt-

ness after the Government gained knowledge of the facts;

by putting off its decision for an inordinately long period,

the defendant lost the right it earlier had to terminate the

contract without incurring any cost.

As early as May 1953, the Philadelphia Ordnance District

had sufficient information to determine whether Acme had

previously made any misrepresentations relating to con-

tingent fees or had violated the covenant. In June 1953,

defendant nevertheless issued a supplemental agreement,

which increased the number of rifles to be manufactured

under the contract from 2,322 to 2,751 (an 18% increment).

Despite the production difficulties it encountered, plainti

continued manufacturing the rifles until Ordnance directed it

to suspend all work under the contract on July 22, 1954.

Cancellation for unspecified “statutory violations” followed

on August 18, 1954.

This phase of the case—as distinguished from the Gov-

ernment’s responsibility to reimburse Acme for payments to

Tucker in violation of the covenant against contingent fees—

is governed by the rule that, “[W]here a contract is breached

in the course of its performance, the injured party has a

choice presented to him of continuing the contract or of re-

fusing to go on. If he chooses to continue performance he

has doubtless lost his right to stop performance *.” 5

Williston, Contracts § 683 (3d ed. 1961) (footnotes omitted) ;

e. g. Lummus Co. v. Commonwealth Oil Refining Co., 280

F. 2d 915, 929-30 (C. A. 1), cert. denied, 364 U.S. 911 (1960);

Lichter v. Goss, 232 F. 2d 715, 720 (C. A. 7, 1956). After dis-

In both this case and its companion, we also reach the different question

whether the Government can validly refuse to reimburse the plaintiff for

payments made to Tucker.

6

covering the contingent-fee violations, defendant could not

wait for over a year to decide whether it wished to annul the

‘contract as a whole, on that basis. The sanction of contract

cancellation is too drastic to permit a long delay. Beyond the

time reasonably necessary to determine if there has been a

misrepresentation or a violation of the covenant,’ the de-

fendant cannot allow an unwary contractor to continue. per-

“formance and thus incur large expenses, all of which the Gov-

ernment will refuse to reimburse if and when it decides to

‘cancel the contract on the ground of the violation. As this

— said in Companhia Atlantica v. United States, 148 Ct.

Cl. 71, 78, 180 F. Supp. 342, 347, cert. denied, 364 U.S. 862

(1960), “it would be a great wrong to permit the Government

to awaken such a ‘sleeper’ to justify its cancellation * *.”

In that case, the plaintiff had fully apprised the defendant

of the contingent fee arrangement at the outset of negotia-

tions, which lasted over a year. The Government then can-

celed its contract for the purchase of tungsten from the plain-

tiff less than two months after the agreement had been signed,

and later sought to defend its action on the grounds that the

‘covenant against contingent fees had been violated. Al-

though the court found that there was no violation, it also

based its decision on the alternative ground that the defend-

‘ant had waited too long before annulling the contract. Here,

too, we refuse “to awaken such a ‘sleeper’.”

The severity of contract cancellation makes the present

case, in this aspect, wholly unlike one in which the Govern-

ment simply attempts to recover or withhold funds paid in

violation of the covenant against contingent fees. That type

of action is governed by the principle that, where government

officials have erroneously or illegally paid out money, mere

delay in seeking its recovery will not preclude a suit by the

United States. See Acme Process Equipment Co. v. United

States, Ct. Cl., No. 538-59, slip op. pp. 17-19, decided this day.

But when the Government cancels an entire.contract because

We take into account, in establishing what was a reasonable time for

determining whether the covenant against contingent fees was violated, the

fact that an evaluation of all the circumstances surrounding the arrangement

is often necessary. See Aome Process Equipment Oo. v. United States, Ct. Cl.

No. 588-59, slip op., pp. 12-16, 19, decided this day. Dot, an potated ont saire,

the fourteen months which the Government waited before canceling Con

1213 was an unreasonable delay even by lenient standards.

*

7 *

of a breach of the covenant, it can refuse to reimburse the con-

tractor, not only for wrongful or illegal expenditures, but

also for amounts to which the contractor would otherwise be

legally entitled. To avert extreme hardship, we think that

the Government is obliged to take such a course within a

reasonable time after it has discovered the breach."

The defendant does not seem to question that an uncon-

scionable delay in raising a misrepresentation or a violation

of the covenant against contingent fees as a ground for an-

nulment will preclude the Government from thereafter urg-

ing that defense. It contends instead that there was no

unreasonable delay, because the Government did not discover

all the material ‘facts until shortly before the actual cancel-

lation. The evidence fails to bear out this argument.

In connection with its other major government contract

(“8580”), Acme gorrectly represented, on November 4, 1952,

in the bid which it submitted to Rock Island Arsenal that it

had employed a part-time agent to obtain the contract. On

or about December 12, 1952, Rock Island received from plain-

tiff a formal “Contractor’s Statement of Contingent or Other

Fees,” to which was attached a copy of Acme’s employment

contract with Tucker dated October 13, 1952. Contract 8580

was awarded to plaintiff by Rock Island on J. anuary 8, 1953,

but was administered by the Philadelphia Ordnance District,

Mississippi Valley Generating Oo., 364 U.8. 520 (1961), in which the Supreme

Court held that a government contract for the construction and operation of

power plant was unenforceable, on the ground that a federal confiict-of-

interest statute, 62 Stat. 708, 18 U. 8. C. § 434, had been violated in

the contract. That penal provision “speaks in broad, absolute terms,” estab-

lishing “a rigid rule of conduct” (364 U.8. at 550, 551), and its violation may

8

the same agency which handled present Contract 1213 from

its inception. Thus, even prior to the award of Contract

1213 to Acme on January 27, 1953, the contracting Ordnance

District had access to the Tucker employment agreement,

which was physically incorporated in the Contract 8580 file,

although the District had no particular reason to refer to

that part of the file.

On May 18, 1953, the Ordnance District was again told of

the agreement between Acme and Tucker. Plaintiff in-

formed representatives of the Ordnance District that Tucker

had been a full-time employee since January 1953, that his

original part-time contract on a commission basis had been

ended, and that he had received no commissions under the

prior agreement. The letter also referred to the contingent-

fee statement previously filed with the Rock Island Arse-

nal and asked that it be withdrawn.’ See finding 8(f). The

defendant was thus told that (1) at the time that the plain-

tiff made its bid and negotiated for Contract 1213, it had in

its employ a part-time agent whom it had hired to solicit

government contracts; and (2) that agent was Harry K.

Tucker, Jr., who, along with his father, had been under sur-

veillance by the Government for suspected statutory viola-

tions in connection with prior contingent fee arrangements.

Finding 3. Furthermore, by referring back to the bid and

the related forms which Acme submitted to Ordnance in

connection with Contract 1213 (and to which Acme specifi-

cally referred), the Philadelphia Ordnance District could

easily have discovered the prior misrepresentations. Yet

the defendant waited for fourteen months before canceling

the contract. During this period the plaintiff continued to

perform and to incur expense.

The Government seeks also to justify the delay on the

ground that it was not told al the relevant facts until shortly

before it canceled. It emphasizes an alleged informal agree-

ment between Tucker and plaintiff’s president, entered into

* Plaintiff seeks to impute knowledge of the Tucker contract to the Ordnance

District as of January 1953, but we see no basis for such an imputation.

be May 18, 1953, notification included one incorrect statement. The letter

said that Tucker had been a full-time employee since January 1953, whereas

the contract under which he began working full-time was not effective until

March 1953. However, this errer did not conceal the existence of the

contingent-fee relationship.

9

when he first began working for Acme in the fall of 1952.

Under that agreement, Tucker was to receive a three per-

cent commission, which he agreed to share equally with Nor-

ris. But the only evidence in the record of this arrange-

ment is a written statement made by a General Accounting

Office investigator in June 1955, on the basis of an interview

with Joshua Epstein, Acme’s president. Even if we accept

at full value this second-hand statement made three years

after the events, there is no way of knowing whether the

alleged informal agreement was superseded by Tucker’s

written contract. If that was the case—which it might well

have been—this commission-splitting agreement lasted no

more than two weeks. In this state of the proof we cannot

give any significance to this allegéd side-agreement. Other

than the information referred to in footnote 9, swpra, this

is the only “fact” which the Government can point to as re-

maining undisclosed after May 1953. We do not hesitate,

therefore, to conclude that the defendant had sufficiently

full knowledge of the contingent-fee arrangement as of

May 1953, and could not delay until July 1954 to elect on

that ground to exercise the drastic remedy of complete

cancellation.

B. ANTI-KICKBACK ACT

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 week-

ly 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 pre-

pared Acme’s government contract bids, but also negotiated

all its related subcontracts, they were in 4 splendid position

to mulct their employer.

As pointed out in the opinion in the other Aome case, No. 588-59, the facts

known to defendant by the Spring of 1953 were sufficient to call for an election

at that time to use the severe remedy of total cancellation, but the Govern-

ment’s delay after these facts were known was not sufficient to constitute an

affirmative waiver of the defendant’s conventional right to refuse to reimburse

Acme for its illegal payments to Tucker. There is no inconsistency.

10

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, Nor-

ris, and Jack Epstein, who was a plant superintendent and

minor stockholder of Acme, 1 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 sub-

contract 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 al-

ready paid to Gunn Engineering Company (although this

‘sum was more than offset by Tucker’s waiver of certain com-

missions Which All Metals owed him). Even after All

Metals decreased its ultimate price to less than that con-

» templated,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.

Bookkeeping technicalties tend to obscure this fact, but, in

the final analysis, had Contract 1213 been of a cost-reim-

‘- bursable nature, the Government would ultimately have

borne part of the cost of the kickbacks. See findings 20

and 21. *

The arrangements between Tucker and other firms for

which he obtained subcontracts from Acme were less com-

plex, but hardly less reprehensible. For instance, Manala-

pan hired Tucker in November 1952 and agreed to pay him

$100 weekly as a nonrecoverable advance against commis-

sions. As a result, Manalapan obtained a series of small pur-

chase orders Acme under Cotitract 1213 from February

through July 1953. The subcontract prices hid the $1,350 in

u Zack Epstein was the son of Joshua Epstein, president of\Acme. There

is no evidence, however, that Joshua Epstein knew anything about the kick-

backs which Tucker and Norris were receiving from subcon or the

extortion scheme they, carried out with his son. Nor is there ive evi-

dence that any Acme employee or official other than the conspira aware

of these illicit activities.

\

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11

commissions and/or salaries which Manalapan paid Tucker

and which Tucker shared with Norris. The conspirators -

entered into comparable agreements with several other sub-

contractors. 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.

In these circumstances, the defendant claims that Acme

violated the Anti-Kickback Act, 60 Stat. 37, as amended, 41

U.S.C. 8 51, and that that violation authorized the Govern-

ment 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

& 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 re-

ceiving prohibited payments. Under the 1946 Act, coverage

is limited to government contracts on a “cost-plus-a-fixed-fee

or other cost reimbursable basis.” *

u Citing Carrier Corp. v. United States, Ct. Cl., No. 346-59, decided Feb. 14,

1964, 828 F. 2d 328, the Government claims that the wrongdoers were given

broad apparent authority by the plaintiff, and that Acme is therefore bound

by their acts. Even if the premise is true, the conclusion does not follow.

Imputation of an agent’s actions to his principal is precluded where the agent’s

action is taken for the purpose of defrauding the principal. 8 Fletcher,

Private Corporations § 826 (rev. ed. 1947) ; ¢.9., Maryland Casualty Co. v. Tulea

Industrial Loan & Investment Co., 88 F. 2d 14, 16-17 (C.A. 10, 1036). Since

the commissions which the Tucker organization received from subcontractors

increased their charges to Acme, plaintiff was being swindled by its own agents.

The statute, as originally enacted in 1946, provided: “[T]he payment of

any fee, commission, or compensation of any kind or the granting of any gift

or gratuity of any kind, either directly or indirectly, by or on behalf of a sub-

contractor, as hereinafter defined, (1) to any officer, partner, employee, or

agent of a prime contractor holding a contract entered into by any department,

agency, or establishment of the United States for the furnishing of supplies,

materials, equipment or services of any kind whatsoever, on a cost-plus-a-fixed-

fee or other cost reimbursable basis; or to any such prime contractor or (2) to

any officer, partner, employee, or agent of a higher tier subcontractor holding

a subcontract under the prime contract, or to any such subcontractor either

as an inducement for the award of a subcontract or order from the prime

contractor or any subcontractor, or as an acknowledgment of a subcontract

12

Tucker, Norris, and Jack Epstein were indicted for vio-

lation 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 con-

tract. 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 con-

duct 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 retro-

actively 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.

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

or order previously awarded, is hereby prohibited. The amount of any such fee,

commission, or compensation or the cost or expense of any such gratuity or

gift, whether heretofore or hereafter paid or incurred by the subcontractor,

shall not be charged, either directly or indirectly, as a part of the contract

price charged by the subcontractor to the prime contractor or higher tier

subcontractor. The amount of any such fee, cost, or expense shall be recover-

able on behalf of the United States from the subcontractor or the recipient

thereof by sét-off of moneys otherwise owing to the subcontractor either directly

by the United States, or by a prime contractor under any cost-plus-a-fixed-fee

or cost reimbursable contract, or by an action in an appropriate court of the

United States. Upon a showing that a subcontractor paid fees, commissions,

or compensation or granted gifts or gratuities to an officer, partner, employee,

or agent of a prime contractor or of another higher tier subcontractor, in

connection with the award of a subcontract or order thereunder, it shall be

conclusively presumed that the cost of such expense was included in the price

of the subcontract or order and ultimately borne by the United States. Upon

the direction of the contracting department or agency or of the General

Accounting Office, the prime contractor shall withhold from sums otherwise

due a subcontractor any amount reported to have been found to have been paid

by a subcontractor as a fee, commission, or compensation or as a gift or

| &ratuity to an officer, partner, employee, or agent of the prime contractor or

another higher tier subcontractor.”

13

the kickback, it did not intend to alter the pre- existing com-

mon law remedy of contract cancellation. The major stum-

bling 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 8

1946 Act states, There is no existing statutory or other au-

thority 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., Ist Seas.

2 (1945). 4 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 im- SE ae

proper kickbacks of which he was unaware.

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. 428, 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 Govern-

ment Had a pre-existing right of contract cancellation in the

present circumstances.“ Whether it was codifying an exist-

ing 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 pived secret kick-

backs. Had the legislature wished to p 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. 8 2306 (b). In the absence of any statutory

„indication that the Government has a right to cancel the con-

tract in this situation, it is not for the court to engraft a new

and drastic remedy onto the Anti-Kickback Act. Cf. Un-

- encelled Chemical Corp. v. United States, 187 Ct. Cl. 681, 684

149 F. Supp. 383, 385 (1957).

2 It fe of course clear . kuows that another has éniployed

an.agent to conduct a transaction with him is subject to lability to the other-

for secretly employing the [agent] to act on his account in the transaction.

* © © The defrauded principal can rescind the transaction with the

, principal * * *.” Restatement, Agency 24 § 391, Comment g. That

ciple would have enabled Acme to cance] its agreements with the n-

tractors, but it could not give the defendant a right to cancel its con with.

Acme. See Aome Process Equipment Co. v. United States, Ct. Cl., No. *

decided this day, slip op., p. 20, et geg. 5

14

Furthermore, we have grave doubts about the applicability

of the 1946 Act to the present contract. If it is not appli-

cable, the Government’s position must be rejected for the

additional reason that in 1953 and 1954 there was no recog-

nized federal public policy invalidating Contract 1213. Cf.

Muschany v. United States, 324 U.S. 49, 66-67 (1945).% 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.” ** When Acme’s agents received

kickbacks about which plaintiff had no knowledge, it can

scarcely be said that plaintiff (as distinguished from the

agénts) violated “obvious ethical or moral standards”, and

that its contract with the defendant could therefore be can-

celed on that

The unreported district court decision granting the mo-

tion for acquittal of Tucker, Norris, and Jack Epstein is,

of course, a direct holding that the 1946 anti-kickback legis-

lation did not cover the present contract. One of the pri-

mary 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 “no 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

nn is a matter of public importance that good faith contracts of the

United States should not be lightly invalidated. Only dominant public policy

would justify such action. In the absence of a ploin indication of that policy

through long governmental practice or statutory enactments, or of violations

of obvious ethical or moral etendards, this Court should not assume to declare

meer The courts must

be content to await legislative action.” (Emphasis added.)

Like its predecessor, the 1960 statute was given retroactive effect, and

might conceivably be a “statutory enactment” on the basis of which

contract could be canceled. This would result, however, in the use of legislation

enacted in 1960 to condemn conduct taking place in 1953-1954, and to justify

@ fcrfelture. We think the Court in the Muschony case was referring to

“statutory enactments” in ese.

1 The district court decision in the criminal case does not collaterally estop

the Government from aéserting the applicability of the 1954 Anti-Kickback Act

to the present contract. See United States v. PT ee ee

Boerds, 339 U.S. 485, 492-04 (1950). —

2

15

U.S. 919 (1958). Acme’s contract, however, had a limited

range of upward revision. See finding 15. The applica-

ility: of the 1946 Act to Contract 1213 is thus highly

For these reasons, the present case is not like United States

v. Mississippi Valley Generating Co., 364 U.S. 520 (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. Here, the civil

remedy established by the statute enables the Government

to recover any amounts it has paid out as a result of kick-

backs; the public does not bear any part of the expenses

illegally incurred. And most significantly, the violation in

Mississipi 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 pos-

sible conflict of interest. 364 U.S. at 565 n. 19. The kick-

backs 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 gai 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 suboontractors. ova

__™ The defendant urges that a ruling against cancellation will render It im-

possible for the Government to annul an agreement with a prime contractor

after discovering that its agents have secret kickback arrangements with its

b 16

O. CONFLICT-OF-INTEREST STATUTES

- ‘Defendant urges that Acme’s employment of Harold J.

Lee and Charles G. Hochstuhl contravened certain provisions

of the federal conflict-of-interest statutes, thereby e

the contract voidable by the Government.

In the early stages of contract performance Acme was ex-

periencing production problems with machines and tooling

supplied by the Government under a companion facilities

contract. At plaintiff's request Watervliet Arsenal ordered

Harold J. Lee, a machinist lead foreman at the Arsenal, to

report to Acme’s Lansdale plant to assist plaintiff in its tech-

nical problems. Under his official orders Lee worked at

Acme’s plant from his arrival on April 20 until April 24,

1953, at government expense. The Arsenal refused ‘Acme’s

request that it loan Lee’s services for an additional week at

government expense. Instead, Lee was given official per-

mission to remain at the plant, advising plaintiff in an absent-

without-pay status from April 27 to May 1, 1953. During

this latter period he worked 96 hours, for which Acme paid

him $5 per hour plus hotel expenses (compared to his gov-

ernment salary rate of 52. 0 per hour). The amounts paid

by Acme to Lee were charged against Contract 1213. Plain-

tiff was pleased with Lee’s services and commended him to

Watervliet Arsenal. Upon his return Lee filed with the

Arsenal a trip report, which described the production prob-

lems he had observed and the advice he had given Acme

personnel for their solution. In large part the report re-

flects the mexperience of Acme’s personnel and their lack of

necessary equipment. There is no evidence of any improper

conduct on the part of plaintiff or of Lee—aside from the

propriety of his being hired at all. The defendant concedes

that Lee’s employment by plaintiff did not affect his impar-

tiality, —— ——̃ of Nis tenort

dq ·- A nee

case.

3 ee

provide itself with that remedy, it may do so by inserting a “covenant against

kickbacks” (similar to the covenant against contingent fees) in all its contracts.

Z eee eee

e

17

A federal statute precluded any “employee of the United

States or any department or agency thereof” from receiving

“any compensation for any services rendered * * in rela-

tion toany * * * contract * * * in which the United States

is a party.” 62 Stat. 697. During the week he received a

salary from Acme, Lee was not on the Government’s payroll

at all. We are not concerned with the undercover activities

of an employee who pretends to be working for the Govern-

ment while secretly performing services for a contractor.

During that week, Lee received a reasonable salary from

plaintiff and performed valuable services about which the

defendant was fully informed. It may well have been poor

judgment for Acme to hire, or the defendant to permit the

hiring of, Lee’s services under this arrangement (rather than

detailing Lee for an extra week to Acme’s plant on the Gov-

ernment’s payroll). The fact remains that both parties

acquiesced in the arrangement so that, for one week, Lee was

not working for the Government at all; in effect, he became

an Acme employee. As such, the compensation which

he received did not fall under the statute and the harsh sanc-

tion of forfeiture need not be considered.

After Contract 1213 was awarded to Acme, Charles G.

Hochstuhl of Philadelphia Ordnance District was assigned

to administer it, along with other contracts. As part of his

duties in connection with 1213, Hochstuhl recommended

changes in the delivery schedule, and journeyed to Ohio in

March 1953 in the company of Acme officials to show them

existing gun-manufacturing facilities. He was removed

from his position with the Government effective August 4,

*The conflict-of-interest provisions allegedly violated have since been super-

seded by Public Law 87-849 (76 Stat. 1119, 18 U.S. C. $§ 201 et seq.), enacted

October 23, 1962, an omnibus exposition and revision of all statutes in the

field of confiict-of-interest, bribery and graft relating to government employ-

ment. Since the acts complained of occurred prior to the omnibus measure

they must be tested against the law then extant, but useful tion on

the purpose of the superseded statutes is available from the legislative back-

ground and content of the latest compendium.

Don his return to Philadelphia Ordnance District from this trip, Hochstuhl

submitted a voucher and was paid for his per diem and other trip expenses.

An Acme employee had paid $1240 for Hochstuhl’s hotel room charges on

diseusséd tn connection with Lee. Even if it & violation, the $12.50

gratuity would not justify cancellation of a $1 000 contract.

210—151—66— 2 *

18

1953, “* * * for making material false statements and exag-

gerations on [his] application standard Form 57,” relating to

prior private employment. During his notice period, Hoch-

stuhl looked for other work and was employed by Acme in

August 1958, immediately following his release. The de-

fendant advised Acme at the time that, for two years there-

after, Hochstuhl could not engage in negotiations with his

former employer concerning Acme’s contracts.

During the first few weeks of his employment by Acme,

Hochstuhl helped Norris as a subcontract expediter. After

Norris was discharged in September 1953 and replaced by

Jack Epstein as superintendent of the Lansdale plant, Hoch-

stuhl was designated Epstein’s assistant. As such he was

given a variety of assignments, all of them involving one

form or another of paper work. He established a control

system for subcontracts, prepared letters to Ordnance for

signature by others, correlated plant inspections, and assisted

in the preparation of requests for change orders. He had

no personal contacts with government representatives in

connection with plaintiff's contracts.

In the fall of 1953 Hochstuhl came across a number of

vouchers and other cost records in the files, which related to

repairs made by Acme to government-owned machines sup-

plied under Facilities Contract 1214 (related to Contract

1213). On his own volition and in the interest of keeping

adequate cost records, Hochstuhl undertook to segregate and

allocate the cost records to individual machines; thereafter,

as additional repairs were made to the machines, he kept a

running record of them. There is no suggestion that this

record was originally made for the purpose of a claim

against the Government; in the fall of 1953 there was no

prospect of the contract cancellation which took place in

July-August 1954. In September 1954, at the direction of

his superiors, Hochstuhl prepared an up-to-date record of

Acme’s expenditures in repairing the various government-

owned machines. It was based on the data he had compiled

a year earlier and had kept current in the meantime. . The

cost record was attached to a letter from Acme (signed by

Sidney Cohen, its secretary-treasurer) to Ordnance on Sep-

tember 7, 1954, in which’ plaintiff refused to return the

19

machines to the Government unless it gave assurance that

Acme would be reimbursed for its cost of repairs. See find-

ing 53. 5

The defendant charges that Hochstuhl's participation in

the preparation of Acme’s claim for reimbursement violated

a penal conflict-of-interest statute, which provided that,

“within two years after the time when [federal] employ-

ment or service has ceased,” a former government employee

may not “prosecute * any claims against the United

States involving any subject matter directly connected with

which such person was so employed.” 62 Stat. 698. Cast-

ing aside any doubts that Hochstuhl’s work for the defendant

was “directly connected” with a claim made by Acme, we

reach the question whether his services for Acme amounted

to “prosecution” of such a claim. Hochstuhl simply com-

piled data on which his superiors based a claim which they

presented to the Government. The basic information was

first assembled by him purely as a matter of record-keeping,

i.e. before there was any specific thought of a claim. More-

over, Hochstuhl’s participation in the total claim process was

merely clerical in nature. Other personnel in plaintiif’s em-

ploy could just as readily have performed the relatively

simple duties involved in compilation of costs relating to

repair of machines, and his prior government service gave

Hochstuhl no special knowledge or inside contacts which

contributed to the undertaking in any way that we can see.

There is a complete absence of evidence that Hochstuhl par-

ticipated in the presentation of the claim to the Government

after he had completed his assignment. On these facts, we

hold that Hochstuhl’s activities did not violate any conflict-

of-interest statute or afford the defendant a valid basis for

annulment of the contract.

D. FALSE CLAIMS ACT

The last reason which the defendant gives for vitiating

the contract is the presentation of certain allegedly false

claims for payment, both before and after cancéllation. As

a result of these submissions, the Government argues, Acme’s

claim was subject to forfeiture under 62 Stat. 978, 28 U.S.C.

20

§ 2514, and the corporation may be fined under the False

Claims Act, 12 Stat. 696, 31 U.S.C. § 231.

In offering cost figures to the Government on April 29,

1954, in support of its request under the price-redetermina-

tion clause for allowance of the maximum ceiling price, plain-

tiff included certain costs which, while actually expended,

are said by defendant not to have been properly chargeable to

this contract. These were: subcontractors’ costs which in-

cluded without specification commissions which they had

paid to the Tucker group; $12,000 which All Metals had

included in its subcontract price to Acme as a result of the

extortion scheme carried out by Tucker, Norris and Jack

Epstein; payments of salaries and/or commissions by plain-

tiff to Tucker; $1,045.52 charged by Norris against the con-

tract for personal services rendered by plaintiff’s employees

on Norris’ farm (the facts of which were first discovered by

the Government in December 1953) ; $470 plus hotel expenses

paid by plaintiff to Harold. J. Lee, whose services have previ-

ously been described; and minor hotel, meal and entertain-

ment charges for government employees. The defendant’s

Board of Awards approved the requested increase in the price

on the basis of revised data, but final action was not taken

because the contract had been canceled in the meantime.

Another set of allegedly false claims came during the pen-

dency of this suit when the parties held settlement negotia-

tions. In conjunction with these efforts, plaintiff submitted

the fiscal aspects of its claim to the Government in August

1958 on a standard contract-termination form, certifying in

part that “they have been prepared with knowledge that they

will, or may, be used directly or indirectly as the basis of

settlement of a claim or claims against the United

™ The statute provides: “Forfeiture oj fraudulent claims. A claim against

the United States shall be forfeited to the United States by any person who

corruptly practices or attempts to practice any fraud against the United States.

in the proof, statement, establishment, or allowance thereof.

In such cases the Court of Claims shall specifically find such fraud or attempt

and render judgment of forfeiture.”

. The relevant portions of thie statute read as follows: “Liability of persone

faloe claims. Any person employed in the service of the United

tes, who shall make or cause to be made * * * any claim upon or against

the Government of the United States, or any depertment or officer thereof,

knowing such claim to be false, fictitious, or fraudulent, * * * shall forfeit

and pay to the United States the sum of $2,000, and, in addition, double the

amount of damages which the United States may have sustained by reason of

the doing or committing such act, together with the coste ef t

21

States * *.” In its proposal, plaintiff reclassified several

of the previously-mentioned cost items as General and Ad-

ministrative expenses rather than direct charges, thus allocat-

ing only a portion of them to the performance of Contract

1213. This settlement claim was subsequently rejected.

With some modifications the same cost items were again

submitted by plaintiff in June 1961 in response to the issu-

ance of an order by the court under former Rule 28(b).

This last submission, which dealt separately with the plain-

tiff’s claims and those of its subcontractors, was accompanied

by a letter in which plaintiff said that it had not audited

the subcontractors’ claims but believed them to be accurate;

the covering letter also invited the Government to confer

with plaintiff as to any items in the claim which were not

properly includable. This Rule 28 damage schedule elimi-

nated certain costs which had been objected to in the

termination settlement proposal (payments to Lee, expenses

in connection with N orris’ farm, certain travel expenses of

Tucker, and a few entertainment expenses). Other con-

troverted expenditures were, however, retained in the cate-

gory of General and Administrative expenses, so that they

were proportionately allocated to the contract in suit (i. e.,

Tucker's salaries and/or commissions paid by plaintiff and

the subcontractors).

The defendant has asked not only that the plaintiff’s en-

tire claim be forfeited for practicing “fraud against the

United States in the proof * * * thereof” (62 Stat. 978,

28 U.S.C. § 2514, supra); it has also filed a counterclaim

under the False Claims Act, 12 Stat. 696, 31 U.S.C. § 231,

supra, seeking an affirmative judgment of $6,000 for plain-

tiff’s misrepresentations in the price redetermination pro-

ceedings, in the termination settlement proposal, and in the

schedule submitted pursuant to former Rule 28 (b). But

“fraud, resulting in forfeiture, can be found only on the

basis of clear and convincing evidence.” Chelsea F

Ino. v. United States, 149 Ct. Cl. 202, 212, 181 F. Supp. 685,

691 (1960). Inthe Government’s effort to supply such “clear

and convincing evidence,” there is at least one large gap.

Plaintiff's costs, exclusive of those challenged as improper,

overwhelmingly exceeded the contract ceiling price for which

22

the application in April 1954 was designed to obtain ap-

proval. In a letter sent to the Philadelphia Ordnance Dis-

trict in connection with the application, Acme’s accountants

noted that certain “recommendations of the Army Audit

Agent as to record keeping were not followed because the

difference between the ceiling price and the actual costs in-

curred was so great that any further expenditures on this

job should not be undertaken unless * * * absolutely nec-

essary.” At the same time, the accounting firm pointed

out that the Army would have to disallow $600,000 of Acme’s

costs in order to fall below the ceiling price of $1,191,077.

Defendant’s Exhibit 70. The inclusion of the controverted

items was thus unnecessary to justify receipt of the ceiling

price. Plaintiff had nothing to gain by insertion of these

disputed amounts in.its claim. That circumstance strongly

tends to negate the affirmative intent to defraud which de-

fendant must establish.“

Moreover, at the time of the submission of the 1958 and

1961 claims, and probably as early as the initial claim in

April 1954, the defendant was aware of the facts concern-

ing each of the allegedly false items. Also, the plaintiff

had actually expended the sums involved and, at least in

several instances, the propriety of charging them as contract

costs, either directly or indirectly by allocation through an

overhead account, was debatable or a matter of judgment.

While the inclusion of these items may have displayed poor

judgment, we are not convinced, in the circumstances, that

the plaintiff was endeavoring to deceive.

Citing United States v. Fow Lake State Bank, 225 F. Supp.

723, 724-25 (N. D. III., 1963), defendant argues that it is re-

quired, as & precondition of forfeiture, to show only that

Acme knowingly submitted false claims. But Fox Lake in-

volved the False Claims Act, 12 Stat. 696, 31 U.S.O. § 231,

» Defendant claims that the ceiling price is a reflection of all the items

submitted in the claim, and therefore, if allowed, it necessarily ineludes a

proportionate part of the allegedly improper costs. The argument might be

more convincing ff plaintiff's costs had not so greatly exceeded the ceiling price.

In the present context, the Government's contention ignores reality.

™ Defendant mistakenly relies on Wagner Iron Works v. United States, 146

Ct. CL 334, 174 F. Supp. 956 (1959).. That case was unlike this one in a

number of ways. Tt tavolved dagrant padding by inctusion of persons! expenses

im a cost-plus-a-fixed-fee contract. Furthermore, the scheme was carried out

by the corporation's sole stockholders, whose persona! intent to defrand the

United States was clearly established.

— ee Cn al — — F

23

which does not encompass forfeiture as a sanction. To jus-

tify cancellation of the contract, the Government must prove

ita case under 62 Stat. 978, 28 U.S.C. § 2514, which provides

for forfeiture of claims made by “any person who corruptly

Claims “specifically find such fraud or attempt.” An actual

intent to defraud is a prerequisite to annulment of the con-

tract under these provisions. See e. g. Pewee Coal Co. v.

United States, 142 Ct. Cl. 796, 806, 161 F. Supp. 952, 958

(1958), cert. denied, 359 U.S. 912 (1959) ; Kamen Soap Prod-

ucts Co. v. United States, 129 Ct. Cl. 619, 641, 124 F. Supp.

608, 620 (1954).

For the same reasons, a related defense asserted by the

Government must likewise fail. The defendant contends

that, independently of any statutory provision, it was en-

titled, on the basis of Carrier Corp. v. United States, Ct. Cl.,

No. 346-59, decided Feb. 14, 1964, 328 F. 2d 328, to cancel the

contract for the fraudulent and illegal acts of the contractor.

But in Carrier the court stated unequivocally, “There is no

doubt that a fraud was committed.” Slip op., p. 11, 328 F.

2d at 334. In the present case, we have, as we have said,

very grave doubts that Acme, through submission of the dis-

puted claims, ever intended to defraud the Government.

Defendant has failed to bear its burden of proving the de-

fense of fraud. .

We come now to defendant’s counterclaim for $6,000 under

the False Claims Act, 12 Stat. 696, 31 U.S.C. § 231, which

imposes a $2,000 fine for “any claim upon or against the Gov-

ernment” submitted by one “knowing such claim to be false,

fictitious or fraudulent.” If Acme included cost items in its

1954 price-redetermination statement even though it knew

them to be false, it is subject to a $2,000 fine. See, e. g.,

United States v. Vom Lake State Bank, 225 F. Supp. 723,

724-25 (N.D. III., 1963); but see United States v. Park Mo-

24

tors, Inc., 107 F. Supp. 168, 174-77 (E. D. Tenn., 1952).

Although Acme could not be certain that expenses such as

the salaries paid to Tucker were not reimbursable, it could

have had no similar doubts regarding the personal services

rendered by Acme employees on Norris’ farm. This matter

was brought directly to the attention of Acme officials by the

Federal Bureau of Investigation, but plaintiff failed to re-

move Norris’ personal expenditures from the charges claimed

on Contract 1213. Finding 26. This $1,045 charge was

subsequently included as a cost component in Acme’s April

1954 request for the contract ceiling price. In that manner,

plaintiff knowingly submitted a false claim and is subject to

a fine of $2,000

The Government maintains that inclusion of the same

items in the claims submitted by Acme in 1958 and 1961

justifies the imposition of two more civil penalties of $2,000

each. But Norris’ farming expenditures were not included

in the 1961 statement, and it is difficult to imagine that plain-

tiff even recalled this item when it submitted the 1958 termi-

nation-cost proposal. Moreover, we are not dealing with

different expenditures; the subsequent claims contained the

same costs which the Government had previously challenged.

The present case is unlike those in which numerous vouchers

are submitted to the Government, and each contains a sepa-

rate and distinct false claim for which the fine may be validly

imposed. Z. g., United States v. Veber, 299 F. 2d 310, 313

(C.A. 6, 1962) ; United States v. National Wholesalers, 236

F. 2d 944, 950 (C.A. 9, 1956), cert. denied, 353 U.S. 930

(1957). We are faced, rather, with one false claim, which

was denied by the Government and thereafter reasserted by

the plaintiff. The court holds that the defendant cannot

recover more than once for the very same false claim; it is

therefore entitled only to $2,000 by way of counter-tlaim.

In sum, we conclude that none of the legal defenses which

the Government has asserted justifies its cancellation of the

contract in the summer of 1954 for the alleged fault of the

*

The Park Motore case held that the clause of the False Claims Act with

which we are concerned requires a finding of specific intent to defraud. But

the language of the statute discloses no such element. Since “proceedings

{under the False Claims Act] are remedial and impose a civil (rather than a

criminal] sanction,” (United States es rel. Marous v. Hess, 317 U.S. 537, 549

(1943)), we see no justification for adding a requirement that specific intent

to defraud be proved.

25

contractor. When the Government is displeased with the

contractor’s administration of an agreement, it may always

sever contractual relations under the standard termination-

for- convenience clause inserted in its contracts. John Reiner

& Co. v. United States, Ct. Cl. No. 431-57, decided Dec. 13,

1963, 325 F. 2d 438, cert. denied, 377 U.S. 931 (1964), But

if the United States seeks instead to annul 4 contract for

fault, thereby leaving the contractor wholly uncompensated,

it must have proper justification for such harsh consequences.

Klein v. United States, 152 Ct. Cl. 8, 285 F. 2d 778 (1961) ;

Nesbitt v. United States, Ct. Cl., No. 321-61, decided May 14,

1965, fn. 2.

II, PLAINTIFF'S DAMAGES

A. GENERAL STANDARD

Having rejected each of the absolute defenses urged by

the Government, we must determine the appropriate meas-

ure of damages incurred as a result of the improper cancella-

tion. The position advanced by the defendant, and accepted

by the Trial Commissioner, is that plaintiff is entitled only

to the traditional remedy of damages given by this court for

breach of an express contract. The purpose of that remedy

is to place the party against which the breach has been com-

mitted in the position it would have held if the contraet had

been fully performed. Acme had suffered large losses in the

performance of Contract 1213 at the time it was wrongly

canceled by the defendant. According to projections, how-

ever, Acme would have been able to reduce its losses consid-

erably had it been permitted to complete the contract. The

Trial Commissioner therefore determined that plaintiff was

entitled to recover any post-cancellation costs incurred as a

result of the Government’s erroneous action, plus the amount

by which it would have been able to decrease its losses through

completion of the contract. In this way, the Commissioner

reasoned, Acme would be given the same benefits it would

have received had it been permitted to carry out the

agreement. —

Plaintiff's main argument is that it is entitled to restitution

as an alternative remedy. Under that standard of relief, a

party whose contract has been repudiated or otherwise

breached may, if he meets certain conditions, recover the

— ——

*

reasonable value of his services, measured as of the time of

performance. The purpose is to restore the injured party

to the pre-contract status quo, not to put him in his post-

contract position. Restitution has long been recognized by

the commentators as one of three possible remedies for the

substantial breach of an express contract, the others being

damages and specific performance. See Restatement, Con-

tracts §§ 347-57; 5 Corbin, Contracts §§ 1102-21 (1951); 5

Williston, Contracts §§ 1454-85. (rev. ed. 1937). The Re-

statement contains a full discussion of restitution in its chap-

ter entitled “Judicial Remedies for Breach of Contract.”

Corbin states explicitly, “In the present chapter we are deal-

ing with restitution as a remedy for breach of contract; a

judgment for such restitution is as truly a remedy for a

‘breach’ as is a judgment for damages.” 5 Corbin, Contracts

81104 (1951). The applicability of restitution as an alter-

native remedy for breach is also well-established in both the

federal and the state courts. Z. g., Michael Del Balso, Ino. v.

Carossa, 136 F. 2d 280 (C. A. D.C., 1943); United States ew

rel. Susi Contracting Co. v. Zara Contracting Co., 146 F. 2d

606, 610 (C.A. 2, 1944); Southern Painting Co. v. United

States ex rel. Silver, 222 F. 2d 431, 433-34 (C. A. 10, 1955);

Valente v. Weinberg, 80 Conn. 134, 67 Atl. 369 (1907); Pelle-

tier v. Masse, 49 R. I. 408, 143 Atl. 609 (1928).

Although the Court of Claims has permitted quantum

meruit recovery for contracts implied in fact (see, e. g.,

New York Mail d Newspaper Transp. Co. v. United States,

139 Ct. Cl. 751, 759, 154 F. Supp. 271, 276, cert. denied,

355 U.S. 904 (1957)), no past contractor has successfully

sought restitutionary relief for breach of an express contract.

But unless this form of recovery is precluded by our general

jurisdictional statute, 28 U.S.C. § 1491, we must be guided

by the principal that, “When the United States, with con-

stitutional authority, makes contracts, it has rights and in-

curs responsibilities similar to those of individuals who are

parties to such instruments.” Perry v. United States, 204

U.S. 330, 352 (1935). See, also, New York Mail & Transp.

* United States ex rel. guet Contracting Co. v. Zara Contracting Oo., supra,

146 F. 24 at 610, a leading case in this area, involved unit prices in a construc-

tion contract, and the defendant contends that recovery on the basis of

restitution must be limited to cases of that nature. But neither Zara nor any

of the other cases or commentaries intimate the existence of such a restriction.

27

Co. v. United States, supra, 139 Ct. Cl. at 759, 154 F. Supp.

at 276; Refining Associates, Inc. v. United States, 124 Ct.

Cl. 115, 120, 109 F. Supp. 259, 261 (1953). Since contracts

with the United States are to be governed by the same prin-

ciples as “those between man and man” (Gilbert v. United

States, 1 Ct. Cl. 28, 37 (1863), aff'd, 75 U.S. (8 Wall.) 358

(1869), and see Padbloc Co. v. United States, 161 Ct. Cl. 369,

377 (1963) ), we are obliged to award restitution to a peti-

tioner meeting the prescribed qualifications, unless there is

some jurisdictional impediment.

The Tucker Act empowers this court “to render judgment

upon any claim against the United States founded * * *

upon any express or implied contract with the United States

.“ 28 U.S. C. 5 1491. Although this precludes recovery

on the basis of a contract merely implied in law (see Sutton

v. United States, 256 U.S. 575, 581 (1921)), the plaintiff

seeks restitution for breach of an empress contract, which

clearly comes within the ambit of the Act. The cases cited

by the Trial Commissioner simply denied “quantum meruit”

(i. e. restitutionary) recovery for the alleged breach of an

express contract where the court determined that no breach

had in fact taken place. See Laoohi Constr. Co. v. United

States, 102 Ct. Cl. 324, 355-56 (1944); Frazier-Davis

Constr. Co. v. United States, 100 Ct. Cl. 120, 161-62 (1943);

Steel Products Eng’r Co. v. United States, 78 Ct. Cl. 410,

418 (1933). ;

The Government says that, even if restitution is an avail-

able remedy, Acme has not met the conditions necessary for

recovery on that basis. The accepted rule is that,

If the rmance that the contract required of the

plaintiff been wholly prevented, and if the result

of his labor and expenditure still belongs to him, he has

no remedy by way of restitution. If the performance

required was the production and delivery of a finished

article, and the defendant wrongfully prevents comple-

tion and delivery of the article, the plaintiff cannot

judgment for the reasonable value of his work and r

™ These cases contain broad statements to the that “quantum meruit

cannot be allowed where there is a valid con between the parties.”

Frazter-Davie Constr. Oo. v. United States, „ 100 Ct. Cl. at 162. In each

one, however, quantum meruit relief appears been considered, as an

alternative, only after the court found that the tract was not breached.

1

7

28

nen a eae: to perform, except so far as it may be

included in a claim for damages. Such work and labor

is not itself requested or received by the defendant.

‘Restatement, Contracts § 348, 8. 4 Defendant

contends that Contract 1213 was for the purchase of (com-

pleted) 75 mm. recoilless rifles from plaintiff, and therefore

_, contemplated “the production and delivery of finished ar-

ale * for the breach of which plaintiff is entitled only

damages. This misconceives the nature of the contract

which states, expressly, that Acme is to “furnish and deliver”

specified items (emphasis added). The entire pre-contract

negotiations were based on the assumption that it was Acme

which would manufacture the requested rifles. The de-

fendant at first had reservations about plaintiff's ability to

perform the contract, but, after investigating Acme’s plant

and personnel, the Government concluded that Acme and its

subcontractors would be capable of carrying out the agree-

ment. Defendant’s Exhibit 12. One of the contemplated

benefits of awarding the contract to Acme was that “placing

this procurement [in] subject contractor’s plant will not

only broaden the manufacturing base but create a salutary

effect, pricewise, on all other procurements of this type.”

Ibid. Thus, the Government contracted not only for a

finished product, but also for the manufacture of that prod-

uct by Acme. When an agreement of this nature is breached,

restitution is available.

The next argument is that plaintiff’s recovery must be.

limited to the reasonable value of the goods it actually de-

livered prior to cancellation. It is clear, however, that resti-

tution is permitted as an alternative remedy for breach of

contract in an effort to restore the innocent party to its pre-

contract status quo, and not to prevent the unjust enrichment

of the breaching party. “Judgment will be given for the

value of service * * rendered, even though the product

created thereby has been lost or destroyed by the defendant,

and even though there never was any product created by the

service that added to the wealth of the defendant.” Restate-

ment, Contracts § 348, Comment “a” (emphasis added). It

is when the plaintiff is the party in default that his recovery

may be limited by the amount of the benefit to the defendant.

— —

e

29

See Schawasnick v. Blandin, 65 F. 2d 354, 357 (C.A. 2, 1933).

But “if the promisee has performed so far as he has gone, and

the promisor breaks his promise, the promisee may abandon

the contract and sue for restitution, in which he can recover

the reasonable value of his services, measured by what he

could have got for them in the market, and not by their benefit

to the promisor.” Jbid.. See, also, Restatement, Contracts

§ 347, Comment c. Acme’s recovery is not limited to the

value of the goods received by the Government under the

contract ; rather, it can be based on the reasonable value of the

entire performance. ‘

Acme’s position is that the reasonable value of its services

is most accurately reflected by the actual costs it incurred in

the performance of Contract 1213. As the best means of

restoring the status quo ante, cost of performance is often

sused as the basis for determining the amount of guantum

meruit recovery, in the absence of “any challenging evi-

dence.” United States ex rel. Susi Contracting Co. v. Zara

Contracting Co., 146 F. 2d 606, 611 (C. A. 2, 1944) ; see, also,

United States ex rel. Arc & Gas Welder Associates, Inc. v.

Blount, 182 F. Supp. 648, 665 (D. Md.), aff'd, 285 F. 2d 863

(C.A. 4, 1960), cert. denied, 366 U.S. 919 (1961); United

States ex rel. Wander v. Brotherton, 106 F. Supp. 353, 354-55

(S.D.N.Y., 1952). But if the defendant is able to show that

the costs incurred by the contractor were excessive (asa result,

for example, of inefficiency or extravagance), the amount of

recovery is commensurately reduced. Cf. Barrett Co. v.

United States, 273 U.S. 227, 235 (1927); United States v.

Behan, 110 U.S. 338, 345-46 (1884). 1

„Being on United States v. Pena Foundry & Mfg. Co., 887 U. 8. 198 (1949)

and Chain Belt Co. v. United States, 127 Ct. CL 88, 59, 118 F. Supp. 701, 714-

15 (1953), the Government claims that Acme is not entitled to restitution on

the basis of its costs, because those costs were in no way caused by the

defendant's breach, The cited cases treat with the disallowance of lost Profits

as damages when they are too speculative. Since the theory behind restitution

is to restore the status quo ante, potential profits under the rescinded contract

are irrelevant. 11232

It is likewise immaterial that, under a convenience-termination, plaintiff's

recovery would be limited by its costs and the cefling price. ‘The cancellation

here was for the contractor’s fault, and in such a situation the rule of John

Reiner & Co. v. United States, supra, is inapplicable if there was In fact no

default. See Nein v. United States, eupra > Goldwasser v. United Btates, Ct.

CL, No. 477-61, decided Dec. 13, 1963, 325 F. 2d 722; Litchfield Mfg. Corp. v.

United States, Ct. CL, No. 458-56, decided Oct. 16, 1964, slip op., P. 4, fa. 9,

388 F. 24 94, 96 ; Dale Constr. Co. v. United States, Ct. Cl., No. 184-57, decided

Dec. 11, 1964, slip op., p. 26; Nesbitt v. United States, supra.

30

The record before us is inadequate to determine whether

Acme’s costs were, in fact, excessive. Plaintiff’s expenses ap-

pear to be inordinately High even if one takes into account

its lack of experience in this manufacturing line and the

prospective advantage to the Government of broadening the

base of procurement. The contract ceiling price, for in-

stance, was $384.95 per unit, but plaintiff's actual cost in

manufacturing the first 446 rifles was $1,179.29, and its cost

of production during the last six months of the contract was

$690.21. See findings 7, 52(a), (c). Although it is con-

ceivable that these expenditures accurately reflect the value

of Acme’s services, the present record does not provide

enough information for a sufficiently accurate answer. In

particular, it would seem important to compare Acme’s costs

with those of other manufacturers of the same rifles during

that period, taking into consideration that Acme should be

permitted greater reimbursement than established manufac-

turers because of its inexperience and the anticipated bene-

fits of its entry as a competitor. Since this issue was not

squarely presented at the original trial, the defendant had

no real opportunity to prove that plaintiff’s costs were in-

flated; it should be permitted to do so now. We are there-

fore remanding the case to the Trial Commissioner under

Rule 47(c) for a separate determination of liability.

To the extent that Acme’s actual costs are used in making

this determination, the Commissioner should consider that

the amounts which plaintiff paid its subcontractors latently

included reimbursements for kickbacks paid to various mem-

bers of the Tucker organization. See findings 18-25. Al-

though the defendant has not attempted to prove that any of

the subcontract prices were inordinately high, the kickbacks

involved were hardly ordinary business expenses incurred

in manufacturing 75 mm, rifles. If Acme’s total costs are

to measure the value of its services, they must be reduced by

any kickbacks actually paid to the Tucker organization by

plaintiff's subcontractors. Nor should Acme be reimbursed

for the amounts it paid to Tucker; for the reasons given in

the. companion case, we conclude that his employment vio-

lated the covenant against contingent fees. See Acme

Process Equipment Co. v. United States, Ct. Cl., No. 588-59;

31

decided this day. Tucker's salaries cannot be considered

reasonable expenses which enhanced the value of Acme’s

services to the Government. Neither the contingent fee pay-

ments nor the kickbacks may be included in the computation

of Acme’s restitutionary recovery.

B. GOVERNMENT-FURNISHED MACHINERY

Plaintiff urges that a determination of the reasonable

value of its contract performance must take into account

costs incurred as a result of defective government-furnished

machinery was, however, furnished under a separate facili-

ties contract, not the main contract. That agreement ex-

ing condition, the Contractor shall repair, restore, or rehabili-

tate such equipment so as to make it serviceable or fit for use

(cost connected with such repairs, restoration, or rehabili-

tation shall not be reimbursed to the Contfactor).” If the

of liability for breach of warranty would possibly have to be

disregarded under plaintiff's th „which fixes the measure

of. by the value of the services performed, rather

than by the terms of the breached contract providing or re-

breached. :

re legal fees incurred by plaintiff in defending suits brought by subcon-

tractors and in submitting its termination claim did not add to the value of

recovery and therefore may not be considered in calculating plaintifrs

32

stricting compensation. But the facilities contract was sep-

arate and was not materially breached; its clauses limiting

liability remain in effect." We must therefore determine

whether the plaintiff is correct that the disclaimer clause is

less-than-absolute and does not bar recovery for increased

costs resulting from defective government machinery.

Plaintiff would have us read this disavowal of liability

as applicable only to ordinary repairs made following de-

livery of the equipment. Because the disclaimer refers to

Acme’s obligation to repair the machinery in case of “delivery

of such items not in operating condition,” Acme infers that

the cost of extraordinary repairs incurred in the course of

performance was to be borne by the defendant. Aside from

the practical difficulty of separating “normal” and “extraor-

dinary” expenses, there is a more basic objection. The

terms of the disclaimer are broad, and refer to Acme’s duty to

repair items “not in operating condition,” without imposing

any limitation as to the time when the equipment becomes

inoperable or the amount of work required to fix it. There is

no reason to qualify or limit the general sweep of the contract

words.

On the other hand, along with the disclaimer, the facilities

agreement also specified that, if the equipment supplied by

the Government required repair as a result of defects pres-

ent at the time of delivery, the “Contracting Officer, upon

written request of the Contractor, may equitably adjust the

price, the time of performance, and other terms and condi-

tions of the affected supply contract (s): Any failure

by the parties hereto to agree upon such equitable adjust-

ment shall be determined in accordance with the article of

the related supply contract(s) entitled ‘Disputes’.” See

finding 35. We do not interpret these provisions as incon-

sistent with the explicit disavowal of liability. Instead,

they specify the only form in which relief can be obtained

for injuries resulting from substandard machinery furnished

by the defendant; unless the contractor makes timely writ-

ten request for an equitable adjustment, he must, according

to the disclaimer, bear all costs of resulting delays and re-

® Althongh the main contract also contained a government-furnished prop-

erty clause, it was superseded by the more extensive provisions of the separate

facilities agreement.

33

pairs. See, generally, Goodwin, Government-Furnished

Property, Government Contracts Monograph No. 6, p. 17

(1963); Paul, United States Government Contracts and

Subcontracts 267 et seq. (1964) .**

During the course of contract performance, Acme made

at least two written requests for reimbursement of costs in-

curred as a result of defects in equipment supplied by the

defendant. See finding 39(b)(2), (6). About one week

after cancellation, on August 26, 1954, the plaintiff filed a

claim with the Philadelphia Ordnance District, asking to

be repaid for all parts which it purchased to make the de-

fendant’s machinery workable. Finding 44 (a). This Au-

gust 1954 request is challenged by the defendant as un-

timely. Considering all the circumstances, we cannot agree.

The machinery was supplied to plaintiff throughout 1953;

although some performed reasonably well, other pieces re-

quired constant tinkering and broke down repeatedly, dis-

rupting the smooth flow of production. See findings 39(b),

43(c). At least as late as May 1954, flaws in the govern-

ment machinery were still being encountered (see finding

39 (b) (11)), and, if past experience is the guide, such diffi-

culties were probably prevalent until the suspension of con-

tract performance a little over a month later. Had plain-

tiff been required to ask for an equitable adjustment each

time a minor defect was discovered, the result would have

been a continuous flow of such requests to the contracting

officer. The time and effort expended by both parties in

effecting numerous equitable adjustments would have been

excessive. Instead, Acme apprised the defendant of the

various difficulties at approximately the time they were en-

countered, but, with several minor exceptions, it in effect

waited until after the abrupt termination of the contract to

make a single request for compensation.” This was un-

could reasonably be implied from the contractual provisions. See slip op-

pp. 8-8. 17-18, 312 F. 24 at 771.

210-151—66—_—3

34

doubtedly the most efficient manner of obtaining relief.

Plaintiff's cumulative demand for reimbursement in August

1954, as well as the two requests made prior to annulment of

the contract, were timely.

- Plaintiff's letters sought reimbursement for repair costs,

without specifically invoking the equitable adjustment pro-

vision of the facilities contract or the Disputes article of

the supply contract. But the letters were easily under-

standable, and the failure to delineate the precise clauses

permitting recovery should not stand asa bar. Cf. Specialty

Assembling & Packing Co. v. United States, 156 Ct. Cl.

252, 254-55, 298 F. 2d 794, 796 (1962). To the extent that

the trial commissioner finds that these timely claims for re-

imbursement reflect actual costs incurred by the contractor

to an equitable adjustment as provided in the facilities eon-

tract. This equitable adjustment should be added to the

determination of the value of the rest of plaintiff’s per-

formance.“

Ill. LIQUIDATED DAMAGES

Throughout the contract plaintiff was behind in its de-

liveries. The original] schedule was substantially revised in

supplemental] agreements executed in August 1953 and Jan-

uary 1954. Despite these time extensions, plaintiff was still

late in deliveries at the time of the suspension of its contract

in July 1954, and was assessed liquidated damages pursuant

to the contract clause. On that basis, $53,715.19 was with-

35

paying liquidated damages when the delay arises out of

causes beyond his control and without his fault or negli-

gence. It says that in such cases, subject to the Disputes

clause, “the Contracting Officer shall ascertain the facts and

extent of the delay and shall extend the time for performance

when in his judgment the findings of fact justify an exten-

sion.” The Disputes clause says simply that “any dispute

concerning a question of fact arising under this contract

which is not disposed of by agreement shall be decided by

the Contracting Officer . It cannot be said that

these provisions, taken together, required the contractor to

make a specific request to the contracting officer for a deter-

mination of the reasons for the delays. So long as the con-

tracting officer was put on notice that the plaintiff wanted to

avoid the levy of liquidated damages, the minimum demands

of the contract would be met. | | i

This is precisely the effect of a letter sent on May 20, 1954,

by plaintiff to the Comptroller General via Philadelphia

Ordnance District. The contracting officer refused to for-

ward the letter as requested, because he felt that the ap

was addressed to equitable rather than legal considerations

and would not be cognizable by the Comptroller General.

After being told of the contracting officer’s action, Acme

wrote another letter to him on June 21, 1954, explicitly re-

affirming the prior request and “asking relief from our Liqui-

dated Damages Clause at the District level” (emphasis

added). This notification was quite different from the

“mere ambiguous requests for adjustments or possible nego-

tiations” which were deemed insufficient in Specialty As-

sembling & Packing Co. v. United States, swpra, 156 Ct. Cl. at

255, 298 F. 2d at 796. Acme’s letters put the defendant on

notice both as to the relief requested and the contract cleuse

on which the request was based; furthermore, in its June 21st

letter, plaintiff invited a ruling by the contracting officer.

It is clear that plaintiff was in effect asking for an equitable

adjustment; the need for a degree of precision, as suggested

36

in Specialty Assembling, was met. When the defendant sus-

pended all production on July 22, 1954, and completely

canceled the contract a month later, the contracting officer had

‘taken no action on Acme’s demand for remission of liqui-

dated damages; the annulment of the agreement destroyed

the administrative appeal mechanism created by the contract.

Since Acme properly sought to invoke its administrative

remedies as long as they were available, the Government’s

defense of failure to exhaust must be rejected.

Having surmounted this procedural defense, plaintiff is

entitled to recover on its claim for remission of liquidated

damages, because the delays on which the assessment was

based were caused by the Government as well as by Acme.

On the one hand, the plaintiff’s difficulties in operating the

government machinery were partially attributable to the in-

experience and incompetence of its own personnel. On the

other, defects in some of the equipment furnished by the de-

fendant resulted in repeated failures and breakdowns.

While some of the machines performed reasonably well if

properly operated, the smooth flow of production was rend-

ered impossible when other machines essential to a sequence

of operations were in disrepair. See finding 43. “[WJhere

delays are “caused by both parties to the contract the court

will not attempt to apportion them, but will simply hold

that the provisions of the contract with reference to liqui-

dated damages will be annulled.” Schmoll v. United States,

91 Ct. Cl. 1, 28 (1940). See, also, United States v. United

Eng’r & Contracting Co., 234 U.S. 236, 242 (1914); Vogt

Bros. Mfg. Co. v. United States, 160 Ct. Cl. 687, 709 (1963) ;

Commerce Int'l Co. v. United States, Ct. Cl., No. 287-55,

decided Oct. 16, 1964, slip op., p. 12, 338 F. 2d 81, 90. That

result is fair. It does not deprive the Government of an

opportunity to prove and recover its actual damages caused

by the contractor’s delay; instead, the defendant merely

loses its right to insist on an artificial measure of damages

% Since the Army had decided to discontinue the use of 75 mm. rifles at the

time Acme’s contract was canceled, proof of actual damages would be virtually

37

agreed on by the parties for the situation in which the con-

tractor alone is responsible for the delay.

IV. SUBCONTRACTORS’ RIGHT TO RELIEF

Along with its own claim, Acme has brought suit on be-

half of a number of firms to which it sublet portions of the

prime contract. The three major subcontract claims are

those of All Metals Industries, Manalapan Machine Works,

and Foley Machine Company. Each of these subcontractors

obtained orders from Acme through the payment of kick-

backs to Harry K. Tucker, Jr.** See findings 18-23. At

the time the kickbacks were given, All Metals knew of

Tucker’s double agency, and the other two subcontractors

either knew or should have known of it. On the other hand,

Acme was unaware of Tucker’s duplicity.

When a contract is obtained by a person secretly acting as

a dual agent, and one party knew or should have known of

the double employment, only the innocent party has the op-

tion of either affirming or avoiding the agreement.“ Af-

firmance is not effective as ratification until after the inno-

cent party obtains full knowledge of the material facts

concerning the fraudulent procurement. See Restatement,

Agency 2d, §§ 91, 313. In the present case, it was not until

well after cancellation of its prime contract that Acme, the

innocent party, learned of the kickback arrangements. See

Acme Process Equipment Co. v. United States, Ct. Cl., No.

538-59, decided this day, fn. 20. Prior to that time, it did

not have the requisite knowledge to effect ratification.

When its prime contract was canceled by the Government,

Acme responded by immediately requesting all its subcontrac-

* Since the issue of liquidated damages has been resolved in Acme’s favor,

it is unnecessary to pass on the broad contention advanced by plaintiff that,

when the contractor is given restitutionary recovery, the contract is effectively

wiped out, and the Government automatically loses any rights it may have had

under the liquidated damages clause.

* Foley’s payments were actually made to Neptune Manufacturing Company,

a dummy corporation formed by Tucker and Norris to carry out their kickback

activities. When it paid the kickbacks, Foley knew of Tucker's relationship to

Neptune. Tr. 657-58.

The rule that a patty knowing of the double agency may not disavow the

contract is traditionally stated in terms of actual knowledge. In the present

case, both Foley and Manalapan denied having such knowledge. Tr. 668, 682.

Judging from the circumstances, however, these two subcontractors were hardly

innocent parties and, at the very least, can plainly be saddled with constructive

knowledge.

38

—

tors to halt performance. From that time forward, the

plaintiff had nothing to gain by ratification of its voidable

subcontracts. Yet long after conclusion of performance,

Acme has nonetheless chosen to “ratify” these agreements.

The reason is not difficult to discern: Only if Acme is liable

to the subcontractors, may Acme recover from the defendant

in their behalf. See J. L. Simmons Co. v. United States, 158

Ct. Cl. 393, 304 F. 2d 886 (1962). Acme was apparently

willing to affirm the agreements on the theory that the

Government would probably bear any resulting liability.“

As is pointed out in the discussion of All Metals’ claim in the

companion case, No, 538-59, this form of after-the-fact ratifi-

cation cannot be accepted since it violates the rule. that

“affirmance is * * * inoperative as ratification * as

against persons who in the meantime have acquired interests

with which it would be unjust to interfere.” 2 Williston,

Contracts § 278A n.1 (3d ed. 1959). 4 See, also, Restatement,

Agency 2d, § 101 (c). Had Acme acted reasonably, avoiding

these subcontracts after it found out about the improper

double agency, the Government would not be liable. This

freedom from liability is an “interest with which it would

be unjust to interfere.” Acme’s attempt to destroy that in-

terest by post-cancellation ratification of the moribund sub-

contracts is unavailing.

It is still necessary to determine whether the Government

would be liable to All Metals, Manalapan, and Foley, if

Acme had in fact avoided these subcontracts, as we have held

it was bound to do. Before a contract may be rescinded be-

cause of its fraudulent procurement by one of the parties, to

prevent unjust enrichment, the defrauded party is generally

required to return the goods it received under the contract,

or their. reasonable value. See Restatement, Restitution

88 65, 66. Since these three subcontractors would have

been entitled to the reasonable value of the goods they ac-

“The agreements with both All Metals and Manalapan specifically provided

that, if the defendant terminated the prime contract, Acme would be liable

to the subcontractor only to the extent the latter’s claims were allowed and

paid by the United States. See finding 64(b), (e). With regard to these two

claimants, if Acme’s purported ratification were allowed to stand, its effect

would be to make the defendant exclusively liable.

a Since this principle is determinative for the present, we need not at this

stage consider the Government's defense based on the Severin“ doctrine. See

Severin v. United States, 99 Ct. Cl. 486 (1948), cert. denied, 322 U.S. 788

(1944).

39

tually delivered, the defendant should in turn be liable to

that extent. Cf. Crocker v. United States, 240 US. 74, 81-

82:(1916). In the future proceeding before the Commis-

sioner, if plaintiff is able to prove that the value of the items

delivered by any of the three subcontractors exceeded the

total amount it was paid, then recovery on behalf of that sub-

contractor will be permitted—unless the “Severin” doctrine

is a bar (see footnote 41, supra).

With respect to the claims of the remaining subcontractors,

there has thus far been inadequate proof of damages. Al-

though the defendant audited the accounting records of each

one, such verification is no substitute for actual evidence of

injury. See River Constr. Corp. v. United States, 159 Ct. Cl.

254, 271 (1962). When this question arose during the trial,

plaintiff’s counsel acknowledged that further proof was re-

quired, explaining that, although the other subcontractors

had been invited to submit more detailed claims, they had

failed to so so. Tr. 1396-97. These claims being unproved,

they cannot be accepted at the present time. Plaintiff, how-

ever, may present further e if it can, in the proceedings

under Rule 47(c).

v. INTEREST

The last matter is the plaintiff’s demand for interest from

January 1, 1955, on those parts of its overall claim for

damages represented by (1) the improper assessment of

liquidated damages by the defendant, (2) the withholding

of amounts due under the price redetermination provision

of the contract, and (3) the failure to pay the equitable

adjustment requested in August 1954 for repairs of govern-

ment-furnished machinery. These amounts, the plaintiff

says, were retained by the defendant without any color of

right and thus come within the circle of the Fifth Amend-

ment’s guarantee that property shall not be taken for pub-

lic use without payment of just compensation. This type

This measure of damages is of course far less than that which Acme itself

is receiving, since it is recovering the reasonable value of all its services,

whether they resulted in actual deliveries to the United States or not. To the

extent that the three subcontractors incurred expenses on unfinished or unde-

livered goods, they may not recover. This disparity is only fair, since Acme

is recovering on a contract breached by the United States, while each subcon-

tractor’s agreement must be treated as rescinded because it was fraudulently

procured from Acme.

40

of demand is not novel in suits on government contracts;

nor is its steadfast repudiation by the courts. See, ¢.g.,

United States v. N.Y. Rayon Importing Co., 329 U.S. 654,

658-59 (1947) ; United States v. North American Transp. &

Trading Oo., 253 U.S. 330, 335-86 (1920); Komatsu Mfg:

Oo. v. United States, 132 Ct. Cl. 314, 131 F. Supp. 949 (1955) ;

Ramsey v. United States, 121 Ct. Cl. 426, 430-33, 101 F.

Supp. 353, 355-57 (1951).

Plaintiff concedes that, under the case law, unless the Gov-

ernment acted in bad faith when it withheld the funds in

dispute, there could be no violation of the Fifth Amend-

ment, and recovery of interest on the basis of the contract

would be prohibited by 28 U.S.C. § 2516(a), permitting this

@court to allow interest on a claim “only under a contract or

Act of Congress expressly providing for payment thereof.”

To show bad faith, the plaintiff stresses a determination by

the Department of Justice in December 1954 that it would

bring no civil or criminal action against Acme. But, plainly,

this was not tantamount to a finding of bad faith on the

part of the Army; a difference of opinion is not proof of

malice. The plaintiff also alleges that, at the time of can-

cellation, the Government did not have proof that plaintiff

was guilty of fraudulent acts which would justify annul-

ment; that the Government knew that its proposed action

might force plaintiff into bankruptcy; and that the real

cause of the cancellation was the defendant’s decision to dis-

continue production of 75 mm. recoilless rifles because they

were obsolete. At the trial of this case, an Ordnance at-

torney who advised that Contract 1213 be rescinded testified

that, at the time, he deemed this action appropriate because

he thought plaintiff had violated the covenant against con-

tingent fees, as well as the anti-kickback and false claims

statutes. Tr. 1024-25. Assessing the credibility of this

witness and the others who testified as to the matter, the

Trial Commissioner concluded that the defendant canceled

the contract for two equally potent reasons: the termination

of military requirements for the 75 mm. rifles and the con-

tractual irregularities thought to be present. Finding 50(a).

The circumstantial evidence submitted by plaintiff to over-

come the presumption of correctness attaching to the Com-

*

41

missioner’s finding is wholly inadequate for that purpose.

Of. Commerce Int'l Co. v. United States, Ct. Cl., No. 287-55,

decided Oct. 16, 1964, slip op., pp. 6-7, 338 F. 2d 81, 86;

Davis v. United States, Ct. Cl., No. 179-59, decided Feb. 14,

1964, slip op., pp. 45. We must therefore turn aside

Acme's argument that the Government acted in bad faith.

Our conclusion is sustained by an examination of the spe-

cific claims which, according to plaintiff, were rejected in

bad faith. The Government withheld liquidated damages,

thinking that the contract gave it the right to take such action.

The court’s determination that liquidated damages were not

properly assessable in no way negates the existence of a bona

fide dispute involving difficult legal issues. Similarly, so far

as can be ascertained, the defendant had almost concluded at

the time of the contract annulment that the plaintiff would be

entitled to the ceiling price under the redetermination clause.

But it withheld this amount, along with other entitlements,

because of an honest belief that plaintiff's conduct merited

forfeiture. Although the defendant erred in believing that

it could annul Acme’s contract for violation of such provi-

sions as the covenant against contingent fees, it cannot be

charged with bad faith. Finally, the Government’s failure

to allow an equitable adjustment for expenses incurred in

repairing machinery furnished under the facilities contract

is attributable to its view that the disclaimer provision was

absolute. In none of these instances was the defendant’s

action without some color of right. Even though a court

may determine eleven years later that the Government’s

premises were faulty, that does not alter the bona fide char-

acter of its original actions under the contract or convert the

erroneous cancellation of the contract into a taking.“

We do not reach the issue of whether there would be a taking (for which

just compensation should be paid) if bad faith on the part of the defendant had

been shown. In addition, we point out that the statute of limitations bars

recovery by the plaintiff on this ground. Acme first alleged a Fifth. Amené-

eat taking in an amendment to its petition aed in September 1961. Since

amendment stated a new cause of action, it had to be filed within six years

after the claim accrued. See Dawnic Steamship Corp. v. United States, 90 Ct.

CL. 587, 580 (1940). But all events fixing the defendant's lability for the

alleged taking had occurred on or before January 1, 1955. Plaintiff's claim

having accrued by that date, it is barred by the six-year statute of limitations.

The fact that settlement negotiations continued thereafter is irrelevant. See,

€.9., Ouban Truck 4 Equipment Co. v. United States, Ct. Cl. No. 245-57,

decided June 12, 1964, slip op., pp. 5, 6-8, 333 F. 24 873, 877-79; ante

Institute of Tailoring, Inc. v. United States, 142 Ct. Cl. 165, 168, 161 F. Supp.

409, 411 (1958).

42

VI. SUMMARY ~

I. Cathy: ds reden def tothe Trial \Comininsionse Sot u.

determination, under Rule 47 (e), of the defendant’s liability

to Acme, based on (a) the reasonable value of its performance

under Contract 1213; and (b) an equitable adjustment for the

amounts expended under the facilities contract for repair of

defective government machinery, for which timely requests

were filed. The total thus arrived at should be reduced by

defendant’s undisputed counterclaim for $15,898 (see find-

ing 60), and by $2,000, based on plaintiff’s violation of the

False Claims Act. Plaintiff has permission, in proceedings

under Rule 47(c), to present further proof on the claims on

behalf of all subcontractors other than All Metals, Foley,

and Manalapan; in the absence of sufficient proof, those

claims will be dismissed. The claims on behalf of All Metals,

Foley, and Manalapan are remanded to the Commissioner

for a determination under Rule 47(c) of the extent of liabil-

ity for delivered items, if there is any such liability.

FINDINGS OF FACT

The court, having considered the evidence, the 8

Trial Commissioner C. Murray Bernhardt, and the briefs

and argument of counsel, makes findings of fact as follows:

1. Plaintiff's corporate identity and control. Acme Process

Equipment Company (formerly Acme Coppersmithing and

Machine Company) is a Pennsylvania corporation located at

Oreland, Pennsylvania. At relevant times all of its voting

stock was owned jointly by its president and vice president,

Joshua Epstein and Samuel Fisher, respectively, who also

had controlling interest in the National Molasses Company, a

separate corporation. They and their children and relations

(including sons Irving and.Jack Epstein) owned all of the

non-voting stock of plaintiff company and served as its

officers.

2. Aome’s line of business. Until the latter part of 1968

Acme’s business consisted principally in the manufacture of

processing tanks, boilers, containers, etc., for the distillery,

brewery and sugar industries. In 1952 it became interested

in obtaining Government contracts in order to offset uneven-

ness in its commercial business, but had no one on the com-

43

pany payroll with background and experience in the field

of Government procurement. ,

PROCUREMENT OF CONTRACT 1213—CONTINGENT FEE PROBLEM

3. Entry of Norris and Tucker, Jr. Unknown to plaintiff,

the Government had put under surveillance the activities of

a group known as Harry K. Tucker Associates, comprising

Harry K. Tucker, Sr., and his son, Harry K. Tucker, Jr., in

connection with suspected statutory violations in their con-

tingent fee arrangements for services rendered contractors

in procuring Government supply contracts. (Hereafter,

use of the name “Tucker” shall denote Tucker, Jr., unless the

contrary is indicated.) James S. Norris, who had been gen-

era] manager of an eventually defunct machine shop, met

Tucker in September 1952 and they decided to pool their

talents in a company which would render “sales and engineer-

ing” assistance to clients of Tucker. In late September or

early October 1952 Norris met for the first time with Sidney

Cohen, Secretary-Treasurer of the plaintiff company, to as-

certain plaintiff’s interest in bidding on the manufacture of

some apparatus. In this meeting Cohen was asked if he

would be interested in engaging a salesman to secure com-

mercial and Government production contracts. In conse-

quence Tucker visited Cohen several times and there were

negotiations for his services and those of Norris. It was

decided at the instigation of Norris and Tucker that Acme

would set up a separate division to handle Government con-

tracts in the metals field, that Norris would manage the

operation, and Tucker would contribute his “know-how” in

procuring and administering Government contracts and in

expediting subcontract operations. Plaintiff’s officers had

not known Tucker prior to these events; however, plaintiff

failed to ascertain who Tucker’s other clients were or to ask

them about the quality of his services.

4. Informal hiring of Norris and Tucker. At this stage the

plaintiff informally agreed to hire Tucker and Norris.

Tucker was to be paid 3 percent. commission—to be divided

equally between Tucker and Norris—on all business he pro-

cured, with a minimum salary guarantee against which his

commissions would be applied. Tucker and Norris were to

manage the plaintiff’s proposed new division. Norris began

44

work at the Acme plant in Oreland, initially on an unpaid test

basis, and his first duties were to estimate the bids, ete., in

response to invitations which Tucker would procure for the

plaintiff.

5. Tucbber's employment contract. Plaintiff entered into a

one-year employment contract with Tucker, dated October

13, 1952, whereby he and/or his “organization” agreed to

serve as a “bona fide sales agent” on a parttime basis and be

paid initially a weekly minimum salary of $150 which, start-

ing 45 days after the initial delivery date in contracts pro-

cured by him for Acme, would be increased to equal the sum

of (1) 5 percent of weekly gross sales up to $10,000 generated

by him and (2) 3 percent of weekly gross sales in excess of

$10,000. Minimum salaries paid prior to any sales being

made were to be deducted later from the excesses of his

commissions over his minimum weekly guarantee. The net

effect of the arrangement was that the guaranteed weekly

salary was an advance against commissions, and Acme could

cancel the contract if commissions did not cover the minimum

salary guarantee. The contract defined Tucker’s services to

include solicitation of invitations from both commercial firms

and the Government. Tucker represented in the contract

that he had no special connections of any kind with any Gov-

ernment departments. He agreed to assist in preparing price

breakdowns and in planning of shop production methods,

as well as in the collection of invoices if requested, in obtain-

ing contract financing, and in locating materials, although

the contract stated explicitly that it could not be canceled for

failure to perform any of these duties not involving solicita-

tion. The contract specifically provided that Tucker repre-

sented and would continue to represent other persons and

firms having dissimilar lines of business. Norris and Tucker

also entered into an agreement with each other that Tucker

would pay Norris 50 percent of any money to be paid

Tucker by his clients for procuring work for them from Acme.

6. Tucker's early services. After the hiring of Tucker

plaintiff experienced a pronounced increase in inquiries, bid

proposals and bid invitations from both commercial and

Government sources, thus increasing Cohen's confidence in

his judgment in hiring Tucker. Tucker’s services the first

few months included investigations to determine: prior bid

45

prices, solicitation of bid invitations, securing quotations

from subcontractors, locating applicable specifications, and

liaison work with the Philadelphia Ordnance District (here-

‘after POD).

7. Plaintiff's bid. On October 17, 1952, Tucker submitted

to plaintiff information concerning the subject contract to be

awarded by the Army Ordnance Corps for 2,322 75 mm.

recoilless rifles, M-20. Tucker assisted in the preparation of

plaintiff’s bid estimate. Acting on Tucker’s advice that a

bid of $350 per rifle would probably insure an award as low

bidder, Acme submitted its bid (signed by Norris) to POD

on October 23, 1952, at a unit target price of $337.31 per rifle

(later corrected to $337.23), subject to upward or downward

price revision, with a ceiling price of $365.41 (later corrected

to $384.95). Deliveries were proposed starting in March

1953 and finishing January 1954. Two other bidders in that

district submitted bids at unit prices of $484.05 and $930.16,

respectively. Two other bidders from outside the district

submitted bids at unit prices of $423 and $684, respectively,

one of them (Firestone) being an experienced manufacturer

of the 75 mm. rifle which was then producing them at a con-

tract unit price of $452.60. Plaintiff was thus considered to

be the low bidder, although its bid on accessories under the

invitation was not as low as one of the other bidders.

8. Representations as to contingent fees.

(a) In its original bid dated October 23, 1952, for Con-

tract 1213 Acme, under the certification of James S. Norris

as General Manager of the Defense Work Department,

answered in the negative that part of the form requiring the

contractor to represent whether it has or has not (boxes were

supplied against each of the alternatives for inserting a mark

to denote the correct fact) “employed or retained a company

or person (other than a full time employee) to solicit or

secure this contract, and agrees to furnish information relat-

ing thereto as requested by the Contracting Officer.” Under a

revised proposal of December 10, 1952, also signed by Norris,

it was instead represented that Acme “has * * * employed

or retained a company or person (other than a full-time em-

ployee), to solicit or secure this contract and agrees to furnish

in formation relating thereto as requested by the Contracting

46

Officer.” However, under date of December 18, 1952, Joshua

Epstein, president of Acme, executed a Government form en-

titled “Contractor’s Statement of Contingent or Other Fees”,

in which he reverted to the company’s position on October 23

by filling in one of the two alternative boxes to indicate that

Acme “has not employed or retained a company or person

(other than a full-time employee) to solicit or secure this pro-

posed Contract No. —— and agrees to furnish information

relating thereto as requested by the Contracting Officer.“

(b) Within a roughly contemporaneous period (N ovem-

ber 4, 1952 to January 5, 1953), plaintiff submitted bids.on

three other Army Ordnance contract invitations to the Rock

Island Arsenal; and in these bids it disclosed the fact that it

had retained someone other than a full-time employee work-

ing solely for the plaintiff. On or about December 12, 1952,

plaintiff furnished the Rock Island Arsenal with a form 119

(Contractor's Statement of Contingent or Other Fees), to

which was attached a copy of its October 13, 1952 em-

ployment contract with Tucker; the submitted contract did

not, however, disclose the fee-splitting arrangement made

by Tucker and Norris. Rock Island Arsenal was thus on

notice of the Tucker employment on a part-time basis.

There is no evidence that POD had any more than imputed

knowledge of it, since it administered the contract to which

the form 119 related (see, next, paragraph). The disclosure

provided the Office of the Chief of Ordnance in Washington

with its first indication that Acme had an employment rela-

tion with Tucker whose 5 percent activities had excited

official interest for some time past.

(c) One of the plaintiff's three bids referred to in the

preceding paragraph ripened into the award to Acme on

January 7, 1953, of Contract No. DA-11-070-ORD-8580

(hereafter referred to as Contract 8580), which was executed

by the Rock Island Arsenal but was administered by POD.

8580 is the subject of another pending action by

the plaintiff in this court in Court of Claims No. 538-59.

It bears the plaintiff's statement that it has employed or

retained, a company or person (other, than a. full-time, em,

plovee) e solely for the bidder) to solicit or secure

this contract, and agrees to furnish information relating

thereto as requested by the Contracting Officer.” 5

1 —

e er Ahn

—

47

(d) Prior to award of the contract in suit to plaintiff,

Army Ordnance headquarters had in formation relative to the

contingent fee activities of the Tucker father and son team,

but to what extent this information was in the possession of

POD personnel who were negotiating with plaintiff is not

known. Certain POD personnel apparently had some in-

formation concerning Tucker, Sr., because they advised

plaintiff of its possible mistake in employing the son of a

man suspected of so-called “five-percenter” activities, but

plaintiff had no other factual basis for imputing the fa-

ther’s delinquencies to the son and so ignored the advice, At

the request of one of the POD negotiators the plaintiff sub-

mitted a certification, dated December 18, 1952, that it has

not employed or retained a company or person (other than

a full-time employee) to solicit or secure. this N con-

tract * * on.

(e) Under date of May 8, 1953, in response to de

request for a proposal for an additional quantity under the

r signed s warrenty: that, is Shap

not” retained anyone, eto.

3 d 18, 8 POD by igen ki

a full time basis with this company, acting in the ca-

Pang ori part-time 471 pent 11

rt-time sa nt ‘contract

with Mr. Was rr

collected any, commissions, on any prime contract or

: e work that he hae obtained

57 2 commission on, the three. contracts we now ha ail

Although this letter states That eee 4

full-time basis in January 1953, the contract providing for

his full · time employment eee

effective as of March 2, 1953 (see finding’ 9(b)).:: 21

— Az

48

(g) There is no evidence that Tucker used any corrupt or

improper influence in obtaining Contract 1213 for the plain-

tiff,

9. Modification of Tucker's contract.

(a) With the award of the contract in suit to Acme on

Ay 27, 1953, the demands on Tucker's time increased.

From some time in February 1953 Tucker devoted the major

part of his time to administration of Contracts 1213 and 8580

for plaintiff, including the procurement of subcontracts, ex-

pediting of parts and supplies, and liaison with POD. In

the meantime he also solicited new business for Acme and

assisted in the preparation of bids on this new business.

What proportion of his time ostensibly devoted to the inter-

ests of Acme was actually pccupied in his reprehensible

secret deals with subcontractors as described in findings 22

through 24, infra, is not known.

(b) Commencing the week ending March 7, 1953, Acme

increased its weekly payment to Tucker to $300. By an

agreement of March 18, 1953, effective March 2, superseding

all prior agreements, Acme hired Tucker and Norris on a

full-time salary basis at 8300 each per week. Each was to

receive in addition 25 percent of the annual net profits of

the Lansdale operation and, after Acme had recouped its

Lansdale investment “all assets created by the Lansdale

plant * * will be owned by the partnership, or Acme

and Norris Tucker.“ The purpose of this agreement was to

provide incentive to Tucker and Norris to build up this new

department of Acme’s business. Tucker's salary was reduced

to $250 per week on October 11, 1953. Throughout his em-

ployment by Acme, Tucker was compensated on the basis of

e guarantee, Whether or not it was denominated as

ce against commissions, and deductions were duly

sie from a such payment, for social peourity and with-

holding taxes.

10. Wegotiations. Acme’s bid of October 28, 1952 (finding

7, supra) did not contemplate that the Government would

farnish any financing or Government-owned production ma-

chines. On December 3, 1952, POD requested plaintiff to

file a revised bid containing complete cost breakdowns and

@ list of proposed ‘subcontractors; which was done December

12. The revised bid proposed a two-month overall post-

49

ponement of the delivery schedule. Meetings between POD

personnel and Acme representatives (most frequently Norris

and Tucker) were held from December 11, 1952 onward to

discuss various aspects of the contract, including. price, which

POD felt to be quite low in comparison with other bids, but

reasonable and attainable nevertheless in the light of the

delivery schedule, subcontracting plans, and other factors

then known to POD. Moreover, POD was influenced in

favor of Acme because it would then be the only small busi-

ness concern in the country manufacturing the recoilless

rifle, and could possibly develop into an additional source of

supply for the 20 mm. gun. . POD was:concerned, however,

over plaintiff's ability to produce an item foreign to its expe-

rience and at an admittedly low price, and offered. Acme an

opportunity to withdraw its bid, which plaintiff refused.

11. Request for Government machinery. Acme had

planned to subcontract the rifling phase of the proposed

contract. When the rifling subcontractor withdrew its quo-

tation Acme advised defendant, on January 13, 1953, that

if it could obtain the necessary rifling and honing equipment

either from Army Ordnance sources or elsewhere it would

undertake to perform the rifling phase of the contract it-

self. At this time Acme also advised the defendant that it

would manufacture the vent-assembly component in its own

shop rather than subcontract it as planned, and gave infor-

mation as to certain subcontracts. which had been let, includ-

ing one for the chamber assembly which had been tentatively

subcontracted to All Metals Industries, Inc. Acme was then

making arrangements to obtain the equipment and machinery

necessary to perform those parts of the contract which it did

not plan to subcontract. On January 20, 1953, Acme re-

quested the use of two government-owned rifling machines,

two lathes and two honing machines, which it estimated

would cost $15,000 and take about ten weeks to fepair and

install. Acme assured’ POD that no V-loan wöüld be nee-

essary for contract financing because it had other access td

funds, and requested a small increase in the eeiling price:

On January 23, 1953, the Board of Awards at POD; cotitrary

to the recommendation of POD negotiators, rejected Aemes

bid because the delivery schedule — for prc pp

in May 1953 was too optimistic. iibbe an bo:

210-151—66——4

50

12. Availability of Government machinery. Following

the rejection of-Acme’s bid by the Board of Awards a series

of meetings were held at POD attended by representatives

of POD, Acme and All Metals. POD announced the avail-

ability to Acme of government-owned machinery requested

by Acme capable of producing in excess of Acme’s delivery

schedule if properly set up and tooled. It was recommended

by the Philadelphia Regional Office representative of POD

that the contract be awarded to Acme.

CONTRACT AWARD AND MODIFICATIONS

13. Description. Under date of January 27, 1953, nego-

tiated Contract No. DA-86-034-ORD-1213(R) . (hereafter

referred to sometimes as Contract 1213) was awarded to

plaintiff by POD, requiring plaintiff to ‘manufacture and

*

deliver 2,322 75 mm. recoilless rifles, M-20, at a unit target

price of 5337.23 (total $783,048.06) , plus 24 sets of accessories,

tools and equipment at a target price of $3,787 per set (total

$90,888), all subject to limited price revision upward upon

delivery of 30 percent of the rifles. The origina] contract

provided for déliveries as follows:

* 1 th R. ir 1: Item 1: tigm 8:

May 74 1

June n. 233 8

i Barr 3

i 2 233 2

.,. October 234 2

» November 233 2

February 233 3

| ‘March 148 8

2 “2, 822 2

Subesquent eee to the contract up to May 7, 1984

resulted in various adjustments of quantities and prices, the

total quantity finally required being 2, 751 recoilless rifles,

a 9d. parts. ma: fois} cowtract tarpet

price, of 18.72. The modifications included changes

in ,certain, ; schedules, provision for use of specific

government, fk acm ft — agreements adjust-

ing prices on items not meeting specification, requirements,

and the addition of spare parts to the procurement. Where

a

51.

these modifications are relevant to the consideration of par-

Rie

ticular developments in contract performance they will be

referred to specifically at the appropriate parts of these

find;

14. Deliveries; scheduled v. actual. The delivery schedules

required by the contract as revised by supplements thereto,

and the actual deliveries by the plaintiff, are shown in the

following

*

that the 2,400

DELIVERY SCHEDULES AND ACTUAL DELIVERIES

7 *

5 i 8 beret

Ae n,

41 II * in

a $e) HAD HEEL ES Le

sly. 1. mt 10588 Hi

. | { Loe „

725 32 22281 27.

Pes ag isang 383883888883 82888288322

1 a nne 1

2 §- * NN — [7 1 5 5

— ae 5 —

EF AA RARE? I

0 2 =, —— 2 99 ii

AE a n

TTT CHT TA CT

MH eee

| apenas “agitate sain

ca

We

shall be delivered by 1964."

tro **

. “Pant

:

52

4. racrirries: In the performance of this contract the

_. Contractor shall have the right to use the facilities

listed in the FACILITIES TRACT between 5

parties numbered DA-36-034-ORD-1214F, subject

_ the terms thereof; and the unit prices of this supp 78 con-

tract are based on such use.

. * * a | *

10. LIQUIDATED DAMAGES: 14 of 1% of the contract

— of undelivered units for each day's delay after the

te or dates specified for — hereunder.

The — — hs shall be added to General

Provision No. II, D T, of Standard Form 32,

and Paragraph (5 pose i therein is hereby deleted :

(.) If the * Contractor fails to deliver the n or

perform the services within the time in this

contract, or any extension thereof, t ect damage to

the Government for the delay will b ible to oe

termine, and therefore in lieu thereof e Contractor

shall pay to the Government as fixed, ed, agreed, and liqui-

dated damages for each calendar day of delay the amount

set forth elsewhere in this contract; provided that the

Government — terminate 1 (a) of this —.— or —

rt as provi in paragrap 0 8 cla an

In chat event the Contractor shall 14 liable, in addition

to the excess costs provided in paragraph (c) abo —

liquidated damages accruing until such time as the

ernment may reasonably provide for the procurement of

similar supplies or services. The Contractor shall not

with liquidated damages when the delay

arises out of causes the C the control and without the

fault or negligence of the Contractor, as defined in

. graph (b) above, and in such event, subject to the

ef this contract entitled “Disputes,” the Contracting

Officer shall ascertain the facts and extent of the delay

and shall extend the time for performance when in his

judgment the findings of fact sage! an extension.

weeded The * and rem the Government

5 clause shall not be exclusive and are

r orher rights and remedies provided

by law or under contract.

* 0 1 1 *

: 12, overTIME: No overtime work in excess of the six

(ee) day, eight Ihe oo — shall be performed in this

eontract by em the Contractor without prior

ot the Contracting Ofer excep or such ovo

time as is necessitated by — —

plete heat cycles.

20. COVENANT AGAINST CONTINGENT FEES: The Con-

tractor warrants that no n or selling agency has

been employed or retained to solicit or secure this con-

tract upon an agreement or understanding for a com-

mission, percentage, brokerage, or contingent fee, ex-

cepting bona fide employees or bona fide established

commercial or selling agencies maintained by the Con-

tractor for the purpose of securing business. For breach

or violation of this warranty the Government shall have

the right to annul this contract without liability or in its

discretion to deduct from the contract price or consider-

ation the full amount of such commission, percentage,

brokerage, or contingent fee:

* * * * *

8 GENERAL PROVISIONS

(Supply Contract)

* * * * ’ *

31. graturries (O. P. I. [Interim] 64-51)

(a) The Government may, by written notice to the

Contractor, terminate the right of the Contractor to

proceed under this contract if it is found, after notice

and hearing, by the Secretary or his duly authorized

representative, that ee (in the form of enter-

tainment, gifts, or otherwise) were offered or given by

the Contractor, or any agent or representative of the

Contractor, to any officer or employee of the Govern-

ment with a view toward securing a contract or secur-

ing favorable treatment with respect to the awarding or

amending, or the making of any determinations with

respect to the performing, of such contract; provided,

that the existence of the upon which the ta

or his me Bremer — representative makes such find-

ings shall be in issue and may be reviewed in any com-

petent court. As f

(b) In the event this contract is terminated as pro-

vided in paragraph (a) hereof, the Government Hall

be entitled (i) to pursue the same remedies against the

Contractor as it could pursue in the event of a breach

of the contract by the Contractor, and (ii) as a penalty

in addition to any other . of which it may be

entitled by law, to exemplary in an amount

(as determined by the Secretary or his duly authorized

representative) which shall be not less than 3 nor more

4

than 10 times the costs incurred by the Contractor in

providing any such gratuities to any such offiver or

loyee.

8 The rights and remedies of the Government pro-

vided in this clause shall not be exclusive and are in

g

it * a „*

205 GoVERNMENT-FURNISHED PROPERTY (AS PR 13-

(a) The Government shall deli the Contractor,

for uBe in connection with and the terms of this

referred to as “Government-Furnished property”).

an ony iy performance dates for the ——— or

services to be furnished by the Contractor under this

contract are based upon expectation that Govern-

ment-Furnished property of a type suitable for use will

be delivered to the Contractor at the times stated in

the schedule or if not so stated in sufficient time to

enable the Contractor to meet such delivery or 2

ance dates. In the event that Government-Furnished

property is not delivered to the Contractor by such time

ec shall, if requested b

the Contractor, make a inati **

: casioned the Contractor thereby, and shall grant to the

contractor a reasonable extension of time in respect of

such delivery of ormance dates. The Government

shall not be liable to the Contractor for damages or

loss of profit by reason of any delay in delivery of or

failure to deliver any or all of the Government-

Furnished property, except that in case of such delay

or 8 the written request of the Contractor,

an — adjustment shall be made in pod aie

or ormance dates, or prices, or both, and in an

other contractual provision affected thereby, in — 4

ance with the procedures provided for in the clause of

this contract entitled “Changes”.

F * * * * *

86. Spmorat Trootine (ASPR 13-504)

s * * * *

37. Price Redetermination (Form II-B).

(a) The prices stated herein may be increased or de-

creased in accordance with this clause. In no event shall

the revised P iia exceed 115% of the Unit Price, as

amended, of item 1 plus 110% of the Unit Price, as

amended, of item 2 ,

*

55

(b) Timesfor negotiation. 6 i

1) Upon completion of delivery of 30%. percent of

“dll ee

parti

ate to revise the prices of all items: theretofore

—— vered. Within 30 days after

the completion of delivery or expenditure of funds re-

ferred to above, the Contractor shall furnish to the Con-

tracting Officer the statements and data referred to in

paragraph (e) of this clause. N

THE LANSDALE PLANT

16. Locating Lansdale facility. Norris and Tucker had

recommended to plaintiff that its home plant at Oreland

would be unsuitable for performance of Contract 1213, and

advised that a separate plant should be established to han-

dle Government contracts. Sidney Cohen of plaintiff com-

pany located a factory at Lansdale, Pennsylvania, which had

been used as a hosiery mill, one-quarter of which was still oc-

cupied for that purpose. Plaintiff made arrangements to

lease the available portion of the Lansdale plant for opera-

tion as its proposed Defense Works Division. Norris was

placed in charge of operations as general manager of pro-

duction, and as such was authorized to submit bids, sign

Government contracts, award subcontracts, and hire and fire

personnel. Tucker was put in charge of sales, Government

dollars in setting 1. additional organization, 3

man

ee 12 f includi i

0 be ense items, including the in-

vestment of many thousands of dollars in the new build -

ing at Lansdale, Pennsylvania, along with the neces-

sary equipment, placing itself in a position to imme-

diately on this contract, when awarded. Of

con:

cern, emerging 4 capacity to

— — of i tay adulte Regn —

our

also to our National needs. U.

56 —

17. Lease of Lanadale plant.. On January 23, 1953, Acme

leased that portion of the Lansdale plant which was not

occupied by the existing tenant and was given the right,

inter alia, * * to install steel plates on the floor for the

purpose of 3 supporting any of its machinery * * *.”

‘ SUBCONTRACT TO ALL METALS 5

18. Services contract with Tucker. All Metals Industries,

Inc., was established in July 1951 at Latrobe, Pennsylvania,

as a small machine shop. Its stock was owned equally by

John Hopkins, its president, Edward G. Oppenheimer, its

vice president, and by Leonard Morris. In the spring of

1952 All Metals learned collaterally that Tucker was for

hire to solicit commercial and Government contracts. He

‘was interviewed and his references checked. On October 1,

1952, All Metals entered into a written contract with Tucker

for his services and agreed to pay him 5 percent of weekly

gross sales up to $10,000 to customers procured by him, plus

3 percent above $10,000, with a minimum guaranteed weekly

salary of $100 to be charged against commissions. The con-

tract defined Tucker’s services to include the solicitation of

invitations to bid on commercial and Government contracts,

preparation of price estimates on such invitations, rendering

of advice as to production methods, collection of bills when

requested, assistance in obtaining financing for performance

of contracts which he might secure, and in locating mate-

rials. It provided for cancellation in the event of violation

of contingent-fee provisions. All Metals eventually paid

a total of $2,200 to Tucker under this contract.

19. Procurement of Acme subcontract. There is no record

of Tucker’s concrete accomplishments for All Metals in the

form of business obtained through him until he informed All

Metals of the possibility of securing purchase orders from

Acme under Contracts 1213 and 8580. All Metals partici-

pated in some of the negotiation conferences between Acme

and POD, which led to the award of Contract 1213 to Acme

on January 27, 1953. On the evening of that day Norris and

‘Tucker met with Oppenheimer and Hopkins of All Metals

and Norris gave All Metals verbal assurance of giving it a

subcontract. to manufacture chamber and vent assemblies,

which were components in the guns which Arme was to manu-

57

facture under Contract 1213. The fact is disputed, but it is

reasonable to conclude that at least as of January 27, 1953,

Oppenheimer of All Metals knew that Tucker was Acme’s

agent, although the officials of Acme other than the con-

spirators were unaware that Tucker was serving simultane-

ously as agent for All Metals in procuring the subcontract.

The only Acme personnel who were aware of Tucker’s double

agency were Norris, Jack Epstein (see finding 1, supra),

Philip Chagnon, and, of course, Tucker himself. By Acme

purchase order No. 35986, dated February 2, 1953, All Metals

was issued a subcontract for the production of 2,322 cham-

bers and vent assemblies at unit prices of $71.29 (target) and

$81.64 (ceiling) for the chambers, and $51.66 (target) and

$58.93 (ceiling) for the vent assemblies. The subcontract

contained the following clauses:

CONTINGENT FEES : Seller warrants that he has not em-

ployed any gees to solicit or secure this contract upon

any agreement for a commission, percentage, brokerage,

or contingent fee. Breach of this warranty shall give

Buyer the right to annul this contract, or, in its dis-

cretion, to deduct from the contract price or prices the

amount of such commission, percentage, brokerage, or

contingent fees. This warranty shall not apply to com-

missions payable by Seller upon contracts or sales se-

cured or made through bona fide established commercial

or selling agencies maintained by Seller for the purpose

of securing business. 4

CANCELLATION: (b) Buyer also reserves the t at

any time whenever the prime contract is can to

cancel this order, or an Es thereof, os notice

to Seller, even 2 Se er is not in default hereunder,

and this order is subject to all the terms and conditions

of th 1 standard form of provisions of clauses pro-

viding for the termination of supply contracts for the

convenience of the Government, and to all the terms and

conditions of any prime contract to which this order

relates. Thereupon Seller shall, unless the notice other-

wise specifies, discontinue all work and the placing of

orders hereunder and shall cancel all existing o

and subcontracts. Upon such cancellation settlement of

any amounts due the Seller shall be in accordance with

such equitable settlement of any approved and allowed

by the Government as being reimbursable to the Buyer

under the prime contract. Buyer shall be under no liabil-

ity for the payment of such settlement until it receives

4

58

3 epprovil ana allowance of Seller’s

claim in respect of such settlement.

The subcontract price included latently the sales enden

due Tucker from All Metals.

20. The “shakedown”.’ On or about February 17, 1958,

Hopkins and Oppenheimer of All Metals were advised by

Tucker and Jack Epstein (then superintendent of Acme’s

Oreland plant and son of its president, Joshua Epstein),

that All Metals’ purchase order 85986 from Acme would be

canceled unless All Metals paid Jack Epstein $25,000 in

cash. Jack Epgtein falsely represented himself to be a vice

president of Acme and Oppenheimer assumed erroneously

that he had the power to cancel the subcontract and that

Joshua Epstein was implicated, neither of which assump-

tions was true. Oppenheimer assumed that it was an “in-

come tax dodge” of some kind. On the protest of Hopkins

and Oppenheimer that All Metals was not financially able

to meet this demand, Tucker and Jack Epstein suggested

that, as an alternative, All Metals should let a contract for

$23,500 to°Gunn Engineering Company for “engineering

services”, whilé Acme’s Subcontract to All Metals would be

increased ly. This alternative propesition had

around the time of the cancellation of Acme’s Contract

1218 in August 1954. All Metals accepted the alterna-

tive proposal under economic duress, and on February 18,

1958, All Metals issued a purchase order to Gunn En-

gineering Company for “Consulting Engineering Serv-

and

price not to exceed $23,500 payable in installments. On

ame day Acme issued purchase order 36108 to All

Metals for chambers and vent assemblies which super-

seded the earlier purchase order of February 2 and in-

creased: the vent assembly prices by $10 per unit to cover

Through May 5, 1953, a total of $12,000 was paid by All

Metals to Gunn Engineering Company by check. Needless

59

to say, Gunn Engineering Company rendered. 10 services

whatsoever to All Metals.

21. Effort to capunge consequences of Gunn purchase

order.

(a) Following the May 5, 1953 installment paid by All

Metals to Gunn, Tucker instructed All Metals to discontinue

further payments, which All Metals did. In June 1953

Tucker told Oppenheimer that Norris was under official in-

vestigation and that he wanted to clear up the situation and

cancel certain transactions that had been entered into. Prin-

- cipally Tucker wanted to erase the effect of the “shakedown”

transaction narrated in finding 20, supra, and to create an

appearance that he had not been All Metals’ =, agent dur-

ing the shakedown period.

(b) To accomplish this, on or about June 25, 1958, Tu

gave All Metals a letter predated February 10, 1953

nating his services contract with All Metals as of tha .

Having previously in March 1953, for obsture as-

signed this services contract to one Philip who

immediately reassigned it to Gunn, on June 25 by means of

a “Release and Acknowledgement” backdated to March 20,

1953, Tucker canceled and voided these assignments. Op-

penheimer then canceled by letter All Metals’ purchase order

of February 18, 1953 toGunn. In furtherance of the fiction,

Oppenheimer drafted a letter which he wanted Acme to send

to All Metals, and sent this to Tucker’s residence with a cov-

ering letter. Under date of June 30, 1953, this letter on

Acme’s letterhead (composed as stated by Oppenheimer) was

sent by Norris to All Metals. It purported to reduce retro-

actively by $11.50 per unit the price in Acme’s second pur- |

chase order (No. 36108) to All Metals, which, as has been

described, had increased the first purchase order by $10 as

part of the “shakedown”. Since by this time All Metals

had already delivered and billed Acme for one shipment (four

units) under the second purchase order at the inflated price,

the letter of June 30, 1953 from Acme provided that a credit

memorandum would be issued to Acme for $202.71, $41.04

of which represented the inflationary element in the invoice

for the first shipment. Also, on June 30, 1953, a supple-

ment was issued by Norris to Acme purchase order 36108

reducing the unit price of vent assemblies by $11.50, and

60

halving the quantity of vent assemblies. On August 15,

1953, Acme paid the June 3 All Metals’ invoice after deduct-

ing the credit, and thereafter all invoices submitted by All

Metals to Acme for completed shipments were paid at the

corrected prices. All Metals corrected its books of account

to reflect these price readjustments. As of June 30, 1953,

its books carried as an uncharged expense the $12,000 which |

it had paid to Gunn up to May 5, and it was not charged in

the books to the Acme subcontract for chambers and vent

assemblies. All Metals’ accountant testified that the $12,000

was not included as a contract cost by All Metals directly or

indirectly in either its original cost submission for termina-

tion purposes to the Army or in the damage schedule filed

in the instant proceeding for audit under former Rule 28.

(o) The defendant.concedes that by its revision of the sec-

ond purchase order from Acme, All Metals reduced its price

to less than the price in the first purchase order, but contends

that the method of computation employed by Oppenheimer

and Tucker in arriving at the amount of the reduction left

in the ultimate cost figures the $12,000 which All Metals had

paid to Gunn, so that its final price to Acme and its claim

to the Government necessarily included a kick-back element

in violation of the statute. Thus, the method of computa-

tion was as follows:

The sum as yet unpaid by All Metals to Gunn under the

bogus purchase order wag $11,220 (i.e., $23,220 less $12,000

already paid). This $11,220 was added to $15,487.74 (the

5 percent commission due Tucker for procuring the pur-

chase order from Acme), and the resultant total of $26,707.74

was deducted from the price in the second purchase order

No. 36108, thus providing a basis for a new unit price by

dividing the number of units into the reduced total. .

(d) The facts from which the parties reach opposite con-

tentions are correet as stated. If we refer to the successive

purchase orders from Acme to All Metals as the first, second

and revised in the order of their issuance, it appears that

ices charged by All Metals in the first and second pur-

orders included latently Tucker’s commission, but the

revised purchase order did not. The amounts paid to Gunn

by All Metals were buried in the cost structure of the second

and revised purchase orders but not in the first one. Since

61

there is no evidence that All Metals made any effort to recover

the $12,000 extorted from it by Gunn, it is concluded that,

in its final cost structure on which its ultimate revised. price

to Acme was based, All Metals included the 612,000 paid to

Gunn in exchange for a waiver by Tucker of the $15,487.74,

which was technically owed:him * for commissions and which

had been indirectly included in All Metals’ cost structure

underlying its initial price to Acme.

TUCKER’S DUPLICITOUS AGENCY FOR OTHER SUBOON TRACTORS

22. Manalapan.

(a) On November 10, 1952, Tucker entered into an agree-

ment with Jaime Kohan, trading as Manalapan Machine &

Welding Works, whereby for a minimum six-month period

Tucker was to be employed on a non- exclusive basis as sales

representative to secure contracts for Manalapan to perform

at a minimum weekly salary of $100 which was to be applied

against commissions earned on business brought in. Tucker

took Kohan to see Norris at the Acme plant to look over

some: blueprints for a potential subcontract. After some

negotiations and the rejection by Acme of an initial price

which was too high, Manalapan was given a series of pur-

chase orders by Acme relating to the latter's Contract 1213

during the period from February 1953 to July 1953. Only

a portion of Manalapan’s various quotations were accepted.

Some of the parts it furnished to Acme were unsatisfactory

and required reworking. Manalapan’s prices to Acme in-

cluded latently amounts paid by Manalapan to Tucker under

the employment agreement described above. Pursuant to the

employment agreement Manalapan paid Tucker $428.50

from November 21, 1952 to December 29, 1952 (which was

prior to Manalapan’s purchase orders from Acme) and

$1,350 from February 16, 1953 to May 15, 1953 (which was

during. the performance by Manalapan of its purchase

orders from Acme). Tucker shared these payments with

Norris pursuant to their agreement. Not all of the work

which Manalapan received from plaintiff was the result of

1 As stated tm paragraph (a) of this finding, Tucker's assignment of his 5

percent commission to Gunn was canceled, so that as of June 1953 All Metals

was technically indebted to Tucker for commissions.

62

Tucker’s efforts, for after the discontinuance of Tucker’s

agency for Manalapan it received requests from Acme for

quotations.

(b) There is some e between Jaime Kohan, seid

ing as Manalapan Machine & Welding Works, and a corpo-

ration by the name of Manalapan Machine Works, Inc.,

organized January 2, 1953. Jaime Kohan had no financial

interest in this corporation but eventually served as its super-

intendent. His son was a principal in the corporation. The

corporation received and performed some of Acme’s pur-

chase orders until November 1953, when it discontinued due

to lack of funds. Other purchase orders were received and

performed in the name of the individual proprietorship.

Thereafter, at Acme’s request and with the consent of the

Manalapan. Machine Works, Inc., Jaime Kohan, trading as

Manalapan Machine & Welding Works, continued the work

under the corporation’s purchase orders until they were

canceled. Acme treated both of the Manalapan companies

interchangeably as a single legal entity. The corporation

did not file a claim with the defendant, but the individual.

proprietorship did. The payments to Tucker described

above were made by the individual proprietorship.

(c) Jaime Kohan of Manalapan knew or should have

known that Tucker was an employee or agent of Acme at

the time of their relations described above. The officers of

Acme (as distinct from Norris, Tucker, Jack Epstein and

Chagnon) did not know until after cancellation of Contract

1213 that Tucker was a paid agent for Manalapan.

23. F Machine Company. Foley Machine Company

had been doing business for several years with Tucker, Sr.,

the father of Tucker, Jr. Norris and Tucker, Jr., had

formed the Neptune Manufacturing Company, Inc. Foley

knew that Neptune was Tucker’s company. On January 24,

1953, Foley contracted on a contingent basis with Neptune

for the latter’s services in securing subcontracts from Acme,

MS 9 Pee ee oe a Oy he wally Seah iene

or business which Neptune might get for Foley from

with a weekly drawing account of $75 to be applied e

commissions’ Thereafter, Foley met with eae at the

Acme plant to review the prints under the 1213 contract.

At that time Foley knew or should have known that Tucker

63

was an employee or agent of Acme. On February 10, 1953,

Acme issued a purchase order to Foley under its Contract

1213. Foley sent two checks to Neptune for $75 each, dated

February 12 and 19, 1953. By a document dated February

27, 1953, and signed by Tucker, the contingent fee agreement

of January 24 between Neptune and Foley was canceled.

The two checks referred to above, which had not been depos-

ited by Neptune, were returned to Foley. Defendant con-

tends that Acme included the contingent fees paid to Nep-

tune by Foley in its schedule of costs filed in this court

pursuant to former Rule 28, that the contingent fee which

Foley had agreed to pay Neptune constituted an improper

and illegal cost and expense incurred or paid by plaintiff

and/or Foley, and that it constituted an illegal kickback un-

der 41 U.S.C. 51. Undoubtedly, the price charged by Foley

te Acme in the purchase order included latently an amount

sufficient to pay the contingent fee. The officers of Acme (as

distinct from Norris, Tucker, Jack Epstein and Chagnon)

did not know until after cancellation of Contract 1213 that

Tucker and Norris were paid agents for Foley through the

medium of Neptune.

24. Nicholson Products Company. In June 1952 Nichol-

son Products Company entered into an agreement with

Tucker, Sr., hiring him at a minimum salary of $200 per

week for his services in procuring customers. The agree-

ment provided for an eventual increase in compensation to

equal 5 percent of weekly gross sales up to $20,000 and 3

percent over that from all new business for which Tucker,

Sr., was responsible. Through arrangements made by

Tucker, Sr., Nicholson’s president visited Norris at Acme

to obtain details of a subprocurement. Nicholson then ob-

tained some subcontracts from Acme under Contract 1213

and paid commissions to Tucker, Sr., on such subcontracts.

There is no evidence that any responsible officers of Acme

were aware of this matter.

. Johnson and Tuns. After Norris was hired by Acme

as general manager of the Lansdale plant he hired as his

assistant at $150 per week one Philip Chagnon, who had

been associated in previous business relations with Norris

since 1944. Chagnon performed some expediting work but

his duties for Acme wers principally clerical in nature. He

64

entered into a private agreement with the firm of Johnson

and Kunz to be paid a commission on any business he ob-

tained for the latter. At Chagnon’s recommendation Norris

awarded a subcontract to Johnson and Kunz under Acme’s

Contract 1213. Johnson and Kunz paid commissions of $900

to Chagnon by checks made out to a mythical Robert Skill-

man, Chagnon’s pseudonym. The checks were endorsed

and cashed by Chagnon. No other Acme employee was

aware of Chagnon’s private commission arrangement. He

used a pseudonym as a cover because he understood that the

Federal Bureau of Investigation had commenced an investi-

gation of certain aspects of Acme’s performance under Con-

tract 1213. 47

‘ DEPARTURE OF THE CONSPIRATORS

26. Norris. From May to July 1953 Norris used several

Acnie employees to perform work on his farm, charging

the labor cost of $895.52 and travel expenses of $150 against

Contract 1213 on Acme’s books. This matter was brought to

the attention of Joshua Epstein, Sidney Cohen and Jack Ep-

stein of Acme by an FBI agent who had investigated it.

They disclaimed prior knowledge of it. Jack Epstein rec-

ommended that the labor costs should be charged against

Norris’ account and thus credited to Contract 1213 to remove

the charge, but this was not accomplished. On September

4, 1953, Norris was discharged with the following letter from

Joshua Epstein:

We are obliged to advise you that your services with

this company are terminated immediately because of:

A. Your improper conduct and unauthorized expendi-

tures, involving contracts with agencies of the

United States Government, which resulted in

your being investigated by the Federal Bureau

of Investigation ;

B. Your voluntary abandonment of your duties, with-

out excuse or permission; >

C. Other reasons well known to you, not necessary to

relate in detail.

mw ins os om ‘chdrae als, ‘naan ie

all unautho wi wals, or improper r

salaries, moneys, value of materials or otherwise.

On Se ber 11, 1953, Acme wrote to POD requesting the

ion of the latter’s records showing Norris’ elimina-

65

tion as General Manager and his replacement by Jack Ep-

stein as plant superintendent.

27. Tucker. Effective October 17, 1058, Acme reduced its

weekly payment to Tucker to $250, and effective the week

ending November 11, 1953, Tucker’s services with Acme were

terminated for reasons which are not specified in the record.

28. Chagnon. At the end of November 1953 Chagnon left

Acme’s employ.

29. Epstein. On November 23, 1958, Jack Epstem exe-

cuted a false affidavit that at no time had he received any

commission, etc., from any Acme subcontractor or supplier

in connection with Government contracts. On August 28,

1954, he resigned from Acme.

30. Knowledge of Joshua Epstein. POD had advised

Joshua Epstein on several occasions prior to the removal

of Norris and Tucker that Tucker, Sr., was known to be a

five-percenter in Government contract eircles and that it was

risky to hire his son, Tucker, Jr. Joshua Epstein did not.

consider this advice to be worthy of reliance, and as late

as June 1955 asserted that he had found Norris and Tucker

to be willing and competent workers and that their hiring

had been. justified. From the circumstances related in find-

ings 26 through 29, supra, relative to the removal of the con-

spirators from Acme’s payroll, particularly the inferences

contained in the letter discharging Norris (finding 26, supra)

and the contents of Jack Epstein’s affidavit (finding 29,

supra), it is reasonable to conclude that during the late sum-

mer and fall of 1953 some information had come to Joshua

Epstein’s attention leading him to suspect that the con-

spirators (including his son) had engaged in some improper

activities. Rather than expose the culprits he induced their

removal for suspected cause. Joshua Epstein was not called

as a witness in the trial of the instant case. Jack Epstein’s

delayed resignation is understandable in view of the relation-

ship which existed.

31. Prosecution of conspirators. Tucker, Norris and Jack

in were indicted for violation of the Anti-Kickback

Law (41 U.S.C. 51, 52, 54). On April 13, 1956, after pres-

entation of the Government’s case, the defendant’s motion

for acquittal was granted (see finding 54(j), infra). The

court, inter alia, said:

210-151—66——5

66

* * * T may say that I have been shocked at the sordid

picture that has been exhibited here in this case. I have

never seen such an exhibition of disloyalty to an em-

ployer as has been exhibited in the actions of these three

men. )

* * the picture of a scheme set up, not only to in-

crease the cost to the employer, but also to increase the

cost to the United States, for a few paltry dollars, shows

complete 42 the hearts of these three defendants.

They thought they were doing something crooked, and

that is clear from the actions they took in effectuating

this scheme. The scheme was — — and morally

oo but unfortunately within the narrow letter

of the law.

This statute, as I see it, does not cover the contract

in this case. I am intellectually certain that this is not

the type of contract that is covered by the Act of March

8, 1946, being Title 41, Section 51, of the Act. There

is nothing that I have seen in an 2

in the congressional history which would indicate to me

that there was any intention on the part of Congress to

cover this particular of contract. It may well be

that Congress thought in this type of contrest the

era be would be the one that wo wer ge the inter-

ests of the United States, but no employer can protect

himself against treacherous a who are deter-

mined to commit morally pen le acts and who, for

the sake of a few paltry dollars, set up the type of vicious

scheme that has set up in this case, which resulted

— increased cost both to the employer and to the United

tates.

733 TTT

is case is that i 80 it should expand the

provisions of Title 41 to cover just this sort of machina-

tion on the part of trusted emp oyees and I am ane ym.

that my remarks here be transcri 115 of record, and

that the United States Attorney be furnished two copies

so that if he wishes he may transmit a copy of my

remarks to the Attorney General of the United States,

to the end that Congress may if it so desires amend this

Act to include as a crime the vicious and immoral type

of conduct that has been exhibited in this case.

is case oem | showed that the employer was victim-

i and I would say indirectly the United States was

also, but the defendants were narrowly within the law.

I don’t know what type of action the employer may take

against these employees, but I do say that I have nothing

but contempt for their actions. Unfortunately, they are

without the purview of this particular statute.

67

ALLEGED IMPROPRIETIES INVOLVING GOVERN MENT EMPLOYEES

32. Hochstuhl.

(a) After Contract 1213 was awarded to Acme, Charles

G. Hochstuhl of POD was assigned to administer it, along

with a number of other contracts, under the immediate super-

vision of Harry Oschwald. In this capacity Hochstuhl

journeyed to Ohio in March 1953 in the company of Acme

officials to show them existing gun-manufacturing facilities.

On his return to POD he submitted a voucher for his per

diem and other trip expenses, and was paid th~ same. Adolph

Gromada of Acme had paid $12.50 for Hochstuhl’s hotel

room charges on the trip, and this expensg was charged by

Acme against the contract in suit. On another occasion

Acme charged against the contract hotel and meal charges

for visitors, apparently Government employees, from Water-

vliet Arsenal. Hochstuhl’s duties at POD in connection with

Contract 1213 included recommending changes in the de-

livery schedule, for review by Oschwald.

(b) Hochstuhl was removed from his position with POD

effective August 4, 1953 “* * * for making material false

statements and exaggerations on your application standard

Form 57”, relating to some prior private employment. Dur-

ing his notice period he looked for other employment and

was employed by Acme in August 1953 immediately after

the termination of his employment at POD. POD advised

Acme at the time, in Hochstuhl’s words, that he “would be

limited for a period of two years after being separated from

the Government, which would restrict [him] in not negoti-

ating any prices or any legal matters, any technical involve-

ments of the contract, as a contractor’s representative to any

individual Government employee.” If POD’s advice to

Acme was in writing it is not in the record.

During the first few weeks of his employment by Acme he

helped Norris as an expediter of subcontracted components.

After Norris was discharged in September 1953 and replaced

by Jack Epstein as superintendent of the Lansdale plant,

Hochstuhl was appointed as Epstein’s assistant. As such

he was given a variety of assignments, all of them relating

in one form or another to paperwork. He helped to estab-

lish a control system for subcontracted work, correlated

many details relating to Acme’s several Government con-

- tracts, maintained quality control records, prepared letters to

Ordnance from Acme for signature by others, correlated

plant inspections by inspectors for Acme and the Govern-

ment, handled various matters with reference to the records

ing Government-furnished machines and tools, and

helped with preparation of requests for change orders. He

did not make personal contacts with Government representa-

tives in connection with Acme’s Government contracts.

In the fall of 1953 he came across a number of vouchers

and other cost records in Acme’s files whieh related to re-

pairs made by Acme to Government-owned machines

supplied under the Facilities Contract 1214. On his own

volition and in the interest of keeping adequate cost records

should need arise for them, he undertook to segregate and

allocate the cost records to individual machines, and there-

after as additional repairs were made to the machines he

kept a running record of them as to each machine. There is

no suggestaoff that this record in its inception was made for

the purpose of a claim by Acme, since as of the fall of 1953

there was ng prospect of the contract cancellation in July

1954. Under date of January 1954 he prepared a chart which

depicted certain facts pertaining to Government-furnished

machines, such as when they were ordered and received, the

periods they were out of operation or not functioning prop-

erly and the reasons, and the nature and cost of repairs.

In September 1954 at the direction of his superiors,

Hochstuhl prepared an up-to-date record of Acme’s expendi-

tures in repairing the various Government-owned machines.

This record was based on the records he had compiled a year

earlier and had kept current in the meantime. The cost

record was attached to the letter from Acme (signed by Mr.

Cohen, its secretary-treasurer) to POD on September 7, 1954,

in which plaintiff refused to return the machines to the Gov-

ernment unless POD gave assurance that Acme would be

reimbursed for its cost of repairs. These facts are set forth

in finding 58, infra. Other than as described there is no

evidence from which it could possibly be inferred that Hoch-

stuhl prosecuted a claim against the Government as Acme’s

agent.

69

33. Zee. Acme was experiencing difficulty in getting into

uction with the machines and tooling furnished by the

t. At Acme’s request Watervliet Arsenal ordered

Harold J. Lee, a machinist lead foreman at the Arsenal, to

report to plaintiff’s Lansdale plant for the purpose of assist-

ing plaintiff in its technical problems. Under his official

orders Lee worked at plaintiff's plant from his arrival on

April 20 until April 24, 1953, at Government expense. Plain-

tiff requested the Arsenal to loan Lee’s services for an addi-

tional week at Government expense, but this was refused.

Instead, Lee was given official permission to remain at the

plant, advising plaintiff in an absent-without-pay status

from April 27 to May 1, 1953. During this latter period he

worked 96 hours and was paid by the plaintiff $470 plus his

hotel expenses, at the rate of $5 per hour compared to his

Government salary rate of $2.60 per hour. The amount

paid by Acme to Lee were charged agaimt Contract 1213.

Plaintiff was pleased with Lee’s services and commended him

to Watervliet Arsenal, Upon his return Lee filed with the

Arsenal a trip report. There is no evidence of any improper

conduct on the part of plaintiff with reference to Lee. Lee’s

observations of the plaintiff's operations and the nature of

his services are described in finding 39(b) (1), infra.

CAUSES OF PLAINTIFF’ 8 PRODUCTION DELAYS

34. Prefatory statement. The plaintiff contends that the

defective condition of certain items of machinery furnished

by the defendant under a so-called Facilities Contract, some

of which machines were also used by its subcontractor, All

Metals, was responsible for its inability to adhere to the

original and subsequent delivery schedules under Contract

1213. Acme also asserts that the defective machinery caused

not only the incurrence of unreimbursed costs of machinery

repairs in excess of those anticipated, but also the delays

which led to the assessment of liquidated damages for de-

linquency in deliveries, Plaintiff seeks to recover these costs

and to have remitted the liquidated damages which have been

withheld. The defendant contends that the machinery it

furnished plaintiff was not defective but was usable, that

plaintiff's difficulties in its use were attributable to improper

70

installation and operating incompetence, that plaintiff’s ac-

tual cost of repairs and installation was well within its orig-

inal estimate, that $44,358.58 of the amount spent by plaintiff

for special tooling was included in its bid price (as amended

by Supplemental Agreement No. 6) and the balance was

plaintiff's responsibility under the terms of the Facilities

Contract, and that the part of plaintiff’s delays not attribut-

able to its own deficiencies was attributable to the failure of

All Metals to adhere to subcontract delivery schedules,

35. Facilities Contract. Clause 4 of Contract 1213 pro-

vided that plaintiff would have the right to use certain Gov-

ernment-owned machinery enumerated in the so-called Fa-

cilities Contract (No. DA-36-084-ORD-1214F) entered into

between the parties simultaneously with Contract 1213, al-

though not fully executed until February 27, 1953. The Fa-

cilities Contract contained the following selected provisions:

Trriz II

GOVERNMENT FURNISHED FACILITIES

ARTICLE -A. DELIVERY.

1. The Government shall furnish to the Contractor

the facilities described in Schedule “B”, attached hereto

and expressly made a part hereof, for use in the per-

formance of certain supply contracts, identified in Arti-

cle IV-A. The Government shall deliver, or has already

delivered, such Schedule “B” facilities at the time or

times stated in such Schedule or if not so stated in suf-

ficient time to enable the Contractor to perform the

affected supply contract(s). If any such facilities are

not 2 to the Contractor by such time or times,

or are delivered in such condition as to require repair or

rejection pursuant to the provisions of Paragraphs 2

and 3 of this Article, the 1 1 — Contracting Officer,

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