Brief for the United States — United States v. Acme Process Equipment Co.

Supreme Court brief1967

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Jurisdiction - ae

Questions presented... vs _—

Statute involved alters nie men

Statement : | .

1. The facts: : .

a. The contract and its termingtion

b, The kickbacks.

2 Ings belOW 20 meee ain se

Summary ot PETRA 4 . idemeiimalines

I. Where responsible officials of a prime govern-

ment contractor accept bribes from the sub-;,.

contractors in violation of the Anti-Kickback

Act, the govetuimént is’ éntitled to cancel:

“here: pivtatan of ths ningryof ts

--precurement process requires - that ‘a:

contract taintéd by kickback violn-°

a Mago rrP gre

conflict of interest, be promptly termi

‘nated without Liability to the govern- ;

ment_

II. To allow ‘restitution in’ the ‘cireumsténcés of the

- present case—where damages would ‘fully coni- ‘

pensate the plaintiff for the loss he sustained ‘

as a result of the alleged breach—would offend

sound principles of contract law and inipor: |

_ tant! federal policies governing ee

RTA

Si nal ply Se SAL sity it Ate che

Arguments—Continued

A. Restitution is designed to provide a flex-

ible, essentially equitable, remedy in

situations where damages are not so

‘accurate a measure of the injury caused

by the breach as is the value of the

services rendered under the contract to

B. Measured by sound principles of restitu-

tionary relief, the contractor is not en-

titled to a deoovery in excess of the

damages he actually suffered as a re-

sult of the termination where, as here,

there is no question of the adequacy

of the damages remedy___-..__---_-- 36

C. Important federal policies would be im-

paired by allowing restitution in this

Rs iandten-cheemretastncsna-asnidinesipenchninenceuyhen 42

Conclusion_ ia ac MAR om a ae

CITATIONS

Cases:

Aberdeen. Railroad Company v. Blaikie Bros., 1 Mac-

Queen’s Appeal Cases, 461_....-..2.----_----_-- 24

Adams y. Healy, 227 Mich. 159, 198 N.W. 584____-- 33

vt Bailey v. Furleigh, 121 Wash. 207, 208 Pac. 1091__- 35

Bank of the United States v. Owens, 2 Pet..527.... 18

Boomer v. Muir; 24 P. 2d 570 (Cal. App.) --------- 35

Brown v. Bullock, 294 F. 2d 415......-------__-_- 18

Burck v. Ta@§or, 152 U.S. 634__.......-.-.------_- 18

City of Electric Lighting Co. v. London

Corp. [1903]>A,C. 484 (House of Lords) ----_---- 18

Cleveland, C.C. & St. L. Ry. Co. v-goore, 170 Ind.

OU a ie ee amnnnnne 35

Connolly v. Sullivan, 173 Mass. 1, 53-N.E. 148_.-_- a1

Crocker v. United States, 240 US. Diineneebescnn 18

Derby v. Johnson, 21 Vt. 172..----.---...---.----- 33

Fairport P. & E.R. Co. v. Meredith, 292 U.S. 589_. //1

Farnum v. Kennebec Water District, 170 Fed. 178_/

Finch v. Riverside & A. Ry. Co., 87 Cal. 597, 25 x

Dickson v. Emmerson, 154 Ore. 558, 61 P. 2d a.

Nya eadsensiitniarnsentionresavesnngpiaiesanse 18

Fitegerald v. Pan American Airways, Inc., 229 F.

|, | Us RR RGE AOR ES a eaa aaitee 20

enanedt Se om iin pei tee oe 6 -

Cases—Continued

Frost & Co. v. Mines Corp., 312 U.S. 38.....__..___ 17

Gleason v. Seaboard Ry., 278 U.S. 849.2. 28

Heitz v. Sayers, 32 Del. 207,121 At).295....... 35

J. 1. Case v. Borak, 377 U.S. 426... Lwecmiia’, 17

Johnston v. Star Bucket Pump Co., 274 Mo. 414, 202

BMA So Sie la ot he) wesc sual . 85

K v. Clifford, 165 Ill. 544, 46 N.E. 248. | 35

Kehoe v. Rutherford, 56 N.J.L. 23,27 Atl. OMB 35

Kitchell v. Crossley, 90 N.J.L. 574, 101 Atl. 179___.. 35

L. Albert & Son y. Armstrong Rubber Co., 178 F.

ee Ties ae nl pb be wiatibe bien dusbins, 40

Mammoth Oil Co. v. United States, 275 U.S. 18... 18

Massachusetts Bonding & Ins. Co. v. United States,

PS AM Ne cesses stu, bes 42

McConnell v. Commonwealth, Pictures Corp., 7 N.Y.

2d 465, 166 N.E. 9d 49¢. 18

Merritt v. United States; 267 U.S. 338... 39

Missouri Pac. RR. Co. vy. Ault, 256 U.S. ~ 2-52) 42, 43

Miller v. Ammon, 145 U.S. edie | a ET 18

Montgomery, Matter Of, 272 N.Y. 323, 6 N.E. 2d 4022.41; 35

Moses v. MacFerlan, 2 Burr. 1005 (Lord Mansfield)... 39

Muschany v. United States, 324 U.S. 49... iéas/ 99

Nashtv. Towne, 5 Wall. 689... a 32

New York Mail & Transp. Co. v. United States, 154

F. Supp. 271, certiorari denied, 355 U.S. 904______ 31

Northport v Northport Townsite Co., 27 Wash. 543,”

68 Pac. 204...-2 2-2. beens cpisias 18

Noyes v. Pugin, 2 Wash. 653, 27 Pac. 548_...____ 35

Oakley v. Duluth Superior Dredging Co., 223 Mich.

U5 Pe, Sa aR RR aS ioe iartenttegireom 35

Pan American Co. v. United States, 273 U.S. 456... 18

Paul v. United States, 371 U.S. 245_-.... - 44

Peist v. Richmond, 97 Vt. 97, 122 Atl. 490... 35

Pelletier v. Masse, 49 R.I. 408, 143 Atl. 609_..._..: 35

Philadelphia v. Tripple, 230 Pa. 480, 79 Atl. 703... 35

Reitmeister v. Reitmeister, 162 F. 2d 691_________.. “- 18

feynolds v. Levi, 192 Mich. 115, 80 N.W. 900 sini, 35

Rodemer v. Hazlehurst &: Co., 9 Gill. 288 (Md.)______ 33

Rustles v Christensen, 207 Wis. 326, 241 N.W. 635__ 35

Sanitary District y United States, 266 U.S. 405_______ 18

Southern Painting Company of Tenn. yv United =

States, 222 F. 9d 431... i: 88

re. 2 + —- ee ea . - -- — ~ ~< — - _ 2a. ne Cal URN AD, wo

Cases—Continued

Standard Surety & Cas: Co. v. Planteville Nat. Bank,

158 F. 2d 429, certiorari denied, 881 U.S. 812..... 28

Stark v. Magnuson, 212 Minn. 167, 2 N.W.@d 814.. - 35

Sutton v. United States, 256 U.S. 575_. oi 39

5 Tewas & Pacific Ry.v. Rigsby, 241. U.S. 83_._._.- . 18

Thompson v. Gaffey, 52 Neb. 317, 72 N.W. 814..--. 35

~< 3 Tunstall v. Brotherhood of Locomotive Firemen &

Enginemen, 323 U.S. 210_........-.. Leas) © 27

United States v. Barnard, 965 F. 94 883, certiorari

denied, 358 U.S. 919......-.- Lid 28, 29

United States v. Carter, 217 US. 286 iu.°6~6 lOO

United States v. Minnesota Mutual hw. Co., at

UWS. (238..2-.2 ersere@ 39

United States v.. Mississippi Valley Gonerathiy Vo.,

364 U.S. 520____-. 11, 14, 15, 18, 19, 20, 24, 25, 26, 28

United Siates v. Republic Steel Corp., $62 US. 482.. 18

Valente v. Weinberg, 80 Conn. 134, 67 Atl. 369_....- 35

Wellston Coal Co. v. Franklin Paper Co., 57 Ohio

St. 182, 48 N.E. 888....-.-.-...-. s- 3

Wuchter v. Fitagerald, 83 Ore. 672, 163 Pac. 819... 35

Statutes:

Anti-Kickback Act, 60 ‘Stat. 87, as amended, 74 Stat.

740, 41 U.S.C. 51----- 2, 3,4, 6,9, 10, 11, 12, 18, 14, 17, 20,

21, 93 , 24, 28, 29

Buy American Act 21 USC. Wa, et seqg--=-- 45

False Claims Act, 31 U.S.C. 231--~--- % 6,7

Federal Tort Claims Act, 28 U.S.C. 2647__..--._-- 42

Tucker Act, 28 U.S.C. 1491_..--------- 80, 31, 35, 39, 42, 43

10 U.S.C. 2304(g) WEieedl. 44

10 U.S.C. 2306(b)...-..-.---- 4 6, 45

18 U.S.C. 201-218____- pee 45

18 U.S.C. (1946 ed.) 202_-..--- “ 21

18 U.S.C, 494__../.-.--. Ss | 19

18 U.S.C. 874_. : ak ett oe i 45

28 U.S.C. 1346(a) (2)------ Sha ee

28 U.S.C. 2514 45

Walsh-Healey Act, 41 U.S.C. 35, e¢ seg 45

2A N. J. Stats. Ann., § 170-88 ‘ 29

N. Y. Penal Law (McKinney’s), § 439_ a

18 Pa. Stat. Ann. (Purdon’s), § 4667_......-..___. 29

aneous: } 3

32 C.F.R. (1966 ed.) :

Zl ® | Seine renee ee

- sakes a fl

Miscellaneous—Continued

Bil etna ee LER OG 44

Be oc a ae ne na 44

Epp ae CA On ANGER 44

So er ee ae ee 45

32 C.F.R. (1965 ed.):

Ron shicig ee ee RSI EOD 43

Bronce tk tet oi ial a NS 43

ie cape ETL ON es 44

32 C.F.R. (1954 ed.):

Boccia AEE SIS RAN RE OED 44

ETAT LA 43

§ 3.405_______ he Nite por Senn ie clea Eid og SOA 43

DN Caines atacand ies ce 43

A, SEDER Oe ARR REE Fn ie 43

§ 3.406-1_____ ii tidccinaiiesggad Oe ee ae 43

Bocca Not Ne IDE, 44

Beene: apis s+ 4

a thet ati eniccctith beau ca 44

41 C.F.R. 1-12.800, et OD ncsnqiwiitenamiettememaes 45

5 Corbin, Contracts (1964 ed.) :

8§ 1054 et seg_________ ee 38

DRO cenierns <pssmenetennicinciiiigiva i uaiee | a 31

S 30. a 31

6A Corbin, Contracts, § 1373 i ft eee 18

Fuller and Perdue, The Reliance Interest in Contract

Damages, 46 Yale T.. J. 52 fb : Sea nae ee Oe ao 34

Hearings on H.R. 131 before House Committee on

Expenditures in the Executive Department, 79th

peg Ah ae A 21

H. Rep. No. 212, 79th Cong. Ist Sess... 21, 24

H. Rep. No. 1880, 86th Con »y 2d Sess... 9, 10, 20

Palmer, The Conthact Price as a Limitation on Res-

titution for Defendant's Breach, 20 Ohio St. L. J

ee: CO ca . iis a, we

Patterson, Builder’s Measure of Recovery for Breach

of Contract, 31 Col. L. Rev. 1286 t | eer api er 34

II Restatement of Contracts (1932) :

Oils as t's Seine 2 ie 18, 31, 33

ag ge RE TEATS LENE TE 33

S. Rep. No. 1585, 86th Cong., 2d Sess_ 9,10

BLANK

PAGE

dete NG nt ne ae Lee Se ert an ee ee

Gu the Supreme Gourt of the Bnited Ftates

OctToBeR TERM, 1966

No. 86

Unitep STaTEs oF AMERICA, PETITIONER

v. .

AcmME Process EquipMENT CoMPANY

ON WRIT OF CERTIORARI TO THE UNITED STATES OOURT

OF CLAIMS

BRIEF FOR THE UNITED STATES

OPINIONS BELOW

The opinion of the Court of Claims (R. 78) is re-

ported at 347 F. 2d 509. Its findings (R. 123) are

unreported. The opinion (R. 1) and findings’ of the

Commissioner of the Court of Claims are unreported.

JURISDICTION . x

The opinion of the Court of Claims (which includes

its order, R. 123) was issued on June 11, 1965, and a

timely motion for reconsideration denied on October

15, 1965 (R. 237). By orders of the Chief Justice

1 Excerpts from the Commissioner’s findings of fact are set

forth at R. 62-77.

(1)

and Mr. Justice Brennan, entered on January 12,

1966, and February 9, 1966, the time for filing a peti-

tion for a writ of certiorari was extended to and

Fi Wee hunt ai. 966 (R. 238-239). The petition

drdth Wad Hed ou litt day and

granted on April 25, 1966. (R. 240, 384 U.S. 917).

The jurisdiction of this Court is conferred by 28

U.S.C. 1255(1).

QUESTIONB PRESENTED

1. Whether the discovery that. executiyes of a prime

government contractor had.accepted bribes from sub-

contractors,in violation of the Anti-Kickback Act

justified the. government in terminating the prime

contract.

3° Resting thing this was not adequate cause for

termination and that the government therefore

breached the contract, whether the contractor was en-

titled to restitution bf thé reasonable expenses he in-

curred under the contract, although the result (since

the contract was not’ a profitable one for him) is to

place iim in a far better position than he would have

eecupied had the contract not, been terminated.

Séetion'1 ofthe Anti-Kickback Act, 60 Stat. 37, as

amended, 74 Stat. 740, 41 U.S.C,.51, provides in perti-

nent part: — | , 7

a 2 ‘payment of any tee, .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 heim

tor, * *.* (1) to any officer, partner,

ployee, or agent of a prime contractor holdi

a negotiated contract entered into by any dey

partment, ageney, or estabiishment:f the

United Stetes for the furnishing of supplies,

materials, equipment or services of any kind

whatsoever; * * * as an inducement for the

award of a subcontract or order from the prime

contractor * * * is 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: subcon-

tractor to the prime contractor. * * *, The

amount of any such fee, cost, or.expense shall

be recoverable on behalf of the United States

from the subcontractor or the recipient thereof

by setoff of moneys otherwise going to the sub-

-_contractor.either directly by the ‘United, States,

. or by’ a prime contractor under any contract

or by an action in an appropriate court of the

United States. Upon a showing that a Sub-

contractor paid fees, commissions, or compensa-

tion or granted gifts or gratuities to an officer,

partner, employee, or agent of a prime con-

tractor * * * 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 sub-

contract or order and ultimately borne by the

United States. * * ** ;

Section 4 of the Act provides:

Any person who shall knowingly, directly or

indirectly, make or receive any such prohibited

*Prior to its amendment in 1960, 74 Stat. 740, the Act

applied only to contracts “on a cost-plus-a-fixed-fee or other cost

reimbursablebasis.” 60 Stat. 37. See Statement, infra, pp. 9-10,

227-268-662 .

payment shall be fined not more than $10,000 or

be imprisoned for not more than two years, or

both.

STATEMENT

1. THE FACTS

ade A. THE CONTRACT AND ITS TERMINATION

On January 27, 1953, the Army Ordnance Corps

awarded the Acme Process Equipment Co. a contract

for the-manufacturé ‘of 2,751 75 mm. recoilless rifles

(F. 13, R. 132).* Acme had not previously manufac-

tured weapons, but desired to diversify into the mili-

tary supply field in order to offset unevenness in its

ciyilian business (F', 2, R. 124).. It was awarded the

contract primarily because it was the lowest bidder.

Its bid was $337.23 per rifle; the competing bids

ranged from $423 to $930.16 (F. 7, R. 126-127). In

addition, the government desired to encourage the

entry of a new competitor into the field (F. 10, R.

130-131). The government contracting officers were,

however, concerned over Acme’s ability to produce the

rifle at its bid price, especially since it did not have

previous experience in the field. Acme was offered

the opportunity to withdraw its bid, but declined, and

the contract was then awarded to it (fF. 7, 10, 13, R. Aer

127, 130-131, 132-133). ;

It was contemplated that the project would largely

be subcontracted, “leaving for Acme only the final

finishing and assembly of components, and the earlier

job of fashioning the rifle barrels from rough forg-

*“F.” refers to the Findings of the Court of Claims o

123-237).

ings with machines furnished by the Government tn-

der a separate facilities contract’? (R. 79). Indeed,

the price of the subcontract with All Metals Indns-

tries—$300,000—was almost one third ‘the total con-

tract price of $1.04 million (F. 13, 61.R. 132, 232), and

All Metals participated in some of the negotiations over

the prime contract (F. 19, R. 139). In assessing the

feasibility of Acme’s bid, the Army reviewed Acme’s

subcontracting plans (F. 10, R. 130), and, during the

final stagés of negotiation, Acme advised the Army

of changes in those plans (F. 11, R. 131). The con-

tract itself required Acme to obtain the approval of

the government for all subcontracts of more than

$25,000 (R. 257).

The contract proved unprofitable to Acme, in part

because of Acme’s inexperience (F. 41, R. 187-188).

Its cost of production on initial deliveries was more

than double the ceiling price specified in the contract

(F. 52 (a), (¢), R. 206, 207-208). Although delivery

schedules were extended, Acme fell behind and liqui-

dated damages were assessed (F. 14, 46, R, 133, 199-

200). By the end of July 1954, 1,163 rifles had been

delivered (F. 14, R. 133) at an average cost of $877.77

per rifle.” The government paid for the rifles, as they

were delivered, at the contract price (R. 64, 68, 255).

On July 22, 1954, shortly after learning that em-

ployees of Acme had received kickbacks from several

*The contract price of $337.23 per rifle was subject to rede-

termination up to $384.95 (F. 7, 13, R. 126, 132). 1

* This figure is based on the average costs of $1,179.29 for the

first 446 and $690.21 forthe remaining 717 rifles actually de-

livered (R. 110), )

subcontractors (pp. 7-10, infra), the Army suspended

the contract, and, a month later, cancelled it for ‘‘statu-

tory violations’’ (F’. 47, 49, R. 201, 202-204.) °

*In addition to the kickbacks, ‘the Army found that Acme

had’ violated ‘the False Claims’ Act (81 U.S.C. ~ and

was guilty of conspiracy and ‘common-law fraud (F. 40, RB.

200-203). The Army also determined that there had been

violation of Acme’s contractual and statutory warranty against

contingent-fee arrangements (10 U.S.C. 2306(b)). These ‘con-

tingent fes arrangements, like' the kickbacks, involved Tucker

and. Norris (see mfra, pp. 7-10). Acme hired Tucker in

October 1952 to solicit bid invitations from private-firms and

the government. It agreed to pay him a commission of 5 per-

cent on resulting gross weekly sales up to $10,000 and 3 per-

cent of sales over $10,000. Tucker agreed to split this com-

mission with Norris., In its original bid, which was submitted

by Norris as General Manager of Acme’s Defense Work

Department, and later, on December 18, 1952 (one month

before award of the prime contract), Acme executed govern-

ment forms which represented that Acme “has not employed

or retained a company or person (other than a full-time em-

ployee) to solicit or secure this proposed Contract” (F. 5, 8(a),

R. 125~126, 127). Subsequently, on March 2, 1953, Acme hired

Tucker and Norris on a full-time basis, with part of their

compensation dependent upon the receipts of the plant at which

“the government. contract was to be performed. On May 18,

1953, Im response to a question as to Tucker’s status, Acme

stated that he had been originally. hired on a part-time com-

mission basis, but as of “January 1953” (7.e., the time Acme’s

contract was executed) had entered upon. full-time, non-

commission employment (F. 8(f), 9, R. 129-130). The fact

that Acme had been in violation of its contractual warranty

against contingent fees for at least the first two months of its

performance of the contract was not disclosed in the letter (F.

8(f), R. 129).

While the Court of Claims affirmed the Army’s determina-

tion that both the False Claims Act and the contingent-fee

warranty had been violated, it held that neither violation

afforded a ground for termination of Acme’s contract. As to

the contingent-fee violations, the court held that the goverti-

STEINER

B. THE KICKBACKS

In October’ 1952, prior to the negotiation of the

contract with the Army; Acme had hired Harry

Tucker, Jr., and his associate, James Norris, for the

purpose of establishing and managing a new division

of the company to handle government contracts.

Norris was made general manager of production, with

authority to submit bids, sign government contracts,

and award subcontracts; Tucker was placed in charge

of sales, government contracts, and expediting sub-

contract operations (F. 3, 16, R. 124-125, 138),

Before the execution of the prime contract. Tucker

entered into arrangements with three companies,

under which he was to receive ‘“‘commissions’’ (which

he shared with Norris) on sales by these companies to

customers procuréd by Tucker, including Acme (F.

18, 22, 23, R. 139, 144-146).’ After entering into this

“kickback” arrangement, one of these companies—

All Metals Industries, Inc.—participated in negotia-

tion conferences between Acme and the Army which

led to the award of the prime contract (F. 19, R. 139),

ment’s delay in cancelling after learning of the violations

justified enforcement of the contract (R. 83-87). As to the

False Claims Act, the court found that the government had not

shown intent to defraud, and that such intent was necessary to

justify nonenforcement on this ground (R. 102). We did not

seek review of these aspects of the decision below. ;

* Tucker’s contract with Foley Machine Company was limited

to orders procured by Tucker from Acme (F. 23, R. 146).

This contract. was executed ,three days before the date of

Acme’s prime contract with the Army (F. 13, RB. 182).

Tucker’s other two kickback contracts—signed in October and

November 1952—were with All Metals Industries, Inc., and

Manalapan Machine & Welding Works, and applied to any

customer Tucker might bring in (F. 18, 22, R. 139, 144-145).

Within a few weeks after the award of the prime

contract, all. three companies were awarded subcon-

tracts by Acme’ (F. 18, 19, 22, 23, R. 139-141, 144

146). A fourth company obtained subcontracts from

Acme with the help of Tucker’s father, with whom the

company had a commission agreement (F’. 24, R. 146-

147), and a fifth obtained an Acme subcontract upon

the recommendation of Philip Chagnon, who was on

Acme’s payroll as Norris’ assistant. This company

had a kickback agreement with Chagnon (F. 25, R.

147).

Within a month after the award of the prime con-

tract, Jack Epstein, the superintendent of an Acme

plant and the son of Acme’s president and principal

stockholder, joined the kickback conspiracy. Epstein

and Tucker threatened cancellation of one of the sub-

contracts unless the subcontractor paid them $25,000.

It was arranged that $23,500 would be paid to a

dummy corporation owned by Tucker, Norris and

Epstein for fictitious consulting services, and this

amount was charged to Acme through an increase in

the subcontract price (F. 1, 20, 21, R. 123-124, 141-

144).° ,

Other officials of Acme were not consciously aware

of the kickback activities of Epstein, Tucker, Norris

and Chagnon until the late summer and fall of 1953

(F. 30, R. 149). However, Tucker’s employment con-

tract with Acme specifically stated that he represented

and would continue to represent firms in other lines

8 After the commencement of an official investigation of

Norris’ activities Tucker attempted to reverse the charge so

that Acme would -not bear the cost of the kickback (F. 21,

R. 142-144)...

ee 9

of business and Acmé did not consult with: any. of

his other clients at the time Tucker’ was’ hired” (F. 3;

5, R. 124-126). In addition, Army officials advised

Acme that Tucker’s father was ‘suspected of ‘five-

percenter” activities_and that it was risky to ‘hire

Tucker; Joshua Epstein, Acme’s president, ignored

this advice (F. 8(d), 30, R. 128-129, 149). When

Joshua Epstein ultimately came to suspect improper

activities, he caused the resignation of the employees

involved (F. 26-30, R. 147-149) .°

Tucker, Norris and Jack Epstein were subsequently

indicted for violation of the then Anti-Kickback Act,

60 Stat. 37 (F. 41, R. 149-150).° After presentation

of the government’s case, the defendants’ motion for

acquittal was granted, on the ground that the Act—

which at that time embraced only “‘cost-reimbursable”

government contracts—did not apply to the Acme

contract, a fixed-price contract with a provision for

limited price redetermination. The disttict court

stated that the defendants’ conduct was “ despicable

and morally reprehensible, but unfortunately. within

the narrow letter of the law” (F. 54(j), R. 219-220).

Amendatory legislation was recommended by. the

Comptroller General (H..Rep. No. 1880, S..Rep. No.

1585, 86th Cong, 2d Sess.) and in: 1960 thé Act was

amended to apply to all negotiated contracts including

* Jack Epstein’s resignation, however, was delayed for nearly

a year. During that time he replaced Norris as plant super-

intendent (F. 26, 29, R. 147-149). The Court of Claims found

that the delayed resignation was “understandable in view of

the relationship that existed” between Jack and Joshua Epstein

(F. 30, R. 149). WOES

——

contracts such as the ‘one in this case (74 Stat. 740,

al USC. 51). This :amendment was retroactive.”

ee 2. PROCEEDINGS BELOW |

In 1957, after failing to obtain an administrative

settlement, Acme brought this action in the Court of

Claims, alleging that the government’s cancellation

was a breach of contract and seeking ‘‘full restitution

of its costs’’ or, alternatively, damages. Acme con-

tended that the Army had used the statutory viola-

tions as an excuse to mask the real reason for eaneel-

lation—the fact that 75 mm. recoilless rifles had be-

come obsolete (F'. 47, R. 201), After full trial before —

a Commissioner, and extensive proceedings before the

full court, the Court of Claims found that the ob-

solescence of the rifles and Aecme’s illegal activities

were both reasons for cancellation and.that either

1°The original statute provided that the amount of any

kickback, “whether heretofore or hereafter paid or incurred by

the subcontractor,” could not be charged under a subcontract

and, if charged, was recoverable by the United States. 60

Stat. 37. The 1960 amendment, in extending the Act to all

negotiated contracts, did not change this retroactive feature.

74 Stat. 740. The Comptroller General, in explaining his pro-

posed amendment (which was enacted into law without mate-

rial change), stated im a letter reprinted in the committee

reports (H. Rep. No. 1880, supra, pp. 5-6; S. Rep. No. 1585,

supra, p. 8):

The proposed amendment does not disturb the retrospec-

tive feature of the act. It is not our intention, nor would it

be practicable, for our Office to examine all contracts nego-

tiated prior to the time the amendment may become law.

However, im the event that current audits disclose kickback

practices, the General Accounting Office should have the

authority to take appropriate action with respect to viola-

tions under prior negotiated contracts

would have sufficed in the absence of the other (F.

50(a), R. 204-205). Moreover, the court found that

the Army’s decision to cancel for statutory violations,

instead of invoking the contractual procedure for _

termination for convenience of the government, “was

not controlled by considerations of termination costs,

but rather by the Army’s interest in promoting

morality in publie procurement” (F. 50(a), R. 204).

The court therefore rejected Acme’s contention that

the government had acted in bad faith (R. 121-122).

a. The court found that Aeme employees had ac-

cepted the kickbacks described above (F. 18-25, R.

139-147), but held that these activities did not justify

cancellation of the contract. Hence, the government

was liable for breach of contract for terminating the

contract. The court reasoned that the Anti-Kickback

Act provides for a specific civil remedy—recovery of

the kiekbacks—in addition to criminal sanctions, and

that any further civil remedy is impliedly negatived.

On this basis the court distinguished United States v.

Mississippi Valley Generating Co., 364 U.8. 520 (the

Diton-Y ates case), where violation of a eonflict-of-

interest statute that provided only a criminal remedy

was held to justify cancellation of a government con-

tract. The court also concluded that the statutory

violations here, unlike those in the Dizon-Yates case,

were not related to the negotiation and execution of

the prime contract and consequently did not taint the

entire transaction. The court further distinguished

Dixon-Y ates on-the ground that the conspirators here

227-268 663

had defrauded Acme as well as the government (R.

87-94) au

b. With regard to Acme’s remedy, the Commis-

sioner of the Court of Claims had rejected Acme’s

contention that it was entitled to full restitution of its

costs, and had held that the proper remedy was to

award Acme the damages actually suffered as a result

of the government’s breach, 1.e., to place Acme in the

financial position it would have attained had the

government not cancelled the contract (R. 50-56).

The Commissioner found that Acme would have re-

couped a portion (albeit not the whole) of its loss on

the contract had it been permitted to complete per-

, formance (R. 74-75). Accordingly, he ruled that

Acme should recover its post-cancellation expenses

($11,597) plus the difference between its loss on the

completed portion of the contract ($673,053) and the

amount it would have lost on the entire contract had

it not been eancelled ($550,409). He thus recom-

mended an award to Acme (exclusive of awards to its

subcontractors) of $134,241 (R. 76).

¢ The Court of Claims reversed the Commissioner’s

ruling on damages (R. 105-111). It held that Acme

was entitled to be returned to its status quo before the

contract, and, therefore, to restitution of the value of

the services it had rendered under the contract. The

value of these services was to be measured, not by the

contract price, but by Acme’s actual costs (which were

11The Court also deemed it relevant that, although the 1960

amendment to the Anti-Kickback Act—which was concededly

intended to apply to prior events—clearly covered these kick-

backs, the application of the original Act to the government

contract here involved was “highly questionable” (R. 92-93).

. eee 3

greatly in excess of the contract price), except to the

extent that the government could show that these costs

were excessive.” The effect of this ruling is that

Acme, which would have lost $550,409 if the contract

had been fully performed, is to be made whole except

insofar as the government can demonstrate that

Acme’s costs were excessive; and the government,

which agreed to buy the 75 mm. rifles at a cost not to

exceed $384.95 each, is (subject to the same reserva-

tion) required to pay approximately $877.77 per rifle.

SUMMARY OF ARGUMENT

Respondent (Acme) entered into a negotiated con-

tract with the government to manufacture recoilless

rifles. The project was to be largely subcontracted.

4 Key employees of Acme, however, had received bribes

from firms awarded major subcontracts, in violation

of the Anti-Kickback Act, and the government can-

celled the contract believing it to be tainted by the ’

violations. The Court of Claims held (1) that the -_

government was not entitled to cancel the contract for

that reason and hence was guilty of breach of con-

tract, and (2) that Acme was entitled by way of rem-

edy therefor to restitution of the reasonable costs it

had expended in performing under the contract, even

though these costs were greatly in excess of any return

Acme could have earned had completion of its per-

%* Excessiveness was to be determined primarily by compar-

ing “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 estab-

lished manufacturers because of its inexperience and the antici-

pated benefits of its entry as a competitor” (R. 110).

14.

formance not been prevented by the government’s ean-

ecliation. We challenge both rulings of the Court of

Claima—ihat the government committed a breach and

that the restitutionary relief decreed by the court was

& permissible remedy for the breach in the circum-

stances of this case.

It is established that the government may, without

fault or liability, cance) a contract on the ground that

it is tamted by illegal conduet, if such a remedy, al-

though not specified in the statute making the conduct

illegal, is nevertheless consistent with, and essential to,

attainment of the statutory goals. United States v.

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

Dizon-Yates case). ‘The present case satisfies this

standard.

_ The cardinal vice at which the criminal proscription

of subcontractors’ kickbacks is aimed is the selection

of subcontractors on grounds other than competitive

merit, with the attendant danger (a substantial one

since major procurement contracts typically involve

substantial subcontracting) that the performance of

the contract will be less adequate and less expeditious,

and the contract price higher, than it would have been

if bribery had played no role in the award of the sub-

contracts. Correction is not assured by. the criminal

sanction in the Anti-Kickback Act or by the provision

for recover of the amount of the kickbacks (the only

remedies expressly provided in the Act). Neither

restores to the public the monetary equivalent (if, in-

deed, that could be ascertained) of the injuries it may

have suffered as the result of the selection of the sub-

contractors on a corrupt basis. Frequently, the only

assured means of extirpating the continuing effects of

the corruption will be to terminate the agreement. ”

We stress finally that the fundamental purpose of

the anti-kickback statute, like the conflict-of-interest

statute involved in Dtxon-Y ates, is a prophylactic oné.

The remedy we invoke is essential to effective policing

and deterrence of kickbacks. They are normally se

cret, and the prime contractor is in an immeasurably

better position than the government to detect and pre-

vent derelictions by his agente—if he has an ineentive

to do so. Only the threat of cancellation a

provide that incentive.

Assuming that the government was guilty of a

‘breach of contract, the restitutional remedy prescribed

by the Court of Claims was not justified. ‘Restitution

as a remedy for breach of contract is essentially

equitable in nature. Its purpose is to supplement the

conventicnal damages remedy in instances where dam-

ages are inadequate and relief measured by the

breaching party’s gain is just and proper. These are -

principally cases where for obvious reasons prorating

the contract price falsely or inadequately measures the

injury suffered by the innocent party. But that is

not the situation here.

In the first place, the contract was unquestionably

a losing one from Acme’s standpoint. To allow resti-

tution of its costs of performance would give Acme

a windfall far in excess of the actual injury it sus-

tained because of the government’s cancellation. ‘This

is a punitive result incompatible with the basic pur-

pose of contract remedies—to protect the bargain

‘struek by the parties. Secondly, the government’s

breach was an innocent one, grounded in a good-faith .

belief that it was entitled to cancel the contract’ be-

cause of the kickback and other violations that it had

discovered. This makes the case especially inappro-

priate for a punitive award. Thirdly, Acme should

not be heard to complain of being held to its contract

measure of damages. It entered into the contract in

full awareness of the considerable risk it was taking

that: the contract would prove unprofitable. It also

assented to a termination-for-convenience provision

under which the government could have cancelled for

reasons sufficient unto itself without being liable for

anything more than the actual damages thereby

caused. |

_ The Court of Claims’ award of restitutionary relief

here also runs counter to important federal policies.

It has never been the policy of Congress to permit

punitive judgments to be levied against the govern-

ment; yet that is the practical consequence of the

holding below. It is also settled policy to avoid cost

reimbursable procurement contracts, under which the

_government’s obligation is measured by the contrac-

tor’s costs rather than by a‘ fixed price established

in advance by competitive bidding or negotiation.

Finally, to hold the government to an enhanced lia-

bility in cases like this one will inevitably tend to

discourage vigorous implementation of the various

statutes designed to assure probity on the part of

government contractors.

ARGUMENT

I. WHERE RESPONSIBLE OFFICIALS OF A PRIME GOVERN-

' MENT CONTRACTOR ACCEPT BRIBES FROM THE SUBCON-

TRACTORS IN VIOLATION OF THE ANTI-KICKBACK ACT,

THE GOVERNMENT IS ENTITLED TO CANCEL.

A. THE RIGHT TO CANCEL A CONTRACT BECAUSE OF A STATUTORY

VIOLATION IS PROPERLY IMPLIED WHEN THAT REMEDY IS NECES-

SARY AND APPROPRIATE TO EFFECTUATE THE STATUTORY POLICIES

The Anti-Kickback Act forbids a subcontractor to

pay a fee or gratuity to an officer or employee of a

government contractor as an inducement to award

the subcontractor a subcontract. 41 U.S.C. 51. The

unmistakable purpose of this prohibition is to protect

the integrity of federal procurement, in which sub-

contracting plays a major role.

The key employees of Acme responsible for the

contract in this case violated the Anti-Kickback Act

by awarding subcontracts to subcontractors who had

bribed them. While the Act imposes a criminal sanc-

tion for its violation, and’ also permits the govern-

ment-to sue.to recover the amount of any illegal kick-

backs, it does not expressly authorize the cancellation

of a contract under which illegal kickbacks have been

made. The question is whether that additional rem-

edy, although not affirmatively declared by the statute,

is nonetheless available.

Courts have frequently found additional remedies

to be implicit in the scheme of federal statutes.

Frost & Co. v. Mines Corp., 312 U.S. 38, 43. Thus,

private rights to damages or injunctive relief are

commonly inferred from regulatory enactments. F.g.,

J. I. Case v. Borak, 377 U.S. 426; Tunstall v. Brother-

hood of Locomotive Firemen & Enginemen, 323 U.S.

210; Fairport P. d& E. R. Co. v. Meredith, 292 US.

589; Texras & Pacific Ry. v. Rigsby, 241 U.S. 33;

Brown v. Bullock, 294 F. 2d 415 (C.A. 2); Fitzgerald

v. Pan American Airways, Inc., 229 F. 2d 499 (C.A.

2); Rettmetster v. Rettmeister, 162 F. 2d 691 (C.A. 2).

Governmental injunctive remedies have likewise been

inferred. E.g., Sanitary District vy. United States,

266 U.S. 405, 426; United States v. Republic Steel

Corp., 362 U.S. 482, 491-492. Cancellation of con-

tracts tainted by illegal conduct is also a well recog-

nized remedy allowable in appropriate cases though

not expressly authorized by statute. H.g., United

States v. Mississippi Valley Generating Co., 364 U.S.

520; Mammoth Oil Co. v. United States, 275 U.S. 13;

Pan American Co. v. United States, 273 U.S. 456;

Crocker v. United States, 240 U.S. 74; Burck v,

Taylor, 152 U.S. 634; Miller v. Ammon, 145 USS.

421; Bank of the United States v. Owens, 2 Pet. 527;

City of London Electric Lighting Co. v. London Corp.,

[1903] A.C. 434 (House of Lords); McConnell v.

Commonwealth Pictures Corp. 7 N.Y. 2d 465, 166

N.E. 2d 494; Finch v. Riverside & A. Ry. Co., 87 Cal.

597, 25 Pac. 765; Northport v. Northport Townsite Co.,

27 Wash. 543, 68 Pac. 204; II Restatement of Contracts

(1932), § 347; 6A Corbin, Contracts (1962 ed.), § 1373.

The leading recent case on contract cancellation as

an implied remedy for violation of a federal statute

is United States v. Mississippi Valley Generating Co.,

supra (the Dixon-Yates case). The government con-

tract in that instance had grown out of a proposal

‘

“~

,on the part of a government agent may be dis-

—

resulting from negotiations in which the government’s

representative had at the same time been an officer of

a company that expected to profit from the transac-

tion. Having: initially.found that this individual had

violated a federal _ conflict-of-interest statute (18

U.S.C. 434), the Court next addressed itself to the

question whether cancellation was permissible as an

implied remedy for the violation. The Court declared

that the proper test was ‘‘whether the sanction of

nonenforcement: is consistent with and essential to

effectuating the public policy embodied in” the statute

and ‘‘that a contract is not to be enforced when it

arises out.of circumstances that would lead enforce-

ment to offend the essential purpose of the enact-

ment” (364 U.S. at 563).. Finding that the “pri-

mary purpose” of the conflict-of-interest statute was

“to protect the public from the corrupting influences

that might be brought to bear upon government

agents who are financially interested in the business

transactions. which they are conducting on behalf of

the Government’? (364 U.S. at 563), it concluded

(tbid.): ‘‘This protection can be fully accorded only

if contracts which are tainted by a conflict of interest

affirmed by the Government. * * * Were we to de-

cree the enforcement of such.a contract, we would be

affirmatively sanctioning the type of infected bargain

which the statute outlaws and we would be depriving

the public of the protection whic Congress has

conferred. ai

The Court deemed irrelevant thefgct that the con-

tractor itself may not have known of, or been respon-

227-268— 66—__4

sible for, the illegal conduct. ‘‘Although nonenforce-

ment frequently has the effect of punishing one who

has broken the law, its primary purpose is to guar-

antee the integrity of the federal contracting process

and to protect the public from the corruption which

might lie undetectable beneath the surface of a con-

tract conceived in a tainted transaction. [Citation

omitted.] It is this inherent difficulty in detecting

corruption which requires that contracts made in

violation of Section 434 be held unenforceable, even

though the party seeking enforcement ostensibly ap-

pears entirely innocent.’’ 364 U.S. at 564-565.

We believe these precepts are applicable in the

present case as well.

B. THE THST OF THE DIXON-YATES CASE 18 MET HERE; PROTECTION

OF THE INTEGRITY OF THE PROCUREMENT PROCESS REQUIRES THAT

A CONTRACT TAINTED BY KICKBACK VIOLATIONS, LIKE ONE TAINTED

BY A FORBIDDEN CONFLICT OF INTEREST, BE PROMPTLY TERMINATED

WITHOUT LIABILITY TO THE GOVERNMENT

The Dizon-Yates decision lays down a simple and

pragmatic test: the government may, without fault,

cancel a procurement contract if such a step is neces-

sary to effectuate the policies of the statute that has

been violated. Applying that test here, we believe

the government was entitled to cancel the Acme

contract.

1. Congress recognized that, in view of the extent

to which subcontracting is typically involved in the

performance of government contracts,” bribes taken

%*The Comptroller General’s report to Congress, in recom-

mending the 1960 amendment that broadened the coverage of

the Act, pointed to the “enormous extent of subcontracting”

involyed in weapons contracts. H. Rep. No. 1880, 86th Cong.,

2d Sess., p. 5. The Acme contract in issue here was largely

subcontracted. See Statement, supra, pp. 4-5.

by purchasing officers of contractors in connection

with the award of subcontracts undermine govern-

ment procurement in essentially the same manner, and

to a comparable degree, as bribes taken by the gov-

ernment’s own purchasing officers. Accordingly, al-

though the primary purpose of the anti-kickback bill

originally proposed by the Comptroller General had

been to provide a secure legal basis for recovering

kickback payments discovered on audit,* Congress

added to the bill a severe criminal penalty modeled

upon that applicable to the bribery of government

contracting officers.” /

The analogy to bribery of government procurement

officers‘is instructive with respect to the basic concerns

that led Congress to attempt to prevent and punish

kickbacks from subcontractors to prime government

contractors. In both instances, there is substantial

danger that the bribes or kickbacks will ultimately be

paid by the government in the form of a higher

contract price. But there is a greater danger—that

“H. Rep. No. 212, 79h Cong., 1st Sess., pp. 46 (report

of Comptroller General, October 5, 1943).

** The penalty prescribed by the Act—a fine of $10,000 or two

years imprisonment or both—is identical to the penalty pre-

scribed in 1946 (when the Act was passed) for bribing a

government employee to procure a government contract. 18

U.S.C. 202 (1946 ed.).. The War Department witness who

first suggested a criminal penalty at the congressional hearings

stated that the statute regarding bribery of. government. con-

tracting officers had been used as a model in drafting the

Suggested penalty. Hearings on H.R. 131 before House Com-

mittee on Expenditures in the Executive Departments, 79th

Cong., Ist Sess. pp. 24, 25. The bill proposed by the Comp-

troller General. contained no criminal penalty. /d., pp. 1-2.

the contract, if it was conceived in corrupt dealings,

will ill serve the government’s needs.

The public interest in assuring that government

contracts be awarded on the ®asis of merit need not

be labored. The interest in assuring that prime gov-

ernment contractors award subcontracts: on a merit

basis stands on the same footing. Often, as here,

the project contemplated by government procurement

contract is largely subcontracted. If prompt, ef-

ficient, and economical performance of the contract

is to be assured, it is essential that the subeontractors,

no less than the prime contractor, be fully reliable.

The feasibility of the contract, the likelihood that it

can be completed for the contract price without up-

ward redetermination, and even the amount that the

prime contractor’ is willing to bid—all may depend

upon his subcontracting arrangements. In recogni-

tion of their importance to the success of the contract,

subcontractors are typically brought into the negotia-

tions for the prime contract, and the government

carefully reviews the prime contractor’s subcontract-

ing arrangements. Thus, in the present case the price

of one of the subcontracts procured through a kick-

back represented almost one-third of the total price

of the prime contract, and this subcontractor partici-

pated in the negotiation of the prime contract—as

his stake in the total Project. 7 warranted. eiamiin

supra, pp. 4-5).”

1*In light of. the detailed finding at the. Court. of Claims on.

this point, its conclusion that the kickbacks “were in no way

related to the negotiation and execution of [the prime con-

tract]” (R. 94) appears unfounded.

~ 23

A subcontractor who owes his subcontract to a kick-

back cannot be considered fully reliable. In selecting

him, the prime contractor may have passed over far

more competent firms. In addition, the price of the

subcontract—and hence of the prime contract as

well—may be inflated, and not merely by the amount

of the kickbacks. A subcontractor who expects to

obtam a subcontract by bribery has little incentive

to ‘stint in his estimates of cost and profit. The

ordinary constraints of competition are absent where

orders are awarded not on the basis of price and

quality but because of kickbacks to officials of the

prime: contractor.

. 2. If we have correctly identified the principal evils

of kickbacks from subcontractors to employees of

prime government ‘contractors, there can be little

doubt that a government right of ‘cancellation is a

necessary adjunct to the remedies expressly prescribed

by the. Anti-Kickback Act, and one that should be

recognized as implied in the Act. The. express

remedies are of themselves inadequate to provide an

assured cure for the principal injurious consequences

of kickbacks. The criminal sanction. doubtless deters

many from violating the statute; but in cases where,

despite*the*€riminal penalty, a bribe is given, punish-

ment of the guilty persons leaves the ill effects of

their illegal conduct intact. Those effects live on in

the contract. .If the government is bound to the con-

tract, it has no remedy against either the unreliability

of the subcontractors’ performance or ‘the possible

inflation of the contract price incident to the method

of letting the subcontracts. |

The civil remedy provided by the Act—recovery of

the kickbacks—is likewise incomplete. The price of

the subcontract (reflected in the contract price) may

well be greater, and the performance of the sub-

contractor less satisfactory, if the subcontract was

awarded on the basis of bribery rather than competi-

tive merit; and the result may be to increase sub-

stantially the real cost of the contract to the govern-

ment. The full amount of the additional cost cannot,

however, be recovered in a suit limited to the amount

of the kickbacks.” Nor would a suit (assuming it

were possible or feasible) against the corrupt individ-

uals to recover damages for the injuries they caused

the government be likely to. provide complete relief,

for those injuries are rarely measurable.” Additional

remedies are thus necessary. Cancellation of the con-

tract—which frees the government from further ob-

17 The inadequacy of the civil remedy prescribed in the Act

provides a complete answer, we think, to the view of the Court

of Claims (R. 93-94) that a different result is warranted in

this case from that in the Diwon-Yates case because the Anti-

Kickback Act contains a civil as well as criminal sanction.

Moreover, the legislative history contains no suggestion that

the provision for recovery of the kickbacks was to be exclusive

of all other civil remedies. Congress merely wished to assure

that the right to such recovery would be available in addition

to the remedies ordinarily recoverable against corrupt practices.

H. Rep. No. 212, 79th Cong., 1st Sess., pp. 2, 5. Cancellation,

as we have seen (p. 18, supra), is such a remedy.

18 See Aberdeen Railroad Company v. Blaikie Bros., 1 Mac-

Queen’s Appeal Cases, 461, 472, quoted in United States v.

Carter, 217 U.S. 286, 306-307: “It obviously is, or may be,

impossible to demonstrate how far in any particular case the

terms of such a contract [a contract involving an agent’s con-

flict of interest] have been the best for the interest of the cestui

que trust, which it was possible to obtain.” °

ligation under a contract whose terms may well be

prejudicial to the public interest because of the kick-

back violations—will in many cases be the only

adequate one.” |

The case is similar to Dixon-Yates. Because the.

government’s representative in the Dizon-Yates con-

tract negotiations was guilty of a conflict of interest,

there-could be no assurance that the contract was in

the public interest. Punishing the guilty person, or —

even recovering (had that been possible) the value of

any benefit received by him, would not have protected

the government if the contract was indeed tainted by

the conflict of interest. Here, too, there is a conflict

of interest.” The prime contractor’s key employees,

in awarding subcontracts, were hardly guided by the

interest of the contracting parties; their self-interest

7#Tt is no answer that in such cases the government should

persuade the prime contractor to cancel the tainted subcon-

tracts. Its efforts at persuasion may in many cases be wholly

unavailing. It will frequehtly be prohibitively expensive for 2

contractor to change major subcontractors in midstream, so

that his only practical course will be to let the tainted sub-

contracts stand—with the ‘incidental consequence of providing

profit to the subcontractors. who committed commercial bribery

in order to obtain the government’s business. In this case,

indeed, Acme—after discovery of the kickbacks—specifically

agreed not to assert any defense of illegality agaist the claims

of the principal subcontractor, All Metals, which had made a

kickback (F. 64, R. 236-237).

*° The illegality here is actually more flagrant than in Dizon-

Yates. There the corruption was merely potential; the gov-

ernment negotiator had an interest in a potential subcontractor,

but no actual corruption of judgment on his part was shown.

Here bribes were actually solicited and received, and subcon-

tracts were awarded to companies giving the bribes.

was served by eliciting graft from compliant subcon-

tractors. Subcontracting being so dominant a charac-

teristic of the contract, the result of this corruption of

judgment was a contract whose performance from the

government’s standpoint is highly suspect. The con-

sequences of the corruption are not expunged merely by

criminal punishment or civil recovery of the kickbacks

and may indeed be impossible to measure. Cancella-

tion of the contract is required to protect the public

interest from any further injury‘ under a contract

negotiated in circumstances which raise a grave doubt

whether it is consistent with the public interest.

3. An additional reason for allowing cancellation is

the ‘“‘imherent difficulty in detecting corruption.”’’

United States v. Mississippi Valley Generating Co.,

364 U.S. 520, 565. Normally, of course, kickbacks

are concealed. Detection is difficult. And the gov-

bane is not well situated to determine whether

emplo of its contractors are taking bribes from

subcontractors. Unless the contractor himself is

vigilant in policing his employees and subcontractors,

the statute is likely to be widely disobeyed. But

without the threat of cancellation the contractor may

have little incentive to root out kickbacks. He may

indeed condone the practice, expecting to pass on to

the government any additional costs he may incur.

™To be sure, the contract turned ont to be a losing one for

Acme. But that may prove no more than that Acme’s costs

were higher than anticipated—a circumstance which may be re-

lated to the selection of principal subcontractors on a corrupt

basis.

The facts of the present case illustrate the impor-

tance of obtaining the contractor’s active co-opera-

tion—through threat of cancellation—if there is to

be an effective program of preventing kickbacks:

Acme’s officers (other than the conspirators) were

found to have had ‘no conscious knowledge of the kick-

backs. However, had they thought the government

would be entitled to cancel if it diseovered kickbacks,

and so been on their guard, they would doubtless have

discovered them. Suspicivts circumstances abounded

(see Statement, supra, pp. 8-9).

The Court of Claims’ suggestion that Acme should

be exonerated from responsibility for the illegal kick-

back activities of its high-ranking executives on the

ground that. the executives intended to defraud

Aeme™ (R. 88-89, n. 12) is thus wide of the mark.

Kickbacks were taken by the general manager of

Acme’s chief plant. (who. was also the son of Acme’s

president and principal stockholder and a stockholder

in his own right) and by the Acme officials in charge

The Court of Claims’ assumption that the aim of Tucker,

Norris, and Epstein was to defraud Acme rather than the gov-

ernment is apparently based on the fact that Acme’s costs were

so far in excess of the maximum contract price that it would

have been impossible to pass the kickback charges on to the

government through price redetermination, even if the conspir-

acy had not been discovered. However, the kickback. arrange-

ments in this case were all made either before the prime con-

tract. was executed or within a few weeks thereafter (F. 18-25,

R. 139-147), and at that time, surely, Acme did not. realize it.

had a losing contract, else it presumably would not have signed.

it. And had it not been a losing contract, undiscovered kick-

backs could have been passed om to the government through

price redetermination—in which event Acme would not have

been injured.

of operations, sales and government contracts (F. 16,

20, R. 138, 141). Having chosen these officials to con-

duct its government contract business, Acme may

properly be held responsible for their actions in re-

gard to that business even if designed to benefit them-

selves rather than Acme.” Any other rule would un-

dermine the contractor’s incentive to take steps to

ensure the integrity of its employees. --

In short, the ,root error of the decision below is its

failure to recognize that the fundamental purpose

of the anti-kickback statute, no less than the conflict-

of-interest statute involved in Dixon-Yates, is a

prophylactic one.”

* Cf. Gleason v. Seaboard Ry., 278 U.S. 349, 357, where this

Court held a railroad liable for its employee’s issuance of a false

bill of lading, ruling that “the agent’s secret purpose to benefit

himself by his breach of duty” was not ground for refusing to ap-

ply the principles of respondent superior. See, also, Standard

Surety & Gas Co. v. Plantsville Nat. Bank, 158 F. 2d 422, 424-

425 (C.A. 2), certiorari denied, 331 U.S. 819,

* We note briefly the Court of Claims’ observation that it is

“highly questionable” whether the kickbacks—which covered

the period 1952-1954—-violated the Anti-Kickback Act as orig-

inally enacted in 1946, since that Act applied only to “cost

reimbursable” contracts, and the contract here was a fixed-

price contract with a price redetermination clause (R. 93). It is

clear that these kickbacks violated the Anti-Kickback Act as

ametided) in 1960, and that the amendment was retroactive (see

Statement, supra, p. 10,n. 10). We thus fail to see the relevance

of the court’s observation. In addition, we point out that the

only appellate ruling on the question held the original 1946 Act

applicable to price redetermination contracts. The 1946 Act ap-

plied where the prime contract was “on a cost-plus-a-fixed fee or

other cost reimbursable basis.” 60 Stat. 37. United States v.

Barnard, 255 F. 2d 583, 588 (C.A. 10), certiorari denied, 358 U.S.

919) held the 1946 Act applicable to a price redetermination con-

tract, as an “other reimbursable basis contract.” To be sure, as

the Court of Claims pointed out (R. 93), in Barnard the

Il. TO ALLOW RESTITUTION IN THE CIRCUMSTANCES OF

THE PRESENT CASE—WHERE DAMAGES WOULD FULLY

COMPENSATE THE PLAINTIFF FOR THE LOSS HE SUS-

TAINED AS A RESULT OF THE ALLEGED BREACH—-WOULD

OFFEND SOUND PRINCIPLFS OF CONTRACT LAW. AND IM-

PORTANT FEDERAL POLICIES GOVERNING PROCUREMENT

CONTRACTS

If we are correct in Point I—that the government

acted within its prerogatives in cancelling the con-

tract with Acme—no question of remedy remains. In

this part we assume that there was a breach and

address ourselves to the question of the proper

remedy. |

Tenth Circuit emphasized that the prime contract contained

no limitation on the range of price revision. However, this

fact was not crucial to thé Tenth Circuit’s holding. The

court reasoned (255 F. 2d at 588) :

[The contract] partook of both aspects. It was in sub-

stance and effect a fixed price and “other reimbursable basis

contract”. And partaking in part of an “other reimbursable

basis contract”, it came within the range of [the Act].

Similarly, Acme’s contract—despite the ceiling on price rede-

termination—“partook of both aspects.” Moreover, the reason,

for the limitation in the 1946 Act to cost-reimbursable contracts is

that, under such contracts, kickbacks may be charged through to

the government. In the present case, at the time the kickback

conspiracy was formed, the individuals involved had every

reason to expect that the kickback would be charged through

to the government (see n. 22, supra).

Moreover, the kickbacks were undoubtedly in violation of

State law, regardless of the nature of the prime contract.

The kickbacks took place primarily in Pennsylvania, with some

events occurring in New Jersey and New York. All three

States have statutes prohibiting commercial bribery of this

kind. 18 Pa. Stat. Ann. (Purdon’s), § 4667; New York Penal

Law. (McKinney’s), § 489; 2A NJ. Stats. Ann., § 170-88. And

there can be no doubt that the kickbacks violated “obvious

ethical or moral standards.” Muschany v, United States, 324

US. 49, 66-67. 7 '

Under conventional principles of contract law, the

successful plaintiff in an action for breach of contract

will, in many cases, be. permitted to elect among

remedies. He may ask for specific performance of

the terms of the contract (a remedy not ir. issue

here).* Alternatively he may ask for damages—that

is, to be placed in the same position he would have

oecupied had the eontract been fully performed—and

thereby recover the profit he would have made but for

the breach. Assuming that the government breached

the contract here, we grant that Acme is entitled to

damages, for the evidence shows that, had the contract

been fully performed, Acme would have recouped

about 20 percent of the heavy: losses it sustained on

the rifles it delivered prior to the breach (see State-

ment, supra; p. 12).

There is a third remedy uaiatiie available, at

least where, as in the present case, the breach pre-

vented the other party from completing his perform-

ance under the contract—that of restitution." The

measure of restitutionary relief is the value of the

partial performance. The theory is that the victim

of a breach has a claim to be placed, if he chooses, in

the position he occupied before the contract was

~35A government contractor is normally not entitled to such

relief, owing to the standard provisions of government con-

tracts and the limitations on the jurisdiction of the courts in

contract. suits against the United States. See 28 U.S.C. 1346

(a) (2), 1491.

* We deal here with restitution as a remedy for breach of

contract. It, is, of course, frequently granted in cases of

“quasi-conttact”—as where benefits have been received by mis-

take or under a contract that cannot be enforced because it

violates the Statute of Frauds.

made, as distinguished from the position he would —

have attained had the contract been fully performed.

E.g., II Restatement of Contracts (1932), § 347, Com-

ment b; 5 Corbin, Contracts (1964 ed.), § 1102, p. 548;

§ 1107, p. 573. Henee, if, by performing his obliga-

tion under the contract until prevented from con-

tinuing by the breach of the other party, the victim

conferred a benefit upon the other, he may demand

that the monetary equivalent of that benefit be

restored to him,

Applying this reasoning, the Court of Claims held

that Acme should be awarded the value of Acme’s

services less the payments already made. The court

also ruled that the value of the services was to be

measured by the costs (unless shown to be excessive)

incurred by Acme. These costs far exceeded both the

contract rate and Acme’s damages. Under this rul-

ing Acme stands to recover an amount far larger than

its actual damages or even the total price of the un-

completed portion of the contract.

We believe that the Court of Claims’ grant of

restitutionary relief contravenes sound principles of

general contract law and important federal procure-

ment policies. This is not to suggest that restitution

is never available as a contract remedy in suits under

the Tucker Act. We urge no such principle. See,

e.g., New York Mail & Transp. Co. v. United States,

154 F. Supp. 271 (Ct. Cl), certiorari denied,

355 U.S. 904. On the other hand, we think the

remedy should not be applied where the damages

remedy is adequate to compensate the plaintiff for all

the loss he has suffered as a result of the breach, and

> 32

where restitution would place the plaintiff in a better

position than he would have attained had the contract

been completed. ‘ !

A. RESTITUTION IS DESIGNED TO PROVIDE A FLEXIBLE, ESSENTIALLY

EQUITABLE, REMEDY IN SITUATIONS WHERE DAMAGES ARE NOT SO

ACCURATE A MEASURE OF THE INJURY CAUSED BY THE BREACH AS

IS THE VALUE OF THE SERVICES RENDERED UNDER THE CONTRACT

TO THE DEFENDANT

The traditional common law remedy for breach of

contract was damages. In some respects, however,

it was a rather rigid remedy that was inadequate to

do justice in all situations. Restitution, like specific

performance and other equitable remedies, arose in

response to the need for greater remedial flexibility.

See Nash v. Towne, 5 Wall. 689; Moses v. MacFerlan,

2 Burr. 1005 (Lord Mansfield); 5 Corbin, supra,

§ 1103. An example will illustrate the kind of prob-

lem that restitution (as a remedy for breach of con-

tract, see note 26, supra) was designed to meet. |

Suppose A employs B as his valet for one year,

under a contract which provides that B shall receive

$5,000 at the end of the year. After six months A

wrongfully discharges B, who promptly takes another

job as a valet at the same salary. If B sues A for

damages, he can presumably recover only $2,500—the

contract price less what he earned doing the same

“work for someone else for the balance of the contract

period. Suppose, however, that the fair value of the

service rendered B to A during the six months before

the wrongful discharge was $3,000. Should B be per-

mitted to sue, not for the contract price, but for

restitution of the value’ of the service . rendered—

$3,000% The answer is yes. B bargained for a year’s

employment—not six months. He was willing to

work for $5,000 for one year but may well not have

been willing to work for half that amount for six

months. To give him merely a prorated share of the

contract price—the practical result of awarding him

damages—is thus to give him less than he bargained

for. See II Restatement of Contracts, § 347, Illustra-

tion 2, p. 589.

Or suppose a building entihabiititie begins a siiadetl

but, before he can complete it, the owner wrongfully

terminates the contract. To award. the contractor

only a prorated share of the contract price would

ignore the possibility that, had he been allowed to

complete the project and so earn the entire contract

price, he might have made a greater profit by reducing

his costs in the later stages of his performance. See

Rodemer v. Hazlehurst & Co., 9 Gill. 288 (Md.);

Adams v. Healy, 227 Mich. 159, 198 N.W. 584; ae

v. Johnson, 21 Vt. 17. ;

In both types of situation (aikido we note ‘that

employment and building contracts appear to'be the

types most frequently involved in contract restitution

cases) the traditional remedy is not adapted to

measuring accurately the extent of the loss suffered

by the innocent party as the result of the. breach.

In both situations, moreover, the plaintiff has ren-

dered the defendant valuable s:rvices in performing

his obligation under the contract until prevented from

continuing by the latter’s wrongful action. It is fair

and just that the defendant be required to restore to

the plaintiff the value of the services rendered, rather

than that the plaintiff be remitted to a damages

remedy: that is likely to be inadequate to redress ‘the

injury caused by the breach: See Patterson, Builder’s

Measure of Recovery for Breach of paetiet, 31 Col.

L: Rev. 1286, 1302. r

We view restitution, then, as a meaiieeaty to the

conventional damages remedy, flexible and essentially

equitable in its nature and purposes, and appropri-

ately invoked where damages are inadequate to com-

pensate the aggrieved party for the loss of his bar-

gain.” See Fuller and‘Perdue,; The Reliance Interest

in Contract Damages, 46 Yale L.J. 52, 75-80; Palmer,

The Contract Price as a Limitation on Restitution for

Defendant’s Breach, 20 Ohio St. L. J, 264, 278-279.

Thus viewed, the availability of restitution cannot be

reduced to a hard-and-fast rule applicable in all cir-

cumstanees. We accordingly suggest no such rule.

We are content to show that the policy and rationale

of restitutionary relief, as we coneeive it, do not sup-

port permitting the plaintiff to recover his costs of

performance where damages are completely adequate

to compensate him for the loss resulting from termi-

nation of the contract and restoration of his costs

~# That inadequacy of the damages remedy is the true rationale

of restitutionary relief is indicated by the fact that, when the

innocent party has completed performance prior to the breach,

he cannot ask restitution, but is limited to damages based upon

the contract price. II Restatement of Contracts, § 350. For it is

only where performance has been interrupted due to the breach

that the problem of prorating the contract price—a solution likely

to be inadequate to measure the full extent of the innocent

party’s loss—arises.

FR Te en re Bete en Tene ete oe eee aay

35.

would give him a pure windfall. apart as we show,

is the case here.

A caveat is necessary. We do not elaim that the

concept of restitutionary relief advanced herein would

commend itself to every State court. Some might

allow restitution in the circumstances of this case,”

while others probably would not.” In adapting the

law of restitution to actions upon government con-

tracts under the Tueker Act, this Court is not, of

eourse, bound by the views of particular States. We

urge the Court to hold that the essence of restitution-

ary relief, soundly conceived, is recognition that the

normal remedy for breach of contract is to give the

innoncent party the value of the bargain he struck

38 See Philadelphia v. Tripple, 230 Pa. 480, 79 Atl. 703; John-

ston v. Star Bucket Pump Uo., 214 Mo. 414, 202 Sw. 1148;

Connolly. v... Sullivan, 173 Mass. 1, 53 NB. 143; Valente: ¥.

Weinberg, 80 Conn, 134, 67 Atl. 369; Boomer v. Muir, %% P. 2d

570 (Cal. App.); ‘Southern ‘Painting Company of Tenn. v.

United States, 202 F.2d 431 (CA. 10); Heitz v. Sayers, 32

Del. 207, 121 Atl. 225; Matter of Montgomery, 272 N.Y. 323, 6

N.E. 2d 40; Stark v. Magnuson, 212 Minn. 167, 2 N.W. 2d 814;

Pelletier v. "Mets, 49 R.I. 408, 143 Atl. 609; Poist v. ikmend,

97 Vt. 97, 100, 122 Atl. 420, 491 » Thompson v. Gaffey, 52 Neb.

317, 72 NW. 314; Rustles v: Ohvletoneon; 207 Wis. 326, 241

N.W. 635. .

See Oakley v. Duluth Superior Dredging Co., 223 Mich,

478, 194 N.W. 123; Reynolds v. Levi, 122 Mich. 115, 80 N.W.

999; Kehoe v. Rutherford, 56 N.J.L. 23, 27 Atl. 912; Kitchell v.

Croasley, 90 N.J.L. 574, 101 At. 179; Farnwm v. Kennebec

Water District, 170 Fed. 173 (C.A. 1) (applying law of

Maine) ; Heeler v. Clifford, 165 Til. 544, 46 N.E. 248; eland

C., €. & St. LE. Ry. Co. v. Moore, 170 Ind. 328, 341-348, 82 N.E.

52, 56-57; Wuchter v.. Fitegerald, 83 Ore. 672, 163. 819;

Bailey v, Furleigh, 121 Wash. 207, 208 Pac. 109¥; Noyes v.

Pugin, 2 Wash. 653, 27 Pac. 548; Wellston Coal Cojv. Franklin

Paper Co., 57 Ohio St. 182, 48 N.E. 888; Dickson y. Emmerson,

154 Ore. 558, 562, 61 P. 2d 439, 441.

36.

and, no more, and that a different measure of relief is

appropriate only where the traditional remedy is in-

adequate for this purpose.

B. MEASURED BY SOUND PRINCIPLES OF RESTITWTIONARY RELIEF, THE

CONTRACTOR IS NOT ENTITLED TO A RECOVERY IN EXCESS OF THE

DAMAGES HE ACTUALLY SUFFERED AS A RESULT OF THE TERMINA-

ee ocean OF THE ADEQUACY

OF THE DAMAGES REMEDY

We think the. cixowmatences of this case are such

that to allow restitutionary relief as decreed by the

Court of Claims would distort the policy and ration-

ale. of the restitution remedy under general contract

principles. The cardinal circumstances are as follows.

"1. In retrospect, it is indisputably clear that Acme

entered into an unprofitable contract. Even had it

been permitted to complete performance, it would

have made no profit, albeit it would have reduced its

losses. There is no ambiguity on this point. The

record indicates clearly what Acme lost on the rifles

it delivered to the government and what it would

have earned on the remaining rifles. Plainly, it could

not have recouped its earlier losses over the remain-

ing life of the contract. Assuming—as we do

throughout this part of our argument—that the gov-

ernment breached the contract in cancelling for statu-

tory violations, we agree that Acme is entitled to re-

cover the net sums it would have received on the

remaining rifles, t.¢., those it was unable to deliver

because of the government’s termination. But we see

no justification for awarding Acme the much larger

sum representing its costs of producing the rifles that

it did deliver under the contract—even assuming that

37.

those eosts were not excessive and that they may

fairly be equated with the value received by the gov-

ernment from Acme’s partial performance.

There can be no contention, in this case, that the

contractor’s remedy in damages would not adequately

measure the loss it suffered as a result of the breach.

We do not urge that damages here be measured simply

by prorating the contract price, ignoring the consid-

eration that declining costs over the life of the con-

tract would have enhanced its profitability. to the

contractor. Precisely such a computation of deéin-

ing costs was made; it formed the basis of the Com-

missioner’s award of damages,*which we believe pro-

vided the appropriate and complete relief for the in-

jury caused by the breach. Nor is this a case where it

ean be cogently argued that limiting the plaintiff to

the contract price gives him less than he bargained

for. The contract price was computed according to

the unit of production. It was simply the product of

multiplying the number of rifles by the price of each

individual rifle. To be sure, had fewer units been

specified in the contract, Acme might have made a

higher bid in recognition that its initial production

costs were likely to. be disproportionately high. But,

to repeat, the Commissioner took full account of this

factor in awarding Acme damages representing the

sums it would have recouped on subséquent deliveries.

Finally, this is not a case where it is unfair to subject

the plaintiff to the burden of proving his future costs

as a basis for damages recovery. The contract. con-

templated that the contractor would be able to furnish

reliable estimates of future costs in connection with

price determination (R. 254-255). Acme’s own ac-

fade mad vom Page 69 eres .

countants’ accordingly were able to furnish detailed

estimates ((R. td daha were largely accepted by

the Commissioner. |

Sinee the damages awarded by the Commissioner

would place Acme in the position it would ‘have at-

tained had no breaeh oecurred, there is no justifica-

tion for awarding Acme the greatly enhaneed sum

representing the costs it incurred in producing. the

rifles délivered under the contract. Such an award

would give Aeme & pure windfall. It would go much

further than ‘to repair the injury suffered by Acme

as a result of the cancellation ‘of the contract; it would

repair the mistake Acme made when it entered into

a losing’ contract. The short of itis that Acme in-

eurred ‘costs far in excess of’ the contract price not

because the government cancelléd the contract; but

beeausé of its own managerial mistakes and entrepre-

neurial fortunes. In these cireumstances, restitution

of costs cannot realistically be regarded as a remedy

for the breach; it is punishment meted out to the

breaching party. To punish for breach of contract

euts deeply against the grain of traditional contract

principles.” We submit it is not a proper office for

restitution or any other remedy for breach of contract.

It is no answer that, the government having

breached, the contract must be treated as rescinded

and adjustment made irrespective of its terms. The

eontract is the very basis of the restitution action;

without the breach of the contract, there would be no

sitiiiddiiiied nidiaihaie shtadinndt Siew tiie. mnlien to, 0

* contract cannot prescribe penalties for its breach. E..g., 5 Cor-

bin, supra, 8§ my ale )

A...

cause of action: .-Furthermore, if .restitution here. is

not viewed as a remedy upon the contract, but asia

remedy, sounding .in . quasi-contract or quantum

merutt, no recovery is, possible against the govern-

ment under the Tucker Act. _ 28;U.8,C.; 1491; United

States. v, Minnesota, Mutual Inv., Co.,.271. 08, 212,

717; Merritt. v.. United States, 2670.8... ens Sutton

v. United States, 256,U;S: 575, 581... pelt

Nor is it an,answer that. the, Pate nig hadi

received a benefit, from Acme, should be.required to

pay for it, agcording to. Acme’s costs, ,The,value to

the government was. not, the: cost | te, Acme, even, as-

suming that, cost,.was,a.fair.one; but the contract

price, . There is nothing to indicate that the govern-

ment would voluntarily have, paid Acme twe or. three

times the contract price for, these rifles, albeit it.de-

sired to.encourage entry of new competitors inte the

military-supply field, It might well have concluded

that such.an investment would be, unwarranted, and

that the money ‘could be spent to. greater advantage

on other weapons. Or_ it .might, have decided to

procure the rifles from other contractors—as it could

have done at prices only slightly higher than the

maximum contract) price in the Acme. eontract>?

There is, in sum, no basis for the view ‘that the

government. was unjustly en enriched because Acme spent

The ceiling price . of the "Wallick with Acme was $384.95

per rifle (F. 7, R. 126)’ The government liad received a bid

of $452.60 from {another contractor “who ‘was successfully pro-

ducing rifles, ey fe from other firms at $83, $484 and ie

respectively (F. 7, Re ners ph

etdnotlgus - ‘indice Jo sanbrieoh eff ters

t ve bsp

TN,

more than it anticipated in the production of these

2. Even if, contrary to our suggestion, a punitive

measure of damages for breach of contract may in

some circumstances be warranted, surely it is not in

a ease like this, where the breach was neither wanton

nor deserving of censure. The Oourt of Claims

found that the government believed in good faith that

the statutory and contractual violations of Acme and

its employees warranted cancellation. If the govern-

ment erred in that conclusion, the error was an in-

nocent one. ' Certainly the’ government was the less

culpable party in the course of events that led to the

cancellation of the contract: The precipitating cause

of the cancellation was the unethical and illegal con-

duct of key Acme employees. In view of the basically

equitable nature of the restitution remedy, we think

it important to stress the actual balance of equities

in this case—and the highly technical sense in which

the government, because it cancelled the contract, may

be said to have acted wrongfully.

32Compare L. Albert & Son v. Armstrong Rubber Co., 178

F. 2d 182 (C.A. 2) (L. Hand, J.), which held that a seller

of machinery who had breached by delaying delivery could

deduct the buyer’s loss on the contract from its recovery for

expenses in preparing his factory for receiving the machines

(which were never delivered). Under this well settled rule,

if the plaintiff’s expenses confer no benefit on the defendant,

the plaintiff is not entitled to recovery in excess of his actual

damages. It seems anomalous that if, as here, the plaintiff’s

expenses confer some benefit, he is entitled to recover his entire

expenses though they are grossly disproportionate to the value.

of the benefit conferred. Hence, even if this Court concludes

that the doctrine of restitution is applicable here, we urge it to

reject the measure of restitutionary relief (costs) applied by

the Court of Claims.

In this connection, we point out that Acme entered

into this contract with full awareness of the risks in-

volved. Indeed, the government had offered it a

chance to withdraw its bid—which was so low as ‘to

raise doubts concerning Acme’s ability to perform

without loss—but Acme had declined, its eagerness to

become a military supplier impelling it to enter upon

a contract it knew to be risky. We also note that

the contract contained a price redetermination clause,

under which Acme might obtain payment above the

contract price if its costs proved to be higher than

anticipated; and most pointedly, that the contract

contained a provision authorizing the government to

terminate the contract “whenever the Contracting

Officer shall determine that such termination is in the

best interests of the Government.” ° (R. 247.)

‘Had ‘the government invoked this clause in’ can-

eelling ‘the contract—as it was entitled to do on any

ground—its maximum liability to Acme in termina-

tion costs would not have exceeded the amount ad-

judged by the Commissioner to be Acme’s damages

for breach of contract.. (Compare F. 48, R. 202, with

Commissioner’s finding 84, R. 76.) Acme had in

effect agreed that the government could at any time

cancel the contract for reasons sufficient unto itself

without being liable for any more than the actual

damages caused by the cancellation. The government,

to be sure, did not invoke this clause, believing that it

was entitled to cancel the contract because of statu-

tory violations without any liability. But, in view

of its initial assent to inclusion of the termination-

for-convenience provision, Aeme has no..equity in

Ror the Nstegetie bho: we é redpéctfelly subst

that’ the items below: should be reversed.

es a ., Tizurceo MAnsHAtt,

peal Solicitor General.

Hit 96 Youn W. Dovanas,

OF 5] 4 bebaan Attorney General.

Ricuarp.A, Posner,

Assistant to the Solicitor General.

Davw L. Rose)

ere V/ ZENER,

) oe

AvaustT 1966 .

U.S. GOVERNMENT PRINTING OFFICE: 1966

BLANK

PAGE

lag tin min Lene = ee

42 a

qlaiming a, larger. jndgment than that clause sees

for a, ‘government cancellation without cause—merely

hecause the goyernment acai and in pond faith

believed that it had cause. eit Tt ay geht

Q: IMPORTANT. FEDERAL POLICES: WOULD BB EMPAIRED BY. ALLOWING

it Tentiioot IN (THIS car }

_ Byen, if, as a. matter. of sqund general poaraae

principles, restitution is allowable in a case like this,

we. think it. should, ibe. disallowed on, policy grounds

arising, From, the nature of government procurement

gontract&.. 6 ot hevots +t f jysite

1, As. noted in: the mndine. Seeiiion the, Court

‘of. Claims, would give, Acme an award that is, clearly

punitive, in that it.is, grossly disproportionate to, the

actual injury, sustained, by Acme as. a :result of. the

government’s reach.;;, (That, injury was. the much

smaller amount representing the sunis Acme would have

recaptured on the undelivered rifles.) , Such an award

of, punitive, damages. contravenes. the. basic. principles

of contract, remedies, but. it is particularly anomalous

where the defendant isthe government. - It jis..un-

sound: to- suppose that, by. subjecting the government

to suit;for breach of cgntract, Congress in the Tucker

Act ; intended 'to., open. the government | to, punitive

judgments, .In the. context .of suits against, the gov-

ernment, ‘the remedy accorded by the court below: is is

unprecedented (see R, 106).*.. : 65 Pouseiah

“Tad Gompare 98 U.S.C. '9647 (‘Tort Claims Act) ; Massachisetts

Bonding & Ins. Oo: v. United States, 852 U.S. 128. '\'\ See, also,

i Pac. R.R.. Co, y,. Ault, 256 U.S, 554, 563-565, holding

that. a statute subj jecting the government, as owner and opera-

tér of the’ nation’s railroads during World War 1, t6'“all laws

arid liabilities as common catriers,” did not suthorize recovery

ee ere — —— oe

case tstanelin natin atte a»

n° ‘Where, as in the present case, ‘restitution is | ap-

plied so as-to yield damages far in’ excess of those

possible’ under conventional remedies for breach of

contract, it becomes fictional ‘to speak of the action a8

one upon the contract. ‘The breach, to be sure, is the

trigger that allows ‘the restitution remedy to be in-

voked,’but the remedy itself is independent of (if not

contrary to) the terms of the contract. In such a

case, thé action realistically is oné' sounding in quasi-

contract or quantum meruit—an action for the value

of goods received without referencé to a legal’ cor

tract. The Tucker Act does not authorize such ac=*

tions (see p. 39, supra),

8, The rite of dhimapes applied ty thé Colirt’ uf

‘Claims ‘has the effect of giving’ the contractor an

option, in the event of the government's breach, of

placing his contract on a full cost reimbursable basis.

This new’ rule: violates’ established federal procure-

‘ment policies and regulations, which require govern-

ment supplies and services to be purchas ~ 80 far as

possible on a fixed-price basis.“ ''The federal policy

in favor’ of fixed-price contracts is also expressed in

ots ee init “The purpose for which the Government

permitted itself to be sued was compensation, not punishment.”

256 U.S. at 564,

% The, present regulation states: Sw heteivede rénsenahle heals

for firm pricing exists * * *, the finm fixed-price contract shall

be used, because its uge under these circumstances will provide

the contractor with a maximum profit incentive ‘to comtsé] ‘the

costs of performance.” 382. C.F.R. 3.402(b) (1965. ed.). The

regulations in effect in 1953, when: the contract here involved was

executed, required use of fixed price contracts for negotiated

procurements “unless conditions necessitate” otherwise. 32

C.F.R. 3.401 (1954 ed.). See, also, 32 C.F.R. 3.405 (1965: ed:));

32 C.F.R. 3.405, 3.405-1, 3.406, 3406-1 (1954 ed.). J

the standard default and termination-for-convenience

clauses, which were, included in the contract in this

case (R, 244-258). although not invoked by the govern-

ment. These clauses limit the ,contractor’s recovery

by reference to the contract price (see. pp, 41-42,

supra). * A rule of recovery that enables the con-

tractor .to disregard the contract, price in recovering

for his costs in excess of the contract rate stands in

square conflict with, this fixed-price policy preference.

_ .,, Af the same time, the measure of recovery prescribed

by the Court of Claine frustrates the federal procure-

ment policy of encouraging the award of contracts

on the basis of competitive bids, oX,, where. that is

not, feasible, of obtaining as many quotations for

negotiated contracts as possible.in order to secure

the most advantageous terms for the government.

See 10 U.S.C. 2304(g) ; 32 C.F.R, 3.801-1 (1965 ed.) ; ef.

32 C.F.R. 1,301 (1954 ed.). See, also, Paul v. United

States, 371 US. 245, 252-253, The result of the Court

of Claims’ Tuling i is to allow Acme compensation far

in. excess of both, its. own bid. and, of the higher com-

peting bids. Acme was. awarded. the .contract, after

competitive quotations were obtained, at a price of

$8337.23 per Tifle, subject to upward or, downward re-

~ % The standard default clause states that if the government’s

termination for default is improper because the contractor’s

default: was excusable, or if there was rio default, recovery sliall

be measured by the termination-for-convenience clause. 32

C.F'R. 7.103-11 (1954 edi) ; 32 C.F.R.:7.103-11, 8.707 (1966 ed.).

That clause specifies that the contractor is to receive the contract

price for items delivered, plus its costs for uncompleted por-

tions of the contract limited by reference to the contract price.

82 C.R.F. 7.103-21, 8:701(e) (1904 ed.) ; 82 C.F.R, 7.108-21, 8.701

‘(e) (1966).

X46

hon

vision, with a-ceiling price of $384.95 (F. 7, R. 126-

127). Other bids of $423, $484.05..and. $684 per. rifle

_ were rejected (F. 7, R.:126-127)... Under the Court, of

Claims’ ruling, however, the government is to be

charged Acme’s costs of $1,179.29 for each of the first

446 rifles it received and $690.21 for the remaining rifles

delivered prior to cancellation (F. 52, R. 206, 207-208),

except to the extent that it can show these costs to have

been excessive or illegal.

4, Government contracting officers have a broader

duty with respect to public contracts than do private

parties. A private party will repudiate his contract

only if the contract appears ‘disadvantageous. But a

government officer is charged with enforcing the fed-

eral statutes and regulations ‘designed to further im-

portant federal policies in procurement, and he may

thus be authorized to cancel a contract because the

. contractor has violated such a statute or regulation.

A breach of contract based upon an innocent but er-

roneous application of this principle cannot be likened

to the self-interested action of a breaching private

party. To impose punitive damages for a breach

of the former sort is to deter government contracting

officers from vigorous use of the cancellation power to

foster important federal policies such as equal oppor-

tunity, honesty and fair dealing.”

*6 See, ¢.g., 10 U.S.C. 2306(b) (contingent fees); 18 U.S.C.

201-218 (bribery, graft, conflicts of interest); 28 U.S.C. 2514

(fraudulent claims) ; 41 U.S.C. 35, et seg. (Walsh-Healey Act) ;

41 C.F.R. 1-12.800, et seg.; 32 C.F.R. 12.801, et seg. (non-discrim-

ination in employment) ; 18 U.S.C. 874 wage rebates) ; 41 U. S.C.

10a, e¢ seg. (Buy American Act).

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.