Petitioners Brief — Armstrong v. War Contracts Price Adjustment Board

IN THE

Supreme Court of the United States

October Term, 1951

James B. Armstrone, Petitioner,

v.

War Contracts Price ApsustmMent Boarp, Respondent.

a en

BRIEF FOR PETITIONER

Opinions Below

A statement of the opinions of the Courts below

appears on page 2 of the foregoing petition and is, by

reference, adopted as part of this brief.

Basis for Jurisdiction

A statement showing the ground upon which the juris-

diction of this court is invoked is set forth on page 2 of

the preceding petition, and is also, by reference adopted

as part of this brief.

Statement

The material facts have been set forth in the Statement

of the Case at pages 3 to 6 of the foregoing petition

and such statement is likewise, by reference, adopted as

part of this brief.

[11]

SECT RE SM wag tena ERT re TL NI NORA GEE ENERO PSH NDS WISER EO TORRENS 0 5 Pie et

12

ARGUMENT

POINT I

The Court below has misinterpreted subsection

403(a)(5)(B) of the Renegotiation Act of 1943.

Respondent has contended in these proceedings that

since petitioner’s commissions were conditioned upon his

securing for his principals purchase orders, which were

defined as subcontracts under subsection (a)(5)(A) of the

Renegotiation Act, he received contingent fees within the

meaning of subsection (a)(5)(B) of the Statute. It is

petitioner’s contention that respondent has wrongfully

interpreted and wrongfully applied said subsection

(a)(5)(B); that said provision was specifically designed

by Congress to apply to contingent fee contracts entered

into by so-called war brokers or Washington agents (more

recently termed ‘‘5 Per centers”’ or ‘‘Influence Peddlers’’)

with respect to the procurement by them for their princi-

pals of both contracts and subcontracts with the Govern-

ment. Petitioner takes the position that said subsection

was not intended to apply to or interfere with the employ-

ment contract of a bona fide commission salesman such

as petitioner who, for many years, has been engaged in

the legitimate business of selling his principals’ products

to commercial concerns only and has never been engaged

in the solicitation or procurement of Government business.

The lower courts, in upholding respondent’s construc-

tion of the Act, have given subsection (a)(5)(B) a cover-

age which, the petitioner contends, is completely at vari-

ance with the expressed aim and purpose of the legislation.

Under such circumstances, this Court has said that the

court may look to the reason of the enactment and inquire

into its antecedent history and give it effect in accordance

with its aim and purpose.

13

Church of the Holy Trinity v. U. 8., 143 U. S.

457, 461;

Ozawa v. U. S., 260 U. S. 178, 194.

In that connection, it has also been stated that the

Court may take into consideration the evils at which the

legislation was aimed, the title of the act, the testimony

presented at the hearings of the Congressional Commit-

tees, the Reports of the Committees, the debate in the

House and Senate, and the statements made by those

sponsoring the legislation and those requesting its enact-

ment.

Church of the Holy Trinity, supra;

United States v. St. Paul M. & M. Railroad, 247

U. S. 310, 318.

Careful examination of the legislative history of sub-

section (a)(5)(B) clearly discloses what was in the mind

of Congress when the legislation was enacted and fur-

nishes conclusive evidence to support petitioner’s inter-

pretation of the statute.

The provision had its genesis in H. R. 1900 and was

enacted into law on July 9, 1943 as Public Law 149, 78th

Congress. The title of the bill has significance. The bill

was entitled: ‘‘An Act to prevent the payment of exces-

sive fees or compensation in connection with the negotia-

tion of war contracts.’’

It is common knowledge that the legislation resulted

from the investigation by the House Naval Affairs Com-

mittee (the so-called Vinson Committee) into the intense

activities in Washington, at the outset of World War II,

of so-called ‘‘war brokers’’ and ‘‘Washington agents’’ and

the exorbitant fees they were receiving for procuring

Government contracts or subcontracts for their principals.

(See Report of Hearings pursuant to H. R. 30, Vol. 1,

78th Congress, First Session.)

14

The Act was ‘‘the product of a period’’ and, as this

Court said in United States v. Union Pac. Ry. Co., 91

U. S. 72, 79:

‘‘Courts, in construing a statute, may with pro-

priety recur to the history of the times when it was

passed; and this is frequently necessary, in order to

ascertain the reason as well as the meaning of par-

ticular provisions in it.’’

The report of the hearings of the Vinson Committee

shows that the testimony of a number of those ‘‘war

brokers’’ or ‘‘Washington Agents’’ was taken. It ap-

pears from such testimony that most of them had only

recently opened their offices in Washington or in other

procurement centers. They sold almost entirely to the

Government and did practically no commercial selling.

Some of them, in correspondence with prospective clients,

claimed to have influence with Government officials and

boasted of their ability to influence the drawing of specifi-

cations and to have their principal’s articles placed on

procurement schedules. Representatives of the Army and

Navy and other Government Departments also appeared

before the Committee and testified as to the evils to be

remedied and the specific purpose of the proposed legis-

lation. It thus clearly appeared from all this testimony

that the so-called ‘‘Washington Agent’’ or ‘‘war broker’’

was the type of broker the legislation was aimed at.

The House Committee, in reporting out the bill, suc-

cinctly stated the purpose of the legislation and the need

for it as follows (Report No. 353, 78th Cong., 1st Sess.,

dated April 12, 1943):

‘«* * * The purpose of the legislation is to clarify

the present definition contained in section 403(a) (5),

by expressly including certain types of contracts or

arrangements as ‘subcontracts’ for the purpose of

renegotiation.

15

‘In hearings just concluded before the House Naval

Affairs Committee, * * * considerable evidence was

presented to the committee which demonstrated the

unconscionable profits being realized by numerous

manufacturers’ agents or ‘war brokers’ in connection

with the procurement of Government contracts.”’

At the hearings on H. R. 1900 before the Senate Naval

Affairs Committee on May 12, 1943, Mr. Vinson appeared

before the Committee and, in referring to the work of

the House Committee, said at page 3:

‘‘We have had before the committee, through the

efforts of our staff, a great many of these war brokers,

and the fees they have been making here have been

of such a character that it is shocking to the country.

Those are the brokers we are trying to reach.’’

The legislative intent to remedy those evils by enacting

H. R. 1900 and placing the 5 Per Centers in a special

category of subcontractors under subsection (a)(5)(B) of

the Renegotiation Act was tersely stated by Mr. Vinson

on the floor of the House as follows (Congressional Rec-

ord, page 3629) :

‘Its sole purpose is to bring these war brokers

under the jurisdiction and scrutiny of the renegotia-

tion statute by classifying them as subcontractors.”’

In speaking on the measure in the Senate, Senator

Walsh made this brief explanation of its intended appli-

cation (Congressional Record, June 15, 1943, page 5865) :

‘‘The bill applies only to persons who have made

tremendous sums of money by using their influence,

personally and politically, to obtain contracts from

our Government.’’

16

At the hearings before the House Naval Affairs Com-

mittee the language of H. R. 1900 was discussed almost

word by word. Representatives of the War and Navy

Departments were present and assisted in the drafting

of the legislation. Their interpretation of the proposed

measure is clearly disclosed by their testimony.

Mr. H. 8S. Hensel, Chief, Procurement Division, Navy

Department, in emphasizing the type of contingent fee

contract or arrangement at which the legislation was

aimed, said (Hearings, Volume 1, page 278):

‘*Here is the point. We are trying to reach con-

tracts or arrangements by which agents have to be

paid commissions largely for soliciting business from

the United States. That is the type of contract we

are trying to reach.’’

There is ample evidence that what Congress had in

mind in enacting subsection (a)(5)(B) was to cover what

was termed the ‘‘war brokerage’’ type of business, that

is, the solicitation by war brokers or 5 Per Centers for

their principals of prime contracts or subcontracts under

prime contracts. It was clearly brought out before the

Vinson Committee that there was much more activity

among such brokers in. connection with the awarding of

subcontracts under prime contracts than in the awarding

of the comparatively few prime contracts.

Mr. Hensel, beginning at page 258, had pointed out

the advantages of having (a)(5)(B) embrace subcontracts

as well as prime contracts inasmuch as the prime con-

tractors normally did not employ any contingent-fee

agents but many contingent-fee agents were involved in

the procuring of subcontracts from large prime contrac-

tors. He also pointed out that the excessive contingent-

fee problem was probably more concerned with the solici-

tation and procuring of subcontracts than prime contracts.

Lt. Col. R. A. Cutter, speaking for the Army Services

Force, stated that (a)(5)(B) would be effective in helping

af RRO ee ee «Oe ee eS ee P SP a eee ire or eee

17

to control the ‘‘war brokerage’’ type of business (Appen-

dix B, page 31).

With reference to the $25,000 exemption contained in

the statute, Mr. Hensel testified at page 267:

‘Tt is limited to this type of contract that we are

looking at, the contingent fee contract.’’

Mr. Jacob E. Davis, Special Assistant to the Secretary

of the Navy, in testifying about the contingent fee prob-

lem created by the war brokers, told the Committee, at

page 233:

‘“‘The great majority of the agents were originally

employed by their principals because of their famili-

arity with Government procurement methods, their

‘know how’ in the Government, rather than because

of their familiarity and experience with the products

they were attempting to sell.’’

The legislation also received the endorsement of other

Departments of the Government. In a letter addressed to

Chairman Vinson, Mr. E. S. Land, Chairman of the Mari-

time Commission, called attention to the purpose of H. R.

1900 and the evils it was designed to eradicate, in the

following words (Exhibit 608, page 399):

‘“‘The proposed legislation is aimed at what the

Commission regards as an evil, which should be

eradicated as far as possible. These ‘brokers’ or

‘agents’ charging contingent fees for procuring gov-

ernment contracts render little or no actual service,

and are for the most part engaged in selling what

they do not possess—influence over the actions and

discretion of Government officials. * * * ”’

For the convenience of the Court, there is annexed to

this brief an Appendix B, containing pertinent excerpts

from the hearings before the House and Senate Com-

18

mittees and from their reports on H. R. 1900; also ex-

cerpts from statements by the sponsors of the legislation

and from the testimony by Departmental representatives

who sought its enactment. This material furnishes much

additional evidence of the legislative intent with respect

to the particular aims of the bill. It abounds with such

expressions as: ‘‘War Brokers’’, ‘‘Washington Agents’’,

‘‘fraternity of war brokers’’, ‘‘Washington representa-

tion’’, ‘‘procurement of Government business’’, etc. The

Appendix also contains specific statements by the House

Committee on Ways and Means and the Senate Finance

Committee that the $25,000 exemption provided for in

subsection 403(c)(6) of the Renegotiation Act of 1943

related to ‘‘war contract brokers’’ or ‘‘war broker con-

tracts’’ (pp. 37-38).

All of the proof mentioned above was called to the

lower court’s attention. It makes crystal clear that the

avowed object of (a)(5)(B) was to subject to renegotia-

tion the so-called ‘‘war brokers”’ or ‘‘5 Per Centers’’, by

classifying them as ‘‘subcontractors’’. To repeat the

statement of Chairman Vinson, that is all there was to

the measure.

The record of the progress of H. R. 1900 through Con-

gress can be searched in vain for any indication that

subsection (a)(5)(B) was intended to apply to bona fide

commission salesmen such as the petitioner. On the con-

trary, it was conclusively brought out in testimony before

the House Committee, by a witness in petitioner’s particu-

lar line of business, that the legislation was not intended

to embrace such salesmen.

Mr. Robert Heppenstall, President of Heppenstall

Company of Pittsburgh, Pennsylvania, manufacturer of

heavy forgings, testified that he had about fourteen sales

agents and that the products they sold had a war-end use.

In addition his company had a Washington agent—the

firm of Shirley, Olcott & Nichols. Heppenstall was being

questioned about his willingness to have his contract with

btn A a dae ke ek a a ih Oh a at ea ce te

19

Shirley, Olcott & Nichols renegotiated. He replied that

he did not think it would be fair to renegotiate them

unless all of his sales and commission people were rene-

gotiated. To that Chairman Vinson replied:

‘‘We haven’t anything in the world to do with

what you pay to commission salesmen to sell to some

commercial concern. That is a matter of business

between you and your sales agents and your com-

mercial houses that you sell to. We are not concerned

about that and they are not analogous propositions

in any way at all,* * *. We are not trying to regu-

late that.’’ (Hearings on H. R. 1900, House Committee

on Naval Affairs, March 25, 1943, pages 217-218, 227-

228.)

It is respectfully submitted that the court below was

in error in reaching the conclusion that petitioner came

within the category of persons which subsection (a) (5)(B)

of the Renegotiation Act of 1943 was designed to en-

compass.

The Opinion of the Lower Court

The instant cases are both (a)(5)(B) cases. However,

the Tax Court appears to have confused renegotiation

under (a)(5)(B) with renegotiation under (a)(5)(A). It

adopted respondent’s contention that ‘‘within the thought

of the adjudicated cases’’, the petitioner came within the

coverage of the Act (R. 66). Those ‘‘adjudicated cases”’

were not named. The sole authority relied upon by the

Tax Court is Providence Wool Combing Company v. Sec-

retary of War, 14 T. C. 979. That case was concerned

only with the interpretation of (a)(5)(A) and has no

bearing whatever upon the question of coverage here pre-

sented. The Wool Combing case simply held that

(a)(5)(A) applied to the lower tiers of purchase orders

:

20

or subcontracts as well as to the first tier of any such

orders or subcontracts. Examination of the decision in that

case discloses that the ‘‘legislative hearings’’ there referred

to were only concerned with the incorporation into (a) (5)

(A) of the broad definition of a subcontract urged by some

of the Departments. The Grob Brothers and National

Electric Machine cases cited in that portion of the Wool

Combing opinion quoted by the Tax Court were also (a) (5)

(A) cases (R. 68).

If, as the court below seems to hold, the coverage of

(a}(5)(A) was broad enough to include the activities of

petitioner, then the enactment of (a)(5)(B) was entirely

unnecessary. It is elementary, however, that legislative

language is deemed to have had some purpose.

Furthermore, acceptance of respondent’s contention

necessarily leads to the conclusion that prior to the enact-

ment of subsection (a)(5)(B) the earnings of bona fide

commission salesmen were precluded from renegotiation.

There is nothing in the legislative history of (a)(5)(B)

to indicate that such was the case. On the contrary, as

will hereinafter be shown in Point II of this brief, earn-

ings of a bona fide commission salesman were already

subject to renegotiation under the act.

As an indication that the Tax Court may not suffi-

ciently have examined into the legislative history of

(a)(5)(B), the following language is quoted from its —

decision : fs

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‘¢* * * Though there are to be found various ex-

pressions in the hearings before Congressional Com- ,_

mittees with reference to what the petitioner calls :

Washington agents, war brokers and 5 percenters, and

we have no doubt that they were intended to be in-

cluded perhaps primarily under the statute, from an

examination of the whole history of this matter we

are not convinced that petitioner’s activities do not

come within the range and purview of the statute

and the intendment of Congress’’ (R. 67).

21

As to the various ‘‘expressions’’ before the Congres-

sional Committees :—as appears from Appendix B to this

brief, those ‘‘expressions’’ included numerous categorical

statements by the Committee Chairmen and by representa-

“tives of the various Departments as well as explicit state-

ments contained in the Committee Reports and made on

the floor of the House and Senate. All of those ‘‘expres-

sions’’ emphasized that the evils aimed at by the specific

enactment of (a)(5)(B) were the ‘‘5 Per Centers’’ and

their contingent fee arrangements which had resulted in

‘‘tremendous and unconscionable profits’’ to them.

As to the Court’s statement that such ‘‘war brokers

and 5 Per Centers’’ were intended to be included, ‘‘per-

haps, primarily’’ under the statute, the report of the

hearings before the Committees will be searched in vain

for any indication of an intent to include bona fide com-

mission salesmen within the coverage of subsection

(a)(5)(B). That the war brokers and 5 Per Centers

were definitely the people at whom the statute was exclu-

sively aimed is made unmistakably clear by the statements

of Senator Walsh and Mr. Vinson, briefly quoted on page

15 of this brief and more fully set forth on pages 35 to 37

of Appendix B hereto annexed.

The concluding portion of the sentence to the effect

that the court was ‘‘not convinced’’ that the petitioner’s

activities do not come within the language and purview

of the statute’’ is both at variance with the court’s find-

ings regarding the nature of petitioner’s employment and

indicative of some lingering doubt as to the applicability

of the statute to him. As summarized on pages 3 to 6 of

the foregoing Petition, the Court found in effect that

petitioner’s activities did not remotely resemble those of

the ‘‘war brokers’’ or ‘‘5 Per Centers’’. Respecting the

negative statement by the Court that ‘‘it is not con-

vinced’’ that the petitioner is not covered by the Act, it

is submitted that a negative statement in that manner of

the court’s conclusion is inadequate. To justify the taking

LEANER LIED E LISSA EEL POPE a

22

of substantial sums from this petitioner, it was error for

the Court not to find that undoubted authority did exist

in law for the renegotiation of petitioner by the re-

_spondent.

Reference was made in the foregoing petition (page

7) to the observation of this court in Lichter v. U. S.,

334 U. S. 742, 787, that the Renegotiation Act is in the

nature of a tax statute. As this court said in Gould v.

Gould, 245 U. S. 151, at page 153:

‘‘In the interpretation of statutes levying taxes,

it is the established rule not to extend their provisions

by implication beyond the clear import of the lan-

guage used, or to enlarge their operation so as to

embrace matters not specifically pointed out. In case

of doubt they are construed most strongly against the

Government, and in favor of the citizen.’’

Applying to the instant cases the doctrine of Gould v.

Gould, it is submitted that the lower court erred in failing

to conclude that respondent had unmistakable authority

to renegotiate this petitioner.

POINT II

The decision of the Lower Court is at variance

with the administrative interpretation of the Renego-

tiation Act.

Before (a)(5)(B) was incorporated into the statute,

Section 403 (d) of the Renegotiation Act of 1942 provided

that, in renegotiating a contract price or determining

excessive profits, no allowance should be made for any

salaries, bonuses, or other compensations paid by a con-

tractor or subcontractor to its officers or employees in

excess of a reasonable amount.

23

On March 31, 1943 the War, Navy and Treasury De-

partments and the Maritime Commission promulgated a

Joint Statement of ‘‘Purposes, Principles, Policies and

Interpretations’? under the Renegotiation Act of 1942.

The statement set forth, at page 7 thereof, ‘‘The General

Principles Followed and Factors Considered’’ in deter-

mining the existence of excessive profits in connection

with the renegotiation of war contracts. On page 9 of

the Joint Statement, there were also set forth ‘‘Interpre-

tations of the Statute’’ by the several ‘‘Departments’’

and the Maritime.Commission. The Joint Statement is not

in evidence in these proceedings but this court had occa-

sion to consider it in Lichter v. U. S., 334 U. S. 743, and

the Court is respectfully requested to take notice of the

‘‘Joint Statement’’ in the instant cases. (See Report of

Hearings before the House Committee on Naval Affairs,

78 Cong., 1st Sess., 1943, Vol. 2, pages 1025-1039.)

This court pointed out in the Ltchter case at pages

774 and 783, that the Joint Statement above referred to

was considered by the appropriate Congressional Com-

mittees at their hearings on the proposed Renegotiation

Act of 1943, and that the administrative practice shown

in the Joint Departmental Statement was substantially

incorporated into the statute.

Therefore the administrative interpretation placed on

the Act by those charged with its execution are, we be-

lieve, particularly pertinent to its construction and entitled

to considerable weight.

Paragraph J-PAB-8, at page 21, of the Joint State-

ment, provided as follows:

**8. Contracts with Manufacturers’ Representa-

tives. Contracts between manufacturers and their

representatives are subject to renegotiation as sub-

contracts when the representative is performing, or

agrees to make available on request, engineering,

mechanical, or other services related to the perform-

24

ance of one or more prime contracts with one of the

Departments or subcontracts thereunder, * * *. These

activities comprise ‘part of the work required for the

performance of another contract’ within the definition

of subcontract in the renegotiation statute. * * *”’

This court has said that the word ‘‘when’’ carries

substantially the same meaning as ‘‘if’’ and is frequently

employed as equivalent to the word ‘‘if’’ in legislative

enactments and in common expressions. U. S. v. Willings,

8 U.S. 48, 54.

It stands admitted in this proceeding that the peti-

tioner rendered no engineering or technical services for

his customers and had no agreement with his principals

to do so (R. 86-87). It is submitted, therefore, that the

lower court was in error in failing to give weight to the

Departmental interpretations of the Act set forth above

and in failing to hold that petitioner was not renegotiable

as a manufacturers’ representative.

Petitioner has claimed in these proceedings that, al-

though there is no statutory authority to renegotiate him

individually, his commissions were properly subject to

review as part of his principal’s selling expenses in the

renegotiation proceedings had against them.

Section 381.4 of the Renegotiation Regulations provides

as follows:

**381.4 Profit, Cost Allocation and Allowance—

General

**(1) Profit. The term ‘profits derived from con-

tracts with the Departments and subcontracts’ is

defined by the Act as the excess of the amounts re-

ceived or accrued under contracts and subcontracts

over the costs paid or incurred with respect thereto.

The term ‘costs’ includes selling, general and adminis-

trative expenses.’’

25

Section 403(a)(4)(B) of the Renegotiation Act of 1943

directs that such ‘‘costs’’ shall be determined ‘‘in accord-

ance with the method of cost accounting regularly em-

ployed by the contractor in keeping his books’’ (Appendix

A, page 27).

Salesmen’s commissions are, of course, proper items of

selling expense. In that respect, Paragraph J-PAB-5(f),

on page 20 of the Joint Statement, contains this interpre-

tation:

‘5. (f) Salaries, wages and other compensation.—

Subsection (d) of section 403 provides that ‘in re-

negotiating a contract price or determining excessive

profits * * * the Secretaries of the respective Depart-

ments shall not make any allowance for any salaries,

bonuses or other compensation paid by a contractor

to its officers or employees in excess of a reasonable

amount.’ * * * Reasonableness of compensation is

determined only within broad limits, and weight is

given to the determination by the company of the

value to it of the services of any officer or employee.’’

The evidence is undisputed in the instant proceedings

that each of petitioner’s principals were renegotiated for

the years 1943 and 1944. Endicott Forging & Manufac-

turing Company was renegotiated by the Army Air Force;

Hartford Electric and Roxbury Steel Casting and Cooper

Alloy Foundry Electric were renegotiated by the Navy

Department (R. 162, 179, 187).

Each of petitioner’s said principals reported the com-

missions which had been paid to him as part of their

selling expenses in accordance with the system of cost

accounting regularly employed by the company (R. 172,

179, 187). Said commissions were not disallowed, reduced

or objected to in any way (R. 163, 180, 187, 188).

The fact that the commissions paid to petitioner were

not questioned or disturbed in the renegotiation proceed-

26

ings against his principals indicates strongly that the

renegotiating agencies considered his compensation to be

legitimate items of selling expense and reasonable com-

pensation for his services.

Conclusion

The lower court was in error in holding that petitioner

was subject to renegotiation as a subcontractor within the

meaning and purview of subsection 403(a)(5)(B) of the

Renegotiation Act of 1943.

Respectfully submitted,

Freperick H. Koscuwitz

WiuiuaMm F. Keiry

P. J. J. Nicovames

Ricnarp L. Nicouames

Counsel for Petitioner

to

~I

APPENDIX A

Statute Involved

Renegotiation Act of 1943—Act of Feb. 25, 1944, ¢. 63,

Title VII, see. 701(b), 58 Stat. 78.

Sec. 403(a) * * *

(4)(B) The term ‘‘profits derived from contracts

with the Departments and subcontracts’? means the

excess of the amount received or accrued under such

contracts and subcontracts over the costs paid or in-

curred with respect thereto. Such costs shall be

determined in accordance with the method of cost

accounting regularly employed by the contractor in

keeping his books, * * *.

(5) The term ‘‘subcontract’’ means— * * *

(B) Any contract or arrangement other than a

contract or arrangement between two contracting par-

ties, one of which parties is found by the Board to be

a bona fide executive officer, partner, or full-time em-

ployee of the other contracting party, (i) any amount

payable under which is contingent upon the procure-

ment of a contract or contracts with a Department or

of a subcontract or subcontracts, or determined with

reference to the amount of such a contract or sub-

contract or such contracts or subcontracts, or (ii) un-

der which any part of the services performed or to be

performed consists of the soliciting, attempting to

procure, or procuring a contract or contracts with a

Department or a subcontract or subcontracts: * * °.

28

Sec. 403(c) * * *

(6) This subsection shall be applicable to all con-

tracts and subcontracts to the extent of amounts re-

ceived or accrued thereunder in any fiscal year ending

after June 30, 1943, * * * unless * * * the aggregate

of the amounts received or accrued in such fiscal

year * * * under subcontracts described in subsection

(a)(5)(B) do not exceed $25,000 for such fiscal year.

29

APPENDIX B

I

(a)

Excerpts from Hearings of House Naval Affairs

Committee on H.R. 1900, Pursuant to

H.R. 30, Vol. 1

Opening statement of Robert E. Kline, Jr., General

Counsel for the Committee, at the public hearings con-

ducted on H. R. 1900 in March and April, 1943 (Vol. 1,

pages 1-4):

‘««* * * Mr. Chairman, the committee will recall

that early last summer, in a series of hearings, con-

siderable testimony was adduced to the effect that

excessive contingent fees and commissions were being

received by certain Washington sales representatives

or ‘War Brokers’ in connection with the procurement

of Government business. * * *

‘‘Supported by the War and Navy Departments,

the Committee reported out a bill (H. R. 7304), which

sought to outlaw the payment of contingent fees in

connection with Government procurement. The bill

was passed by the House on July 20, went to the

Senate, and was referred to the Senate Naval Affairs

Committee. There a considerable lobby developed

against it. * * * The net result was that the House

bill died in the Senate committee.

‘“‘The Chairman still feels, however, that some-

thing must be done to remedy this contingent-fee

situation, and, as he stated when he introduced H. R.

1900 (which was referred to this committee for con-

sideration), he had adopted a different approach, in

the hope that it will meet with favorable consideration

and prompt enactment by both the House and Senate.

30

This time the proposed legislation which is designed

to eliminate the exorbitant profits being realized by

these Washington sales agents and so-called engi-

neers, by expressly including them within the defini-

tion of ‘subcontractor’ in the renegotiation statute.

* * * That is the purport of the substitute bill which

is now before you in committee print form.

‘In order to bring before this committee a sample

of what is going on right here in the city of Washing-

ton, I have subpoenaed to appear before you a number

of these agents. * * *

‘“We have here before us a committee print of a

bill that I have prepared to correct this situation, to

correct the evil of these exorbitant fees being paid to

brokers. * * * ”’

At page 279, Mr. H. Struve Hensel, Chief, Procure-

ment Division, Navy Department, emphasizing the type

of contingent fee contract or arrangement at which the

legislation was aimed, stated as follows:

‘<* * * We are trying to reach contracts or ar-

rangements by which agents have to be paid commis-

sions largely for soliciting business from the United

States. That is the type of contract we are trying

to reach.”’

Referring to the $25,000 exemption provided for sub-

contractors as defined in the bill, Mr. Hensel had also

said, at page 267:

‘¢* * * Tt is limited to this type of contract that

we are looking at, the contingent-fee contract.’’

LEIS Sey RIES £2 SRE EREVAN S ET a

31

Concluding the discussion with reference to the $25,000

exemption, Chairman Vinson remarked, at page 295:

‘«* * * Tf he makes over $25,000 then he is brought

within—or then the fraternity of war brokers can

know that they have a free limit up to $25,000 before

the Department steps in to make any inquiry about

their influence or anything in connection with it.’’

At page 298, Lt. Col. R. A. Cutter of the Army Services

Force stated his endorsement of the measure as follows:

‘«* * * A measure of this type would be effective

in helping to control the war brokerage type of busi-

ness, and we recommend it.’’

And at page 301 Chairman Vinson also made this

statement:

‘«* * * Tf we can classify these war brokers as

subcontractors we have gone a long way to put the

hand of the Government over their earnings.’’

Mr. E. §. Land, Chairman of the United States Mari-

time Commission, in a letter addressed to Chairman

Vinson and put into the record as Exhibit 608 (page 399)

made this statement:

‘“‘The purpose of the substitute (bill) is to make

subject to renegotiation contingent fees and compen-

sation for securing war contracts from Government

agencies. This would be accomplished by broadening

the definition of the word ‘subcontract’ so as to include

agreements for the payment of such fees, and by reduc-

ing the exemption for this particular form of ‘sub-

contract’ so that incomes of over $25,000 per year from

such ‘subcontracts’ would be subject to renegotiation.

‘‘The proposed legislation is aimed at what the

Commission regards as an evil, which should be

32

eradicated as far as possible. These ‘brokers’ or

‘agents’ charging contingent fees for procuring gov-

ernment contracts render little or no actual service,

and are for the most part engaged in selling what

they do not possess—influence over the actions and

discretion of government officials. * * * ”’

(b)

Excerpts from Hearings Held May 12, 1943

Before the Senate Committee on Naval

Affairs on H. R. 1900

Mr. Vinson, Chairman of the House Naval Affairs

Committee testifying before the Senate Committee stated, _

at page 3:

‘“We have had before the (House) committee,

through the efforts of our staff, a great many of

these war brokers, and the fees they have been making

here have been of such a character that it is shocking

to the country. Those are the brokers we are trying |

to reach. |

‘‘It never was intended to try to wipe out a legiti-

mate brokerage business, a brokerage business that |

was on a legitimate basis, and where the custom or

trade that made it necessary to so operate. So to |

eliminate any doubt about the matter we have ap- |

proached it entirely from the viewpoint that was sug-

gested in correspondence with the distinguished chair-__ ,

man and myself, by which we recognize that these

agents have a right to do business, but we want to

control them and classify them as subcontractors, with

the privilege of renegotiating their contracts. That

is the whole theory of it in a nutshell.’’

KSEE AI De NA RYE CPR ML NO en NS a

33

At pages 6 and 7, he stated further:

‘¢* * * the bulk of them do not do a thing in the

world, just come down here and tell the Navy Depart-

ment they represent so and so, and the Navy Depart-

ment draws specifications somewhat to fit their ar-

ticles, and then they get a contract. * * *

«* * * The bulk haven’t anything in the world;

they have just their offices in their hats.’’

Mr. Hensel of the Navy Department also testifying

before the Senate Committee, stated at page 11:

‘«* * * As to these brokers, we are going at them

directly. We do not care whether the corporation is

absorbing it out of surplus or not. We want to cut

down the highpaid brokers from the morale end of it.

We do not want corporations to pay men $200,000 or

$300,000 for a supposed ‘know how’ in getting around

Washington.”’

Mr. Jacob B. Davis, also of the Navy Department,

testifying before the Senate Committee stated, at page 17:

‘‘The great majority of the agents were originally

employed by their principals because of their famili-

arity with Government procurement methods, their

‘know how’ in the Government, rather than because

of their familiarity and experience with the products

they were attempting to sell.’’

SORE IESE INIT NENTS PIE USL RO RY ee IES EN pe

34

Extract From Report of the House Committee

on Naval Affairs, 78th Congress, 1st Session,

No. 353, Dated April 12, 1943

‘¢* * * The purpose of the legislation is to clarify

the present definition contained in section 403(a) (5),

by expressly including certain types of contracts or

arrangements as ‘subcontracts’ for the purpose of

renegotiation.

NEED For LEGISLATION

‘‘In hearings just concluded before the House

Naval Affairs Committee, which were in effect a con-

tinuation of hearings held early last summer on the

same subject, considerable evidence was presented to

the committee which demonstrated the unconscionable

profits being realized by numerous manufacturers’

agents or ‘war brokers’ in connection with the pro-

curement of Government contracts.

‘Several of these agents appeared before the com-

mittee and testified at length. Their fees and com-

missions, based upon a percentage of Government

business obtained, were so excessive as to become

scandalous and shocking to the public conscience. It

was revealed that the incomes of these selling agen-

cies, comparatively modest in pre-war years, in many

instances had skyrocketed well into six figures in

1941 and 1942. Potential and projected earnings were

indicative of even more astronomical figures for 1943.

‘It was shown that the amounts being paid to

these agents in selling commissions and fees in respect

to subcontracts were at least as great as the amounts

being paid in connection with prime contracts. All

of this expense, of course, must ultimately be borne

by the taxpayers.

35

‘‘Hach agent was questioned regarding the nature

of his services. It was developed that these services

consisted primarily of ordinary salesmanship, al-

though in some cases they were of a more technical

nature. Most of them performed certain functions in

addition to the obtaining of Government contracts—

they secured necessary priorities, discussed changes,

expedited payments, and generally ‘serviced’ the con-

tracts. Even in these cases, however, the agents were

seldom more than intelligent conveyors of detailed

information. They seldom performed engineering

services in the strict sense; indeed, they usually were

not qualified, either by education or experience, to do

so. Many of the agents only opened their offices and

began business in Washington at the beginning of the

emergency period, attracted by the rich possibilities

of making large profits in connection with the tre-

mendously increased volume of Government busi-

ness.”’

Extracts From Remarks of the Committee

Chairmen in the Debate on H. R. 1900

in the. House and Senate

Mr. Vinson, Chairman of the Naval Affairs Committee,

speaking on the bill on the floor of the House of Represen-

tatives on April 20, 1943 said (Congressional Record, Vol.

89, pp. 3626-3629) :

““* * * Mr. Chairman, for the second time within ©

the course of a year, I wish to direct the attention of

the House to an evil which, despite the glare of public

hearings, the prompt action of this House at the last

session, and the increased vigilance of the War and

Navy Departments, has continued to flourish until it

lie Poo he TYR I ARRAS Rr a

36

has reached such proportions that it threatened to

become a public scandal.

‘‘T refer to the enormous amounts in commissions

and fees which are being paid to manufacturers’

agents, or war brokers, in connection with the pro-

curement of Government contracts. * * * The bill in its

present form is designed to control the excessive prof-

its being received by these agents, by defining their

arrangements with their principals as subcontracts

under the renegotiation statute.

‘‘For the most part, they were employed in the first

place because of their ‘know how’ in Washington.

They know their way about the various procurement

offices, and can call or go to see the right official. I am

aware that the intricacies of Government procurement

may seem a bewildering maze to the small business-

man. And do not think that these war brokers have

not done all that they can to build up this ‘bogey man’

of Washington red tape. A number of letters written

by these agents were read at the hearings, which em-

phasized the difficulties of Government procurement,

and claimed an experience in dealing with the many

problems to be met before orders could be obtained.

Some of them even insinuated a certain influence with

Government procurement officials. T am convinced that

many of these agents have ingratiated themselves with

Government officials, by entertaining them and getting

on a friendly basis with them.

‘¢Now, Mr. Chairman, if there are no other ques-

tions I think the committee thoroughly understands

what this bill is about. Its sole purpose is to bring

these war brokers under the jurisdiction and serutiny

of the renegotiation statute by classifying them as sub-

contractors. * * *”’

37

In the debate on the measure in the Senate on June 15,

1943, Senator Walsh, Chairman of the Naval Affairs Com-

mittee remarked as follows (Congressional Record, Vol. 89,

pp. 5864-5865) :

‘*Evidence presented to the House Naval Affairs

Committee demonstrated that excessive profits or fees

were being realized by numerous manufacturers’

agents or ‘war brokers’ in connection with the pro-

curement of Government contracts.’’ * * *

‘«* * * The representatives of various bureaus tes-

tified that the way to reach it was to require that the

agent who negotiated for an excessive fee with any

contractor to obtain a contract from the Government

be made a subcontractor and his fee subject to re-

negotiation. That is all there is to the bill. If a person

collects $200,000 for a $10,000,000 contract, the bill

would make him a subcontractor, and the renegotiators

would decide how much of the money he had honestly

earned, how much was bonus, how much was excessive,

and how much was fraudulent. That is all there is to

the bill. I would not change the policy or principle of

renegotiation. It represents a serious and honest en-

deavor to reach lobbyists who are making enormous

sums of money. If I had the time I would read a list

of them.

. so e

«“* * * The bill applies only to persons who have

made tremendous sums of money by using their influ-

ence, personally and politically, to obtain contracts

from our Government.”’

38

IV

Excerpts From Reports of the House and Senate

Committees on the Revenue Bill of 1943 with

Reference to the $25,000 Exemption for War

Contract Brokers.

The Revenue Bill of 1943 (H. R. 3687; 78th Congress,

Ist Session) included a proposed amendment of Section

403(a) of the Renegotiation Act of 1943 by increasing to

$500,000 the specific exemption applicable to contracts or

subcontracts, other than subcontracts as defined in Section

' (a)(5)(B). As to the latter, the House Committee on Ways

and Means, in reporting out the bill, stated at page 78

(Report No. 871, dated November 18, 1943) :

‘“‘The existing specific exemption of $25,000 relat-

ing to so-called war contract brokers remains un-

changed in the bill.’’

The report of the Senate Finance Committee on said

bill (Report No. 627, dated December 22, 1943) referred

at pages 114-115 to the same provision as follows:

‘““The committee bill also contains amendments re-

quiring the insertion of these provisions only in con-

tracts or subcontracts (other than so-called war broker

contracts) involving an estimated amount of more than

$100,000. In the case of war broker contracts, the pro-

vision is not required to be inserted if the estimated

amount involved is not more than $25,000.”’