460 U.S. 824 (1983), 81-1273, Bowsher v. Merck & Co., Inc.

Docket Nº:No. 81-1273
Citation:460 U.S. 824, 103 S.Ct. 1587, 75 L.Ed.2d 580
Party Name:Bowsher v. Merck & Co., Inc.
Case Date:April 19, 1983
Court:United States Supreme Court
 
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Page 824

460 U.S. 824 (1983)

103 S.Ct. 1587, 75 L.Ed.2d 580

Bowsher

v.

Merck & Co., Inc.

No. 81-1273

United States Supreme Court

April 19, 1983

Argued December 1, 1982

CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR

THE DISTRICT OF COLUMBIA CIRCUIT

Syllabus

Merck & Co. entered into three fixed-price negotiated contracts with the Defense Supply Agency and one such contract with the Veterans' Administration for the sale of pharmaceutical products to those agencies. The prices were based on Merck's catalog prices. As required by statute, each contract contained a standard access-to-records clause granting the Comptroller General the right to examine any "directly pertinent" records involving transactions related to the contract. Relying on these clauses, the Comptroller General, for the stated purpose of reviewing the reasonableness of the contract prices, demanded of Merck access to cost records pertinent to the contracts, including records of costs of direct materials, labor, and overhead, and support for the prices charged. Merck refused to comply with the demand, and brought an action in Federal District Court seeking a declaratory judgment that the Comptroller General's demand exceeded his statutory authority. The District Court granted partial summary judgment for each party, permitting access to records of direct costs, including manufacturing and delivery costs, but barring access to records of indirect costs, including research and development, marketing and promotion, distribution, and administration costs, except to the extent that these costs were included in the direct costs. The Court of Appeals affirmed.

Held: The Comptroller General may inspect Merck's records of direct costs, but not records of indirect costs. Pp. 830-844.

[103 S.Ct. 1589] (a) It is plain from the face of the statutes in question that the words "directly pertinent" are words of limitation designed to restrict the class of records to which access is permitted by requiring some close connection between the type of record sought and the particular contract. The legislative history underscores what the language reflects: Congress' intention to limit to some degree the Comptroller General's access power. The legislative history also reveals that Congress sought, in granting this access authority, to equip the General Accounting Office (GAO),

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which the Comptroller General heads, with a tool to detect fraud, waste, inefficiency, and extravagance in Government contracting. Given these dual, conflicting congressional aims, in construing the statute, the public interest served by GAO investigations must be balanced against the private interest in freedom from officious governmental intermeddling in the contractor's private business affairs. Pp. 830-835.

(b) To define as "directly pertinent" the records of any costs defrayed from commingled revenues that include Government payments under the contract would completely eviscerate the congressional goal of protecting the privacy of the contractor's business records by permitting far-ranging governmental scrutiny of records of nongovernmental transactions completely unrelated to either the contract or the product procured under the contract. P. 836.

(c) There is no merit to the Government's argument that the GAO has had a consistent and longstanding interpretation of its authority under the access-to-records statutes that supports the view that indirect cost records are subject to examination under the contracts in question. Pp. 837-839.

(d) Here, the appropriate balance of public and private interests weighs in favor of access to Merck's direct cost records, but against access to its indirect costs records. Because direct costs have a direct influence on the price charged the Government, the GAO needs to examine records of these costs to determine whether the contractor is making an excessively high profit or the Government is getting a "fair deal" under the contract. On the other hand, even though indirect costs may influence the setting of a catalog price, nevertheless, the degree of intrusion into the contractor's private business affairs is far greater, particularly where fixed-price contracts are involved. Pp. 839-843.

(e) The fact that the records here were sought for the purpose of either conducting an economic study of the pharmaceutical industry or securing information desired by individual Members of Congress did not vitiate the GAO's authority under the statutes to examine directly pertinent records under the contracts in order to determine the reasonableness of the contract prices and to detect inefficiency and wastefulness. Pp. 843-844.

214 U.S.App.D.C. 418, 665 F.2d 1236, affirmed.

O'CONNOR, J., delivered the opinion of the Court, in which BURGER, C.J., and BRENNAN, POWELL, and REHNQUIST, JJ., joined, and in Part V of which WHITE and MARSHALL, JJ., joined. WHITE, J., filed an opinion concurring in part and dissenting in part, in which MARSHALL, J., joined, post, p. 845. BLACKMUN, J., filed an opinion concurring in part and dissenting in part, in which STEVENS, J., joined,post, p. 860.

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O'CONNOR, J., lead opinion

JUSTICE O'CONNOR delivered the opinion of the Court.

The issue before the Court is the scope of the authority of the Comptroller General of the United States to examine the records of a private contractor with whom the [103 S.Ct. 1590] Government has entered into fixed-price1 negotiated contracts. We conclude that, under the circumstances presented in this action, the Comptroller General may inspect the contractor's records of direct costs, but not records of indirect costs.

I

In 1973, Merck & Co., Inc. (Merck), entered into three contracts with the Defense Supply Agency of the Department of Defense and one contract with the Veterans' Administration for the sale of pharmaceutical products to the Government. All four contracts were negotiated, rather than awarded after formal advertising.2 The pharmaceutical products supplied

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under each contract were standard commercial products sold by Merck in substantial quantities to the general public. App. 41a. The price term proposed by Merck for each contract was based on the catalog price at which Merck sold the item to the general public or was otherwise determined by adequate competition. Before the award of each of the contracts at the fixed price proposed by Merck, there was no actual negotiation of price, and the Government contracting officers did not request Merck to submit cost data in connection with any of the four contracts.

As required by 10 U.S.C. § 2313(b) and 65 Stat. 700, 41 U.S.C. § 254(c),3 each contract contained a standard access-

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to-records clause granting the Comptroller General the right to examine any directly pertinent records involving transactions related to the contract. Relying on these clauses, in August, 1974, the Comptroller General issued a formal demand to Merck for access to the following:

all books, documents, papers, and other records directly pertinent to the contracts, which include, but are not limited to (1) records of experienced costs including costs of direct materials, direct labor, overhead, and other pertinent corporate costs, (2) support for prices charged to the Government, and (3) such other information as may be necessary for use to review the reasonableness of the contract prices and the adequacy of the protection [103 S.Ct. 1591] afforded the Government's interests.

App. 18a.4

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Merck refused to comply with the Comptroller General's request, and commenced this action in the United States District Court for the District of Columbia, seeking a declaratory judgment that the Comptroller General's access demand exceeded his statutory authority.5 The United States intervened and counterclaimed to enforce the Comptroller General's demand.

The District Court granted partial summary judgment for each party. Rejecting Merck's argument that cost records are not "directly pertinent" to the fixed-price contracts that were the predicate of the General Accounting Office (GAO) demand, the court permitted access to all records

directly pertaining to the pricing and cost of producing the items furnished by . . . Merck under the . . . contracts . . . including manufacturing costs (including raw and packaging materials, labor and fringe benefits, quality control and supervision), manufacturing overhead (including plant administration, production planning, warehousing, utilities and security), royalty expenses,

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and delivery costs.

App. to Pet. for Cert. in No. 811273, p. 39a. The court barred access, however, to records

with respect to research and development, marketing and promotion, distribution, and administration (except to the extent such data may be included in the cost items listed above).

Id. at 40a. In a brief per curiam opinion, the United States Court of Appeals for the District of Columbia Circuit affirmed. Merck & Co. v. Staats, 214 U.S.App.D.C. 418, 665 F.2d 1236 (1981).

Both parties sought certiorari. In No. 81-1273, the United States petitioned for review of the Court of Appeals' determination that records of Merck's indirect costs are not subject to examination by the Comptroller General. In No. 81-1472, Merck challenges the determination that records of its direct costs are "directly pertinent" to the contracts in question, and are therefore subject to examination. Merck also contends that access to [103 S.Ct. 1592] its cost records is barred because the Comptroller General's access demand was not made for a congressionally authorized purpose. We granted certiorari on the petitions of both parties, 456 U.S. 925 (1982), and now affirm.

II

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