668 F.2d 201 (3rd Cir. 1981), 80-1464, Smithkline Corp. v. Staats

Docket Nº:80-1464.
Citation:668 F.2d 201
Party Name:SMITHKLINE CORPORATION, Appellant, v. Elmer STAATS, Comptroller General of the United States, and the United States of America, Appellees.
Case Date:December 28, 1981
Court:United States Courts of Appeals, Court of Appeals for the Third Circuit

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668 F.2d 201 (3rd Cir. 1981)



Elmer STAATS, Comptroller General of the United States, and

the United States of America, Appellees.

No. 80-1464.

United States Court of Appeals, Third Circuit

December 28, 1981

Argued July 16, 1981.

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Matthew M. Strickler, Ballard, Spahr, Andrews & Ingersoll, Philadelphia, Pa., Stanley L. Temko, Charles Lister (argued), Clare Dalton, Covington & Burling, Washington, D.C., for appellant.

William J. McGettigan, Philadelphia, Pa., for appellee Staats.

Alice Daniel, Asst. Atty. Gen., Robert S. Greenspan, Michael Kimmel (argued), Robert Caplan, Civ. Div., U. S. Dept. of Justice, Washington, D.C., Peter F. Vaira, Jr., U. S. Atty., Philadelphia, Pa., for appellee U. S.

Before SEITZ, Chief Judge, and VAN DUSEN and HIGGINBOTHAM, Circuit Judges.


SEITZ, Chief Judge.

SmithKline Corporation appeals from a final judgment of the district court granting the Government's motion for summary judgment and holding that the Comptroller General (the Comptroller) has the right of access to records of costs "of materials, labor, overhead, distribution, research and development and marketing, and such other costs as are directly pertinent to the drugs purchased" under several contracts between the United States and SmithKline. SmithKline Corp. v. Staats, 483 F.Supp. 712, 722 (E.D.Pa.), conditional petition for cert. before judgment denied, 449 U.S. 1038, 101 S.Ct. 618, 66 L.Ed.2d 501 (1980). This court has jurisdiction under 28 U.S.C. § 1291 (1976).


During 1973 and 1974, SmithKline entered into five negotiated contracts 1 to supply drugs to the Veterans Administration and the Defense Supply Agency. As required by statute, each contract contained an access-to-records provision granting the Comptroller access to "any directly pertinent" records "involving transactions related to this contract." See 10 U.S.C. § 2313(b) (1976) (Defense Supply Agency); 41 U.S.C. § 254(c) (1976) (Veterans Administration).

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In 1971, Senator Gaylord Nelson, chairman of a subcommittee investigating the pharmaceutical industry, learned of the access-to-records provisions contained in certain government contracts and urged that the General Accounting Office (GAO) invoke the provisions: "I think that we ought to take a look at some of those costs." Competitive Problems in the Drug Industry: Hearings on Present Status of Competition in the Pharmaceutical Industry Before the Subcomm. on Monopoly of the Senate Select Comm. on Small Business, 91st Cong., 2d Sess. 8020 (1971). One of Senator Nelson's staff assistants, Ben Gordon, explicitly stated that specific cost and price data should be secured by individual company and product, and that "such data should be made public." Gordon demanded on behalf of Senator Nelson that the data be sought "through the courts if necessary," and "without any strings attached so that the information could be used as needed." Similarly, a staff assistant to Senator Edward Kennedy, chairman of a Senate subcommittee on health, insisted that the "only way" the objectives of Senator Kennedy's subcommittee could be achieved was to "publicize specific price and cost data for individual products."

GAO finally concluded that it had "no viable alternative than to press the companies for access to their cost data." Initially, however, GAO sought the voluntary participation of drug manufacturers. Its appeal was successful; SmithKline and five other manufacturers voluntarily participated in the first phase of a proposed two-phase study. In April 1974, GAO issued a proposal for "Phase II," designed to "gather and develop the data necessary" to make a "presentation concerning salient economic and operational aspects of the industry." The study was to cover research and development, manufacturing, marketing, distribution, and corporate overhead. GAO requested data relevant to all these aspects of the companies' business for the period between 1964 and 1973.

SmithKline expressed reservations about giving GAO access to such cost and pricing data without adequate guarantees of confidentiality. The Comptroller was prepared to give such guarantees in the interests of completing the study. Between April and August of 1974, GAO representatives met with Senate staff to seek their consent to the assurances of confidentiality. GAO emphasized that it would obtain "far more data" from voluntary disclosure, obtained on the basis of guaranteed confidentiality, "than we could demand under our statutory authority." The staff members were unpersuaded and refused to sanction any assurances of confidentiality.

On August 26, 1974, abandoning the concept of a voluntary study, the Comptroller issued formal demand letters, seeking access to the records of the companies that had participated in the Phase I study. This step was taken with the approval of Senator Nelson. GAO was under no legal obligation to accede to the Senators' demands, and the demands had not been formally made by their respective subcommittees. GAO's sole reason for abandoning its voluntary program and resorting to formal demands was the Senators' refusal to approve any assurances of confidentiality.

GAO had no reason to believe that any impropriety had occurred in connection with the contracts, that any excess or unfair profits had been made, or that any violation of the law or other irregularity had occurred. All of the contracts selected by GAO for demand letters were fixed-price procurements, with prices established not by actual negotiation, but by reference either to catalogue prices for ordinary commercial items sold in significant quantities to the general public or to other evidence of a competitive price.

SmithKline filed this action seeking a declaratory judgment that the Comptroller lacked the authority to require the production of the data demanded. 2 The Government

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counterclaimed for declaratory and injunctive relief to compel SmithKline to comply with the Comptroller's demand. The district court granted the Government's motion for summary judgment, holding that GAO shall have access to all of SmithKline's cost records that the Government contended were directly pertinent to the price of the drugs sold under the contracts.


SmithKline makes two main arguments on appeal: (1) that GAO sought information from SmithKline for an improper purpose; and (2) that the scope of the demand exceeds that allowed by the access-to-records provisions. The improper purpose argument raises three distinct issues: (a) whether GAO exceeded its statutory authority to audit the performance of particular Government contracts by demanding access to confidential financial records for the purpose of conducting a general study of procurement techniques or of conducting an economic survey of the profitability of the pharmaceutical industry; (b) whether GAO exceeded its statutory authority by demanding access to confidential financial records, at the instance of two Senators and their staff aides, in order to furnish the Senators with individual company and product data through the conduct of an economic survey of the profitability of the pharmaceutical industry; and (c) whether the district court erred in granting summary judgment because the court's interpretation of the record created a material factual issue regarding the actual purpose of GAO's demand.

SmithKline's arguments are premised on the principle that an agency that is given power to investigate for one purpose cannot use that power to pursue distinctly different, unauthorized goals. See, e.g., United States v. LaSalle National Bank, 437 U.S. 298, 307, 316-17 n.18, 98 S.Ct. 2357, 2367-68 n.18, 57 L.Ed.2d 221 (1978) (IRS subpoena power); United States v. Garden States National Bank, 607 F.2d 61, 68 (3d Cir. 1979) (same); United States v. Humble Oil & Refining Co., 488 F.2d 953, 954 (5th Cir. 1974) (holding that the IRS exceeded its authority in issuing a summons in furtherance of a project for which the primary purpose was research rather than the investigation and adjustment of tax liabilities), vacated and remanded, 421 U.S. 943, 95 S.Ct. 1670, 44 L.Ed.2d 97, reaff'd, 518 F.2d 747 (5th Cir. 1975); Burlington Northern, Inc. v. ICC, 462 F.2d 280, 286 (D.C.Cir.) (ICC request for an injunction), cert. denied, 409 U.S. 891, 93 S.Ct. 120, 34 L.Ed.2d 148 (1972). Assuming, without deciding, that the contractual powers of GAO, a unique independent agency within the legislative branch, are subject to the same restraints as those on the subpoena powers of administrative agencies, 3 we proceed to examine whether the undisputed facts support SmithKline's assertion that GAO sought access for an improper purpose.


SmithKline argues that GAO exceeded its limited authority to audit the performance of particular contracts under 10 U.S.C. § 2313(b) and 41 U.S.C. § 254(c) because it demanded access to confidential records for the stated purpose of conducting a general study of procurement techniques. The critical premise of such a position is that Congress enacted the access-to-records provisions to prevent profiteering and fraud, and not to sanction a general scrutiny of procurement

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techniques or an economic survey of a particular industry. According to SmithKline, Congress sought to deter specific abuses and not to permit general investigations of the records of companies which are not in any way suspected of fraud or impropriety in their dealings with the Government.

The provisions were certainly intended to authorize access to records in cases of suspected fraud and profiteering. See, e.g., 97 Cong.Rec. 13,200 (1951) (remarks of Rep. Riehlman); 96 Cong.Rec. 17,123 (1951) (remarks of Rep. Celler). Nevertheless, given that such...

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