837 F.2d 162 (4th Cir. 1988), 87-3832, United States v. Newport News Shipbuilding and Dry Dock Co.

Docket Nº:87-3832.
Citation:837 F.2d 162
Party Name:UNITED STATES of America, Plaintiff-Appellant, v. NEWPORT NEWS SHIPBUILDING AND DRY DOCK COMPANY, Defendant-Appellee, The Shipbuilders Council of America, Amicus Curiae, The Chamber of Commerce of the United States, Amicus Curiae.
Case Date:January 19, 1988
Court:United States Courts of Appeals, Court of Appeals for the Fourth Circuit
 
FREE EXCERPT

Page 162

837 F.2d 162 (4th Cir. 1988)

UNITED STATES of America, Plaintiff-Appellant,

v.

NEWPORT NEWS SHIPBUILDING AND DRY DOCK COMPANY, Defendant-Appellee,

The Shipbuilders Council of America, Amicus Curiae,

The Chamber of Commerce of the United States, Amicus Curiae.

No. 87-3832.

United States Court of Appeals, Fourth Circuit

January 19, 1988

Argued Nov. 3, 1987.

Page 163

Peter Rolf Maier, U.S. Dept. of Justice (Richard K. Willard, Asst. Atty. Gen., Washington, D.C., Henry E. Hudson, U.S. Atty., Alexandria, Va., Leonard Schaitman, U.S. Dept. of Justice, Washington, D.C., John J. Quill, Kirk Moberley, Defense Contract Audit Agency on brief), for appellant.

John G. DeGooyer (K. Martin Worthy, Maureen Duignan, Theodore A. Howard, Helen Marie Lardner, Hamel & Park, Washington, D.C., Shannon T. Mason, Jr., Mason, Gibson, Cowardin & Martin, Newport News, Va., on brief), Washington, D.C., for appellee.

(Clarence T. Kipps, Jr., Robert K. Huffman, Alan C. Brown, Miller & Chevalier, Chartered, Washington, D.C., W. Patrick Morris, Vice President & Gen. Counsel Shipbuilders Council of America on brief), for amicus curiae Shipbuilders Council of America.

(Herbert L. Fenster, Thomas C. Papson, David M. Eppsteiner, Matthew J. McGrath, McKenna, Conner & Cuneo, Washington, D.C., Robert S. Conrad, National Chamber Litigation Center, Inc. on brief), for amicus curiae The Chamber of Commerce of the U.S. in support of Affirmance.

Before CHAPMAN and WILKINSON, Circuit Judges, and BOYLE, United States District Judge for the Eastern District of North Carolina, sitting by designation.

Page 164

WILKINSON, Circuit Judge:

This case concerns the scope of the subpoena power of the Defense Contract Audit Agency, which seeks to subpoena the internal audits of Newport News Shipbuilding and Dry Dock Company, a large defense contractor. We hold that the statutory subpoena power of the DCAA extends to cost information related to government contracts, but that the DCAA does not have unlimited power to demand access to all internal corporate materials of companies performing cost-type contracts for the government. Because the materials sought by DCAA are not within the scope of its statutory authority, we affirm the order of the district court denying enforcement of the subpoena in this case.

I.

The DCAA was established by administrative order in 1965 as a separate agency in the Department of Defense. Its function is to assist DOD with audits, primarily of cost-type contracts, during the negotiation, administration, and settlement of the contracts. As a part of the audits, DCAA has the power to subpoena and inspect the books and records of contractors. It is the scope of DCAA's statutory authority to subpoena that is at issue here.

DCAA's subpoena authority is set forth in 10 U.S.C. Sec. 2313(d)(1), which reads:

The Director of the Defense Contract Audit Agency (or any agency) may require by subpoena the production of books, documents, papers or records of a contractor, access to which is provided by subsection (a) or by section 2306(f) of this title.

Sections 2313(a) and 2306(f) provide in relevant part:

Sec. 2313.

(a) An agency named in section 2303 of this title is entitled, through an authorized representative, to inspect the plant and audit the books and records of--

(1) a contractor performing a cost or cost-plus-a-fixed-fee contract made by that agency under this chapter; and

(2) a subcontractor performing any subcontract under a cost or cost-plus-a-fixed-fee contract made by the agency under this chapter.

Sec. 2306.

(f)(5) For the purpose of evaluating the accuracy, completeness, and currency of cost or pricing data required to be submitted by this subsection, any authorized representative of the head of the agency who is an employee of the United States Government shall have the right, until the expiration of three years after final payment under the contract or subcontract, to examine all books, records, documents and other data of the contractor or subcontractor related to the proposal for the contract, the discussions conducted on the proposal, pricing or performance of the contract or subcontract.

It is under these statutes that DCAA issued the subpoena that gave rise to this dispute. 1

Also relevant to this case is the function of the DOD Inspector General. The DOD Inspector General was created in 1982. Congress had previously created Inspectors General in fifteen departments in the Inspector General Act of 1978. In those departments, the investigative and audit functions that had existed in other branches were transferred to the Inspector General. In DOD, however, the DCAA retained auditing and investigative functions, and the establishment of the Inspector General did not change DCAA's authority to obtain the records of contractors. The DOD Inspector General was, however, given broad subpoena powers to investigate waste, fraud, and other abuse, and the authority to set policy for audits and investigations. The Inspector General was also authorized to request help in performing its tasks from the other DOD auditing units such as DCAA. It has been held, and both parties appear to agree, that the Inspector General

Page 165

does have the power to subpoena the internal audits at issue here. See United States v. Westinghouse Electric Corp., 788 F.2d 164 (3d Cir.1986).

II.

Newport News Shipbuilding and Dry Dock Company (NNS) performs shipbuilding and repair, primarily for the United States Navy. Approximately ninety-eight percent of its work is performed for the United States government. Many of NNS's contracts with the government are "cost" or "cost-plus" contracts, in which NNS's compensation is based on its cost or its cost plus a set fee.

NNS has since 1946 had an internal audit department. The nine auditors of the department function as an "independent management control" and conduct periodic reviews of the soundness and efficiency of various NNS departments. As the district court noted, the internal audit department serves NNS's corporate management by evaluating these departments and making recommendations for improving efficiency and safeguarding corporate assets. The auditors perform this function by reviewing employee time cards, subcontractor invoices, vouchers, summary cost records, and other evidence of direct and indirect costs. On completion of an audit, the auditors prepare a final report of their conclusions and recommendations for corporate management.

The internal audits are not conducted with regard to individual contracts, but address department performance over time on a number of projects. The costs of internal audits are charged as "general and administrative" overhead, which is allocated to government contracts in the same way as other overhead charges such as executive salaries. The costs of operating the internal audit department, including employee timesheets and other cost documentation from the department are all...

To continue reading

FREE SIGN UP