Newport News Shipbuilding & Dry Dock Co. v. Reed

• Decision Date: 20 March 1987
• Docket Number: Civ. A. No. 86-182-NN. Misc. No. 87-5-NN.
• Citation: 655 F. Supp. 1408
• Court: U.S. District Court — Eastern District of Virginia
• Parties: NEWPORT NEWS SHIPBUILDING AND DRY DOCK COMPANY, Plaintiff, v. William H. REED, et al., Defendants. UNITED STATES of America, Petitioner, v. NEWPORT NEWS SHIPBUILDING AND DRY DOCK COMPANY, Respondent.

655 F. Supp. 1408

NEWPORT NEWS SHIPBUILDING AND DRY DOCK COMPANY, Plaintiff, v. William H. REED, et al., Defendants.

UNITED STATES of America, Petitioner, v. NEWPORT NEWS SHIPBUILDING AND DRY DOCK COMPANY, Respondent.

Civ. A. No. 86-182-NN. Misc. No. 87-5-NN.

United States District Court, E.D. Virginia, Newport News Division.

March 20, 1987.

K. Martin Worthy, John G. DeGooyer, Maureen Duignan and Theodore A. Howard, Hamel & Park, Washington, D.C., Shannon T. Mason, Jr., Mason, Gibson, Cowardin & Martin, Newport News, Va., for plaintiff.

Michael A. Rhine, Asst. U.S. Atty., U.S. Atty's. Office, Norfolk, Va., Surell Brady and David M. Souders, Dept. of Justice, Civil Div., Washington, D.C., for defendants.

Michael A. Rhine, Asst. U.S. Atty., U.S. Atty's. Office, Norfolk, Va., Surell Brady and David M. Souders, Dept. of Justice, Civil Div., Washington, D.C., John J. Quill and Kirk Moberley, Defense Contract Audit Agency, Alexandria, Va., for petitioner.

Shannon T. Mason, Jr., Mason, Gibson, Cowardin & Martin, Newport News, Va., K. Martin Worthy, John G. DeGooyer, Maureen Duignan and Theodore A. Howard, Hamel & Park, Washington, D.C., for respondent.

ORDER

CLARKE, District Judge.

This matter comes before the Court on the government's Petition for Summary Enforcement of a Defense Contract Audit Agency (DCAA) subpoena duces tecum served on the Newport News Shipbuilding and Dry Dock Company (Newport News). The subpoena demands that Newport News produce certain internal audit materials generated by Newport News between January 1, 1986 and the present. Newport News refused to produce the requested materials and filed a Complaint for Declaratory Relief on November 14, 1986. The government, on January 26, 1987, responded to Newport News' Complaint with a 12(b)(1) Motion to Dismiss. In addition, on the same day, the government filed a Petition for Summary Enforcement of the DCAA's subpoena and an Order to Show Cause why the subpoena should not be enforced.

Both parties have filed various reply briefs.

On March 9, 1987, the Court heard oral argument from both parties on the government's Show Cause Order. At this hearing, the Court decided that the question of jurisdiction over Newport News' original Complaint was no longer at issue because the government had filed its Motion for Summary Enforcement and that the Court thus had jurisdiction to hear the case.

As a result of the hearing, and based on the briefs and other materials submitted to the Court since the hearing, the Court finds before it one central issue which is dispositive of this case. That issue is whether the DCAA has the statutory authority under 10 U.S.C.A. § 2313(d)(1) to subpoena Newport News' internal audit reports and other related materials.

Accordingly, for the reasons set forth below, the Court finds the DCAA does not have such subpoena authority and DENIES the government's Petition for Summary Enforcement of the DCAA subpoena.

Facts

Newport News Shipbuilding and Dry Dock Company, a Virginia corporation, designs, repairs and constructs vessels for the United States Navy and for commercial customers. The record reflects that Newport News conducts 98 percent of its business with the United States Navy. Newport News employs nine auditors who work in the Company's Internal Audit Department. The Audit Department functions as an independent management control which periodically reviews and appraises the soundness, adequacy and effectiveness of all accounting, financial and operational controls of the Company. In addition, the Audit Department serves corporate management by providing it with evaluations and recommendations for strengthening and protecting corporate controls and assets and for improving operating efficiency. The auditors review employee time cards, subcontractor invoices, journal vouchers, summary cost records and other direct and indirect contract costs. Once an audit is completed, a final report is prepared which includes findings and recommendations to management.

The internal audits are directed to business functions rather than to individual contracts or projects. Therefore, it is not possible to assign the costs of any particular audit to a particular government contract. The internal audits are called "general and administrative" expenses and are allocated and charged to the government as overhead. Newport News regards these internal audit reports as proprietary and confidential and believes that disclosure of these reports outside the Company would diminish the effectiveness of the internal audits.

The Department of Defense (DOD) retains its own auditors who work for the Defense Contract Audit Agency (DCAA). These DCAA auditors have working space located in the Newport News Shipyard. The DCAA performs all contract audits for the DOD and provides financial advisory services to DOD officials responsible for negotiation, administration and settlement of all contracts between the DOD and defense contractors. Because the DOD ultimately pays for most of the overhead expenses incurred by Newport News, including the expense of Newport News' internal auditors, the DCAA may have a right to review the allowability and allocability of internal audit expenses. These figures have already been furnished to DCAA. The Court concludes that what DCAA now wants is the work product of the internal audit. It is at this point that Newport News draws the line. By statute, the DCAA is authorized to subpoena from contractors certain materials necessary to fulfill their auditing functions. See 10 U.S. C.A. § 2313(d)(1).

The controversy in this case arose when Newport News refused to produce documents pursuant to an administrative subpoena issued by the DCAA on October 24, 1986. This subpoena required Newport News to produce:

Schedules of internal audits performed or expected to be accomplished, working papers generated during any audit, written summary reports on the results of the audit, follow-up action taken by Newport News in response to internal audit recommendations and any time-charging records of the employees assigned to the internal audit department for the period 1 January to the present.

Newport News refused to produce some of these materials because it believed the subpoena was invalid. Newport News states that the DCAA lacks the authority to subpoena such materials and that the information sought is irrelevant to any legitimate inquiry of the DCAA. Newport News further asserts that the subpoena is over broad and that production of the requested materials would be unduly burdensome and would constitute an illegal intrusion into its internal management affairs.

On the other hand, the government asserts that because it pays indirectly for the internal audits, it should be allowed to fully examine the audits, to determine if the costs of the internal audits have been properly charged to the DOD, if Newport News' accounting system is accurate, and to determine if Newport News is effectively combating waste, fraud and abuse. In short, the DCAA is trying to determine Newport News' fitness as a defense contractor and whether the government has received what it has paid for under its contracts with Newport News.

DCAA's Subpoena Power

The DCAA's power to subpoena is conferred by statute and reads as follows:

§ 2313. Examination of books and records of contractor.

(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 that agency under this chapter.

* * * * * *

(d)(1) 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 to the Secretary of Defense by subsection (a) or by section 2306(f) of this title. (2) Any such subpoena, in the case of contumacy or refusal to obey, shall be enforceable by order of an appropriate United States district court.

10 U.S.C.A. § 2313(a), (d)(1)(2) (West 1983 & Supp.1986). Although Section 2313(d)(1) confers subpoena power to the DCAA, the subsection refers to the books, etc. "access to which is provided ... by subsection (a) or by section 2306(f) of this title." A reading of Section 2306(f)(5) reveals the general categories of items the DCAA may subpoena:

§ 2306. Kinds of contracts; cost or pricing data; truth in negotiation.

* * * * * *

(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. (Emphasis supplied.)

10 U.S.C.A. § 2306(f)(5) (West 1983 Supp. 1986). The government contends that Section 2306(f)(5) gives the DCAA power to subpoena all records and documents which relate either directly or indirectly to a particular defense contract. However, the Court cannot adopt this interpretation. The Court is convinced that Section 2306(f)(5) limits the DCAA's subpoena power to the extent that the DCAA may not force Newport News to produce its internal audit reports and other related materials.

The Court's decision is based on the legislative history surrounding Section 2313(d)(1), the implementing regulations found in the Federal Acquisition Regulations, 48 C.F.R. 52.215-2(a)(b) (1986) and on an examination of the Inspector...