Eli Lilly & Co. v. Staats

• Decision Date: 30 June 1978
• Docket Number: No. 77-1280,77-1280
• Citation: 574 F.2d 904
• Parties: 24 Cont.Cas.Fed. (CCH) 82,316 ELI LILLY & CO., Plaintiff-Appellee, v. Elmer B. STAATS, Comptroller General of the United States, and United States, Defendants-Appellants.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 904

574 F.2d 904

24 Cont.Cas.Fed. (CCH) 82,316

ELI LILLY & CO., Plaintiff-Appellee, v. Elmer B. STAATS, Comptroller General of the United States, and United States, Defendants-Appellants.

No. 77-1280.

United States Court of Appeals, Seventh Circuit.

Argued Nov. 4, 1977.

Decided April 12, 1978.

Rehearing and Rehearing En Banc Denied June 30, 1978.

Morton Hollander, Harland F. Leathers, Attys., Civil Div., Dept. of Justice, Washington, D. C., Virginia Dill McCarty, U. S. Atty., Indianapolis, Ind., for defendants-appellants.

Stephen W. Terry, Jr., Indianapolis, Ind., for plaintiff-appellee.

Before CUMMINGS and PELL, Circuit Judges, and CAMPBELL, Senior District Judge. ^*

CUMMINGS, Circuit Judge.

In this action brought under 28 U.S.C. §§ 1331, 1332, and 1337, plaintiff sought declaratory and injunctive relief with respect to the United States Comptroller General's request to examine certain of its books and records. According to the complaint, plaintiff, a manufacturer of drug products, was awarded a contract with the Veterans Administration in January 1974 and six contracts with the Defense Department in 1973. The contracts involved pharmaceutical products widely sold to plaintiff's commercial customers at its standard catalog prices. However, each product sold to the Government was sold below plaintiff's catalog price and at "a price lower than the price given any other person or entity."

The complaint also alleged that the contracts were awarded to plaintiff in response to bids solicited by the United States. Plaintiff was assertedly awarded the contracts because its bids were the lowest submitted to the Government.

In August 1974, the Comptroller General wrote plaintiff requesting that it make available for examination by the General Accounting Office (GAO) which he heads:

"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 afforded the Government's interests."

This request was pursuant to 10 U.S.C. § 2313(b) and 41 U.S.C. § 254(c). ¹ According to the complaint, the Comptroller General's request exceeded his statutory authority and covered confidential business records whose disclosure would benefit plaintiff's competitors. Therefore, plaintiff sought a declaratory judgment that the Comptroller General's request exceeded his legal authority and sought a permanent injunction prohibiting him from examining the following documents:

"(a) Lilly records of experienced costs including costs of direct materials, direct labor, overhead, and other pertinent corporate costs,

"(b) Lilly records supporting prices charged to the Government, and

"(c) other Lilly records containing information for use by the Comptroller to review the reasonableness of the Lilly contract prices."

Two months after the filing of the complaint, the district court permitted the United States to intervene. On the following day, the United States filed an answer and counterclaim. The counterclaim alleged that each of the contracts contained the following standard clauses:

"(b) The Contractor agrees that the Comptroller General of the United States or any of his duly authorized representatives shall, until the expiration of 3 years after final payment under this Contract, or such lesser time specified in either Appendix M of the Armed Services Procurement Regulation or the Federal Procurement Regulations Part 1-20, as appropriate, have access to and the right to examine any directly pertinent books, documents, papers, and records of the Contractor involving transactions related to this contract.

"(c) The Contractor further agrees to include in all his subcontracts hereinunder a provision to the effect that the The counterclaim asserted that plaintiff's refusal to permit the Comptroller General to examine the records in question contravened 10 U.S.C. § 2313(b) and 41 U.S.C. § 254(c) and the contractual clauses. Therefore, the Government sought declaratory and injunctive relief in its favor.

subcontractor agrees that the Comptroller General of the United States or any of his duly authorized representatives shall, until the expiration of 3 years after final payment under the subcontract or such lesser time specified in either Appendix M of the Armed Services Procurement Regulation or the Federal Procurement Regulations Part 1-20, as appropriate, have access to and the right to examine any directly pertinent books, documents, papers, and records of such subcontractor involving transactions related to the subcontract. The term 'subcontract' as used in this clause excludes (1) purchase orders not exceeding $2,500 and (2) subcontracts in purchase orders for public utility services at rates established for uniform applicability to the general public."

Subsequently, the United States filed a motion for summary judgment on its counterclaim and the plaintiff filed a motion for summary judgment on its complaint and on the Government's counterclaim. Finally, the Comptroller General filed a motion for summary judgment.

After hearing oral arguments and considering the briefs, pleadings, affidavits, answers to interrogatories and depositions on file, the district court granted plaintiff's motion for summary judgment and denied all relief requested by the defendants. We reverse.

In granting summary judgment for plaintiff, the district court found in part as follows: The seven contracts in question were "negotiated fixed-price contracts." Six of them were awarded to the plaintiff, the sole offeror, on the basis of a comparison of its offered prices to its standard catalog prices. In each instance, the contract price was lower than the catalog price. Plaintiff was awarded the seventh contract because acceptance of the only other company's offer "was precluded by the Buy-American Act" (41 U.S.C. §§ 10a-10c) and because plaintiff's "offered price was (considered) fair and reasonable based on the competition received." Since the contract prices were identical to the prices initially offered by Lilly, the prices were not actually negotiated but were fixed prices "not based on any type of 'cost-plus' formula."

The district court found the contractual negotiations and performances were not "in any way dependent upon, or directly related to, Lilly's costs of producing the drugs purchased under the contracts, the profits realized by Lilly, or the methodology by which Lilly establishes its catalog prices for standard commercial articles." The court also found that the request for these records was initiated in 1971 by the Chairman of the Subcommittee on Monopoly of the Senate Select Committee on Small Business during hearings on the status of competition in the pharmaceutical industry. Plaintiff and five other pharmaceutical companies participated in phase I of the GAO's study of their manufacturing processes and marketing policies. However, in response to phase II of the GAO's study, they were unwilling to give the Comptroller General cost and pricing records on individual products purchased by the Government under specified contracts. Consequently, the Comptroller General sent the foregoing written request in August 1974 to plaintiff and the other five drug companies that engaged in his phase I. These letters were sent after representatives of the GAO conferred with the Chairman of the same Senate Subcommittee.

The court found that the Government's purpose was not to audit plaintiff's negotiations and performance of the seven contracts in question, but was as disclosed in response to one of plaintiff's interrogatories as follows:

"The sole purpose of the requested examination of Lilly's books and records is not to audit Lilly's negotiations and performance of the contracts involved in this suit. Rather, the purpose of the requested examination, as presently contemplated Another purpose of the Government's study was "to have a better public understanding and legislative understanding of the economics of the industry."

is to review contract pricing by the Government's suppliers, including Lilly, of drug items to determine the adequacy of the protection afforded the Government by the negotiation techniques used by the procuring agencies. Accomplishment of this objective is contingent upon GAO's ability to gain access to the records needed to (1) ascertain the nature of the activities for which the drug firms are incurring costs, (2) to ascertain and verify the extent to which the costs of these activities affect the prices paid by the Government for items procured under the specified negotiated contracts, and (3) to determine the bases of firms' pricing considerations for the products and, particularly, the applicability of these considerations to any Federal procurement of the products involved."

The court found that plaintiff's major items of cost in producing and marketing its pharmaceutical products (including those sold to the Government)

"are general administrative costs, marketing costs, and research and development costs. These major items are not assigned or allocated to individual pharmaceutical products or sales contracts under Lilly's accounting system and no generally accepted accounting principle exists for making such an allocation of those types of indirect costs to specific products or specific contracts."

The court's final finding was that the records sought by the Comptroller General contain confidential business information and secrets of plaintiff which, if made public, would cause plaintiff irrevocable competitive injury.

Based on his 25 findings of fact, the district judge concluded that the Comptroller General's demand exceeded...