United States v. Acme Process Equipment Company

• Citation: 87 S.Ct. 350,385 U.S. 138,17 L.Ed.2d 249
• Decision Date: 05 December 1966
• Docket Number: No. 86,86
• Parties: UNITED STATES, Petitioner, v. ACME PROCESS EQUIPMENT COMPANY
• Court: U.S. Supreme Court

385 U.S. 138

87 S.Ct. 350

17 L.Ed.2d 249

UNITED STATES, Petitioner,

v ACME PROCESS EQUIPMENT COMPANY.

No. 86.

Argued Nov. 9, 1966.

Decided Dec. 5, 1966.

Rehearing Denied Jan. 16, 1967.

See 385 U.S. 1032, 87 S.Ct. 738.

Sol. Gen. Thurgood Marshall, for petitioner.

Jack Rephan, Washington, D.C., for respondent.

Mr. Justice BLACK delivered the opinion of the Court.

The respondent, Acme Process Equipment Company, brought this action against the United States in the Court of Claims to recover damages for breach of a contract under which Acme undertook through itself and subcontractors to manufacture 2,751 75-mm. recoilless rifles for about $337 per rifle. Among other defenses, the United States alleged that it had rightfully canceled its contract with Acme because three of Acme's principal employees had accepted compensation for awarding subcontracts in violation of the Anti-Kickback Act set out in part below.¹ The Court of Claims found, as facts, that the kickbacks had been paid as alleged and that this was the ground on which the United States had canceled the prime contract with Acme, but construed the Act as not authorizing the cancellation. 347 F.2d 509, 171 Ct.Cl. 324. We hold that it does.

I.

In October 1952, Acme hired Harry Tucker, Jr., and his associate, James Norris, for the purpose of establishing and managing a new division of the company to handle government contracts. Norris was made general manager of production with authority to submit bids, sign government contracts, and award subcontracts. Tucker was placed in charge of sales, government con- tracts, and expediting subcontract operations. Prior to this time Tucker had entered into a contract with All Metals Industries, Inc., under which he was to rceive a commission for all sales to customers, including Acme, procured by him. Tucker's employment contract with Acme specifically stated that he represented and would continue to represent firms in other lines of business, but Acme did not consult with any of his other clients at the time Tucker was hired.

Late in October, Tucker advised his superiors at Acme of the proposed Army contract for rifles, and at Tucker's suggestion, Acme submitted a bid of $337 per rifle. Since Acme's bid was the lowest, the Army began negotiations with Acme culminating in the award of the contract in January 1953. The negotiations were handled by Tucker and Norris for Acme. Since it was contemplated that the project would be largely subcontracted, leaving to Acme only the final finishing and assembly of components, the Army expressed a keen interest in Acme's proposed subcontractors. Not only did it review Acme's subcontracting plans and require Acme to notify it of changes in those plans during the final stages of negotiation, but the contract eventually awarded required government approval of all subcontracts in excess of $25,000. All Metals, because its proposed subcontract amounted to one-third of the amount of the prime contract, actually participated in the negotiations between Acme and the Army.

During this period of negotiation two other developments took place. Tucker obtained agreements from two other potential subcontractors to pay him commissions on any orders he could procure from Acme. Army contracting officers warned Acme's president, Joshua Epstein, that Tucker was suspected of having engaged in contingent-fee arrangements with other government contractors.

Finally, Acme was awarded the prime contract. Although the price was fixed at $337 per rifle, the contract contained a price redetermination clause under which, after 30% of the rifles were delivered, the parties could negotiate the price on past and future shipments upward or downward, with an upper limit of $385 per rifle. Within a few weeks after the prime contract was awarded, All Metals and the other two companies with which Tucker had prior kickback arrangements obtained subcontracts from Acme.² Tucker was paid his kickbacks, but, apparently unsatisfied with the amount of his payoff, he got Jack Epstein, the superintendent of the chief Acme plant and the son of Acme's president and principal stockholder, to join the kickback conspiracy. Together Epstein and Tucker threatened to cancel All Metals' subcontract unless it paid $25,000 to a dummy corporation owned by Tucker, Norris, and Epstein for fictitious consulting services. All Metals reluctantly acceded to the shakedown. The amount paid to Tucker, Norris, and Epstein was charged to Acme through an increase in the subcontract price.

Although they knew that Tucker was representing other companies and had been notified of the Army's suspicions of Tucker's involvement in contingentfee arrangements, other officials of Acme were not aware of the kickback activities of Tucker, Norris, and Epstein until late in 1953. At that time, Acme's president caused the resignation of the three suspected officials.

In 1956 Tucker, Norris, and Epstein were indicted for violation of the then Anti-Kickback Act, 60 Stat. 37.³ After presentation of the Government's case, the District Court granted the defendants' motion for acquittal on the ground that the Act—which at that time embraced only 'cost-plus-a-fixed-fee or other cost reimbursable' government contracts—did not apply to Acme's contract, a fixed-price contract with a provision for limited price redetermination. The court found the defendants' actions 'despicable and morally reprehensible, but unfortunately within the narrow letter of the law.' The court recommended that Congress amend the Anti-Kickback Act 'to include as a crime the vicious and immoral type of conduct that has been exhibited in this case.' United States v. Norris, Crim. No. 18535 (D.C.E.D.Pa.), April 14, 1956.

The District Court's opinion did indeed spur the Comptroller General to recommend amendatory legislation and in 1960 the Anti-Kickback Act was amended to apply to all 'negotiated contracts.'⁴ The civil provision of the amended Act was made retroactive to allow government recovery of kickbacks 'whether heretofore or hereafter paid or incurred by the subcontractor.'

II.

The Anti-Kickback Act, as originally passed in 1946 and as amended in 1960, provides two express sanctions for its violation: (1) fine or imprisonment for one who makes or receives a kickback, and (2) recovery of the kickback by the United States. The Court of Claims held, and it is argued here, that had Congress wanted 'to provide the additional remedy of contract annulment, it could have done so' by express language, 347 F.2d, at 521, 171 Ct.Cl. 343, and of course it could have. But the fact that it did not see fit to provide for such a remedy by express language does not end the matter. The Anti-Kickback Act not only 'prohibited' such payments, but clearly expressed a policy decidedly hostile to them. They were recognized as devices hurtful to the Government's procurement practices. Extra expenditures to get subcontracts necessarily add to government costs in cost-plus-a-fixed-fee and other cost reimbursable contracts. And this is also true where the prime contract is a negotiated fixed-price contract with a price redetermination clause, such as the prime contract is here. The kickbacks here are passed on to the Government in two stages. The prime contractor rarely submits his bid until after he has tentatively lined up his subcontractors. Indeed, as here, the subcontractors frequently participate in negotiation of the prime contract. The subcontractor's tentative bid will, of course, reflect the amount he contemplates paying as a kickback, and then his inflated bid will be reflected in the prime contractor's bid to the Government. At the renegotiation stage, where the prime contractor's actual cost experience is the basis for price redetermination, any kickbacks, paid by subcontractors and passed on to the prime contractor after the prime contract is awarded, will be passed on to the Government in the form of price redetermination upward.⁵

Acme argues, however, that the express provision for recovery of kickbacks is enough to protect the Government from increased costs attributable to them. But this argument rests on two false assumptions. The first is that kickbacks can easily be detected and recovered. This is hardly the case. Kickbacks being made criminal means that they must be made—if at all—in secrecy. Though they necessarily inflate the price to the Government, this inflation is rarely detectable. This is particularly true as regards defense contracts where the products involved are not usually found on the commercial market and where there may not be effective competiton. Such contracts are generally negotiated and awarded without formal advertising and competitive bidding, and there is often no opportunity to compare going prices with the price negotiated by the Government.⁶ Kickbacks will usually not be discovered, if at all, until after...