Bowsher v. Merck & Company, Inc. – Oral Argument – December 01, 1982

Media for Bowsher v. Merck & Company, Inc.

Audio Transcription for Opinion Announcement – April 19, 1983 in Bowsher v. Merck & Company, Inc.

del

Warren E. Burger:

Thank you gentlemen, the case is submitted.

We will hear argument next in Bowsher, comptroller against Merck and company.

Mr. Ganzfried, you may proceed whenever you are ready.

Jerrold J. Ganzfried:

Thank you, Mr. Chief Justice, and may it please the Court, this case concerns the role of the Comptroller General in government procurement, specifically his statutory right to access to records of government contractors… books and records.

To put the access provisions in context, it must be recalled that when Congress created the GAO in 1921, it directed that the Comptroller investigate all matters relating to the receipt, disbursement and application of public funds, and further directed the Comptroller to make recommendations to Congress looking for greater economy or efficiency in public expenditures.

Under that mandate, the Comptroller has, for sixty years, examined the fiscal responsibility and the manner in which federal agencies have discharged their fiscal responsibilities, with an eye towards increasing efficiency and promoting economy in the expenditure of public funds.

There should be no doubt that this is precisely the function Congress assigned to the GAO when it included the word 1921 Act.

Congressman Lutes, who proposed that addition, stated that its purpose is to make sure that the Comptroller General shall concern himself not simply with taking in and paying out of money from an accountant’s point of view, but that he shall also concern himself with the question as to whether it is economically and efficiently applied.

Now following World War II, Congress recognized the explosive growth in purchases from the private sector required that the Comptroller be given additional powers so he could discharge these responsibilities properly.

For this reason, Congress passed the access to records statutes at issue in this case.

They gave the Comptroller access to records of government contractors so that he would have the necessary tool to examine the transactions from both sides.

This was based on Congress’ determination that only with this full information could GAO discharge its duties in a meaningful way.

And Congress focused special concern on negotiated contracts… those that were made without advertised solicitation of bids.

Because negotiated contracts lack the inherent safeguards of advertised contracts, they are more susceptible to abuse and more likely to result in waste and extravagance.

In a word, they pose a greater risk that the government will pay unreasonably high prices, and for that reason Congress determined that negotiated contracts require close supervision and control.

In fact, negotiated contracts were prohibited by law until World War II.

In this case, GAO seeks to exercise its statutory right of access to Merck’s records relating to only four of the many negotiated contracts Merck has with the government.

The objective is to determine whether the procurement methods employed adequately protect the government’s interest or whether more economical measures could be recommended.

To put the importance of this effort in perspective, we mention in our brief that in 1973 government expenses for prescription drugs totaled $1.6 billion, including $252 million in direct purchases.

In congressional hearings in 1981, it was estimated the total federal procurement, its aggregate, on pharmaceuticals had blossomed to $2.5 billion, or… that is, $2.5 billion per year, or some 25 percent of total industry sales.

So where you are dealing in the aggregate, with a major aspect of federal spending, where waste, if there is any, would be a serious drain on resources.

But the Court of Appeals’ decision cripples GAO’s ability to make a meaningful examination of procurement practices by limiting access to records of an estimated nine percent of Merck’s costs.

The Court has prevented GAO from obtaining the bulk of the information it needs–

John Paul Stevens:

May I ask you what the basis of the nine percent figure is?

Jerrold J. Ganzfried:

–That’s the estimate in the article, I believe, by Professor Reike.

John Paul Stevens:

Was he dealing with the prices the government pays or with retail prices?

Jerrold J. Ganzfried:

He was dealing with… that nine percent figure is not nine percent of a price.

It’s nine percent of total costs of the manufacturer.

John Paul Stevens:

How did he get these cost figures?

Jerrold J. Ganzfried:

I wish I knew.

Jerrold J. Ganzfried:

I don’t know.

John Paul Stevens:

Well, you don’t really know they’re right, then, do you?

You don’t know the nine percent–

Jerrold J. Ganzfried:

We don’t know that it’s nine percent.

John Paul Stevens:

–So we really shouldn’t rely on the nine percent figure, should we?

Jerrold J. Ganzfried:

The custom… the company has not indicated that it’s anything higher than nine percent.

That is the figure on which this is… these cases have been proceeding, but it is an estimate.

John Paul Stevens:

But would your case be any different if it were 90 percent instead of nine percent?

How does that affect the legal issue before us?

Jerrold J. Ganzfried:

It affects the legal issue in the sense that the Court of Appeals decision has… assuming it is nine percent or something close to it… prevents GAO from getting the vast majority of documents that it needs in order to determine whether the procurement methods involved in this case were the most appropriate ones.

John Paul Stevens:

Your purpose is strictly to improve your procurement methods?

Jerrold J. Ganzfried:

That’s our purpose.

William H. Rehnquist:

When you say that prevents the Comptroller General from getting everything it needs, you’re not suggesting that Congress in Heik Verba said the Comptroller General can have whatever he needs in a situation like this, are you?

Jerrold J. Ganzfried:

No, it didn’t.

But it did grant a broad authorization for access to records.

It does have certain express limitations, all of which we complied with here.

William H. Rehnquist:

And your contention is that the way these costs are allocated, you would have virtually unlimited access to anything because of the way the funds come into the drug companies?

Jerrold J. Ganzfried:

Well, not to everything.

The fact that the company does not allocate costs of particular products does make… does present this case with a certain accounting problem, but that’s not necessarily the legal problem that we have.

I think we agree with the other side that had there been a full allocation of costs that we would be entitled to get everything, but I don’t want to leave the impression that we have a claim to unlimited access to every sort of record that this company has, specifically.

We are not interested in records of non-government work.

We are interested only in cost records.

We have no interest in strategic planning or general budgetary information.

William H. Rehnquist:

But when you say “records of non-government work”, wouldn’t… because of the non-allocation of costs, wouldn’t you necessarily get a fair amount of records of non-government work under your theory that you are entitled to any records that are… or any records of any products that are paid for out of government funds, whatever it is your claim?

Jerrold J. Ganzfried:

Well, the fact that they co-mingle the funds–

William H. Rehnquist:

Yes.

Well, you say “co-mingle” as if it is some sort of sin, but I–

Jerrold J. Ganzfried:

–No, not at all.

We certainly don’t intend to suggest that there is anything wrongful in the commingling simply to recognize that what we are dealing here with is essentially for this company’s costs, as it has been described to us… a large pool of unallocated costs, so that even if we were to go in under this Court of Appeals decision and look at what we estimate to be some nine percent of their costs, we are going to be left with a vast majority of the information that it would be helpful to know whether we should change our procurement methods is not going to be available to us.

William H. Rehnquist:

–Well, suppose they have developed a product like, say, Bufferin.

William H. Rehnquist:

I don’t know whether they develop it or somebody else does.

But they develop a product like Bufferin, sell it on the market, and never sell any of it… or say that they sell one percent of it to the government under a negotiated product contract, 99 percent on the open market.

Is it your contention you can have access to all of the records dealing with Bufferin?

Jerrold J. Ganzfried:

We don’t want the records of their sales to the public other than to determine that there have been substantial sales to the general public, to answer that specific question.

John Paul Stevens:

Well, that puzzles me, because it would seem to me that comparable sales to private customers might be the most relevant to the determination of whether the government’s getting a fair deal.

Jerrold J. Ganzfried:

Well, under the statutes there is the built-in assumption that a contract that… something that is sold at a catalog price item and is sold in substantial quantity to the general public has a built-in, oh, built-in mechanism for assuming that there has been competition.

Because it’s sold to the public, you assume that there has been competition, if the government pays no higher than–

John Paul Stevens:

Well, then you are not interested in any records pertaining to prices that are below a fair market price established by a catalog or something like that.

Jerrold J. Ganzfried:

–Well, the point I was getting to is that it may be, in this industry, where they suggest that they pay no attention to their costs when they set their prices… a contention which I suggest is belied by their answers to interrogatories… it may be that in this industry the fact that something is sold at a catalog price and is sold in substantial quantities to the public provides no real assurance that there has been competition.

John Paul Stevens:

Well, either it does or it doesn’t.

If we assume for a moment it does not provide any assurance, then I should think the records you would want would be the records of sales of the company to other private customers who buy more or less as you do.

It would be the most relevant, I think.

Jerrold J. Ganzfried:

Well, it might be the sort of thing that accountants do, where you need only some relatively small sampling to be able to determine–

John Paul Stevens:

But you disclaim any interest in those records, as I understand your argument.

Jerrold J. Ganzfried:

–Well, to the extent that they are records that could verify the records that we do want, we might have some interest in sampling of them.

John Paul Stevens:

Do you or do you not want to see records pertaining to sales by the drug company to other customers?

Jerrold J. Ganzfried:

We would want to see some of that.

John Paul Stevens:

So there is really no limit on your demand, then, in terms of kinds of records that you are seeking.

Jerrold J. Ganzfried:

Well, there are… let me suggest that as I understand Merck’s position at this point, they would be willing to give us information of sales to other customers at the same prices in order to substantiate the fact that they have in fact made sales of substantial quantities to the general public.

So I don’t think that sets a limit on either position.

John Paul Stevens:

You’re not satisfied with that.

You’re not satisfied with that, as I understand it.

Jerrold J. Ganzfried:

No, because those aren’t cost records.

What we’re really interested in is cost records.

Now we should keep in mind–

William H. Rehnquist:

Would that include all sort of unallocated expenses engaged in research and development?

Jerrold J. Ganzfried:

–Well, since everything that they do in research and development, so far as we know, is unallocated, yes, it would address that.

I can give you–

William H. Rehnquist:

When you say “would address it”, it would take it in, wouldn’t it?

Jerrold J. Ganzfried:

–It would take it in.

Jerrold J. Ganzfried:

Now, to be sure, we don’t want to look at all of their experiments and know what their scientific formulas are, to go in and say we think you should be conducting research in this area and not in that area.

On the other hand, we do want to know, in establishing costs for particular products, whether most of their research is in the pharmaceutical area at all, or whether it’s in the veterinary medicine area, or in the category that they, for their internal allocations, call “other”.

So we would want to have that kind of breakdown.

Warren E. Burger:

Well, is the mission of the Comptroller General to inquire into contracts with the government or in terms of the pricing, or is part of his mission to see whether on the open market the drug companies are charging more than they should?

Jerrold J. Ganzfried:

The Comptroller General’s interest is in the price that the government pays, and whether the procurement methods that are used by the government are appropriate.

Warren E. Burger:

But the inquiry would appear, in many respects, to go way beyond that.

Jerrold J. Ganzfried:

It may be that information is obtained that has implications beyond that, but the Comptroller General’s purpose and his objective in undertaking the study is to provide a check on the procurement methods, to determine whether, for example, negotiated, fixed-price contracts really are the most suitable way to purchase pharmaceuticals, or whether, in this industry where, so far as we can tell, the costs bear no relation to the prices that are charged, we might be better off going to a cost-plus system for buying pharmaceuticals.

It may be that the assumption that we have that because this is a catalog price item, that there need not be any cost and pricing data submitted to the government at the time of negotiation.

But that’s an assumption that might have to be rethought in this industry.

So these are the kind of recommendations that might come out of the study.

I mean, it may be that we conduct the study and we find that this system is just great and we wouldn’t want to touch it at all and would recommend that it remain in place exactly as it is.

But the point is, we cannot–

John Paul Stevens:

What authority do you have to touch it anyway?

Your authority is just to stop buying from these people, isn’t it?

You say you’re not going to touch the way they… what authority do you have to do anything except say we won’t buy anything from you any more?

Jerrold J. Ganzfried:

–The only authority that the Comptroller General has is to make recommendations to the procuring agencies and to Congress.

John Paul Stevens:

Right.

I mean, you said you’re not going to touch the way they do business.

I don’t see how you’ve got any–

Jerrold J. Ganzfried:

If they… well, for example, if they want to charge the prices that they charge and we feel that it’s not a price that we ought to pay, there’s not going to be a deal.

If they want to continue to maintain their books of accounts on an unallocated basis, they can continue to do that.

John Paul Stevens:

–Couldn’t you do that anyway?

Couldn’t you say we won’t buy from you unless you show us your records?

Jerrold J. Ganzfried:

That might be one of the recommendations that would come out of this.

John Paul Stevens:

And you’ve had several years to think up that one.

Jerrold J. Ganzfried:

Well, unfortunately, we have had all too many years in this case before we have gotten any information.

But I think what I’d like to focus in on are the particular aspects of the cost items that the Court of Appeals has barred us from getting, and those are, briefly, advertising, which you would think would be easily allocated, general administration, distribution and research and development, and since these–

Warren E. Burger:

You are running a little fast for me.

You are saying advertising, which can easily… easily… be allocated.

A great many–

Jerrold J. Ganzfried:

–You would think that the company would know what it’s spending, what products it’s spending its advertising on.

Warren E. Burger:

–Oh, a great many companies just advertise the company.

Jerrold J. Ganzfried:

Fine.

Warren E. Burger:

Television and newspapers and magazines constantly have Exxon or Weyerhaeuser… no particular product… and these are all conglomerates now.

Now how would you allocate that?

Jerrold J. Ganzfried:

Well, accountants can certainly do it.

First of all, you take out of that group the advertising that is product-specific, and certainly you could apply it to particular products.

And then, once you are left with the bulk that you would call this corporate name or image advertising… if I can call it that–

Warren E. Burger:

Well, that’s not… your answer now is different from your previous statement.

Jerrold J. Ganzfried:

–Then, you see, you’d be able to allocate it.

Well, I don’t know how Merck’s advertising breaks down, whether it is product-specific or whether it is the corporate name and the image that is being projected.

But that is something we would want to find out.

Now I think one of the unfortunate–

William H. Rehnquist:

How is this going to help the Comptroller General?

He probably has a right to lots of things, maybe even if they don’t help him, but at least part of your argument seems to be that it’s going to be of genuine assistance to get these figures.

How is it going to help the Comptroller General in advising the agencies whether or not to purchase from Merck or Congress whether to pass some law specifying purchasing policies how much Merck spends on advertising?

Jerrold J. Ganzfried:

–Well, the interest in advertising is only a halfway measure to getting a notion of what their total costs are for their products.

If we find out, for example, that on a per-thousand-pill basis the products involved in this case cost the government from a range of $21 for Diuril to $49 to $50 for Aldomet, if we were to find out, for example, that the company’s costs for Aldomet are $2 per thousand and they are charging us $50, well, that may well be an area where the Comptroller General would want to make recommendations either to the procuring agencies and, possibly, to Congress as well for changes in the procurement system.

Thurgood Marshall:

Suppose they sell an item for $2 to the government and they advertise Merck as a great druggist and mention no product.

How much of that would be allotted to the product?

Jerrold J. Ganzfried:

Well, the accountants would have to decide.

It may be that you look at how many products would be covered when you say they are advertising their–

Thurgood Marshall:

Maybe.

You just don’t know where you are, do you?

Jerrold J. Ganzfried:

–Excuse me?

Thurgood Marshall:

You just don’t know where you are, do you, when you get into the advertising business?

Jerrold J. Ganzfried:

Oh, sure we do.

There are certainly ways that accountants can allocate–

Thurgood Marshall:

Well, how do the people collect so much up on Madison Avenue if you know too?

Jerrold J. Ganzfried:

–Well–

Thurgood Marshall:

There are certain fields it seems that are very impossible of delineation and I think advertising is a great one.

Jerrold J. Ganzfried:

–But the accountants certainly have a way to do it.

Thurgood Marshall:

You have a man who’s in a moving picture and he picks up a bottle of Coca Cola.

That’s advertising and they pay for it.

Jerrold J. Ganzfried:

And it’s Coca Cola, and you know what the product is.

Thurgood Marshall:

If Coca Cola were selling you products, you would look into that?

Jerrold J. Ganzfried:

Well, the point is that accountants can make these kind of delineations, and let me give you two examples.

Thurgood Marshall:

If you give me two, I can give you 22.

I mean, we all know about them.

I just don’t understand what precise–

Jerrold J. Ganzfried:

If it’s the corporate name that’s being advertised, that Merck is a great company–

Thurgood Marshall:

–Right.

Jerrold J. Ganzfried:

–And you can break that down on the basis of how many products Merck has.

You can allocate–

Thurgood Marshall:

You also have to find out how many products he sells.

Jerrold J. Ganzfried:

–That’s right.

Thurgood Marshall:

And how much he gets for them.

Jerrold J. Ganzfried:

We wouldn’t have to know how much he gets for them.

We would only have to know how much he pays for the advertising.

Thurgood Marshall:

Well, how else could you know?

Well, if you aren’t interested in how much he gets for them, then you have no interest at all.

You are interested in how much you pay for it.

Jerrold J. Ganzfried:

We are interested in what he gets for the products that he is selling to the government.

Thurgood Marshall:

That’s what I’m talking about.

Jerrold J. Ganzfried:

That’s… then we are in agreement.

Then we’re in agreement.

Thurgood Marshall:

You and I are in agreement?

Jerrold J. Ganzfried:

On that point.

Thurgood Marshall:

You want to bet?

Jerrold J. Ganzfried:

At least we both, I hope, understood that we were talking about the same point.

Jerrold J. Ganzfried:

That is the agreement that I was referring to.

Let me refer the Court to an antitrust case between Smith-Kline and Eli Lilly that’s reported at 427 Federal Supplement, and at pages 1107 and 1108 of that opinion, Judge Higginbotham and the parties had no difficulty in determining, for individual products in the pharmaceutical industry, their promotional expenses, research costs, costs of goods, profit margins, and pre-tax return on sales.

The fact is that in this industry allocations can be made.

Another example comes from the Pfizer case that was before this Court in 1972 and decided in 404 U.S. Pfizer’s brief in that Court… in that case… at page 71 recites the fact that during the grand jury investigation which led to the present indictment each defendant supplied to the government cost studies prepared on principles determined by independent public accountants which showed total costs for each dosage form of each of the drugs involved, and that from these studies actual profitability of each item could be ascertained.

William H. Rehnquist:

But that’s something they do when they are told to do by a court or when they are trying to plead a case.

Jerrold J. Ganzfried:

They weren’t told to do it.

They had an interest in doing it and they did it.

William H. Rehnquist:

Right.

But now certainly you’re not suggesting that the Comptroller General has the same authority to tell them to allocate.

Jerrold J. Ganzfried:

Absolutely not.

William H. Rehnquist:

You’re saying give us the information and we will allocate.

Jerrold J. Ganzfried:

Exactly right.

Just as we don’t tell them that they should take accelerated depreciation for tax purposes but straight line depreciation in their reported financial statements.

The point is that you can have… that accounting that is done for one purpose doesn’t have to be carried over for all other purposes.

Warren E. Burger:

Do I understand correctly that the government does not make any claim that Merck is guilty of any impropriety in any of the contracting?

Jerrold J. Ganzfried:

That’s correct.

Warren E. Burger:

And–

Jerrold J. Ganzfried:

Or is that necessary for us to get access.

Warren E. Burger:

–You concede that there is no suggestion of unreasonableness about the contracts?

Jerrold J. Ganzfried:

As to the methods of the contract or the prices of the contract?

Warren E. Burger:

Both.

Jerrold J. Ganzfried:

As to the methods, they followed the methods and procedures that were in place and should have been used.

As to the prices, that’s one of the reasons we’d like to conduct the study.

We have not prejudged anything.

Warren E. Burger:

This is not like a case where the government, as it does sometimes, suspects bid-rigging in competitive bidding and wants to inquire.

No one would question that.

This is just a broad-scale inquiry in how do you handle your pricing.

Now, as Justice Stevens suggested, isn’t there a simpler, cheaper, quicker way to just simply say companies that don’t give us this information are on the black list or they are off the negotiable contract list?

Jerrold J. Ganzfried:

Well, I understand that there are some cases that suggest that the government would not be in a position simply to blacklist companies.

But we don’t know whether it would even be a good idea at this point.

Warren E. Burger:

There are cases.

I wrote one in the Court of Appeals that was to the effect that you can’t blacklist them without a reason.

But if you said a condition of being eligible for negotiated contracts was that you open your books on prices, that would be quite a different matter.

Jerrold J. Ganzfried:

Well, that may be one of the recommendations that comes out of the study.

There are, in the Truth in Negotiation Act, which was passed after a proposal by the Comptroller General, that did require submission of cost and pricing information in certain circumstances.

Whether that is going to come out of this study, we don’t know.

That’s precisely why we’re here.

We need the information before we know what recommendations we’re going to make.

Lewis F. Powell, Jr.:

May I ask this question since you’re speaking of recommendations that might be made?

Suppose the government is considering buying a drug product that is marketed by two companies and one of the companies spends ten percent on research and development and five percent of that is on pure research and development, trying to reach out ten, twenty years from now to find a cure for cancer, for example, and the other company spends only two percent on total research and development.

Obviously, the latter’s costs are going to be somewhat less.

The government, would it feel compelled to buy only from the company that did two percent research and development, foreclosing or penalizing a company that spent enormous percentage, comparatively, on research that might be of enormous benefit to the government as well as other people?

Jerrold J. Ganzfried:

The answer to that is that the government’s purpose is not to tell companies that they are spending too much or too little on research or to penalize companies for spending too much or too little on research.

What we’re trying to find out is just what it costs the companies to make the products that we’re paying for.

Lewis F. Powell, Jr.:

What are you going to do with it after you find out?

Jerrold J. Ganzfried:

Anything from saying that the system works fine to saying that there are significant changes that ought to be made.

But until we have the information which we are entitled to have, we don’t know what those recommendations are going to be.

I hope I have suggested to you some of the range of possibilities, but I do want to make clear that nothing has been prejudged and that we need the information before any of those judgments can be made.

Warren E. Burger:

Would you concede that there are some industries, including those dealing with the government, who don’t want anyone to know how much they are spending on pure research, that that in itself is a trade secret?

Jerrold J. Ganzfried:

There may be some industries in which that’s the case.

I’m not aware of any at the moment and I certainly don’t believe that the pharmaceutical industry would be one of them.

Warren E. Burger:

On the contrary, it would occur to me that, as Justice Powell has just suggested, the pharmaceutical people would probably be doing more pure research than Detroit with automobiles and other companies.

Jerrold J. Ganzfried:

They may.

But they certainly have not kept any great secret about how much they spend on it.

They certainly may keep secret what they are working on and we’re not interested in the scientific formulas.

We’re not going in to find out are you working on cardiovascular drugs or are you working on analgesic drugs.

That’s not the–

Warren E. Burger:

Well, if you take those examples, might those facts not be matters that the company legitimately would not want anyone to know about, just as during the early part of World War I we were spending billions of dollars in atomic research, and if it had been known how much was being spent that might have been an important factor to other countries?

Now in competitors, is it not a legitimate trade secret to keep secret how much you’re spending on pure research?

Jerrold J. Ganzfried:

–We’re not talking about… we’re not talking about disclosure of any information to competitors.

Jerrold J. Ganzfried:

There is a confidentiality order in this case.

The government will abide by it in fact.

Despite the suggestion to the contrary in Merck’s reply brief, the government proposed the confidentiality order and as early as its interrogatory answers in September of 1976 acknowledged its willingness to provide confidentiality to the company, just as we proposed a consent to such orders in all the other cases involving pharmaceutical companies.

William H. Rehnquist:

Who would enforce the confidentiality order… the Comptroller General’s office?

Jerrold J. Ganzfried:

And the Court.

It’s a Court order.

Thurgood Marshall:

What about those that you don’t have a court order?

Jerrold J. Ganzfried:

In all of the cases that have been litigated in the pharmaceutical–

Thurgood Marshall:

Well, how about all of the cases that haven’t been litigated?

Is there any confidentiality order on those?

Jerrold J. Ganzfried:

–In this particular set of requests there was only one that was not litigated and I don’t know what the status of–

Thurgood Marshall:

Well, are there any that weren’t litigated?

Jerrold J. Ganzfried:

–There was one that was not litigated.

Thurgood Marshall:

Well, that doesn’t have a… in other words, the only way you get the confidentiality order is to go to court?

Jerrold J. Ganzfried:

Not necessarily.

Thurgood Marshall:

Well, how else?

Jerrold J. Ganzfried:

It may be that it could be negotiated at the time that the request is issued.

That would be one possibility.

Thurgood Marshall:

And if they say no, what happens?

Jerrold J. Ganzfried:

If they say no, then you’ve got to go to court in order to get the records.

Of course, as of 1980 we have an additional remedy, and that is that we can issue subpoenas under the amendments to the General Accounting Office Act of 1980.

We can get subpoenas.

Thurgood Marshall:

I just don’t see how the court ordered confidentiality protects the statute in this case, which doesn’t mention court.

It just says you have a right to go in there and do it without a court order, don’t you?

Jerrold J. Ganzfried:

That’s correct.

When the company–

Thurgood Marshall:

That’s what’s before us, isn’t it?

Jerrold J. Ganzfried:

–Is the statute that says that the contracts are to provide that the Comptroller General has the right to go in.

Thurgood Marshall:

Which statute has no confidentiality provision in it at all.

Jerrold J. Ganzfried:

That statute does not.

Jerrold J. Ganzfried:

There are other statutes, the citations of which I can find… I don’t have them offhand… that do afford some protections for companies as to trade secrets that might be disclosed.

William H. Rehnquist:

Can you subpoena post-1980 records of Merck now under the 1980 amendment?

Jerrold J. Ganzfried:

Under… I believe that’s right.

William H. Rehnquist:

Has the Comptroller General started doing it?

Jerrold J. Ganzfried:

He has not.

The scope of access under the subpoena power is precisely the same as the scope of access under the provisions that are at issue here.

William H. Rehnquist:

So really the 1980 Act doesn’t give you anything, I guess, that you don’t have now.

Jerrold J. Ganzfried:

It gives us an additional remedy.

The hope in Congress was that it would speed up the process.

In fact, the pharmaceutical cases that… this case and the Bristol case which was before this Court 18 months ago… were specific examples that were cited to Congress as providing the need for having additional power and Congress did provide the subpoena power to the Comptroller General.

John Paul Stevens:

May I ask you one… one legal question?

At the end of Judge Mikva’s opinion below he has this sentence:

“One must come to statutes such as this with a pro-disclosure bias. “

Do you think that’s a correct statement of the law?

I notice you didn’t cite that sentence in your brief.

Jerrold J. Ganzfried:

Well, I think that given that this statute… I think one must come to this statute with a pro-disclosure bias or one must certainly come to that conclusion after reading the statute because it’s a broad authorization.

John Paul Stevens:

Just if you make an impartial approach to it, maybe you don’t win.

Is that what you’re saying?

Jerrold J. Ganzfried:

No, I think whether one makes a partial or impartial approach, the only–

John Paul Stevens:

He says he must come to it with a pro-disclosure bias.

That seemed to me he regards that as kind of part of his legal analysis, but you don’t subscribe to that.

Jerrold J. Ganzfried:

–Well, I think he had already reached his… he had provided his analysis before he made that statement and having come to his conclusion he addressed it that way.

Byron R. White:

Saying this is a biased conclusion.

Jerrold J. Ganzfried:

I think it’s certainly an appropriate conclusion to come to and it’s a conclusion that we suggest… we submit that this Court should reach.

Thank you.

Warren E. Burger:

Mr. Lacovara?

Philip A. Lacovara:

Thank you, Mr. Chief Justice, and may it please the Court.

This is a statutory construction case.

The argument that has just been presented on behalf of the government emphasizes why the Comptroller General or his counsel today believes that it might be a fine idea for the Comptroller General to have access to the extensive cost records of government contractors, even where costs played no part in the negotiation or pricing of the contract for the goods sold to the government.

That position may make sense.

Philip A. Lacovara:

It may not make sense as a matter of policy.

I don’t know what the right answer to that question is.

All I know is that in 1972 before he was finally forced into pursuing this exercise, when, as the Third Circuit recently put it, he concluded… “he”, the Comptroller General… that he had no viable option but to do what Senator Nelson had urged him, the Comptroller General personally testified before Senator Nelson’s Committee that this very exercise would be, in his words, “a waste of time”.

And he said at that point… and the passage is quoted on pages three and four of our brief… that since the government always buys pharmaceutical products below the cost at which these products are sold in substantial quantities to the general public, he, as he put it,

“found it a little hard on its face to say that the government is not getting good prices. “

William H. Rehnquist:

Well, isn’t that a little bit like a prosecutor saying

“We don’t think we have much cause to prosecute X. “

and then a Senator calls up the prosecutor and the prosecutor says,

“Okay, we’re going to go ahead and prosecute X.. “

A court looks at the merits of that sort of a claim.

They don’t go into all the motivations and that sort of thing.

Philip A. Lacovara:

Justice Rehnquist, I think this case is a little bit different because we’re talking here about the use of a coercive power given under a statute that we think was given by Congress for a very limited purpose.

The purpose was, as the legislative history would show and I think the language of the statute would show, to allow the Comptroller General to conduct audits of individual contracts to see whether the parties on either side had abused the process.

The Comptroller General said that was not something that he thought he was interested in doing in this industry, or something that he thought would be useful.

William H. Rehnquist:

But is Mr. Bowsher bound by Mr. Staats’ subjective feelings on the thing?

Philip A. Lacovara:

I think it’s not quite whether he’s bound by that, Justice Rehnquist, but whether or not when one passes beyond the scope of access that the government is demanding one gets to the question whether this was a bona fide or legitimate inquiry in the first place.

There is case law.

LaSalle National Bank is one such case… there are others, of course, in the lower courts… in which this Court and others have said that if demand for access to private records under summons power or subpoena powers or otherwise is not motivated by the purpose for which that power was granted, then the demand should not be enforced.

I do want to emphasize, though, that is not the principal point of Merck’s argument here this afternoon.

Warren E. Burger:

If the inquiry were directed at a search of all the cost-plus contracts that Merck had, would you have any problem?

Philip A. Lacovara:

Your Honor, no, we would not.

That is–

Warren E. Burger:

That would be part of the audit function, would it not?

Philip A. Lacovara:

–Exactly.

If the price of the contract had been negotiated on the basis of cost, because Merck represented that it would incur a certain level of costs in performing the contract, or if the contract price itself was left open to be based upon the costs actually incurred, then there is no question whatsoever that that would be within the traditional audit function that the Comptroller General has and that this access statute permits him to enforce.

That, however, is not what we have here today.

I’m not sure whether Merck has any cost-plus contracts with the government.

I rather doubt that it does.

There is nothing in the record to indicate that there are any such contracts, and one would have thought that if there had been any the Comptroller General, knowing that this whole dispute concerned the industry’s position that cost records are highly confidential and that they are not relevant to non-cost-based records, if the Comptroller knew of any such cost-based contracts in the industry he would have selected those as the predicate for his access demands.

He didn’t, and what we have here is an access demand that lists four specific, non-cost-based contracts, all of which the government admits are for standard commercial items sold to the general public at catalog prices or otherwise based on prices that are set in the competitive marketplace.

Philip A. Lacovara:

I might at this point pick up on one of the colloquies that was held during my colleague’s discussion with the Court about whether the GAO has any belief or any suspicion that the prices for these contracts were not reasonable in any sense.

The GAO, when it answered interrogatories, expressly denied that it had any reason to suspect any impropriety in any part of the negotiation process or had any reason to doubt the reasonableness of the price.

When the senior GAO official who is involved in this matter, Mr. Ahart, the Director of the Manpower and Welfare Division, was being deposed, I asked him the question.

Is there any specific reason to believe that Merck made excessive or unreasonable profits on any of the four contracts in question?

This is page 76-A of the Joint Appendix.

The answer in full is:

“No. “

“The General Accounting Office has no reason to believe that Merck made unreasonable or excessive profits on the four contracts. “

All of this, however, should be considered, I think, in the context–

John Paul Stevens:

Of course, if that’s the fact, why didn’t you give them the profit margins?

Philip A. Lacovara:

–Pardon me?

John Paul Stevens:

If that’s the fact, what’s the big secret?

Philip A. Lacovara:

The secret, Justice Stevens, is that the government wants not the records that Merck has offered, which are the records to show that the prices that were agreed upon in these contracts were actually based upon catalog prices at which these products were sold to the government.

They have said under this statute, which has, we think, not only limited language but a purpose, a background of legislative intent that shows a narrow range of authority, that they want access to all of Merck’s cost records, except to the extent… and it’s a little hard to pin down precisely what the theory is since it has shifted a bit… except to the extent, as we understand it… and this picks up on Justice… Judge Mikva’s dissenting opinion in the lower court… that Merck bears the burden of showing that costs are specifically allocated by the company to some other product.

Now that’s an interesting inversion of the statutory language, which says the Comptroller General may only get access to records that are directly pertinent to and involve transactions relating to a specific contract.

What that means, Justice Stevens, in this case is that since these clauses must be included in any contract for the purchase of more than $10,000 in goods, even for off-the-shelf kinds of standard commercial items, under the government’s theory… and this is the way it has expressly articulated it again this afternoon… the government, through the GAO, is entitled to examine all of the costs that Merck has incurred for an indefinite period of time… Mr. Ahart said maybe as much as 20 years.

Merck, in a year in which these contracts were signed, had costs of about $1 billion, including about $100 million in research and development costs.

Today, the numbers have jumped to over $2 billion for general costs and $300 million for research and development.

The government’s theory is that it’s entitled to access to all of those costs under this authority.

John Paul Stevens:

Well, I understand their request is very broad.

Supposing you had for internal management purposes set a figure that said what your costs are on every product you sell.

A lot of companies do.

I don’t know whether you do or not.

And they just said we want to know what, for internal management purposes, you treat the cost of these four items as.

That’s all we want to know.

I suppose you wouldn’t tell them that either, would you?

Philip A. Lacovara:

Well, what we would do on a cooperative basis, Justice Stevens, is another matter.

As you know from looking at the record here, Merck was one of the companies that came forward voluntarily when GAO was interested in doing an economic study and we said we will give you access to a lot of information if you’ll keep it confidential.

The record makes perfectly clear, as every court that has addressed this question has recognized, that the GAO said it was prepared to give the industry this kind of commitment of confidentiality for some of the reasons that emerged in the Chief Justice’s colloquy with opposing counsel.

But Senator Nelson and his staff said we want you to get individual product cost information to give to us so that we can disclose it.

Philip A. Lacovara:

It’s in the Joint Appendix.

Mr. Ahart testified that the only reason the GAO did not give the confidentiality pledge when Merck and the other companies said they would produce the costs was the refusal of the Senators to accede to it.

John Paul Stevens:

Does that mean that your underlying interest is not so much in keeping the information from GAO as the danger that it might become… fall into the public domain?

Philip A. Lacovara:

That’s one concern.

When we filed the complaint, Justice Stevens, we said that the scope of the demand made by the Comptroller General proposed to injure Merck in two respects.

One was the danger to the confidentiality of this information, and it is highly important, as I think the Chief Justice’s question suggested, whether competitors know how a particular pharmaceutical company is concentrating its research and development activities.

That is of enormous use.

Industrial intelligence is highly specialized in this way.

But the other purpose that we said motivated the suit to block the sweeping access that was demanded was the sheer cost and burden.

This is not simply a counsel’s flight of fancy or a parade of horribles constructed for litigation.

The record shows that, as my opposed counsel said, one of the six companies on whom these demands were simultaneously served decided it would try to acquiesce rather than fight.

That was Hoffman-LaRoche.

It allowed access in July 1975.

When I asked Mr. Ahart on deposition what was the status of that inquiry, he testified… and this can be found in the Joint Appendix… that the… a team of GAO auditors had been on site at Hoffman-LaRoche’s headquarters for 15 months and were expected to be there a few more months.

It turned out that in July 1975, two years later, the team was still there, and after some of the lower courts began to rule that the GAO had overstepped its bounds, Hoffman-LaRoche finally said enough is enough.

That would appear on Joint Appendix 127-A, Justice Stevens.

So what we have here is a demonstrated track record that if GAO has what it claims in this case it can send teams of accountants to live at the headquarters of a contractor, spend years there… far more than outside auditors find it necessary to spend time to do the annual certifications for the SEC.

I think that makes it perfectly evident that the position of contractors like Merck and the others that this demand is not only abstractly in excess of the GAO’s legal authority but is in fact a real substantial threat to the company’s functioning.

Now opposing counsel also said that we in our reply brief had mistakenly said that the GAO had opposed a confidentiality provision in this case.

In fact, I think the Court should be aware, looking at record reference 58, when Merck moved for the addition of confidentiality provisions to the judgment, a motion that was subsequently granted, the GAO opposed that motion, saying it was prepared to agree to confidentiality only if the District Court granted the full relief that the government had been seeking, but that since the District Court had allowed access only to direct production cost records the government thought that it should be under no obligation to preserve the confidentiality of those records.

So I refer the Court for this I think largely irrelevant dispute to record item 58.

The key point, though, in this case is that it’s a statutory construction case.

The statute printed in the government’s certiorari petition has in it at least four explicit terms of limitation.

Page two of the government’s petition for certiorari says, in relevant part,

“The Comptroller General and his representatives are entitled. “

–first limitation…

“until the expiration of three years after final payment to examine any books or papers. “

–that is number two… “directly pertaining to”… number three… “and involved transactions relating to”… and then, number four… “the contract”.

In the clause that implements this statutory requirement, which is in the record and is also quoted in the government’s answer to the complaint in the Joint Appendix, the government has refined that to make it clear that access is to be granted only to records that are directly pertinent to and involving transactions relating to this contract.

So if the English language means anything, it means that both the statutory grant of authority and the contract clause which implements the authority focus directly, narrowly, specifically on the transactions involving that contract.

Philip A. Lacovara:

That, we think, logically, naturally suggests that what the government is entitled to are records relating to the negotiation of the contract, the performance of the contract, and the support for payment under the contract.

Other procurement statutes make that pattern manifest.

We refer to three or four of them… the Renegotiation Act, the Truth in Negotiations Act, the agency access statute enacted in 1968 to give the agencies, as the Congress was told, the same power of access that the GAO had been given in 1951, and the cost account… the government cost accounting standards statute.

All of those are congressional manifestations of the view that where a product being sold to the government is a standard commercial item sold to the general public at a catalog price or in some other competitive setting, the government does not have any legitimate interest in knowing what the contractor’s costs are.

The government’s interests, as the Comptroller General testified in 1972, are protected when the government is assured… and Merck is prepared to give these records to the GAO… that the price at which the government purchased the items was based on and not more than the catalog price at which the same products were sold to the public.

We, both sides, exhaustively discussed the legislative history, what is suggested by the language of the statute and what the legislative history shows.

Ther has also been a debate about whether the GAO has consistently interpreted the statute since 1951 or whether, as several courts and commentators have said, at best it’s interpretation is checkered.

I think it is worthwhile, though, to see what the GAO told Congress it thought the statute meant when the amendment to the permanent procurement statutes in the fall of 1951 was being considered.

William H. Rehnquist:

Mr. Lacovara, you haven’t yet covered in your oral argument, have you, your objections to what the District Court did give to the Comptroller General?

Philip A. Lacovara:

Well, I’ll deal with that right now.

William H. Rehnquist:

Well, no, I just meant to keep track of you in a way.

Philip A. Lacovara:

I should have given you an outline of where I wanted to go, and I apologize for not having done that.

The thrust of what I was suggesting a moment ago about how the language of the statute reads underlies what we think is the objection to the District Court’s holding.

The District Court, as you know, held in this case… and we recognize that three circuits, at least… well, four circuits, including the Hewlett-Packard decision in the Ninth Circuit… have held that under this statutory authority the Comptroller General can get access to direct production costs, even for… under a non-cost-based contract.

Our view is that the proper reading of the statute is that no cost records are directly pertinent to a contract if the contract is not cost-based, either because there were no representations made about costs during the negotiation of the price or because the price itself does not vary with costs.

If there is to be a conclusion… and one cannot blink the fact that at least four circuits have held that some costs are directly pertinent, but they have drawn the line at direct production costs… if some costs are pertinent, then that seems to be, as these four courts have held, a reasonable place to draw the line.

But our submission this afternoon is that when you look at the terms of the statute, consider the purpose of the statute, which was to enable the GAO to see whether the contracting officers or the government or the sales agents for the suppliers had overstepped their bounds either by making false, inadvertently mistaken, or inaccurate predictions about cost, or whether the contracting officer from the government standpoint had neglected, as the GAO has found in some instances is the case, to ask for cost information when that information should have been provided, then that’s the situation in which cost records may be pertinent.

Otherwise, cost records are simply not directly pertinent and do not involve transactions relating to the contract.

John Paul Stevens:

Is it not true that even in the kind of contract we have here you do have the clause in your contract, though, so we’re not necessarily confined to knowing what the statute means or even if it was just intended to apply primarily to other contracts.

You did agree to this provision in these contracts.

Philip A. Lacovara:

Yes, that’s correct, Justice Stevens.

It’s… the statute requires it to be included.

Generally what happens is… and this is shown by the record… there’s a lot of forms that are issued in connection with contracts and the contracting officer just checks a box.

In fact, in one or two of the contracts this clause was not physically included, but we’re not arguing that that has any legal significance.

Appropos of that point, though, the three or four circuits that have now concluded that the GAO’s argument exceeds the statutory language have reasoned that not only is this in excess of what the statute provides but that because this authority comes in through a contract no government contractor could reasonably construe the language to be as broad as the government now argues it is.

I think it’s relevant also in that connection to note that before this dispute arose the government had never, as far as we can tell, sought to obtain indirect cost information in connection with any non-cost-based contract.

The Hewlitt-Packard case, which until this dispute was the high water mark in this area, granted the Comptroller General access only to direct production costs, far short of what is being–

Sandra Day O’Connor:

Mr. Lacovara, it would seem to me that it would make it difficult for the government to know that Merck’s position was correct, that the price of the goods bore no relation whatever to cost of production, without giving the government access to enough of the records to check the veracity of that proposal by Merck.

Philip A. Lacovara:

–The position, Justice O’Connor is that this access authority is designed to let the GAO check and see whether the contractor and the purchasing agent on behalf of the government did something improper or negligent in the course of negotiating the contract.

Under the procurement statutes there is an elaborate formal record that is established about the basis on which the price being offered to the government was being based.

Byron R. White:

Of course, if you limit… if that’s the limited purpose, you have already won your lawsuit, I guess.

Philip A. Lacovara:

That’s one ground for us to win, Justice White.

But we have never denied that the government, through the GAO, can come in to examine the representations that were made to the contracting officer that the price being quoted was a catalog price and that the price actually being offered to the government was below the price at which these items have been sold.

GAO has conceded in interrogatories and on deposition that in fact the… these items were priced on the basis of catalog price lists or on the basis of other price competition and there was no actual negotiation.

Our suggested interpretation of the statute is that in a non-cost-based contract, the Comptroller General has no function beyond verifying that.

There are examples, however, where he does look at records–

Byron R. White:

Just the point is simply that the verification might take you into some areas that are more in keeping with the District Court and the Court of Appeals order, wouldn’t it?

Philip A. Lacovara:

–We agree that the GAO would have the right to examine records that show that the government was getting the products that it contracted for.

To some extent, that might include records showing that what was being produced was the product involved, and so there might be access through that mechanism, Justice O’Connor to direct production costs showing that materials and packaging and the rest were as represented.

But the principal argument is that costs are not directly pertinent to and do not involve transactions relating to the contract when it is a category called a non-cost-based contract.

Byron R. White:

If you… these are negotiated contracts.

Philip A. Lacovara:

Negotiated in a technical sense only, Justice White.

The procurement law says anything other than a contract arrived at through simultaneous sealed bids is negotiated.

Byron R. White:

And do they actually negotiate?

Philip A. Lacovara:

The evidence is that there was no negotiation about price.

That is, the contracting agency says we would like to buy this product.

What price will you sell it at?

Merck submits its price and in all the four instances that was the price accepted.

Byron R. White:

Yes.

Well, I suppose the government would like to know if they couldn’t have gotten it cheaper and that they might have if the costs were low enough.

Philip A. Lacovara:

That’s in part what the–

Byron R. White:

Would it be legal for the government to say, even though it isn’t a cost-plus contract and it isn’t a bid contract, if they refuse to deal with anybody unless they tell them their costs?

Philip A. Lacovara:

–Oh, no, nothing illegal about that at all.

Byron R. White:

So the government could tell Merck, well, look, don’t send us any… when you send us your bids, send us your costs or we won’t deal.

Philip A. Lacovara:

There’s nothing illegal about that, Justice White.

Byron R. White:

What do you think Merck would do then?

Philip A. Lacovara:

Oh, the record shows what Merck would do or has done.

Byron R. White:

They would say we’ll sell it someplace else.

Philip A. Lacovara:

If you look at record reference 23 attached to the affidavits of Merck’s general counsel, Mr. Banse, are copies of correspondence with the government on this very point.

Various contracting officers said we’d like to know what your costs are for these pharmaceuticals.

Philip A. Lacovara:

In every case Merck said these are confidential.

We will not supply them, and finally Colonel Brafogel–

Byron R. White:

And then the government didn’t call your bluff.

Philip A. Lacovara:

–That’s correct.

Colonel Brafogel, in fact, who is in charge of all pharmaceutical procurement for the Defense Department, wrote back and said we recognize your industry position and we will not in the future ask for cost information.

That’s record reference 23.

So this matter was expressly thrashed out and the government decided it would rather buy at the price Mr. Staats said was protected because it was established in the marketplace rather than say we won’t buy unless you give us your cost information.

The government’s theory, I suggest, has very little relationship to the language of the statute or any of the purposes that one could possibly glean from the legislative history.

If any records are pertinent, then, as several courts have said, we can go no further than direct production costs.

But the notion that under this authority the government is entitled to demand access to what, from the Roche experience and the government’s own articulation, might be billions of dollars worth of cost records because a contractor sold off the shelf a standard commercial item worth $10,000, that seems to have very little connection with the language of the statute or its purpose.

I would also like to emphasize in my conclusion that despite the predictions that the heavens will fall unless the various Circuits are repudiated on this subject, this case is truly unprecedented.

The government, as far as the record shows, has never obtained access to indirect cost records in connection with a cost… non-cost-based product.

Hewlitt-Packard only allowed access to direct production costs.

The amicus brief of the Aerospace Industries Association, whose members have $60 billion a year in government contracts, have said that in their experience the Comptroller General has never tried to get access to cost records under non-cost-based contracts.

In this record, GAO first said it used its access authority to audit $800 million in contracts in 1974 and ’75.

When we asked were any of these non-cost-based contracts, the answer came back, somewhat sheepishly, well, no, they were all cost-based.

So either accepting the decision of the Court of Appeals in this case or Merck’s somewhat broader position would have no impact on the use of this statute as the GAO has actually asserted it over the past 30 years.

The same conclusion applies to the argument that this power can be used to conduct economic studies of industries in order to see how the procurement process is working.

When we asked have you ever used this power for that purpose, back came the answer, yes, on five occasions.

But, as the record shows, when you look at each of those, they turned out to be individual contract audits of cost-based contracts or, in one instance, what the government refers to as the HY-80 steel plate industry.

The government was simply auditing a decision by the Navy Department to accept a contractor’s representation that steel plates for nuclear submarines were commercial products.

There was no cost audit involved.

The Navy was properly chastised for having been gulled into thinking that nuclear submarine plates were consumer items.

That’s the limit to which the Comptroller General has attempted to push this power in the last 31 years.

We think that’s the most eloquent demonstration that this case is a regrettable sport because, as the Third Circuit said, after several years of trying to hold the line against Senator Nelson, the Comptroller General concluded he had no viable alternative but to push ahead.

We ask, therefore, that the judgment either be affirmed or that summary judgment be granted for Merck.

Thank you.

Warren E. Burger:

Thank you, gentlemen.

The case is submitted.