Staats v. Bristol Laboratories Div. of Bristol-Myers Co. – Oral Argument – March 24, 1981

Media for Staats v. Bristol Laboratories Div. of Bristol-Myers Co.

Audio Transcription for Opinion Announcement – April 29, 1981 in Staats v. Bristol Laboratories Div. of Bristol-Myers Co.

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Mark Irving Levy:

I know they have 10-K’s and other registration statements, that sort of thing.

Warren E. Burger:

We’ll hear arguments next in Staats v. Bristol Laboratories.

Byron R. White:

There have been two groups of contracts with this same company, one a cost-plus contract and this kind of contract?

Mark Irving Levy:

If it turns out that a fair allocation under generally accepted accounting principles shows that these other costs of doing business constituted a very small addition to the direct manufacturing costs, the difference between the cost and the price would be exorbitant, the margin would be unreasonable, and GAO could well bring this to the attention of Congress or to the procuring agencies in order to change the way in which the Government procures its pharmaceutical products.

Warren E. Burger:

Mr. Levy, I think now you may proceed, if you’re ready.

Mark Irving Levy:

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

This case is here on writ of certiorari to the United States Court of Appeals for the 2nd Circuit.

The sole question presented by our petition is whether the Comptroller General of the United States in discharging the statutory responsibility to determine the reasonableness of the price charged the Government in a negotiated contract is authorized by law to examine records of a contractor’s unallocated costs that are an integral and significant part of a contractor’s business and are defrayed from funds that include the Government’s payments under the contract.

The relevant facts are straightforward and uncontested.

In 1973 and 1974 respondent Bristol Laboratories entered into three contracts with the Department of Defense and into one contract with the Veterans Administration for the sale of pharmaceutical products to the Government.

All four were negotiated fixed price contracts for the total price of approximately $2 million.

As required by 10 USC 2313(b) and 41 USC 254(c) each of the contracts contained a standard access-to-records clause in which respondent agreed that the Comptroller General shall have access to and right to examine any directly pertinent books and records of respondent involving transactions related to the contract.

Pursuant to these statutory and contractual provisions, the Comptroller General in August, 1974, made a timely request to respondent for access to all books and records directly pertinent to the contracts, including records of experienced costs, support for the prices charged the Government, and 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.

The Comptroller General explained that GAO was reviewing the increasing federal procurement of drug products and that the requested records were necessary to that review.

Respondent agreed that it was obligated to make available certain of its cost records but it refused to produce the remainder of the requested materials.

Thereafter, in March, 1975, it commenced the present action against the Comptroller General for declaratory and injunctive relief.

The United States intervened as a defendant and filed a counterclaim for access to the records sought by the Comptroller General.

Following discovery, the District Court granted respondent’s motion for summary judgment and denied the Government’s cross-motion.

The court concluded that respondent had reasonably construed the access provisions by offering to furnish records of its direct manufacturing costs, manufacturing overhead, royalty expenses, and delivery costs; all of which respondent had allocated to individual products and had expressly considered in setting its prices.

The court also agreed with respondent that the access provision did not extend to records concerning respondent’s costs of research and development, advertising and promotion, distribution, and administration.

In addition the court subsequently granted respondent’s request for a protective order as agreed upon by the parties.

On the Government’s appeal the Court of Appeals affirmed in a per curiam opinion for the reasons stated by the District Court.

William H. Rehnquist:

Mr. Levy, to what extent, if any, do you disagree with Judge Lasker’s conclusion that we have to deal with this case in a contractual context rather than a statutory context?

Mark Irving Levy:

We think Judge Lasker fundamentally misconceived the question before the Court.

We think it is exclusively a question of statutory construction.

First, it’s clear, I believe, that the contractual provision that was included in the contracts was meant to be coterminous and synonymous with the requirements of the statute; the language is virtually identical and no one could have intended anything else.

But, apart from whatever the intent of the parties might have been at the time in a contemporaneous understanding, apart from that question, we think it’s a matter of law with the construction of the statute which governs this case rather than the subjective intentions of the parties, and we think that is a statement of general applicability, as we cite to Professor Corbin and others in our reply brief.

So the sole question before the Court, in our view, is the construction of the access-to-records statutes.

The Court of Appeals in affirming Judge Lasker’s opinion specifically declined to follow the intervening decisions of the 7th Circuit in the Eli Lilly and Abbott Labs cases which had rejected the holding of the District Court in the present case and had sustained access requests by GAO that were identical to the request it made of respondent.

Accordingly, the single issue presented in this case is the Comptroller General’s right of access to records withheld by respondent pertaining to its costs of research and development, advertising and promotion, administration, and distribution.

Mark Irving Levy:

Respondent does not dispute that these costs are an integral and significant part of its pharmaceutical business.

Indeed, it has been generally estimated that indirect costs like these constitute as much as 91 percent of the price of a drug product, and the pharmaceutical companies spend approximately 12 percent of sales revenues on research and development alone.

It is also clear that payments by the Government under the contracts in question here were used as part of respondent’s general revenues to defray these costs of doing business.

Nevertheless, respondent contends the records of these costs are categorically outside the scope of the access provisions.

Although his position is not entirely clear, respondent seems to advance two different interpretations.

First, that access is authorized only for records of costs that are computed or allocated on a product basis and are expressly taken into account in setting the prices for the items sold to the Government.

Or, second, that the right of access is limited to records of manufacturing and other costs specifically incurred in performing the particular contracts.

John Paul Stevens:

May I interrupt just to get something on the table?

Would you in the course of your argument tell us why it’s important for the Government to know how the money spent on research and development was spent?

I mean, why do you want that information?

Mark Irving Levy:

We need that information in order to determine the full costs of the products that the Government bought.

John Paul Stevens:

Would you challenge the fact that they spent as much as they say they spent on research?

Mark Irving Levy:

We don’t know how much they spent on it.

If they were able to tell us, for example–

John Paul Stevens:

Don’t they even given you the percentage of their total expenditures that go into research and development?

Mark Irving Levy:

–I’m not aware that we have even that information, and if that information were available–

John Paul Stevens:

If they give you a balance sheet figure that this year we spent $97 million on research and development, would that satisfy you?

Mark Irving Levy:

–Subject to the need to verify the accuracy of that figure and any internal allocation–

John Paul Stevens:

Well, say they gave you their tax returns that showed it was accurate?

Mark Irving Levy:

–Assuming that that’s the same relevant definition of research and development–

John Paul Stevens:

What I’m asking you is do you really want to look at how much they spent on different kinds of experiments and–

Mark Irving Levy:

–No, we don’t–

John Paul Stevens:

–Do you really know what you’re looking for here is why I’m asking these questions?

Mark Irving Levy:

–What we’re looking for is defined by the purpose of the statutes, I believe.

In order to determine the reasonableness of the price charged the Government, it is necessary at least in this kind of a case where respondent doesn’t fully allocate its costs, in order for the Comptroller General to construct a measure of the aggregate cost for the items that are sold the Government.

This essentially consists of an effort to determine the portion of the total costs of respondent’s pharmaceutical business that’s assignable to the items purchased by the Government.

John Paul Stevens:

Well, they tell you what’s assignable to it.

They tell you all their direct costs and manufacturing costs, as I understand it.

The only thing they don’t tell you is the unallocated costs.

Mark Irving Levy:

They don’t.

Mark Irving Levy:

Those unallocated costs consist of–

John Paul Stevens:

I don’t know why you… I still don’t understand why it’s important to you to go behind some kind of a lump sum figure on all of those.

Mark Irving Levy:

–Because we don’t have a lump sum figure on the totality of their costs.

We only have a figure on certain select portions of their costs.

John Paul Stevens:

If they charged you $10 for a product and they say, we can show that $2.90 is attributable to direct cost.

The other $7.10 is either unallocated costs or profit.

Mark Irving Levy:

And the Comptroller General needs to determine the reasonableness of that price in relation to the full cost.

John Paul Stevens:

Would it matter if, of the $7.10 in my hypothetical, if $1 was profit and $7 research or… I don’t understand what difference it makes.

It seems to me you might well say, if your direct costs are less than 20 percent or something, the price is out of line.

But I don’t know why you care about how they, what they do about the other 80 percent.

Mark Irving Levy:

We care because we need to determine what the full cost is of the products we buy.

If there were some way of determining from the direct costs, if it were invariably true that direct costs were always exactly 10 percent, then we might be able to make that extrapolation.

John Paul Stevens:

You always will know what the percentage of price that the direct costs represent.

Mark Irving Levy:

I don’t believe so.

We won’t know what portion of the remainder is attributable to other costs that are fairly assignable to the cost of doing business.

John Paul Stevens:

They say none of it’s assignable to the product.

Mark Irving Levy:

They say none of it is allocated, but Bristol is conducting a pharmaceutical business here.

Its profits from the sales to the Government and to other purchasers have to fund the ongoing expenses of general overhead, advertising and promotion, and so on.

Warren E. Burger:

Well, isn’t the allocation what the Comptroller General is trying to find out about?

Mark Irving Levy:

That’s exactly what the purpose of the inquiry is.

Warren E. Burger:

You can’t answer it without seeing it, can you?

Mark Irving Levy:

That’s right.

On the other hand, if these other costs of doing business turn out to constitute most of the price leaving a reasonable difference between the cost and the price, then the present system is adequate to protect the Government’s interest and no change may be in order.

But it’s exactly to determine the answer to that question that it’s necessary to inquire into the costs at least here where there is such a large proportion of unallocated cost, the cost, that is, that Bristol itself does not allocate.

That does not mean that the costs are not attributable to this product and all other products and it’s the division, the allocation of those general costs that’s the burden of the accountants who’ve gone in and looked at the records.

Lewis F. Powell, Jr.:

Mr. Levy, were these drugs standard drugs that were available for purchase by the public generally?

Mark Irving Levy:

As I understand it, they were what are called ethical pharmaceuticals which require a prescription.

Yes, with a doctor’s prescription, they were standard items.

Lewis F. Powell, Jr.:

And did the Government pay the same price that the public paid?

Mark Irving Levy:

I believe it paid the standard wholesale price that Bristol offers.

Lewis F. Powell, Jr.:

Was there any suggestion that there was any conspiracy to maintain prices at an improper level?

Mark Irving Levy:

We did not allege that and we don’t think that access depends on any antitrust theory.

William H. Rehnquist:

The statute, I take it, gives you the right to inquire in order to satisfy yourselves without just taking anybody’s word on that?

Mark Irving Levy:

I think that’s one purpose and it may serve… the fact that this is a standard item sold to the public in substantial quantities gives some assurance, no question, that the price was reasonable.

But this access to records statute gives us a way of checking that assumption.

Lewis F. Powell, Jr.:

This is quite different, isn’t it, from negotiating a contract to build a submarine or aircraft carrier or to buy an airplane or a tank?

Mark Irving Levy:

I presume it is different from those; that is correct.

Harry A. Blackmun:

Mr. Levy, at least don’t you have some assurance when you just acknowledged that the price to the Government is comparable to what is charged other purchasers on a wholesale basis?

Mark Irving Levy:

I think that is some assurance, but Congress determined that the market mechanism is not sufficient assurance to make sure that the public funds were not being unnecessarily expensed and that the prices charged the Government were not excessive.

There may be a number of reasons wholly apart from any antitrust violation why the prices charged the Government might be unreasonable even though they were based on standard catalog price.

William H. Rehnquist:

Well, isn’t it possible too that Government could get a lower wholesale price?

Mark Irving Levy:

That might be possible.

William H. Rehnquist:

If they had full knowledge, as the statute seems to authorize them to do.

Mark Irving Levy:

Exactly, because of the Government’s unique position it might be able to better procurement techniques to obtain a price more favorable than that customarily charged the general public.

John Paul Stevens:

May I ask one other question about the rate?

Judge Lasker analyzed your theory and he concluded that under their allocation… there are no excludable records under your theory.

You have to see everything.

Do you disagree with his appraisal of the request in this case?

Mark Irving Levy:

We do disagree with that.

John Paul Stevens:

What is it that they would not have to show you?

Mark Irving Levy:

It’s hard for me to identify document by document since GAO hasn’t yet had the opportunity to study the record-keeping system of Bristol.

The actual audit that is conducted–

John Paul Stevens:

Well, you’ve had some opportunity.

They did tender some records, didn’t they?

Mark Irving Levy:

–They did but no inspection has yet occurred, pending the outcome of this litigation.

The actual audit to be conducted will depend very heavily on the nature of respondent’s record-keeping system.

It may be the case, for example, that the records will show that certain costs are exclusively borne by or can be completely allocated to a non-government purchaser, in which event they would not be assignable to the government contracts and would not need to be examined here except, as I say, for purposes of verification.

For example, in the advertising category, if, Bristol has a contract with an advertising firm on a retainer basis or in some other way, and the firm, as it happens, advertises nothing but a certain product and that product is not one that the Government purchased under these contracts, then when the auditors look at that charge from the advertising company, that expense, and they convince themselves that there is no relationship whatever to the products that the Government purchased, then that cost would not need to be examined any further.

John Paul Stevens:

In other words your purpose is to see if you cannot allocate costs to non-government business.

You’d have to do a rather thorough audit.

Mark Irving Levy:

The thoroughness of the audit will depend in large part on the record-keeping that the respondent maintains.

We haven’t seen that yet, and so it’s hard to know.

John Paul Stevens:

You haven’t looked at what they’ve given you yet, either.

Mark Irving Levy:

Excuse me, Your Honor?

John Paul Stevens:

You have not looked at what they’ve given you yet?

Mark Irving Levy:

We have not, as I say, pending the outcome of this litigation.

So it’s hard to answer categorically, but it does seem to us that it cannot be said that consistent with the statute these entire categories of records should be outside the scope of the review, which is the position that the respondent takes here.

We are not at the position in which we’re trying to decide whether a particular subclass of cost or whether a particular document is relevant to the inquiry or not.

That will be subject to the informal negotiations and give-and-take of the audit process, just as in civil discovery or subpoena demands, for example.

The question here is whether these types of cost records are to be entirely outside the bounds of GAO–

William J. Brennan, Jr.:

Well, Mr. Levy, you do have the problem, I gather, that when Congress amended this statute to add “directly pertains to” it had some purpose in mind in the way of limitation, didn’t it?

Mark Irving Levy:

–I’ll confess it’s hard to know what Congress had in mind, but, no, we–

William J. Brennan, Jr.:

No, no, but doesn’t this language on its face suggest Congress was imposing a limitation?

Mark Irving Levy:

–I don’t believe so.

William J. Brennan, Jr.:

Oh.

Mark Irving Levy:

Because, first, I don’t think that the language “directly pertinent”, on the face of the statute–

William J. Brennan, Jr.:

Well, if that was added to the statute?

Mark Irving Levy:

–the modifier “directly” was added as a floor amendment–

William J. Brennan, Jr.:

And isn’t there some legislative history that suggests it was added because Congress wanted to limit it?

Mark Irving Levy:

–The legislative history is very sparse.

The amendment was proposed by Representative Hoffman.

William J. Brennan, Jr.:

Why do you think Congress added that word?

Mark Irving Levy:

I think the word serves only as one of emphasis to underscore to GAO–

William J. Brennan, Jr.:

Congress went to all this trouble just to add that word?

Mark Irving Levy:

–Well, it wasn’t all this trouble.

The legislative history is as follows.

The Hardy amendment, the Hardy bill, which is the principal basis for the statutes, included the requirement that the records be pertinent.

On the floor of the House the word “directly” was added as a floor amendment by Representative Hoffman.

There was no discussion or debate upon that provision.

It was an amendment to which Representative Hardy did not disagree; he was fully willing to accept it.

Mark Irving Levy:

And it followed closely the rejection of another amendment offered by Representative Harvey that sought to accomplish a significant narrowing of the statute in much the same way the respondent urges here.

That amendment was opposed by Representative Hardy and it was defeated by a voice vote in the House.

So we think, in those circumstances, the addition, the inclusion of the modifier directly in front of “pertinent” does not indicate that Congress had in mind any significant different purpose or any difference in character than the bill that was originally introduced by Representative Hardy.

William J. Brennan, Jr.:

And what do you say Congress’ purpose was?

Mark Irving Levy:

We think its purpose there was simply to emphasize to GAO that it should have a legitimate need before undertaking examination of a contractor’s records and should not, in the language of the Representative introducing the amendment, should not go “snooping” without reason.

We think that purpose in all probability would have been adequately served by the word “pertinent”.

But Congress, to make sure that message was clear to GAO and recognizing the likely objections by the business community, added the modifier to emphasize the point.

We don’t think it changes the meaning of the statute in a significant way, as I say.

Representative Hardy was fully amenable to it.

Thurgood Marshall:

What would you do to them if they don’t give you this information?

Mark Irving Levy:

Well, what has happened here is we’ve brought lawsuits, or where a drug company is involved–

Thurgood Marshall:

I thought they brought the lawsuit.

Mark Irving Levy:

–Well, in one or two cases we commenced litigation and in the others the drug companies did.

Thurgood Marshall:

To do what?

Mark Irving Levy:

Usually to seek declaratory and injunctive relief, either to enforce our rights under the contracting statute or to prevent GAO’s inspection.

Thurgood Marshall:

Now, assuming that they tell you, we’re not going to give you the information, what can you do about it?

Mark Irving Levy:

We would initiate litigation.

If we prevailed–

Thurgood Marshall:

And to make them give it to you under pain of going to jail?

Mark Irving Levy:

–Oh, I fully believe so if they violated a court order that construes the statutes in accordance with our–

Thurgood Marshall:

But you’re not under a court order yet.

I said, you would sue them for an injunction?

Mark Irving Levy:

–Yes, and if we prevailed, then we would have a court order that could be enforced.

Thurgood Marshall:

And your only basis for it is what?

Mark Irving Levy:

The language of the statutes, the legislative history, and it would be based on GAO’s legal right to review these records in order to determine the Government procurement system is working efficiently and economically in its expenditure of public funds.

Warren E. Burger:

Suppose, Mr. Levy, that for whatever reasons the Department of Justice reached the point where it thought that there were some problems.

Is there any barrier to their sending the FBI accountants in to this company and going to them from attic to basement?

Mark Irving Levy:

I must say I don’t know what the authority of the FBI is.

We’re concerned here only with GAO’s authority.

If there were some legitimate reason to suspect criminal activity or something else–

Warren E. Burger:

Would it have to be criminal?

Mark Irving Levy:

–Something within the legitimate domain of the Federal Bureau of Investigation.

Warren E. Burger:

It could be here or it could be a civil claim, a potential civil claim against the company for overcharges, or–

Mark Irving Levy:

If this were a claim that were subject to renegotiation and if that’s a proper purpose of the Federal Bureau of Investigation, certainly they could investigate it.

But what Congress did here was add the–

Warren E. Burger:

–Well, as a matter of fact, couldn’t we take judicial notice that that’s precisely what the Department of Justice does and has done for many, many years?

Mark Irving Levy:

–I believe the Court could take notice of the function of the agency.

I believe that’s correct but what Congress said here is that it specifically delegated to GAO as its arm… GAO is a body under the control of Congress rather than the Executive Branch… and it vested special authority in the Comptroller General to determine the reasonableness of the contract price in negotiated contracts and to assess the adequacy of the protection afforded the Government’s interest.

Congress has always been concerned and its concern is manifested in the legislative history of this statute that negotiated contracts require close supervision and control.

John Paul Stevens:

Mr. Levy, let me ask you one question.

I forget about this.

Are these contracts subject to renegotiation if the prices were excessive or do you want the information for future negotiated contracts?

Mark Irving Levy:

In this case the contracts are not subject to the Renegotiation Act, which in any event has now expired.

John Paul Stevens:

Don’t you have another remedy?

If they didn’t give you enough information, you could say, well, we’re just not going to give you any more contracts because these, on the face of them, look outrageous.

Mark Irving Levy:

Prospectively, that would be true, but I think we have a right even as to contracts that are in existence now and have been previously executed, and I thought that was the question Mr. Justice Marshall was addressing to me.

Warren E. Burger:

Of course, some courts of appeals’ opinions have held that that they can’t “blacklist” a contractor without some kind of notice and hearing.

I don’t think this Court has ever–

Mark Irving Levy:

I don’t think at all that this is black-listing.

If Congress had required that a provision be included in a contract and a contractor refuses to accede to that, to adhere to that congressional requirement, I think it would be incumbent upon GAO, the procuring agency, not to enter into any further contracts with that contractor.

William J. Brennan, Jr.:

–Well, Mr. Levy, if you’ve got everything you wanted and then it was determined that the price was 25 cents too high, would you be able to recoup it from the–

Mark Irving Levy:

Not in this case, as I say, these contracts are not subject to the Renegotiation Act which expired in 1976, in any event.

But if a 25 percent excessive pricing here was on a base of five or ten cents and represented a 250 percent markup or excessive profit, that could well be the basis for recommendations to the procuring agencies or to Congress itself for changes in the procurement process.

William J. Brennan, Jr.:

–But you wouldn’t be able to get that excess back, would you?

Mark Irving Levy:

Not for the previously expended monies.

William J. Brennan, Jr.:

Incidentally, we have no constitutional question here at all?

Mark Irving Levy:

There is no constitutional question, as I say, I believe it’s solely a statutory question.

William J. Brennan, Jr.:

It’s nothing but the statute?

Mark Irving Levy:

That’s correct.

John Paul Stevens:

Is this a public company, by the way?

Mark Irving Levy:

A public company under the Securities and Exchange Act?

John Paul Stevens:

Yes, do they have publicly available financial statements?

Mark Irving Levy:

Yes.

And my understanding is that the respondent in this case, Bristol Laboratories, is an unincorporated division of Bristol-Myers Corporation.

John Paul Stevens:

I see, so they may not have division accounting?

Mark Irving Levy:

Exactly, but Bristol-Myers is the parent of the unincorporated division and is a publicly registered corporation.

The courts of appeals prior to this case in the Hewlett-Packard and Eli Lilly decisions have construed the legislative history of the access statutes to which I referred a moment ago to effectuate the congressional intent of permitting the Comptroller General to determine the reasonableness of the contract price and the adequacy of the protection afforded the Government’s interests.

These courts recognized that Congress intended an inquiry by the Comptroller General into whether costs are excessive in that if the costs were out of line with the contract price, the Comptroller General could recommend other methods of meeting future procurement needs.

In the same way, virtually all commentators have recognized that the broad remedial rights that the access provisions vest in the Comptroller General to evaluate the economy and efficiency of negotiated procurements.

William H. Rehnquist:

Well, it’s a little bit like a congressional investigation, isn’t it?

Because after all the Comptroller General represents Congress.

A committee of Congress could certainly call witnesses to determine pricing and government procurement policies.

Mark Irving Levy:

I’m sure a committee of Congress could do that.

We think the statute here has authorized GAO to do much the same thing.

It may turn out to be the case in some or many of these instances that the Comptroller General concludes that the price charged was reasonable.

It may turn out that that’s not the case.

We simply don’t know.

And without that information it’s not possible to propose or to adopt changes in the procurement system that may be necessary in order to protect the Government’s legitimate interest.

On the other hand, if we make changes in the procurement system that are unnecessary to address any real problem, we may add increased burden and expense and delay to the procurement process.

In other words, it’s only by having full access to the information that Congress envisioned when it enacted the access statutes that the Comptroller General can fulfill the congressional objective to promote efficient and effective procurement techniques by the Government.

John Paul Stevens:

When you ask for full access, I guess you really want to read the words “directly pertinent”… I mean, the statute, as though those words just weren’t in the statute?

Mark Irving Levy:

No, we think that wording in the statute–

John Paul Stevens:

Because you haven’t suggested to me any limit on what you want to see, which you have the right to see.

I mean, as you go into it and say, we need a little more, you could ask for an entire audit of the entire company, if I understand you.

Mark Irving Levy:

–I don’t think that would be at all necessary.

As I say, it’s difficult for–

John Paul Stevens:

Well, Judge Lasker thought it would be in this case.

You don’t know because you haven’t looked at the record, but don’t we have to assume that in order to satisfy yourselves you may need to look at everything?

Because I don’t… or can you tell me one category of records that you would say you would never want to look at?

Mark Irving Levy:

–I think I can.

Mark Irving Levy:

First, let me emphasize that this is limited to respondent’s domestic ethical pharmaceutical business, and not any other businesses he engages in such as veterinary products or other things.

Second, we’re seeking here–

John Paul Stevens:

Would you say that even if research and development is combined for all those other divisions in this division?

Mark Irving Levy:

–Then there would be an allocation of the total pool.

John Paul Stevens:

Who would make it?

They wouldn’t… say they don’t make it, they just say, we have research and development, we have our foreign business, our veterinary business, and all the rest, it’s $97 million.

Mark Irving Levy:

And they say they’re unable to allocate it?

John Paul Stevens:

They just as a matter of accounting practice don’t allocate it.

Mark Irving Levy:

Okay.

If they don’t but they could and we were–

John Paul Stevens:

They always could.

I mean, a good accountant can always–

Mark Irving Levy:

–We would accept that allocation subject to verification–

John Paul Stevens:

–But you would want to be able to verify it by looking at the records of the foreign business and the veterinary business.

Mark Irving Levy:

–If it were necessary to do that–

John Paul Stevens:

So there is really no category you don’t want to have the right to look at if you think it’s necessary in order to make a proper allocation.

Mark Irving Levy:

–Only if it’s necessary to verify the information that we have been otherwise provided.

John Paul Stevens:

Well, they say, we don’t allocate, and you say, you have a duty to allocate, and if you don’t do it yourself we want to look at the records that will enable us to do it.

Mark Irving Levy:

Then we would take a look at the total for all and allocate the portion that’s representative to the pharmaceutical industry.

William J. Brennan, Jr.:

That you determine as representative.

Mark Irving Levy:

In consultations, as GAO always does in accordance with standard practice, with the respondent–

William J. Brennan, Jr.:

Incidentally, was 254(c) the same time 2313(b)?

Mark Irving Levy:

–Yes, they were a part of that same common statute that were enacted at the same time.

Lewis F. Powell, Jr.:

Mr. Levy, you said that even if there were no allocation the company would have to do it.

Research and development comes up with a wonder product that helps cure cancer.

How do they allocate that between drugs they sell abroad and those they sell in the United States, the cost of research and development?

Mark Irving Levy:

Are you asking how Bristol has held–

Lewis F. Powell, Jr.:

How any company; how would you do it?

You have a research and development department that serves wherever you sell products all over the world, you have a division that serves the United States, you have a division that serves abroad.

Research and development serves all of them.

Mark Irving Levy:

–That’s right, and that’s exactly the reason why an allocation is necessary.

Lewis F. Powell, Jr.:

How do you allocate it?

You’ve spent $100 million over 20 years developing a cure for cancer.

How are you going to allocate it between the United States and abroad?

Mark Irving Levy:

The records in question here would only relate to the period when the contracts were in question.

And when respondent incurred the cost of performance, not 20 years ago.

But beyond that, the allocation could be done in several ways consistent with generally accepted accounting principles.

It could be done on the basis of net sales, it could be done on the basis of gross sales, it could be done on the basis of square footage of research space, there are a number of ways to do it.

But that’s essentially an accounting problem that will be worked out in consultation with the contractor in each individual case.

John Paul Stevens:

But in each case they say, well, we don’t do it.

You have to do it, you’re going to decide how to do it, you’re going to decide whether to use square footage or gross sales or overhead or–

Mark Irving Levy:

In accordance with established accounting principles.

John Paul Stevens:

–There are a lot of established, you know, acceptable accounting practices, there are all sorts of alternatives that are available.

Mark Irving Levy:

There are, and that’s why we need to discuss it fully with the contractor and–

John Paul Stevens:

It seems to me it’s always true that when they don’t allocate themselves you’re going to have to look at everything to decide what method of allocation you’re going to think is the proper one.

Lewis F. Powell, Jr.:

That sort of investigation could take years, with dozens of accountants, in a great corporation like this one.

I don’t understand why there isn’t some limitation to the records that you would insist on seeing.

Mark Irving Levy:

–We think there is the limitation.

We’ve limited ourselves to cost and pricing records, we haven’t asked to see any of the vast categories of other kinds of documents that a large corporation invariably maintains.

Lewis F. Powell, Jr.:

Well, in this case, you’ve been limited to that extent, but your principle has no limit.

Mark Irving Levy:

I think it does.

The limit is set by the purpose of the inquiry.

The purpose is to determine the reasonableness of the price.

The application of that general standard, that invarying standard, will depend on the record-keeping system of the contractor in each case.

If for example Bristol had fully allocated all of its costs of doing business and could say that the cost of selling products to the Government were X amount, 10 cents a pill, and we spot check that on one or two items to make sure these figures are accurate and they told us their accounting method, we would say, thank you, very much, and we would leave, and that would be the end of it.

John Paul Stevens:

It would be the end of it if they said, we allocate 90 percent of our research and development to the Government contracts, you don’t think you’d go behind that?

Mark Irving Levy:

If we have reasons to suspect it then–

John Paul Stevens:

Well, you would have reason to suspect it.

Mark Irving Levy:

–Only if there’s some question about it.

If Bristol acts in a good faith manner, as we fully expect him to do, then we think it would be limited to a spot check and verification of selected items with an explanation of their accounting practices.

Thurgood Marshall:

Who decides what’s pertinent, though?

Mark Irving Levy:

I think in the end that’s a question of law that the Court would decide.

Thurgood Marshall:

As between the contractor and the Government, who decides what’s pertinent?

Mark Irving Levy:

I think that’s worked out in an informal negotiation procedure, as it is in civil discovery or subpoena requests.

It depends on each individual case.

If the negotiations come to impasse it will be brought to litigation and the district judge will decide.

But we think that’s exactly the kind of application that should be left open and these categories of records shouldn’t be absolutely excluded from review by the Comptroller General as respondent proposes.

Warren E. Burger:

Well, isn’t one of the broad objectives, to go to the objectives, to determine whether there is a misallocation, that is allocating to some of the Government contracts costs which in good sound practice should be allocated elsewhere?

Mark Irving Levy:

Certainly, and that happens all the time in cost-based contracts where the contractor seeks reimbursement on the basis of his costs allocable to the Government’s contract.

No different methodology is required here simply because it’s GAO rather than the contractor that seeks to do the accounting technique.

Warren E. Burger:

And when we had the contract renegotiation statute and the Renegotiation Board, that was the whole object of that enterprise, was it not?

Mark Irving Levy:

Exactly, although my understanding there was that it was not done on a contract basis as we would do here but it was done on a broad or corporate basis, but I think in principle it’s much the same.

Byron R. White:

Do we judge this case on the… is it submitted on the assumption by one or both sides that research and development costs were a part of the costs of the Government’s products or not?

Mark Irving Levy:

We think it’s incontrovertible that the Government’s payments… that the research and development expenses incurred at the relevant time were borne by the Government–

Byron R. White:

Your opponent says that they… those costs did not directly contribute to the Government’s costs.

Mark Irving Levy:

–What they say is that they didn’t expressly consider them in setting the prices in the day and their business practices don’t allocate them.

I think they recognized though that the Government’s payments as part of their general revenues are used to defray all their overhead expenses of the relevant period.

There’s no doubt that a part of this commingled general revenue is our money and other purchasers’ money was used to pay the costs of research and development, advertising and promotion, and the rest.

Byron R. White:

Well, what if it was?

Mark Irving Levy:

I believe that the respondent concedes that if this were a cost-based contract, we would be entitled to audit the records in order to determine whether the reimbursement was properly charged.

Byron R. White:

Well, you’d just audit what they’ve put down as their cost.

Mark Irving Levy:

And we would make sure–

Byron R. White:

If they made, if they put down, if they didn’t put down any, and didn’t allocate any research and development cost to it, to your cost, you wouldn’t audit their research and development.

Mark Irving Levy:

–I think it’s inconceivable that in claiming reimbursement on any cost-based–

Byron R. White:

That may be; that may be, but as I understand their submission here that they say they didn’t–

Mark Irving Levy:

–If they elect to forego reimbursement for those costs in a cost-based contract–

Byron R. White:

–Oh, they’re going to get their money out for… but they aren’t going to get it from the Government.

Mark Irving Levy:

–We wish them well in that endeavor, then, but when it’s the Government’s interest that is being protected by the Comptroller General’s investigation, we think that their decision on what they do with cost-based contracts is not controlling.

Byron R. White:

So you’re saying you can’t in this, on the facts here, you just can’t tell whether or not their research and development costs entered into the price charged the Government, and therefore you must be able to find out.

Mark Irving Levy:

I think the ambiguity is where you say,

Mark Irving Levy:

“entered into the price charged the Government. “

Bristol recovers its costs of doing business from its sales, including its sales to the Government.

In that sense, in the sense that the Government’s payments were used to bear these expenses, it did enter into the price.

On the other hand, Bristol never sat down and said, we need to charge 72 cents a pill in order to recover research and development costs of $100 million a year.

In that sense they never expressly considered, just as in Hewlett-Packard or Eli Lilly it was never consciously considered expressly and exclusively in reaching a pricing decision.

Warren E. Burger:

Now I think we’d better hear from your friend.

Mr. Weil.

Gilbert H. Weil:

Mr. Chief Justice, and may it please the Court:

With the Court’s permission, rather than go into things that we have gone into in our briefs, I’d just like to track the Government’s oral argument.

Mr. Levy started by saying that the Comptroller General’s duty which is attempted to be implemented by what’s involved in this case is to determine the reasonableness of the contract prices paid by the Government to Bristol.

I dispute that, In the entire legislative history of the statutes involved here, there is no reference to authorizing the Comptroller General to explore the question of reasonableness.

The entire legislative history concerns itself with protection of the Government against fraud, impropriety, abuse, and overreaching.

William H. Rehnquist:

Well, doesn’t that hurt you rather than help you?

Because the statute on its face simply grants an outright authorization without regard to purpose.

Gilbert H. Weil:

That is correct, but if we’re searching for a legislative intent–

William H. Rehnquist:

Maybe the legislature wanted to have the Government have access to all of your records in any of these kinds of contracts, for whatever purpose the Government sought.

Gilbert H. Weil:

–If the Congress had said that, there’d be no question about it, but the Congress did not say that.

William H. Rehnquist:

But the statute it passed places only the limits “directly pertinent to”.

Gilbert H. Weil:

These open the question of, pertinent to what?

Mr. Levy is claiming it means pertinent to reasonableness of the price.

I maintain that when one looks into the legislative history one finds that the pertinency relates to fraud, overreaching, impropriety, and abuse.

It was not intended to empower the Comptroller General to explore for better ways of negotiating contracts.

Warren E. Burger:

Well, let’s take the overreaching now.

If a substantial amount of research and development was allocated to the particular contract when in fact it was demonstrable that it was a covert allocation, would not be relevant?

Gilbert H. Weil:

I agree thoroughly on those facts, but those are not the facts of this case, Your Honor.

Warren E. Burger:

I’m taking about the purpose of the statute, as you were.

Gilbert H. Weil:

Yes.

Warren E. Burger:

Now, that’s the Comptroller General’s mandate from the Congress, to inquire into that.

Gilbert H. Weil:

Yes, and Your Honor’s question is directed again to pertinency, pertinency for the prices that were charged the Government and what went into determining those prices.

Now, if research and development costs had been taken into account, factored into the prices charged the Government on these contracts, then we would agree–

Warren E. Burger:

I suppose you and I would agree on the basis of experience that sometimes research and development simply cannot be allocated with precision.

Gilbert H. Weil:

–Most times.

Warren E. Burger:

That you just don’t know.

The accountants do the best they can, usually having in mind what’s the best for the client, isn’t that correct?

Gilbert H. Weil:

Yes.

That is absolutely correct, and it’s quite pertinent here, Your Honor.

You’re absolutely correct as to the difficulty of allocating R&D expenses.

For example, in the field that Bristol is in, much R&D turns out to be fruitless.

It doesn’t even result in a product.

Warren E. Burger:

Isn’t that true of almost all R&D?

Gilbert H. Weil:

I suspect that it is.

Therefore, how can one allocate to products that are being successfully marketed a cost for research and development–

Warren E. Burger:

Well, even conceding its difficulty, would you agree that there could be a deliberate misallocation in the interest of the producer?

Gilbert H. Weil:

–There could be theoretically.

Absolutely.

But that would pertain primarily to cost-plus contracts, which are not involved here.

Warren E. Burger:

Why would you limit it to cost-plus contracts?

Doesn’t that shed light on future contracts in the same area?

Gilbert H. Weil:

Oh, but the statutory provision, Your Honor, relates to the particular contract that contains the clause that is the subject of this case.

Therefore, the directly pertinent to this contract is what counts.

It excludes matters that might be pertinent to other contracts or to no contracts at all.

It is only those matters, those transactions, in the terms of the statute and then the contractual clause which relate, which are directly pertinent the contract that contains the clause.

Everything else is outside those perimeters.

Byron R. White:

Well, Mr. Weil, suppose you’ve got, you do have R&D expense and let’s suppose that to develop certain products, A, B, C, which you are selling to the Government, you did have research and development costs.

Let’s just assume that.

I’m not saying that’s the case here, but if you assume that but you just haven’t allocated your research and development costs to these, there are no records of allocation but nevertheless you just know that there were research and development costs involved in coming up with these successful products that you’re now selling the Government–

Gilbert H. Weil:

Yes.

Byron R. White:

–Now, how about those research and development costs?

If you did approach the job of allocation, ordinary accounting practice would say, why, of course, part of this should be allocated to these products A, B, and C.

Gilbert H. Weil:

May I… and I did point this out in our brief, but I think it would bear re iteration here: try to be prophylactic against an ambiguity in the term “allocate”.

Gilbert H. Weil:

There are two stages at which allocation of R&D expenses might be made.

One would be in arriving at the price to be charged the Government in a given contract where in addition to the direct manufacturing, labor costs, and such, Bristol could… but has not… say, we also have to recapture in this contract some portion of what we’ve been expending for R&D.

If they did that, then Bristol would give the C.G. access to those records, but Bristol did not.

Now–

Byron R. White:

Then you don’t allocate them?

Gilbert H. Weil:

–We don’t allocate them to the price, and it’s price that counts here.

Mr. Levy has referred frequently to costs.

It’s not costs, it’s price to the Government that counts.

Byron R. White:

Is there some finding, as a matter of fact, that you did not allocate them to price?

Gilbert H. Weil:

Oh, yes, yes.

In fact, I don’t think that’s disputed.

Byron R. White:

And that you certainly recover R&D cost from somebody?

Gilbert H. Weil:

We do it eventually out of the general pool, but we do not–

Byron R. White:

Including the profits you make on the Government contract?

Gilbert H. Weil:

–As with any business, all revenue eventually is available to meet any expense of the business.

Byron R. White:

Like getting interest on bank loans?

Gilbert H. Weil:

Anything; anything becomes available to meet an expense, if it’s needed.

Judge Lasker said that the only expenses the only Bristol Labs costs that would be excludable under the Government’s theory would be those that are recoverable solely from nongovernmental business.

I think he was incorrect even in that.

Because, suppose that the revenue from nongovernmental business was not enough to cover the total costs of the business.

Bristol would have to draw from governmental contracts–

Byron R. White:

In order to make up the loss.

Gilbert H. Weil:

–They’ve got to make it up somewhere.

And that’s why there’s no limit to the records as has been indicated by Mr. Justice Powell, I believe, and by Mr. Justice Stevens.

There’s no limit.

John Paul Stevens:

As you develop this, would you tell us in a little more detail what records you are willing to tender to the Government?

Gilbert H. Weil:

Yes, we have that in our brief.

All direct manufacturing costs including manufacturing overhead, the specific distribution expenses.

John Paul Stevens:

Do they know, for example, what your aggregate research and development costs are?

Gilbert H. Weil:

Well, they can… no, they don’t, Your Honor, but by simple arithmetic subtraction of the price they pay, from the price that the Government pays, of the costs that we do give them, they know that the residue has to be all the unallocated costs, namely, general overhead and administration, general distribution, and research and development, and promotion and advertising.

Byron R. White:

And maybe just a hair of profit?

Gilbert H. Weil:

Well, we hope so.

I’ve got to get paid.

What Bristol has said it would give are its manufacturing cost… this appears at page 6 of our brief… manufacturing costs such as raw and packaging materials, labor and fringe benefits, quality control and supervision, then manufacturing overhead such as plant administration, production, planning, warehousing, utilities, and securities, royalty expense, and in a general way the cost of delivery to the sites specified in the contract.

May I point out, in some of the statements by GAO representatives they have cited the necessity of getting into the costs that are incurred in order to fulfill the Government contracts.

In other words, these would be the incremental costs involved in the contract.

The kind of costs that we’re talking about today, the R&D, the general administration, and the like, are costs that Bristol would incur even if it didn’t have these contracts.

They are not incurred in order to perform the obligations under these contracts.

They would be there and they would be exactly the same regardless of these contracts.

So that they don’t affect the price that is charged to the Government.

Therefore we say, they are not directly pertinent.

Now, the amendment, the Hoffman Amendment that put the word directly into the statute.

While the legislative history on it may be rather brief, it is not sparse in meaning because it followed a very strong movement in the committee to curtail the powers of the Comptroller General because of fear of snooping.

The Harvey Amendment was rejected but it had a very sizeable constituency and that constituency was then called upon, of course, to pass upon the final Hardy Amendment.

Mr. Hoffman representing that constituency and its still abiding concerns, spoke for adding the word “directly” in order to prevent what he called “snooping”.

Warren E. Burger:

Well, but Mr. Weil, would you not agree that sometimes you cannot make a determination whether it is directly related until after you see them all?

Gilbert H. Weil:

Well, that might be, but I think there is some–

Warren E. Burger:

The Comptroller General can’t demonstrate that in advance, can he?

Gilbert H. Weil:

–Well, that would mean then, Your Honor, I fear, that the Comptroller General would be able to see everything he wants to see even though he is not entitled to see it.

I think these are issues that would have to be decided by a court, just as they are presented today.

We have stated… and don’t forget, please, that pursuant to Judge Lasker’s order, the Comptroller General was given full ability to depose the Bristol Laboratories people to find out exactly how they do allocate, what they don’t allocate, how they arrive at the prices they charge the Government.

Having that information, they then come back with the facts that are now on the record, and based on those facts I think our argument is a perfectly sound one, that the judiciary is in a position to say that within the meaning of “directly pertinent” as it appears in the contracts… and I do want to get back to the contract thing again… but as it appears in the contracts, and in the statute itself, does not embrace costs of Bristol that in no way affected or went into or were factored into determining the prices charged the Government.

They were not directly pertinent to that.

Byron R. White:

Well, Mr. Weil, from what you’ve said so far I take it you think that some cost figures are required by the statute?

Gilbert H. Weil:

Yes, and we’ve agreed that the Government can have them.

Byron R. White:

They you don’t agree with some of the amicus views that–

Gilbert H. Weil:

We don’t disagree with them.

Byron R. White:

–Well, I take it, it is submitted by something I read that no cost figures in a fixed price contract is required by the statute to be turned over.

Gilbert H. Weil:

I think that is their argument where the prices in the fixed contract do not result from negotiations that discussed or took into account any particular costs.

Byron R. White:

If you don’t submit any cost figures to the Government, you don’t have to verify them?

Gilbert H. Weil:

In the course of negotiation, and I believe that is the way–

Byron R. White:

Is that true here?

Gilbert H. Weil:

–We did not submit any costs to the Government.

Byron R. White:

So that, if you agreed with your, with the amicus that I read, there wouldn’t be any cost figures called for by the–

Gilbert H. Weil:

Under that theory and the type of contract we’re dealing with here, there would be no cost figures.

Byron R. White:

–You don’t urge us to adopt that position?

The way it stands now?

Gilbert H. Weil:

I don’t disagree with it either.

I think there’s a very plausible argument to be made for it.

I don’t want to attempt to make amici’s arguments for them, I might not do them justice.

But we do not disagree with them.

Harry A. Blackmun:

At least it’s not your case?

Gilbert H. Weil:

It is not our case.

Byron R. White:

Well, it is in the sense that you didn’t submit any cost figures.

Gilbert H. Weil:

It would be if we didn’t submit, but we have agreed that we will submit the cost figures–

Byron R. White:

But you didn’t submit them in the course of negotiations?

Gilbert H. Weil:

–Oh, no, no.

I don’t believe we did.

Warren E. Burger:

Let me take you back to that amendment.

The inserting the word “directly”, which you suggest is a limiting word and must mean something.

That’s followed by “pertaining to” and “involve” transactions relating to the contract or subcontract.

Now, isn’t that something of a giving with one hand and taking away with another?

If “directly” narrows it, then the language relating to “certainly” is almost open-ended, if it relates to.

Gilbert H. Weil:

Your Honor, respectfully, I would read it the other way as being a further constriction that there must be direct pertinence to transactions which relate to the contract.

And as I have just pointed out, the R&D expenses, all these so-called unallocated expenses do not relate to the contract that is in issue here.

Because they would be the same if there were no such contract.

Warren E. Burger:

The Comptroller says that’s what he wants to find out, whether they’re related to and whether they are directly.

Gilbert H. Weil:

And that’s my point.

Do we give him the right to look into records that he may have no right to look into in order to find out whether he’s got a right to look into them?

This is exactly why Judge Lasker handled the deposition, the discovery process in the District Court the way he did.

Gilbert H. Weil:

He gave full right to the Comptroller General’s representatives to depose to their heart’s content the Bristol Laboratories personnel as to all their methods of fixing the prices, but not the details, not the arithmetic or financial details: the methods of keeping their books, the methods of doing their accounting, the methods of doing their pricing to the Government.

With all of that information they come back and then the District Court makes the factual decision which was affirmed by the Court of Appeals, and I think at times this Court has said, when the two lower courts are in agreement on the facts, the Supreme Court becomes very reluctant to upset them.

We do have that total agreement with the two courts.

Lewis F. Powell, Jr.:

Mr. Weil?

Gilbert H. Weil:

Yes, sir?

Lewis F. Powell, Jr.:

There’s been a good deal of talk about R&D expenses.

Did I understand you to say that they were not made public by your company?

Gilbert H. Weil:

I don’t believe they are separately broken out.

Lewis F. Powell, Jr.:

Most pharmaceuticals, I had thought, were very proud of their R&D expenditures and reported them, either in their annual reports on in their 10-K’s.

Gilbert H. Weil:

I hesitate to give a firm answer, Your Honor, because I just don’t know.

It has been my impression that they are not separately broken out.

Lewis F. Powell, Jr.:

Well, perhaps not.

I don’t think it–

Gilbert H. Weil:

And if they were, they might be broken out on a total corporate basis rather than by Bristol Laboratories Division of Bristol-Myers.

Lewis F. Powell, Jr.:

–Would you… first of all, is the contract in the record somewhere or other?

I haven’t seen it.

I don’t want you to look–

Gilbert H. Weil:

–No, I don’t believe the full contract is there but the Joint Appendix does show an identification of the contracts.

I think there’s an affidavit by Mr. Ahart that shows, that identifies the contracts that have in them the specific clauses that we are talking about.

Lewis F. Powell, Jr.:

Does the contract indicate what types of drugs beyond being prescription?

Are they drugs that are subject to competitive conditions in the market and if they’re prescription drugs perhaps you have them patented, but are they competing drugs?

Gilbert H. Weil:

I think that virtually all of them would be competing in the sense that if the identical formula is not available that alternates would be available to achieve the same pharmacological results.

Lewis F. Powell, Jr.:

And these are priced–

Gilbert H. Weil:

There’s considerable elasticity.

Lewis F. Powell, Jr.:

–These are wholesale prices that are published?

Are they available to any purchaser by wholesale?

Gilbert H. Weil:

I believe they are; yes.

They run… yes… they run on usually about five percent below the prices to retail establishments direct sales to retail establishments.

Lewis F. Powell, Jr.:

So, as Mr. Levy said, the competitive market would be a restraint on any holding up of the Government.

Gilbert H. Weil:

Well, on that point, and on Mr. Justice Blackmun’s question about whether there isn’t some assurance from the competitive aspect that the prices are right, we can turn again to the legislative history.

Gilbert H. Weil:

You see, this came up when Congress found itself in the midst of the Korean crisis and there was a necessity of getting supplies for the Armed Services, and at the same time inflation was rearing its very ugly head, as we know it today.

So that suppliers were being caught in a bind.

They would make a contract price and then when they went to their sub-suppliers, they were paying higher and higher amounts than what they had figured on.

This began to present a very difficult problem for satisfactory procurement for the Armed Services, which gave rise to the renegotiation statute.

And then Congressman Hardy, in connection with renegotiation, wanted some protection for the Government, that these things just couldn’t be run wild on the renegotiation.

And hence his amendment which he said, and which Congressman Celler as well, said would serve as a deterrent against a sword of Damocles hanging over the suppliers heads which would deter them from engaging in abusive, fraudulent, and overreaching practices.

But Mr. Hardy at page 97, Congressional Record, page 13198, explaining the rationale behind all of this, said:

“In normal times competitive bidding generally operates as a brake on the price which a contractor can demand from the Government for his goods and services. “

In normal times.

So this was an emergency.

Actually, this entire statutory provision was generated to cope with an emergency situation that does not exist today, which may come up later.

But certainly as of today the competitive bidding situation to which reference has been made does serve as a brake and does serve as a protection and an assurance that the prices are not overreaching or fraudulent.

Fraud comes in with a cost-plus again, which we’re not dealing with here, fraudulent representation as to what costs are.

But where certain costs have not even been taken into account in reaching the price, even though later when for accountancy purposes or for analytical purposes retrospectively the business wants to see how has it done, why has it done what it has done, can it improve its methods of operation?

This is a retrospective analysis.

It has nothing to do with fixing the prices to the Government in the first place.

That’s why I say this term “allocate” can be a little bit equivocal, and misleading, if we don’t keep clearly in mind the difference between allocating for the purpose of reaching the prices to the Government and allocating later on for purposes of analyzing the operations of the business, which has nothing to do with fixing the price to the Government except on future contracts.

But not on the contracts, as the statute provides, that are involved in this case.

I would like to address this question that was raised by the Bench early on with Mr. Levy about whether this is a case involving statutory construction or interpretation of a contract.

It is very clear in the legislative history and we have the quotations at pages three and four of our brief, that Congress deliberately and advisedly put the relationship between the Comptroller General and the supplier on to a contractual basis.

Congress realized the difference.

In one exchange, and this appears in two exchanges, and the first one, you can find at page four of our brief, where one of the Congressmen, Mr. Eberharter, said to Mr. Hardy,

“Now, I would like to ask one question. “

“Does this refer. “

–namely, the Hardy Amendment…

“Does this refer to contracts that have been made in the past? “

“It could not refer to contracts that have been made in the past because it requires the insertion of a clause in contracts. “

Mr. Eberharter:

“I see. “

“I notice that you give power to the Comptroller General. “

Gilbert H. Weil:

Mr. Hardy:

“It does not give him power to inspect the books and records but requires that a clause be inserted in the contracts permitting him to inspect. “

A clear differentiation in the sponsor’s mind between a statutory power and whatever permission he might obtain via a contract, namely, via the application of law of contracts, contract principles.

Then, a little bit later, Congressman… at page 13376 of 97 Congressional Record… said that the Comptroller General’s right of access

“is given him in the contract. “

“The right is not given him in the bill. “

Therefore, if we are looking for congressional intent, while there may be some question as to what Congress had in mind by the term “directly pertinent”… and that is not all too clear; Congress never defined that… one thing is clear beyond any question, that Congress did not intend access powers to flow from the statute to the Comptroller General, but intended only that there go to the Comptroller General such permission for access as might come to him from a contract, and that would have to be in accordance with the principles that govern contracts.

So that I submit that Judge Lasker was 100 percent correct when he approached this case on the basis of a contract.

But I would say that even on a basis of statutory construction, if the word “pertain” is a word of some limitation, “directly pertain” has to be even more limiting, and if it has to be directly pertinent to transactions that are related to the particular contract, you have a very narrowly circumscribed area.

John Paul Stevens:

May I ask just one question about the statute?

Does the statute provide a remedy in the event that the Company wrongfully refuses to make the records available?

Gilbert H. Weil:

No, it does not.

I understand that there’s been an amendment which will become effective in the future, which would give the Comptroller General subpoena power.

John Paul Stevens:

And how did this suit arise?

Did it arise by the Government?

Gilbert H. Weil:

No, no.

Bristol brought a declaratory judgment and injunction action, and then the Government counter-claimed.

John Paul Stevens:

But they have no remedy.

If you just said, no, they have no statutory remedies unless there’s some kind of an implied cause of action; they would have no right to–

Gilbert H. Weil:

Well, it would be more than an implied cause of action, or they’d have an action on contract.

They sue on the contract.

John Paul Stevens:

–So it has to be breach of contract, unless there’s a–

Gilbert H. Weil:

There has to be; yes.

That’s the whole thrust of Congress was in that direction.

I think it’s unmistakable, Your Honor.

Thank you very much, Your Honors.

Warren E. Burger:

Thank you, gentlemen.

The case is submitted.

The honorable court is now adjourned until Monday next at 10:00.