CHARLES A. BOWSHER, COMPTROLLER GENERAL OF THE UNITED STATES, AND UNITED STATES OF AMERICA, PETITIONERS v. SMITHKLINE CORPORATION No. 81-2082 In the Supreme Court of the United States October Term, 1981 The Solicitor General, on behalf of the Comptroller General of the United States and the United States of America, petitions for a writ of certiorari to review the judgment of the United States Court of Appeals for the Third Circuit in this case. Petition for a Writ of Certiorari to the United States Court of Appeals for the Third Circuit TABLE OF CONTENTS Opinions below Jurisdiction Statutory provisions involved Statement Reasons for granting the petition Conclusion Appendix A Appendix B Appendix C OPINIONS BELOW The opinion of the court of appeals (App. A, infra, 1a-28a) is reported at 668 F.2d 201. The opinion of the district court (App. C, infra, 30a-50a) is reported at 483 F. Supp. 712. JURISDICTION The judgment of the court of appeals (App. B, infra, 29a) was entered on December 28, 1981. On March 19, 1982, Justice Brennan extended the time for filing a petition for a writ of certiorari to and including May 10, 1982. The jurisdiction of this Court is invoked under 28 U.S.C. 1254(1). STATUTORY PROVISIONS INVOLVED 1. 10 U.S.C. 2313(b) provides: Except as provided in subsection (c), each contract negotiated under this chapter shall provide that the Comptroller General and his representatives are entitled, until the expiration of three years after final payment, to examine any books, documents, papers, or records of the contractor, or any of his subcontractors, that directly pertain to, and involve transactions relating to, the contract or subcontract. 2. 41 U.S.C. 254(c) provides: All contracts negotiated without advertising pursuant to authority contained in this Act shall include a clause to the effect that the Comptroller General of the United States or any of his duly authorized representatives shall until the expiration of three years after final payment have access to and the right to examine any directly pertinent books, documents, papers, and records of the contractor or any of his subcontractors engaged in the performance of and involving transactions related to such contracts or subcontracts. Under regulations to be prescribed by the Administrator, however, such clause may be omitted from contracts with foreign contractors or foreign subcontractors if the agency head determines, with the concurrence of the Comptroller General of the United States or his designee, that the omission will serve the best interests of the United States. However, the concurrence of the Comptroller General of the United States or his designee is not required for the omission of such clause -- (1) where the contractor or subcontractor is a foreign government or agency thereof or is precluded by the laws of the country involved from making its books, documents, papers, or records available for examination; and (2) where the agency head determines, after taking into account the price and availability of the property or services from United States sources, that the public interest would be best served by the omission of the clause. If the clause is omitted based on a determination under clause (2) a written report shall be furnished to the Congress. The power of the agency head to make the determination specified in the preceding sentences shall not be delegable. QUESTION PRESENTED Whether, with respect to negotiated government contracts, the Comptroller General is authorized by law to examine the contractor's books and records pertaining to costs of research and development, advertising and promotion, distribution, and administration, where such costs, although not allocated by the contractor to particular products or calculated on a product basis in determining price, are defrayed by the contractor from commingled general revenues that include the government's payments under the contract. STATEMENT 1. In 1973 and 1974, respondent SmithKline Corporation ("SmithKline") entered into three contracts with the Defense Supply Agency of the Department of Defense and two contracts with the Veterans Administration for the sale of pharmaceutical products to the government. Each of the five contracts was a negotiated fixed-price contract in which the price was based on petitioner's published catalogue price for the particular product; the total price for the contracts was approximately $3.3 million (App. C, infra, 31a, 44a n.7; C.A. App. 47-51). /1/ As required by 10 U.S.C. 2313(b) /2/ and 41 U.S.C. 254(c), /3/ each of the contracts contained a standard access-to-records clause in which respondent agreed that the "Comptroller General of the United States or any of his duly authorized representatives shall, until the expiration of three years after final payment under this contract * * *, have access to and the right to examine any directly pertinent books, documents, papers, and records of the Contractor involving transactions related to this contract" (App. C, infra, 32a-33a; C.A. App. 48-53). In May 1972, the General Accounting Office began "a two-phase study of the economics and operations of the pharmaceutical industry" (App. C, infra, 36a). In the first phase of the study, respondent and five other pharmaceutical firms agreed to permit GAO officials to visit and inspect their facilities and operations. The companies declined, however, to participate in the second phase of the study, which was designed to enable GAO to examine "the salient economic and operational aspects of the drug industry" (ibid.). Because of the companies' failure to cooperate, GAO abandoned its plans for the second phase of the study and proposed "a more modest study" based on data to be obtained under the foregoing access-to-records provisions (id. at 37a). In August 1974, the Comptroller General wrote to the six companies, including petitioner, to request access to designated records pursuant to the access-to-records provisions. The Comptroller General explained that the request was part of "a review of the procurement of drugs by agencies of the Federal Government, including the pricing of drugs and pharmaceuticals procured under negotiated contracts" (id. at 37a-38a). To that end, the Comptroller General sought to examine (id. at 38a): all books, documents, papers, and other records directly pertinent to the contracts, which include, but are not limited to (1) records of experienced costs including costs of direct materials, direct labor, overhead, and other pertinent corporate costs, (2) support for prices charged to the Government, and (3) such other information as may be necessary for use to review the reasonableness of the contract prices and the adequacy of the protection afforded the Government's interests. 2. Respondent refused to comply with the Comptroller General's request. Instead, on February 20, 1975, it commenced the present action in the United States District Court for the Eastern District of Pennsylvania seeking declaratory and injunctive relief to bar GAO from access to its records. The United States subsequently intervened as a defendant and filed a counterclaim to require petitioner to allow the requested inspection (App. C, infra, 30a-31a, 38a). Following discovery, the district court on January 24, 1980, granted the government's motion for summary judgment and denied respondent's cross-motion (App. C, infra, 30a-50a). Contrary to SmithKline's contention that the Comptroller General's request had been prompted by the assertedly improper purpose of "seeking information concerning profits in the pharmaceutical industry for dissemination to Congress and the public" (id. at 39a), the court found, "(o)n the basis of uncontroverted depositions and affidavits filed by the parties in connection with the motions for summary judgment" (id. at 31a), "that GAO'S purpose is to compare cost to price of drugs purchased under specified contracts to determine the adequacy of the protections afforded the government in the contract negotiation process" (id. at 41a). Relying on the legislative history of the access-to-records statutes and the decision in Hewlett-Packard Co. v. United States, 385 F.2d 1013 (9th Cir. 1967), cert. denied, 390 U.S. 988 (1968), the court also concluded that the statutes were intended to enable GAO "to determine whether * * *there have been 'improprieties and wastefulness in the negotiation of contracts,' or whether * * * the contractor's costs are 'out of line with the contract price'" (App. C, infra, 44a-45a). Accordingly, the court held that the Comptroller General's purpose "to review the reasonableness of the contract prices and the adequacy of the protection afforded the Government's interests" (id. at 45a) was "a purpose authorized by the statutes" (id. at 46a). In addition, in view of the plain meaning of the statutes and the Hewlett-Packard decision, the court rejected petitioner's argument that the access-to-records provisions were entirely inapplicable to negotiated fixed-price contracts in which, as here, the price was based on the contractor's catalogue price (App. C, infra, 44a n.7). Finally, in accordance with Hewlett-Packard and Eli Lilly & Co. v. Staats, 574 F.2d 904 (7th Cir.), cert. denied, 439 U.S. 959 (1978), the court held that, at least with respect to the pharmaceutical industry, the access provisions are not limited to records of "the direct costs of manufacturing the drug covered by the contract" but include "the records of all costs which go into the makeup of the price of the drug covered in the contract" (App. C, infra, 47a). The court recognized that the direct-cost "limitation, in the drug industry, would defeat the purpose of the access-to-records statutes since, as the Court in Eli Lilly pointed out, manufacturing and distribution costs of drugs have been estimated to constitute as little as nine percent of the product's sale price" (ibid.). Construing the statutes "in light of their purpose to permit a determination as to whether costs are 'out of line with the contract price'" (ibid., quoting Hewlett-Packard Co. v. United States, supra, 385 F.2d at 1016), the court "agree(d) with Eli Lilly's reasoning that 'the access-to-records clauses should be interpreted so that an item is "directly pertinent" to a contract if it is a significant input in the price of the product purchased in the contract'" (App. C, infra, 47a). Pursuant to its opinion, the district court entered summary judgment for the government and ordered (App. C, infra, 48a): that the Comptroller General of the United States and his duly authorized representatives have the right to examine all books, documents, papers, or records directly relating to the pricing and cost of producing items furnished by (respondent) under the following contracts * * *, including, but not limited to, records of experienced costs, including costs of materials, labor, overhead, distribution, research and development, and marketing, and such other costs as are directly pertinent to the drugs covered in the enumerated contracts * * *. The court's order also included "provisions concerning the confidentiality of records, as agreed by the parties" (ibid.). 3. Respondent appealed to the United States Court of Appeals for the Third Circuit. During the pendency of the appeal, this Court granted the government's petition for a writ of certiorari in Staats v. Bristol Laboratories, 451 U.S. 400 (1981). The court of appeals accordingly deferred decision in this case pending disposition of Bristol Laboratories. /4/ On April 29, 1981, the Second Circuit's judgment in Bristol Laboratories was affirmed by an equally divided Court (Justice Stewart not participating). Following this Court's action in Bristol Laboratories, the Third Circuit decided SmithKline's appeal. The court of appeals rejected respondent's contention that GAO'S motives could defeat its access to records, noting that "no court has found that GAO is precluded from demanding records from pharmaceutical firms because of an improper purpose" (App. A, infra, 13a-14a). The court also rejected respondent's argument that the Comptroller General has no authority to request cost records for fixed-price contracts (id. at 16a). However, the court disagreed with the district court's definition of "directly pertinent" records; consequently, it restricted GAO'S access to respondent's allocated costs in accordance with the standard formulated by the district court in Bristol Laboratories (id. at 24a). The court therefore concluded that (id. at 27a): SmithKline must allow GAO personnel to inspect its records with respect to manufacturing costs, manufacturing overhead, royalty expenses, and delivery costs. SmithKline need not produce data with respect to research and development, marketing and promotion, distribution and administration, except to the extent that these costs may be included in the manufacturing costs. REASONS FOR GRANTING THE PETITION The question presented for review in this case, concerning the Comptroller General's right of access to records of government contractors, is identical to that presented in the government's petition in Bowsher v. Merck & Co., cert. granted, No. 81-1273 (Apr. 19, 1982). Accordingly, this petition should be held pending the disposition of that case. CONCLUSION The petition for a writ of certiorari should be held pending the decision in Bowsher v. Merck & Co., No. 81-1273, and should then be disposed of as appropriate in light of that decision. Respectfully submitted. REX E. LEE Solicitor General J. PAUL MCGRATH Assistant Attorney General JERROLD J. GANZFRIED Assistant to the Solicitor General MICHAEL KIMMEL Attorney MAY 1982 /1/ "C.A. App." refers to the joint appendix filed by the parties in the court of appeals. /2/ This provision is applicable to the Defense Supply Agency contracts. /3/ This provision is applicable to the Veterans Administration contracts. /4/ While the appeal in this case was pending in the court of appeals, SmithKline filed a conditional petition for a writ of certiorari before judgment. The petiton was denied on December 8, 1980. 449 U.S. 1038. Appendix Omitted