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MERCK & CO. v. STAATS

August 12, 1977

MERCK & CO., INC., Plaintiff,
v.
Elmer V. STAATS, Comptroller General of the United States, Defendant, and The United States of America, Intervenor-Defendant



The opinion of the court was delivered by: BRYANT

MEMORANDUM AND ORDER

This is an action in which plaintiff Merck & Co., Inc., a New Jersey corporation that manufactures, distributes, and sells pharmaceutical products, seeks a judgment declaring that defendant Comptroller General of the United States lacks authority to examine certain records pertaining to Merck's cost structure and corresponding injunctive relief. The Comptroller claims a right to review all of plaintiff's records relating to four contracts, negotiated without advertising, for sale of pharmaceutical products to the Department of Defense and the Veterans Administration. The right, both sides agree, derives from 10 U.S.C. § 2313(b) and 41 U.S.C. § 254(c), which require that the following language appear in government contracts negotiated without advertising:

 
The Contractor agrees that the Comptroller General ... shall ... 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.

 Each of the four contracts involved in this case contains such a provision.

 The dispute centers on the scope of the Comptroller General's authority. Merck contends that since the contract prices were not cost based, the records the Comptroller seeks to examine do not "directly pertain" to the prices paid by the Government, and therefore are not subject to disclosure. Also, Merck contends that the purpose of these contractual provisions is to enable the Government to ensure that the prices it pays are reasonable and appropriate. Here, says Merck, the Government has no such purpose in mind but seeks instead to gain access to Merck's records in order to conduct an economic survey of the pharmaceutical industry. Defendants see matters differently. They interpret the scope of the Comptroller's authority broadly, and they demand from Merck

 
all books, documents, papers, and other records directly pertinent to the contracts, which includes, but are not limited to (1) records of experienced labor 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.

 Defendants contend that the "survey proposed by the Comptroller is being conducted in order to determine the adequacy of protection afforded the Government by negotiating techniques used by the procuring agencies," Reply Memorandum of the United States at 9 (emphasis in original); see also Ahart Affidavit, para. 13; that facilitation of such a determination was one of the primary purposes underlying 10 U.S.C. § 2313(b) and 41 U.S.C. § 254(c), see e.g., H.R. 2574, 97 Cong. Record 13198 (Daily ed. Oct. 15, 1951); and that persuasive authority for broad construction of the contractual provisions exists in Hewlett-Packard Company v. United States, 385 F.2d 1013 (9th Cir.), cert. denied, 390 U.S. 988, 88 S. Ct. 1184, 19 L. Ed. 2d 1292 (1967).

 Hewlett-Packard, supra, is the sole decision by an appellate court that interprets the statutory language involved in this case. There Hewlett-Packard had entered into several negotiated fixed-price contracts with the Department of the Air Force. As 10 U.S.C. § 2313(b) commands, each of the contracts contained a standard access-to-records clause. After performance of the contract, representatives of the Comptroller General demanded from Hewlett-Packard all records

 
relating to the pricing and cost of performance, support for prices charged to the Government, and such other necessary information which would permit such Representatives to review the reasonableness of the contract prices provided for in the aforesaid contracts.

 385 F.2d at 1015. Although, as here, Hewlett-Packard claimed not to consider production costs in arriving at the terms and conditions of the contracts in question, id. at 1016, the Court of Appeals affirmed the trial court's determination that the Comptroller's demand was entirely lawful and appropriate. The court acknowledged that the words "directly pertinent to ... transactions related to this contract" are words of limitation-that an access-to-records clause does not permit open-ended inspection. Id. at 1015-1016. The court went on to say, however, that

 
the word "contract," as used in the statute is intended to have a broader meaning, embracing not only the specific terms and conditions of the agreement, but also the general subject matter. The subject matter of these four contracts is the procurement of described property by the Government.
 
Production costs directly pertain to that subject matter, because if out of line with the contract price, the contract may have been an inappropriate means of meeting this particular procurement need of the Government. While this appraisal could not affect these particular contracts, it could lead to the use of other methods of meeting future procurement needs. Production costs involve transactions relating to the contract, because they encompass business arrangements made by the contractor in obtaining the materials, labor, facilities and the like required by it in fulfilling its commitment with reference to the subject matter of the contract.

 Id. at 1016. Specifically, the Court of Appeals upheld the trial court's declaration that the company's costs of direct material, direct labor and overhead in producing the items furnished under the contracts are directly pertinent to those contracts and must be made available to the Comptroller. Id. at 1015.


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