Respondent sued the Government in the Court of Claims for
damages for breach of contract to manufacture rifles. The United
States asserted as a defense that it canceled the contract because
three of respondent's key employees had accepted compensation for
awarding subcontracts in violation of the Anti-Kickback Act. The
Court of Claims found that the kickbacks had been paid, and that
this was the basis for the cancellation, but construed the Act as
not authorizing such action.
Held: The Act, which clearly expresses a policy hostile
to kickbacks, authorized the United States to cancel this contract.
Pp.
385 U. S.
142-148.
MR. JUSTICE BLACK delivered the opinion of the Court.
The respondent, Acme Process Equipment Company, brought this
action against the United States in the Court of Claims to recover
damages for breach of a contract under which Acme undertook,
through itself and subcontractors, to manufacture 2,751 75-mm.
recoilless rifles for about $337 per rifle. Among other defenses,
the United States alleged that it had rightfully canceled its
contract with Acme because three of Acme's principal employees had
accepted compensation for awarding subcontracts in violation of the
Anti-Kickback Act, set out
Page 385 U. S. 139
in part below. [
Footnote 1]
The Court of Claims found, as facts, that the kickbacks had been
paid as alleged, and that this was the ground on which the United
States had canceled the prime contract with Acme, but construed the
Act as not authorizing the cancellation. 347 F.2d 509, 171 Ct.Cl.
324. We hold that it does.
I
In October, 1952, Acme hired Harry Tucker, Jr., and his
associate, James Norris, for the purpose of establishing and
managing a new division of the company to handle government
contracts. Norris was made general manager of production, with
authority to submit bids, sign government contracts, and award
subcontracts. Tucker was placed in charge of sales, government
contracts,
Page 385 U. S. 140
and expediting subcontract operations. Prior to this time,
Tucker had entered into a contract with All Metals Industries,
Inc., under which he was to receive a commission for all sales to
customers, including Acme, procured by him. Tucker's employment
contract with Acme specifically stated that he represented, and
would continue to represent, firms in other lines of business, but
Acme did not consult with any of his other clients at the time
Tucker was hired.
Late in October, Tucker advised his superiors at Acme of the
proposed Army contract for rifles, and, at Tucker's suggestion,
Acme submitted a bid of $337 per rifle. Since Acme's bid was the
lowest, the Army began negotiations with Acme culminating in the
award of the contract in January, 1953. The negotiations were
handled by Tucker and Norris for Acme. Since it was contemplated
that the project would be largely subcontracted, leaving to Acme
only the final finishing and assembly of components, the Army
expressed a keen interest in Acme's proposed subcontractors. Not
only did it review Acme's subcontracting plans and require Acme to
notify it of changes in those plans during the final stages of
negotiation, but the contract eventually awarded required
government approval of all subcontracts in excess of $25,000. All
Metals, because its proposed subcontract amounted to one-third of
the amount of the prime contract, actually participated in the
negotiations between Acme and the Army.
During this period of negotiation, two other developments took
place. Tucker obtained agreements from two other potential
subcontractors to pay him commissions on any orders he could
procure from Acme. Army contracting officers warned Acme's
president, Joshua Epstein, that Tucker was suspected of having
engaged in contingent-fee arrangements with other government
contractors.
Page 385 U. S. 141
Finally, Acme was awarded the prime contract. Although the price
was fixed at $337 per rifle, the contract contained a price
redetermination clause under which, after 30% of the rifles were
delivered, the parties could negotiate the price on past and future
shipments upward or downward, with an upper limit of $385 per
rifle. Within a few weeks after the prime contract was awarded, All
Metals and the other two companies with which Tucker had prior
kickback arrangements obtained subcontracts from Acme. [
Footnote 2] Tucker was paid his
kickbacks, but, apparently unsatisfied with the amount of his
payoff, he got Jack Epstein, the superintendent of the chief Acme
plant and the son of Acme's president and principal stockholder, to
join the kickback conspiracy. Together, Epstein and Tucker
threatened to cancel All Metals' subcontract unless it paid $25,000
to a dummy corporation owned by Tucker, Norris, and Epstein for
fictitious consulting services. All Metals reluctantly acceded to
the shakedown. The amount paid to Tucker, Norris, and Epstein was
charged to Acme through an increase in the subcontract price.
Although they knew that Tucker was representing other companies
and had been notified of the Army's suspicions of Tucker's
involvement in contingent fee arrangements, other officials of Acme
were not aware of the kickback activities of Tucker, Norris, and
Epstein until late in 1953. At that time, Acme's president caused
the resignation of the three suspected officials.
In 1956, Tucker, Norris, and Epstein were indicted for violation
of the then Anti-Kickback Act, 60 Stat. 37. [
Footnote 3]
Page 385 U. S. 142
After presentation of the Government's case, the District Court
granted the defendants' motion for acquittal on the ground that the
Act -- which at that time embraced only "cost-plus-a-fixed-fee or
other cost reimbursable" government contracts -- did not apply to
Acme's contract, a fixed-price contract with a provision for
limited price redetermination. The court found the defendants'
actions "despicable and morally reprehensible, but unfortunately
within the narrow letter of the law." The court recommended that
Congress amend the Anti-Kickback Act "to include as a crime the
vicious and immoral type of conduct that has been exhibited in this
case."
United States v. Norris, Crim. No. 18535
(D.C.E.D.Pa.), April 14, 1956.
The District Court's opinion did indeed spur the Comptroller
General to recommend amendatory legislation, and, in 1960, the
Anti-Kickback Act was amended to apply to all "negotiated
contracts." [
Footnote 4] The
civil provision of the amended Act was made retroactive to allow
government recovery of kickbacks "whether heretofore or hereafter
paid or incurred by the subcontractor."
II
The Anti-Kickback Act, as originally passed in 1946, and, as
amended in 1960, provides two express sanctions for its violation:
(1) fine or imprisonment for one who makes or receives a kickback,
and (2) recovery of the kickback by the United States. The Court of
Claims held, and it is argued here, that, had Congress wanted "to
provide the additional remedy of contract annulment, it could have
done so" by express language, 347 F.2d at 521, 171 Ct.Cl. 343, and
of course it could
Page 385 U. S. 143
have. But the fact that it did not see fit to provide for such a
remedy by express language does not end the matter. The
Anti-Kickback Act not only "prohibited" such payments, but clearly
expressed a policy decidedly hostile to them. They were recognized
as devices hurtful to the Government's procurement practices. Extra
expenditures to get subcontracts necessarily add to government
costs in cost-plus-a-fixed-fee and other cost reimbursable
contracts. And this is also true where the prime contract is a
negotiated fixed-price contract with a price redetermination
clause, such as the prime contract is here. The kickbacks here are
passed on to the Government in two stages. The prime contractor
rarely submits his bid until after he has tentatively lined up his
subcontractors. Indeed, as here, the subcontractors frequently
participate in negotiation of the prime contract. The
subcontractor's tentative bid will, of course, reflect the amount
he contemplates paying as a kickback, and then his inflated bid
will be reflected in the prime contractor's bid to the Government.
At the renegotiation stage, where the prime contractor's actual
cost experience is the basis for price redetermination, any
kickbacks, paid by subcontractors and passed on to the prime
contractor after the prime contract is awarded, will be passed on
to the Government in the form of price redetermination upward.
[
Footnote 5]
Page 385 U. S. 144
Acme argues, however, that the express provision for recovery of
kickbacks is enough to protect the Government from increased costs
attributable to them. But this argument rests on two false
assumptions. The first is that kickbacks can easily be detected and
recovered. This is hardly the case. Kickbacks' being made criminal
means that they must be made -- if at all -- in secrecy. Though
they necessarily inflate the price to the Government, this
inflation is rarely detectable. This is particularly true as
regards defense contracts, where the products involved are not
usually found on the commercial market and where there may not be
effective competition. Such contracts are generally negotiated and
awarded without formal advertising and competitive bidding, and
there is often no opportunity to compare going prices with the
price negotiated by the Government. [
Footnote 6] Kickbacks will usually not be discovered, if
at all, until after the prime contract is let. The second false
assumption underlying Acme's argument is that the increased cost of
the Government is necessarily equal to the amount of the kickback
which is recoverable. Of course, a subcontractor who must pay a
kickback is likely to include the amount of the kickback in his
contract price. But this is not all. A subcontractor who
anticipates obtaining a subcontract by virtue of a kickback has
little incentive to stint on his cost estimates. Since he plans to
obtain the subcontract without regard to the economic merits of his
proposal, he will be tempted to inflate that proposal by more than
the amount of the kickback. And even if the Government could
isolate and recover the inflation attributable to the kickback, it
would still be saddled with a subcontractor who, having obtained
the job other than on merit, is perhaps entirely unreliable in
other ways. This unreliability, in
Page 385 U. S. 145
turn, undermines the security of the prime contractor's
performance -- a result which the public cannot tolerate,
especially where, as here, important defense contracts are
involved.
III
In
United States v. Mississippi Valley Co.,
364 U. S. 520,
364 U. S. 563,
the Court recognized that
"a statute frequently implies that a contract is not to be
enforced when it arises out of circumstances that would lead
enforcement to offend the essential purpose of the enactment."
The Court there approved the cancellation of a government
contract for violation of the conflict-of-interest statute on the
ground that "the sanction of nonenforcement is consistent with and
essential to effectuating the public policy embodied in" the
statute.
Ibid. We think the same thing can be said about
cancellation here.
The Court of Claims, in holding that the Anti-Kickback Act does
not authorize government cancellation because of its violation,
distinguished
Mississippi Valley Co. on the ground that
the Anti-Kickback Act, unlike the conflict-of-interest statute,
provides a civil, as well as a criminal, remedy. But we do not deem
the provision of a civil remedy in the Anti-Kickback Act decisive.
Where there is a mere conflict of interest, no concrete monetary
rewards may have been received or paid which the Government can
recover in a civil action. But where there is commercial bribery in
the form of a kickback, there is something specific which the
Government can recover, and hence it was quite natural for Congress
to provide this express remedy. There is absolutely no indication
in the legislative history of the Anti-Kickback Act that Congress,
in providing a civil remedy for a more tangible evil, intended to
preclude other civil sanctions necessary to effectuate the purpose
of the Act.
Page 385 U. S. 146
There is likewise no merit to the Court of Claims' distinction
of the
Mississippi Valley Co. case on the ground that
there, the criminal provision of the conflict-of-interest statute
was violated, whereas here, the kickback conspirators were
acquitted of violating the Anti-Kickback Act as it existed when the
kickbacks occurred, prior to 1960. As we have seen, Acme's
employees were acquitted on the technical ground that Acme's prime
contract was not a "cost reimbursable" contract to which the Act
then expressly applied. It is unnecessary for us to decide whether
this holding was correct. [
Footnote
7] For whether the kickbacks here contravened the narrow letter
of the criminal law, strictly construed, they clearly were
violative of the public policy against kickbacks first expressed by
Congress in 1946. If Congress then limited the reach of the Act to
cost reimbursable contracts, it was only because other types of
negotiated contracts were rarely in use then. Though the recent
extensive use of other forms of negotiated contracts led Congress
in 1960 to amend the Act to cover clearly these types of contracts
and to close the technical loophole opened by the acquittal of
Acme's employees, the congressional policy against all kickbacks
was not changed. Congress merely reiterated its recognition of the
evil and sought to correct the letter of the law to effectuate its
longstanding policy. In making the civil remedy of the 1960 Act
retroactive, Congress clearly indicated that there had been no
basic change in the public policy against kickbacks.
This public policy requires that the United States be able to
rid itself of a prime contract tainted by kickbacks.
Page 385 U. S. 147
Though the kickbacks did not take place until after the prime
contract was awarded to Acme, the kickback arrangements existed
either at the time the prime contract was awarded or shortly
thereafter, and at least one of the kickbacking subcontractors
actually participated in the negotiation of the prime contract.
These circumstances, as well as the price redetermination feature
of the prime contract, produced a great likelihood that the cost of
the prime contract to the Government and the reliability of Acme's
performance under it would be directly affected by the fact that
the prime contract was to be performed largely through subcontracts
obtained by kickbacks.
The Court of Claims, in holding that the Act does not authorize
government cancellation because of kickbacks, relied heavily on its
finding that none of the officers of Acme were aware of the
kickbacks. But, as previously stated, those of Acme's employees and
agents who did know were in the upper echelon of its managers. One
of the guilty employees was the general manager of one of the
company's chief plants and the son of Acme's president, and the two
other kickback receivers were in charge of operations, sales, and
government contracts. They were the kind of company personnel for
whose conduct a corporation is generally held responsible.
Cf.
Gleason v. Seaboard Air Line R. Co., 278 U.
S. 349. Since Acme selected those agents to carry on its
business in obtaining and performing government contracts, there is
no obvious reason why their conduct in that field should not be
considered as Acme's conduct, particularly where it touches the
all-important subject of kickbacks. And here, as this Court said
about the conflict-of-interest statute in
United States v.
Mississippi Valley Co., supra, at
364 U. S. 565,
it is appropriate to say that it is the
"inherent difficulty in detecting corruption which requires
that
Page 385 U. S. 148
contracts made in violation of . . . [the Anti-Kickback Act] be
held unenforceable, even though the party seeking enforcement
ostensibly appears entirely innocent."
The judgment of the Court of Claims is reversed with directions
to sustain the United States' right to cancel the prime
contract.
It is so ordered.
[
Footnote 1]
Section 1 of the Anti-Kickback Act, 60 Stat. 37, as amended, 74
Stat. 740, 41 U.S.C. § 51, provides in pertinent part:
"That the payment of any fee, commission, or compensation of any
kind or the granting of any gift or gratuity of any kind, either
directly or indirectly, by or on behalf of a subcontractor, . . .
(1) to any officer, partner, employee, or agent of a prime
contractor holding a negotiated contract entered into by any
department, agency, or establishment of the United States for the
furnishing of supplies, materials, equipment or services of any
kind whatsoever . . . as an inducement for the award of a
subcontract or order from the prime contractor . . . is hereby
prohibited. The amount of any such fee, commission, or compensation
or the cost or expense of any such gratuity or gift, whether
heretofore or hereafter paid or incurred by the subcontractor,
shall not be charged, either directly or indirectly, as a part of
the contract price charged by the subcontractor to the prime
contractor. . . . The amount of any such fee, cost, or expense
shall be recoverable on behalf of the United States from the
subcontractor or the recipient thereof by setoff . . . or by an
action in an appropriate court of the United States. . . ."
Section 4 of the Act, 41 U.S.C. § 54, provides:
"Any person who shall knowingly, directly or indirectly, make to
receive any such prohibited payment shall be fined not more than
$10,000 or be imprisoned for not more than two years, of both."
[
Footnote 2]
Shortly after the prime contract was awarded, two other
companies paid Tucker's father and Norris' assistant kickbacks for
obtaining subcontracts from Acme. This made a total of five
subcontracts obtained through kickbacks.
[
Footnote 3]
This was the original Anti-Kickback Act passed by Congress in
1946. It expressly prohibited kickbacks only to employees of "a
prime contractor holding a contract . . . on a
cost-plus-a-fixed-fee or other cost reimbursable basis. . . ."
[
Footnote 4]
See generally H.R.Rep.No.1880, S.Rep.No.1585, 86th
Cong., 2d Sess., U.S.Code Cong. & Admin.News 1960, p. 3292. The
Act, as amended, is set out in part in
note 1 supra.
[
Footnote 5]
This is precisely what happened here before the Government
canceled Acme's contract. Acme in 1953 submitted cost data for
price redetermination purposes that included the charges of the
five subcontractors which had paid kickbacks to Acme's employees.
These subcontracting charges, in turn, included the amounts paid as
kickbacks. Had the kickbacks not been discovered and the contract
not been canceled, Acme would have been able to use these costs to
renegotiate the price per rifle from $337 to $385. Such price
redetermination could have cost the Government about $132,000 more
on the entire contract.
[
Footnote 6]
See S.Rep.No.1585,
supra, n 4 at 3.
[
Footnote 7]
See United States v. Barnard, 255 F.2d 583,
cert.
denied, 358 U.S. 919, holding that a fixed-price contract with
provision for unlimited price redetermination is a
"cost-reimbursable" contract.