Merck & Co. entered into three fixed-price negotiated
contracts with the Defense Supply Agency and one such contract with
the Veterans' Administration for the sale of pharmaceutical
products to those agencies. The prices were based on Merck's
catalog prices. As required by statute, each contract contained a
standard access-to-records clause granting the Comptroller General
the right to examine any "directly pertinent" records involving
transactions related to the contract. Relying on these clauses, the
Comptroller General, for the stated purpose of reviewing the
reasonableness of the contract prices, demanded of Merck access to
cost records pertinent to the contracts, including records of costs
of direct materials, labor, and overhead, and support for the
prices charged. Merck refused to comply with the demand, and
brought an action in Federal District Court seeking a declaratory
judgment that the Comptroller General's demand exceeded his
statutory authority. The District Court granted partial summary
judgment for each party, permitting access to records of direct
costs, including manufacturing and delivery costs, but barring
access to records of indirect costs, including research and
development, marketing and promotion, distribution, and
administration costs, except to the extent that these costs were
included in the direct costs. The Court of Appeals affirmed.
The Comptroller General may inspect Merck's
records of direct costs, but not records of indirect costs. Pp.
460 U. S.
(a) It is plain from the face of the statutes in question that
the words "directly pertinent" are words of limitation designed to
restrict the class of records to which access is permitted by
requiring some close connection between the type of record sought
and the particular contract. The legislative history underscores
what the language reflects: Congress' intention to limit to some
degree the Comptroller General's access power. The legislative
history also reveals that Congress sought, in granting this access
authority, to equip the General Accounting Office (GAO),
Page 460 U. S. 825
which the Comptroller General heads, with a tool to detect
fraud, waste, inefficiency, and extravagance in Government
contracting. Given these dual, conflicting congressional aims, in
construing the statute, the public interest served by GAO
investigations must be balanced against the private interest in
freedom from officious governmental intermeddling in the
contractor's private business affairs. Pp. 460 U. S.
(b) To define as "directly pertinent" the records of any costs
defrayed from commingled revenues that include Government payments
under the contract would completely eviscerate the congressional
goal of protecting the privacy of the contractor's business records
by permitting far-ranging governmental scrutiny of records of
nongovernmental transactions completely unrelated to either the
contract or the product procured under the contract. P.
460 U. S.
(c) There is no merit to the Government's argument that the GAO
has had a consistent and longstanding interpretation of its
authority under the access-to-records statutes that supports the
view that indirect cost records are subject to examination under
the contracts in question. Pp. 460 U. S.
(d) Here, the appropriate balance of public and private
interests weighs in favor of access to Merck's direct cost records,
but against access to its indirect costs records. Because direct
costs have a direct influence on the price charged the Government,
the GAO needs to examine records of these costs to determine
whether the contractor is making an excessively high profit or the
Government is getting a "fair deal" under the contract. On the
other hand, even though indirect costs may influence the setting of
a catalog price, nevertheless, the degree of intrusion into the
contractor's private business affairs is far greater, particularly
where fixed-price contracts are involved. Pp. 460 U. S.
(e) The fact that the records here were sought for the purpose
of either conducting an economic study of the pharmaceutical
industry or securing information desired by individual Members of
Congress did not vitiate the GAO's authority under the statutes to
examine directly pertinent records under the contracts in order to
determine the reasonableness of the contract prices and to detect
inefficiency and wastefulness. Pp. 460 U. S.
214 U.S.App.D.C. 418, 665 F.2d 1236, affirmed.
O'CONNOR, J., delivered the opinion of the Court, in which
BURGER, C.J., and BRENNAN, POWELL, and REHNQUIST, JJ., joined, and
in Part V of which WHITE and MARSHALL, JJ., joined. WHITE, J.,
filed an opinion concurring in part and dissenting in part, in
which MARSHALL, J., joined, post,
p. 460 U. S. 845
BLACKMUN, J., filed an opinion concurring in part and dissenting in
part, in which STEVENS, J., joined,post,
p. 460 U. S.
Page 460 U. S. 826
JUSTICE O'CONNOR delivered the opinion of the Court.
The issue before the Court is the scope of the authority of the
Comptroller General of the United States to examine the records of
a private contractor with whom the Government has entered into
fixed-price [Footnote 1
negotiated contracts. We conclude that, under the circumstances
presented in this action, the Comptroller General may inspect the
contractor's records of direct costs, but not records of indirect
In 1973, Merck & Co., Inc. (Merck), entered into three
contracts with the Defense Supply Agency of the Department of
Defense and one contract with the Veterans' Administration for the
sale of pharmaceutical products to the Government. All four
contracts were negotiated, rather than awarded after formal
advertising. [Footnote 2
pharmaceutical products supplied
Page 460 U. S. 827
under each contract were standard commercial products sold by
Merck in substantial quantities to the general public. App. 41a.
The price term proposed by Merck for each contract was based on the
catalog price at which Merck sold the item to the general public or
was otherwise determined by adequate competition. Before the award
of each of the contracts at the fixed price proposed by Merck,
there was no actual negotiation of price, and the Government
contracting officers did not request Merck to submit cost data in
connection with any of the four contracts.
As required by 10 U.S.C. § 2313(b) and 65 Stat. 700, 41 U.S.C. §
254(c), [Footnote 3
contract contained a standard access-
Page 460 U. S. 828
to-records clause granting the Comptroller General the right to
examine any directly pertinent records involving transactions
related to the contract. Relying on these clauses, in August, 1974,
the Comptroller General issued a formal demand to Merck for access
to the following:
"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."
App. 18a. [Footnote 4
Page 460 U. S. 829
Merck refused to comply with the Comptroller General's request,
and commenced this action in the United States District Court for
the District of Columbia, seeking a declaratory judgment that the
Comptroller General's access demand exceeded his statutory
authority. [Footnote 5
United States intervened and counterclaimed to enforce the
Comptroller General's demand.
The District Court granted partial summary judgment for each
party. Rejecting Merck's argument that cost records are not
"directly pertinent" to the fixed-price contracts that were the
predicate of the General Accounting Office (GAO) demand, the court
permitted access to all records
"directly pertaining to the pricing and cost of producing the
items furnished by . . . Merck under the . . . contracts . . .
including manufacturing costs (including raw and packaging
materials, labor and fringe benefits, quality control and
supervision), manufacturing overhead (including plant
administration, production planning, warehousing, utilities and
security), royalty expenses,
Page 460 U. S. 830
and delivery costs."
App. to Pet. for Cert. in No. 811273, p. 39a. The court barred
access, however, to records
"with respect to research and development, marketing and
promotion, distribution, and administration (except to the extent
such data may be included in the cost items listed above)."
at 40a. In a brief per curiam opinion, the United
States Court of Appeals for the District of Columbia Circuit
affirmed. Merck & Co. v. Staats,
214 U.S.App.D.C. 418,
665 F.2d 1236 (1981).
Both parties sought certiorari. In No. 81-1273, the United
States petitioned for review of the Court of Appeals' determination
that records of Merck's indirect costs are not subject to
examination by the Comptroller General. In No. 81-1472, Merck
challenges the determination that records of its direct costs are
"directly pertinent" to the contracts in question, and are
therefore subject to examination. Merck also contends that access
to its cost records is barred because the Comptroller General's
access demand was not made for a congressionally authorized
purpose. We granted certiorari on the petitions of both parties,
456 U.S. 925 (1982), and now affirm.
As with any issue of statutory construction, [Footnote 6
] we "must begin with the
language of the statute itself.'" Bread Political Action
Committee v. FEC, 455 U. S. 577,
455 U. S. 580
(1982), quoting 448 U. S. v. Rohm
& Haas Co., 448 U. S.
Page 460 U. S. 831
448 U. S. 187
(1980). The focal point of controversy is the meaning of the
statutory phrase "directly pertain to and involve transactions
relating to the contract." See n
It is plain from the face of the
provisions that these are words of limitation designed to restrict
the class of records to which access is permitted by requiring some
close connection between the type of records sought and the
particular contract. [Footnote
The legislative history of the access provisions underscores
what the language reflects: the intention of Congress to limit to
some degree the Comptroller General's access powers. As originally
introduced, the bill now codified as 10 U.S.C. § 2313(b) and 41
U.S.C. § 254(c) provided access to "pertinent" records "involving
transactions related to" the contract. See
13371 (1951). [Footnote 8
Page 460 U. S. 832
Hoffman opposed the original bill on the ground that it
permitted "unnecessary snooping expeditions" and allowed the GAO to
"go into everybody's business and look it over if they just wanted
to take a look at it." Id.
at 13373. He therefore offered
a floor amendment to insert the word "directly" before the word
"pertinent," stating that the purpose of the amendment "is to limit
the snooping' that may be carried on under this bill."
Id. at 13377. The sponsor of the original bill,
Representative Hardy, did not oppose the amendment, and the
amendment passed without debate or discussion.
The passage of the Hoffman amendment clearly reveals that
Congress did not want unrestricted "snooping" by the Comptroller
General into the business records of a private contractor. The
Government nevertheless attempts to discount the significance of
Congress' addition of the word "directly." Based on the lack of
opposition to the limiting amendment by the bill's sponsor and the
lack of debate, the Government argues that the Hoffman modification
did not significantly alter the scope of the Hardy bill. We cannot
agree. The only explanation in the legislative history of the
meaning and purpose of the amendment is that of Representative
Hoffman. His statement, which, as the explanation of the sponsor of
the language, is an "authoritative guide to the statute's
construction," North Haven Board of
Page 460 U. S. 833
Bell, 456 U. S. 512
456 U. S. 527
(1982), expressly indicates that the intent of the amendment was to
curtail the scope of investigation authorized under the bill.
Although, as the Government emphasizes, Representative Hoffman did
not have the votes to defeat the bill in its entirety, he
nevertheless had the votes to circumscribe the inquiry that the
Comptroller General was authorized to undertake. Moreover, to
accept the Government's contention that the amendment had no
substantive effect would contradict the settled principle of
statutory construction that we must give effect, if possible, to
every word of the statute. Fidelity Federal Savings & Loan
Assn. v. De la Cuesta, 458 U. S. 141
458 U. S. 163
(1982). Therefore, in our attempt to give meaning to the words
"directly pertinent," we must be mindful of Congress' aim to
protect contractors from broad-ranging governmental intrusion into
their private business affairs.
It does not follow, however, that our interpretation of the
language added by the Hoffman amendment must be guided solely by
that policy, for it is expressive of only one of the aims embraced
by Congress in enacting the access-to-records provisions. The
legislative history also reveals that Congress sought, in granting
the GAO this access authority, to equip that agency with a tool to
detect fraud, waste, inefficiency, and extravagance in Government
contracting generally. Representative Hardy, the sponsor of the
legislation, explained that the two major purposes of the bill
"to give the Comptroller General the proper tools to do the job
the Congress has instructed him to do . . . and . . . to provide a
deterrent to improprieties and wastefulness in the negotiation of
97 Cong.Rec. 13198 (1951). With regard to the former purpose, it
is clear that Congress envisioned use of the access authority as an
adjunct to the Comptroller General's statutory responsibility to
"investigate . . . all matters relating to the receipt,
disbursement, and application of public funds" and to "make
recommendations looking to greater economy or efficiency in
Page 460 U. S. 834
expenditures." 31 U.S.C. § 53(a). See also
31 U.S.C. §§
60, 65(a). [Footnote 9
Obviously, broad access to cost records would enhance the GAO's
ability to evaluate the reasonableness of the price charged the
Government and to identify areas of waste and inefficiency in
Because of the lack of debate or discussion of the Hoffman
amendment, however, we do not have any indication in the
legislative history, nor indeed in the language of the statute
itself, of the scope of access authority left to the GAO after the
restrictive words were added to the bill. In defining the degree of
limitation, we thus traverse uncharted seas, guided only by the two
general statutory purposes reflected in the legislative history.
Consequently, our task in construing the statutes as they apply in
this action is to give effect to both of these congressional aims.
The tension between these goals is apparent. For some industries
and some types of contracts, including perhaps those at issue here,
Page 460 U. S. 835
can be achieved fully without sacrificing the other. [Footnote 10
] Given these dual,
conflicting aims, we must balance the public interest served by
full GAO investigations against the private interest in freedom
from officious governmental intermeddling in the contractor's
private business affairs.
Page 460 U. S. 836
The Government contends that the Court of Appeals erred in
holding that records of Merck's indirect costs [Footnote 11
] are not "directly pertinent"
to the contracts in question. In so arguing, the Government
maintains that Merck's indirect costs are directly pertinent to the
fixed-price contracts because Merck uses payments made by the
Government under these contracts to defray indirect expenses. Thus,
the Government would have us define as "directly pertinent" the
records of any costs defrayed from commingled general revenues that
include Government payments under the contract.
We cannot accept this interpretation of the statute, however,
for it completely eviscerates the congressional goal of protecting
the privacy of the contractor's business records. Under the
Government's proposed definition, records of expenditures to
purchase raw materials for the manufacture of an entirely different
product than that sold under the Government contract or to invest
in the stock of another corporation would be subject to inspection
by the Comptroller General. Hence, the Government's interpretation
would permit far-ranging governmental scrutiny of a contractor's
business records of nongovernmental transactions completely
unrelated to either the contract underlying the access demand or
the product procured under that contract. Indeed, carried to its
logical extreme, the argument would dictate that few, if any, of a
private contractor's business records would be immune from GAO
scrutiny. In short, the Government's proposed definition of the
statutory language admits of no doctrinal limitation, effectively
reading the Hoffman limiting language and its "anti-snooping"
policy out of the statute.
Page 460 U. S. 837
Nor are we persuaded by the Government's argument that the GAO's
consistent and longstanding interpretation of its authority under
the access-to-records statutes supports the view that indirect cost
records are subject to examination under the fixed-price contracts
in question here. Even if that interpretation could be
characterized as consistent, it would not be entitled to deference,
for, as we have noted above, it is inconsistent with the statutory
language. See Southeastern Community College v. Davis,
442 U. S. 397
442 U. S. 411
Moreover, to characterize the GAO's current sweeping view of its
access authority as "consistent" would be generous. There is
significant evidence indicating that, in the past, the GAO itself
has acknowledged a deficiency in its statutory authority to examine
indirect cost records. [Footnote
] For example,
Page 460 U. S. 838
in a ruling of particular significance for the facts of this
case, the Comptroller General determined in 1967 that the access
provisions do not confer upon the GAO the right to examine records
relating to a contractor's nongovernmental business, even when such
review is necessary to determine whether a catalog-priced item was
actually sold in substantial quantities to the general public. App.
162a-163a. Moreover, in late 1969, the GAO prepared a memorandum
for Congress in connection with congressional consideration of a
proposed grant of additional access authority to the GAO to pursue
a study of contractor profits in the defense industry. In the
memorandum, the GAO informed Congress that its authority under the
1951 access provisions did not extend to review of records of a
contractor's nongovernmental business, and that additional access
authority was therefore necessary to conduct a profit study. 115
Cong.Rec. 25800-25801 (1969) (reprinting GAO Memorandum on the
Adequacy of the Legal Authority of the Comptroller General to
Conduct a Comprehensive Study of Profitability in Defense
Contracting). Finally, a 1970 internal memorandum also reveals the
GAO's belief that amendment of the 1951 access statutes would be
necessary to give it the power to examine records of indirect
App. 160a-161a. [Footnote 13
The only statements by the GAO directly supportive of its
position here occur in testimony before a congressional
Page 460 U. S. 839
in 1963 regarding the GAO's litigation of the scope of its
access authority in Hewlett-Packard Co. v. United States,
385 F.2d 1013 (CA9 1967), cert. denied,
390 U.S. 988
(1968). [Footnote 14
light of the GAO's litigation posture during these hearings, as
well as the contrary expressions of GAO opinion noted above, this
testimony cannot provide persuasive evidence of the GAO's
consistent interpretation or practice.
To summarize, the Government has failed to offer a definition of
"directly pertinent" that would give any effect to the limiting
purpose of that language. In our view, the appropriate
accommodation of the competing goals reflected in the legislative
history counsels us to draw the line precisely
Page 460 U. S. 840
where both lower courts have drawn it. Thus, under the four
fixed-price contracts in question, the Comptroller General should
be permitted access to records of direct costs. [Footnote 15
] He should be barred, however,
from inspecting records of costs incurred in the areas of research
and development, marketing and promotion, distribution, and
administration, except to the extent the contractor has allocated
these costs as attributable to the particular contract. [Footnote 16
Direct costs certainly pertain directly to even a fixed-price
contract, for direct costs are, by definition, readily identifiable
as attributable to the specific product supplied under the
contract. Consequently, as a rational businessman, the contractor
will have some regard for these costs in setting even a catalog
price in order to avoid a loss on the product. Because these costs
therefore have a very direct influence on the price charged the
Government, the GAO would need to
Page 460 U. S. 841
examine records of these costs to determine whether the
contractor is making an excessively high profit or the Government
is getting a "fair deal" under the contract. Presumably, indirect
costs also influence in some manner the setting of a catalog price,
although to what extent is unclear, given the somewhat arbitrary
accounting allocations that must be made to determine what portion
of indirect costs may be attributed to a specific product.
Nevertheless, the degree of intrusion into the contractor's private
business affairs occasioned by GAO scrutiny of indirect cost
records is far greater, particularly where pure fixed-price
contracts are involved. Such an inspection would entail exposure to
the GAO of many of the contractor's nongovernmental transactions.
] We therefore
conclude that the appropriate balance of public and private
interests in this situation weighs in favor of access to direct
cost records, but against access to Merck's indirect cost records.
] Our decision
in this regard is
Page 460 U. S. 842
in accord with that of the majority of the Courts of Appeals to
have considered this issue. [Footnote 19
The Government objects strenuously that barring such access
impermissibly constrains the GAO in its efforts to improve the
procurement process. In an industry in which indirect costs
represent such a large proportion of total costs, [Footnote 20
] access to records of those
costs is critical to an understanding of the industry with which
the Government is dealing and to an assessment of the fairness of
the contract price and the advisability of continued adherence to
the negotiated procurement methods employed under those contracts.
As we have already noted, however, in adopting the Hoffman
amendment, Congress was apparently willing to forgo the benefits
that might be gained from permitting the GAO broad access to the
contractor's business records in order to protect those contractors
from far-reaching governmental scrutiny of their nongovernmental
affairs. By inclusion of that language, Congress injected into the
determination of which records are accessible considerations
besides the Government's
Page 460 U. S. 843
need for the information. Thus, any impediment that our holding
places in the path of the GAO's power to investigate fully
Government contracts is one that Congress chose to adopt, [Footnote 22
] and any arguments that
this situation should be changed must be addressed to Congress, not
the courts. [Footnote
We address briefly Merck's contention that there is yet another
independent ground upon which the Comptroller General should be
denied access to any of its cost records. Merck argues that the GAO
is not entitled to examine these records, because the access demand
was not made for a congressionally authorized purpose.
Specifically, Merck contends that the access-to-records statutes do
not permit the Comptroller General to request records for the
purpose of either conducting an economic study of the
pharmaceutical industry or securing information desired by
individual Members of Congress.
Much of what we have already said provides an answer to this
contention. The legislative history reveals that Congress granted
the GAO authority to examine directly pertinent records under
individual procurement contracts in order to assess the
reasonableness of the prices paid by the Government and to detect
inefficiency and wastefulness. Given this authorized purpose, there
is no reason to conclude that the GAO may not compile the
information that it may lawfully
Page 460 U. S. 844
obtain, within the statutory limits outlined above, from an
investigation of individual contracts in order to arrive at a
picture of the pharmaceutical industry generally. [Footnote 24
] Moreover, the fact that two
Senators encouraged the GAO to use its lawful authority to the
fullest extent possible is irrelevant. The GAO is an independent
agency within the Legislative Branch that exists in large part to
serve the needs of Congress. If the records sought by the GAO are
within the scope of the access-to-records provisions, the fact that
the Comptroller General's request had its origin in the requests of
Congressmen or that the GAO reported the data to Congress does not
vitiate its authority.
Because of the GAO's mandate to detect fraud, waste,
inefficiency, and extravagance through full audits of Government
contracts, we cannot accept Merck's view that the only records
directly pertinent to the four fixed-price contracts at issue are
those necessary to verify that Merck actually had an established
catalog price for the item procured, that it sold the items in
substantial quantities to the general public at the catalog price,
that it delivered the product specified, and that it received from
the Government no more than the amount due under the contract. On
the other hand, given the policy of protecting the privacy of
contractors' business records also expressed in the statutory
language and legislative history,
Page 460 U. S. 845
neither can we accept the Government's contention that it must
be permitted access to all of Merck's cost records. Accordingly, we
affirm the judgment below.
It is so ordered.
* Together with No. 81-1472, Merck & Co., Inc. v.
Bowsher, Comptroller General of the United States, et al.,
also on certiorari to the same court.
A pure fixed-price contract requires the contractor to furnish
the goods or services for a fixed amount of compensation regardless
of the costs of performance, thereby placing the risk of incurring
unforeseen costs of performance on the contractor, rather than the
1 R. Nash & J. Cibinic, Federal
Procurement Law 413 (3d ed.1977). Variations on the pure
fixed-price contract may contain some formula or technique for
adjusting the contract price to account for unforeseen cost
elements. See id.
at 413-415 (discussing fixed-price
contract with escalation clause, fixed-price incentive contract,
and fixed-price redeterminable contract).
The Government employs two methods of procurement: advertised
formal solicitation of competitive
bids, and procurement by negotiation. A negotiated contract is the
method authorized by statute for use in situations in which the
formal advertising and bidding procedure is deemed impractical or
10 U.S.C. § 2304(a); 41 U.S.C. § 252(c).
In procuring by negotiation, the Government agency discusses the
terms of the procurement with one or more contractors and awards
the contract to the party offering the terms most advantageous to
Title 10 U.S.C. § 2313(b), which applies to the Defense Supply
Agency contracts, 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."
The Veterans' Administration contract is governed by 41 U.S.C. §
254(c), which provides in pertinent part:
"All contracts negotiated without advertising . . . shall
include a clause to the effect that the Comptroller General of the
United States . . . 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
Despite the slight difference in wording, there is no
substantive difference between the defense and civilian procurement
The Comptroller General issued identical demands to five other
pharmaceutical companies. These access-to-records demands
apparently were the product of congressional interest in
competition and profits in the pharmaceutical industry
As early as 1971, Senator Gaylord Nelson suggested during
hearings on competition in the drug industry that the Comptroller
General invoke his access-to-records authority "to take a look" at
the costs incurred by pharmaceutical companies. Hearings on
Competitive Problems in the Drug Industry before the Subcommittee
on Monopoly of the Senate Select Committee on Small Business, 92d
Cong., 1st Sess., 8020 (1971). Following those hearings, Senator
Nelson's staff continued to urge the General Accounting Office
(GAO) to use the access provisions to obtain cost records "without
any strings attached, so that the high profits could be publicized
by product and firm." App. 144a; id.
at 142a-148a. See
at 8537, 8581-8583.
Finally in June, 1973, the GAO responded by proposing a
two-phase study of the economics of the pharmaceutical industry to
be accomplished through voluntary participation by drug companies.
Merck and five other companies agreed to cooperate in the first
phase, which contemplated gathering background data on the
industry. In April, 1974, the GAO issued a proposal for the second
phase of the study, aimed at developing data on "salient economic
and operational aspects of the industry." App. 141a. Merck
expressed its concern over participating in this phase without
adequate assurance of the confidentiality of the cost data it might
be requested to supply.
Initially, the GAO agreed that the data regarding individual
companies and individual drug products should remain confidential
and anonymous. Id.
at 150a. Senators Nelson and Kennedy
and their staffs, however, reiterated that the Subcommittee's
objectives could be served only by publication of the data.
The Comptroller General's formal demand letters to
the six companies that had participated voluntarily in the Phase I
Four of the remaining five pharmaceutical companies that
received demand letters also challenged the Comptroller General's
request. See Smith-Kline Corp. v. Staats,
668 F.2d 201
(CA3 1981), cert. pending,
Nos. 81-2082, 81-2268;
Bristol Laboratories Division of Bristol-Myers Co. v.
620 F.2d 17 (CA2 1980) (per curiam), aff'd by an
equally divided Court, 461 U. S. 400
(1981); United States v. Abbott Laboratories,
597 F.2d 672
(CA7 1979); Eli Lilly & Co. v. Staats,
574 F.2d 904
(CA7), cert. denied,
439 U.S. 959 (1978).
The parties agree that the scope of the Comptroller General's
authority under the access-to-records clauses in the four contracts
turns on the meaning of the statutory language, rather than on the
intention of the parties to the contract. We also emphasize at the
outset that Merck does not challenge the authority of Congress to
impose, as a condition of doing business with the Government, a
requirement that contractors disclose all of their cost records to
the Comptroller General, regardless of the pertinence of these
records to the particular contract. Rather, Merck bases its
arguments on its interpretation of the statutory language.
In partial dissent, JUSTICE BLACKMUN objects that, after a nod
in the direction of the statutory language, we inexplicably wander
off to explore the statutory purposes. Post
460 U. S. 860
As we observe infra
at 460 U. S. 834
however, the statutory language does not tell us exactly which
records are subject to GAO examination. It is a well-settled canon
of statutory construction that, where the language does not dictate
an answer to the problem before the Court, "we must analyze the
policies underlying the statutory provision to determine its proper
scope." Rose v. Lundy, 455 U. S. 509
455 U. S. 517
(1982). Accordingly, we examine the legislative history to assess
the purposes Congress sought to serve by the language it chose. As
the statutory purposes clearly revealed by
the legislative record justify allowing access to direct cost
This bill was modeled on, and as originally proposed was
identical to, a January, 1951, amendment to the First War Powers
Act of 1941. See
Act of Jan. 12, 1951, 64 Stat. 1257. That
amendment was a piece of emergency legislation adopted in response
to the crisis conditions created by the Korean War. Because of
severe wartime inflation, many defense contractors holding
fixed-priced contracts could not meet their obligations. To
alleviate the problem, Congress gave President Truman emergency
authority to renegotiate Government contracts. See
H.R.Rep. No. 3227, 81st Cong., 2d Sess., 3-4 (1950). The
access-to-records provisions were included in order to deter fraud
and profiteering in the renegotiation process. 96 Cong.Rec. 17123
(1951) (remarks of Rep. Celler) ("The amendment will give power to
the General Accounting Office to go into the books and delve into
the records of these contractors who have been relieved to
determine whether or not there is fraud or overreaching or whether
they have done anything untoward").
Although the initial access-to-records legislation in the
January, 1951, amendments was of limited duration, Congress shortly
thereafter passed the permanent version at issue here.
Representative Hardy, the sponsor of both the temporary and
permanent access-to-records provisions, learned that Government
procurement officers were negotiating contract modifications under
two permanent procurement statutes that lacked access provisions,
the Armed Services Procurement Act of 1947 and the Federal Property
and Administrative Services Act of 1949. "In order to plug this
loophole," Representative Hardy introduced the bill to require
inclusion of access-to-records clauses in contracts negotiated
under these statutes. 97 Cong.Rec. 13198 (1951) (remarks of Rep.
Representative Hardy further explained the inspiration for the
bill. Because of the absence of competitive safeguards when the
Government procures by negotiation, rather than by formal
solicitation of bids, Representative Hardy identified a need to
establish "every reasonable safeguard against waste and
extravagance in the spending of" Government funds in the context of
negotiated contracts. 97 Cong.Rec. 13198 (1951). By permitting the
GAO "to check the transaction both from the Government records and
the contractors' books," the bill would ensure that the Government
did not "come out on the short end of the deal." Ibid.
Representative Hardy then cited a number of "typical situations in
which the authority of this bill would play an effective part."
One example dealt with detection of an inefficient
market structure under which, because the Government was purchasing
automotive parts from a dealer who in turn bought from a middleman,
the Government was paying a price that included "profits upon
profits, and completely wasteful administrative and handling
Thus, contrary to Merck's assertion, the 1951 access statutes
were designed to detect more than fraud and abuse in the
negotiation of procurement contracts. Representative Hardy himself
remarked that GAO review under the access provisions would disclose
"a lot of other situations besides those involving fraud."
It is possible that the 1951 Congress was aware of this tension.
The addition of the Hoffman amendment was a clear compromise.
Representative Hoffman had adamantly opposed the Hardy bill from
the outset because of the breadth of authority it would give to the
GAO. The amendment he offered emerged from a discussion between
Representative Hardy and Representative Hoffman and represented the
extent of the limitation upon GAO's access authority that
Representative Hardy would accept. See
97 Cong.Rec. 13377
(1951) (remarks of Rep. Hoffman).
It does not follow, as JUSTICE WHITE assumes, post
460 U. S. 852
from the fact that the Hoffman amendment was a compromise that the
restrictive language is to be given no effect at all. In dissent,
JUSTICE WHITE refers to the Hoffman amendment as "largely a sop to
the bill's opponents." Post
at 460 U. S. 853
The legislative record, however, tells us that a majority voted for
the Hoffman amendment, and we must give weight to the expressed
will of a legislative majority. JUSTICE WHITE also interprets the
Hoffman amendment as an "assurance that the bill would not be used
as a basis for inspection of books and records having no
substantial connection with Government procurement." Ibid.
Notwithstanding this recognition of the amendment's purpose,
however, JUSTICE WHITE adopts a construction of "directly
pertinent" that completely eviscerates the limiting purpose of the
Hoffman amendment, for he would allow the GAO access to any records
helpful in determining the amount of profit being made by the
contractor. See post
at 460 U. S. 856
Thus, under the guise of "interpretation" of the statute, JUSTICE
WHITE has "construed" the statute so broadly as to give it a
reading indistinguishable in effect from the bills to expand the
GAO's access authority that were rejected by Congress in the
1970's. See n
Such an approach therefore bespeaks legislation,
rather than interpretation.
Recognizing the extreme encroachment upon the privacy of a
contractor's business records which his interpretation of the
statutes would permit, JUSTICE WHITE attempts to bring "balance"
and "reason" to bear on the situation by invoking courts' powers
under Fourth Amendment principles to limit the GAO's right of
at 460 U. S.
-858. If, however, Congress had intended the GAO
demands to be limited only by the Fourth Amendment, it need not
have concerned itself with requiring that records be directly
pertinent to the contract.
By indirect costs, we mean costs incurred in the areas of
research and development, marketing and promotion, distribution,
and administration, which are not directly attributable to a
It is significant to note that the profit study of the defense
industry, which Congress authorized as part of the Military
Appropriations Act of 1970, Pub.L. 91-121, § 408, 83 Stat. 204, is
the only occasion on which Congress has deliberately granted the
GAO the kind of broad-ranging authority it asserts here. In
conferring this authority, Congress, wary of equipping the GAO to
conduct a "fishing expedition," 115 Cong.Rec. 25795 (1969) (remarks
of Sen. Ribicoff), carefully limited such authority to "only a
single study." Id.
at 25793 (remarks of Sen.
Although not conclusive with respect to interpretation of the
1951 access statutes, subsequent congressional rebuffs of GAO
requests for expansion of its access authority are instructive both
with regard to the GAO's view of the limits of the 1951 legislation
and Congress' apparent reluctance to broaden that legislation. For
example, a Senate bill introduced in 1973 directed that
"the Comptroller General . . . shall . . . have access for the
purpose of audit and examination to any books, documents, papers
and records . . . which in the opinion of . . . the Comptroller
General may be related or pertinent
to the . . . contracts . .
. [or] subcontracts."
S. 2049 93d Cong., 1st Sess. (1973) (emphasis added). Another
Senate bill which, like S. 2049 never emerged from committee, would
have granted the Comptroller General authority to undertake a study
of profits made on Government and commercial contracts by
contractors having Government contracts aggregating $1 million or
more. To enable the Comptroller General to make such studies, the
bill gave him the authority to demand from the contractor "such
information maintained in the normal course of business . . . as
the Comptroller General determines necessary or appropriate." S.
3014, 93d Cong., 2d Sess. (1974). See also
S. 2268, 94th
Cong., 1st Sess. (1975).
We observe that JUSTICE WHITE's dissent makes no attempt at all
to deal with this evidence of the GAO's own view of the limits of
its access authority. Given the GAO's historic position, excepting
of course its position in the Hewlett-Packard
case and the
current litigation, see infra,
contractors like Merck who
entered into fixed-price negotiated contracts with the Government
had no reason to expect that consenting to inclusion of the
access-to-records clause would subject their businesses to the kind
of broad-ranging inquiry which JUSTICE WHITE's dissent
like this case, involved a request by
the Comptroller General to review cost records of a contractor who
entered into fixed-price negotiated contracts. During that
litigation, a congressional Subcommittee commenced hearings to
investigate "the need for, or desirability of, recommending
legislative action" in light of Hewlett-Packard's refusal to permit
inspection of its cost records under the access provisions.
Hearings on Relation of Cost Data to Military Procurement before
the Subcommittee for Special Investigations of the House Committee
on Armed Services, 88th Cong., 1st Sess., 3 (1963). During the
course of these hearings, Robert F. Keller, General Counsel of the
GAO, testified concerning the GAO's position with respect to the
"It is our position that the contract clause and the statute
give us the right to examine the cost records of the contractor and
other pertinent data that relates [sic
] to the items
included in the contract, in sufficient completeness and detail to
permit us to determine the reasonableness of the negotiated
at 10. Mr. Keller further stated that the GAO could
"go beyond direct manufacturing costs" into such areas as "how
research costs are allocated as between the Government contract and
commercial business." Id.
In legislative hearings in 1965, which in part addressed "the
extent of the GAO's right to examine contractor books and records,"
Hearings on Comptroller General Reports to Congress on Audits of
Defense Contracts before a Subcommittee of the House Committee on
Government Operations, 89th Cong., 1st Sess., 3 (1965), the
Comptroller General again referred to his position in the
case, which was still pending in the
courts, regarding the proper interpretation of the access
Direct costs would include the direct manufacturing and overhead
costs incurred in producing the specific drug items procured under
the four contracts, as identified by the District Court. See
at 460 U. S.
JUSTICE WHITE objects that this line-drawing permits a
contractor to restrict the GAO's access authority by the particular
accounting practices the contractor chooses to adopt. Post
at 460 U. S.
-857, n. 18. That objection, however, is not
accurate. We have indicated that, as a general matter, because of
the congressional intent to protect the privacy of the contractor's
records involving nongovernmental transactions, the Government is
precluded from inspecting records of indirect costs. Nevertheless,
the Government is permitted access to some records falling within
the latter category if the contractor has made the extra effort of
identifying, for his own purposes, some indirect costs that he
thinks may be attributable to specific products. To the extent the
contractor has done so, the Government is permitted access to
records of those costs. This principle does not tie the
Government's entire access authority to the accounting practices
adopted by the contractor. Such inspection represents a windfall,
as it were, to the Government based upon the extra effort the
contractor has made in allocating his costs. Without that effort,
the Government would not otherwise be permitted to inspect such
records because of privacy concerns. Given this added benefit to
the Government, it is anomalous to argue that its access authority
is being "limited" by the contractor's accounting method.
By contrast, where the contract that serves as the predicate for
the GAO's access demand is cost-based -- as in a cost-plus contract
-- the contractor is in no position to complain of the
intrusiveness of GAO inspection of indirect cost records. By
claiming from the Government full reimbursement for these costs
under the cost-based contract, the contractor represents that these
costs are justified as attributable to the performance of the
Government contract, and not to any nongovernmental transactions.
Therefore, the public interest served by permitting the GAO to
inspect records supporting these claims clearly outweighs any
privacy interests the contractor possesses in those records.
JUSTICE WHITE suggests that, when indirect cost records relate
both to governmental and nongovernmental transactions, the GAO
should be permitted access to the records of any indirect costs
that it can prove had a direct and substantial impact on the price
charged to the Government under the contract. Post
460 U. S. 857
This approach is unworkable for both the Government and
contractors. To decide these "close questions" of direct
pertinence, the parties to the fixed-price contract may be forced
to resort to the courts. Bright-line rules upon which the parties'
expectations may be firmly established are preferable to the
protracted litigation that JUSTICE WHITE's suggestion would
In addition to the decision below, see Smith-Kline Corp. v.
668 F.2d 201 (CA3 1981), cert. pending,
81-2082, 81-2268, and Bristol Laboratories Division of
Bristol-Myers Co. v. Staats,
620 F.2d 17 (CA2 1980) (per
curiam), aff'd by an equally divided Court, 451 U.
(1981). See also Hewlett-Packard Co. v.
385 F.2d 1013 (CA9 1967) (permitting access to
records of direct production costs, including direct material,
direct labor, and overhead costs), cert. denied,
The Government suggests that direct costs may represent as
little as 9% of the sales price of a pharmaceutical product. Brief
for Petitioners in No. 81-1273, p. 34.
We observe, however, that the Government has conceded in this
action that it has no reason to suspect that Merck has engaged in
any fraud or impropriety in connection with the negotiation or
performance of these contracts. App. 41a-44a, 76a. Nor does the
Government have any reason to believe that the prices charged under
these contracts were unreasonable in any way. Id.
76a. In fact, the price under each of the contracts was the lowest
price at which Merck sold each of the products to anyone at the
time the contracts were awarded. Id.
at 26a, 42a.
The extent of any burden is, however, unclear. In fact, in
testimony before Congress, the Comptroller General candidly
expressed doubts about the usefulness of access to records of
indirect costs in the pharmaceutical industry, suggesting that the
attempt to determine from these records the portion of indirect
costs allocable to individual drug products would be "a waste of
time." Hearings on Competitive Problems in the Drug Industry before
the Subcommittee on Monopoly of the Senate Select Committee on
Small Business, 92d Cong., 2d Sess., 8578 (1972).
The GAO's own recognition of this dilemma has prompted it, as
outlined in n
to seek expanded access authority from Congress.
Its efforts for expansion are more appropriately directed to that
The record indicates that compilation of information lawfully
obtainable under its access authority is what the GAO intended to
accomplish. One GAO official explained:
"[I]f we were to use our right of access under specified Federal
contracts, we would attempt, insofar as possible,
present a report similar to that which we had proposed to present
under the April, 1974, proposal [for the second phase of the
economic study of the pharmaceutical industry]."
"App. 154a-155a (emphasis added). GAO officials also recognized
that the statutory restrictions on its access authority would
necessitate some changes in the approach contemplated under the
prior two-phase study based on the voluntary participation of the
pharmaceutical companies. Ibid.
JUSTICE WHITE, with whom JUSTICE MARSHALL joins, concurring in
part and dissenting in part.
I join 460 U. S.
I concur in the remainder to the extent it upholds the GAO's right
to inspect Merck's "direct" cost records. [Footnote 2/1
] I dissent to the extent the Court refuses
to allow the GAO access to any of Merck's "indirect" cost
The statutory provisions at issue, 10 U.S.C. § 2313(b) and 41
U.S.C. § 254(c), clearly were intended to allow the GAO the right
to a reasonable degree of access to contractors' records needed to
determine whether prices charged to the Government were excessive.
Of course, this right was not intended to be unlimited; the Court
correctly identifies a congressional intent to protect private
contractors from "officious governmental intermeddling. "
at 460 U. S.
Page 460 U. S. 846
Unfortunately, for the conceded purpose of creating a
bright-line test, ante
at 460 U. S. 841
n. 18, the Court goes astray by adopting a rule that flatly bars
the GAO from access to all indirect cost records pertaining to most
fixed-price contracts, regardless of how urgent the need for them
might be. The Court frankly admits that its rule may deny the GAO
access to cost records critical to an assessment of the fairness of
the contract price, thereby impeding the GAO's ability to protect
the public against wasteful Government expenditures. Ante
at 460 U. S.
-843. These undesirable consequences could be
avoided, without sacrificing the contractors' right to be free from
unwarranted GAO "snooping," by holding the Government to the burden
of showing that requested records likely had a direct and
substantial impact on the price charged to the Government and thus
are "directly pertinent" to the contract.
In each of the four contracts involved here, the United States
agreed to purchase certain pharmaceutical products from Merck at a
fixed price. In each instance, Merck proposed a contract price
based on its catalog or "market" price, and the Government
contracting officer accepted the proposal without any "haggling" or
other negotiation as to price. Each of the contracts contains the
statutorily mandated provision allowing the GAO the right to
inspect Merck's books and records that are "directly pertinent" to
The GAO now seeks to examine those Merck records that indicate
the cost to Merck of the goods sold to the Government. The GAO
deems such an examination necessary to carry out its statutory duty
to "investigate . . . all matters relating to the receipt,
disbursement, and application of public funds," and to "make
recommendations looking to greater economy or efficiency in public
expenditures." 31 U.S.C. § 53(a).
By inspecting Merck's cost records, the GAO hopes to be able to
estimate whether the contract price paid by the Government
Page 460 U. S. 847
was a fair one. The GAO has confirmed by experience the
common-sense observation that the mere
"fact that a product is listed in a manufacturer's catalog and
offered to any customer is no assurance that . . . the standard
catalog price is reasonable. [Footnote
If the GAO's inspection were to reveal that Merck's prices were
unreasonably high, the GAO presumably would recommend to the
contracting agencies that they "negotiate prices more carefully or
. . . obtain greater competition in future similar procurements,"
] or that they take
other action "looking to greater economy or efficiency," 31 U.S.C.
§ 53(a), in future expenditures.
The Court concludes, however, that, despite the inclusion of the
access-to-records provision in the contracts, the GAO has no right
to inspect any of Merck's indirect cost records to determine how
much it cost Merck to produce the products sold to the Government.
This holding exalts the contractors' privacy interest to such a
degree that it displaces the GAO's right to inspect records
unquestionably needed for an accurate determination of the fairness
of the contract price. Congress did not intend this order of
priority of interests. What Congress did intend was that
contractors be spared the burden of unwarranted
intrusions. Congress did not want the GAO to be irresponsibly
"snooping" into records lacking relevance to the question whether
the Government paid a fair price for the products it purchased. But
Congress did not wish to deny the GAO access to records
legitimately needed to detect waste, extravagance, and ineffective
procurement. To the extent the GAO can prove that some or all of a
contractor's indirect cost records fall into this latter category,
the GAO's right of access should be sustained.
Page 460 U. S. 848
I begin with the language of the statute. Jackson Transit
Authority v. Transit Union, 457 U. S. 15
457 U. S. 23
(1982); Touche Ross & Co. v. Redington, 442 U.
, 442 U. S. 568
(1979). The legislation at issue requires unadvertised Government
contracts to include a clause allowing the GAO to examine any of
the contractor's books, documents, papers, or records "that
directly pertain to, and involve transactions relating to, the
contract. . . ." 10 U.S.C. § 2313(b). See
41 U.S.C. §
"'[I]t is hard to imagine anything more directly related to a
contract than the cost of producing the items covered by it or the
matters going into the makeup of the price.'"
Eli Lilly & Co. v. Staats,
574 F.2d 904, 913 (CA7),
439 U.S. 959 (1978). Accord, Smith-Kline
Corp. v. Staats,
668 F.2d 201, 208-209 (CA3 1981), cert.
Nos. 81-2082, 81-2268; Hewlett-Packard Co. v.
385 F.2d 1013, 1016 (CA9 1967), cert.
390 U.S. 988 (1968). The Court does not contend
otherwise. Indeed, all the Court has to say about the literal
statutory wording is that it requires "some close connection
between the type of records sought and the particular contract."
at 460 U.S.
. But there is, of course, no reason why the records of
all indirect costs inherently lack the requisite "close
connection." As the Court fully recognizes, ante
460 U. S.
-843, in some instances, indirect costs have a
critical bearing on the makeup of the contract price. The
Government should at least be allowed an opportunity to prove that
such is the case, and, to the extent it succeeds in this endeavor,
the GAO should be allowed access.
Even if, contrary to my belief, the statutory language is
somehow regarded as ambiguous, resort to the legislative history
further refutes the Court's position. The legislative history of
the access-to-records provisions is relatively brief and to the
point. It demonstrates beyond doubt that Congress
Page 460 U. S. 849
authorized the GAO to examine all of a contractor's books
legitimately needed to evaluate Government procurement techniques
by ascertaining whether the Government had paid a reasonable price
for the contractor's goods or services.
Representative Hardy, the bill's sponsor, indicated that the
bill was intended to improve the adequacy of Government procurement
techniques in various ways. He expressly remarked:
"The major purposes of this bill are two-fold: one, to give the
Comptroller General the proper tools to do the job the Congress has
instructed him to do; and, two, to provide a deterrent to
improprieties and wastefulness in the negotiation of
97 Cong.Rec. 13198 (1951). As noted supra
460 U. S. 846
Congress has instructed the GAO to "investigate . . . all matters
relating to the receipt, disbursement, and application of public
funds," and to "make recommendations looking to greater economy or
efficiency in public expenditures." 31 U.S.C. § 53(a). [Footnote 2/4
Representative Hardy early explained to his colleagues that
normal procurement procedures called for competitive bidding, but
that procurement by negotiation was sometimes necessary. In the
latter context, where there is no competitive bidding to "operat[e]
as a brake on the price which a contractor can demand from the
Government," Representative Hardy saw the need to establish "every
reasonable safeguard against waste and extravagance in the
spending" of Government funds. 97 Cong.Rec., supra,
13198. He felt that, no matter how "conscientious and honest" the
Government representatives might be, the contractor's
representatives would, in the great majority of cases, have a
Page 460 U. S. 850
from the standpoint of both training and experience.
Thus, there was "every chance in the world that the
Government [would] come out on the short end of the deal," and
Representative Hardy deemed it necessary to "at least enable the
[GAO] to check the transaction, both from the Government records
and the contractors' books." Ibid.
The debate continued two days later when Representative Hardy
proposed an amendment that would have allowed agency heads the
discretion to omit the access-to-records clause from contracts with
foreign contractors, id.
at 13371, and Representative
Harvey proposed an amendment that would have exempted "a
manufacturer or processor who is a supplier of material to a
primary contractor and who is not a subcontractor" from the scope
of the bill's coverage. Id.
at 13376. Both of these
proposals were ultimately defeated, but, during the lively debate
on the proposed amendments, several Members of Congress stated
without contradiction that the bill would allow the GAO extremely
broad authority to examine records. For example, Representative
Harvey asked whether, if the bill became law, a subcontractor of a
primary Government contractor "would be subject to having
of his books opened up for inspection by Government
at 13372 (emphasis added). Representative
Hardy replied that it would, unless the subcontractor only supplied
some "casual item" in connection with the performance of the
Based on this understanding,
Representative Harvey later argued that his limiting amendment was
needed, because otherwise
"every manufacturer . . . of . . . goods that eventually find
their way into defense production . . . is going to have to supply
all the answers to the GAO on everything he manufactures."
at 13376. "[E]very section of his books will have
to come under the complete scrutiny of the GAO." Ibid.
response, Representative Hardy did not dispute this
characterization of the scope of the GAO's authority, but he
nevertheless opposed the Harvey amendment, because it "would make
Page 460 U. S. 851
frequently to obtain information which would be vital in the
study of a contract." Ibid.
Representative Hoffman, a strong opponent of the bill, several
times during the debate observed that the "GAO, under this bill,
can go into the books of [contractors] and ask and get from them
anything and everything they want." Id.
at 13373. He
indicated his belief that the bill would allow the GAO "to snoop
into [a contractor's] books and find out what [the goods or
services] cos[t] or what will be a fair price or what profit we
make." Ibid. See also id.
at 13375, 13377.
Standing alone, of course, the statements of an opponent of the
bill, such as Representative Hoffman, would not carry much weight,
] but here, even
though all comments pro and con were made in the midst of a
free-wheeling debate, the proponent of the bill, Representative
Hardy, in no way took issue with Representative Hoffman's view of
the scope of the GAO's authority. Representative Hardy's essential
response was that it was necessary to require contractors to afford
the GAO this broad authority, and that Representative Hoffman's
fears of excessive GAO "snooping" were groundless, because the GAO
would have neither the inclination nor the manpower to examine the
records of every individual supplier. Id.
The original Hardy bill required the inclusion, in negotiated
contracts, of a clause allowing the GAO the right to examine any
records that were "pertinent" to the contract. At the very end of
the debate, Representative Hoffman proposed the amendment that
added the word "directly" before the word "pertinent." Id.
at 13377. Representative Hoffman explained that he had discussed
his amendment with Representative Hardy, the bill's sponsor, and
that, although the amendment was "not all that it should be," it
Page 460 U. S. 852
most that Representative Hardy would agree to. Ibid.
Hoffman then stated that the purpose of his amendment was "to limit
the snooping' that may be carried on under this bill which we
do not have the votes to defeat." Ibid. At that point,
Representative Hardy remarked that he had no objection to the
amendment, and it was accepted without further discussion.
In light of Representative Hardy's consistent position
throughout the debate, it cannot plausibly be argued that he agreed
to the Hoffman amendment with the understanding that it effected a
drastic reduction in the scope of the bill's coverage or purpose.
As outlined above, Representative Hardy continuously spoke of the
need to provide a mechanism to combat waste and extravagance in
federal procurement, and he vigorously and successfully opposed the
Harvey amendment, which would have significantly limited the
Page 460 U. S. 853
scope. His acceptance of the addition of the word "directly" may
have been largely a sop to the bill's opponents. The most that can
be said is that Representative Hardy accepted the amendment to
allay concerns that the legislation "would let the GAO go into
everybody's business and look it over if they just wanted to take a
look at it." Id.
at 13373 (Rep. Hoffman). The amendment
gave assurance that the bill would not be used as a basis for
inspection of books and records having no substantial connection
with Government procurement. But the amendment definitely was not
intended to bar the GAO's access to records legitimately needed to
assess the reasonableness of prices charged to the Government, and
thereby to protect the Government against waste, excessive prices,
and ineffective procurement. [Footnote
Despite the plain statutory language and legislative history,
the Court refuses to uphold the GAO's right of access to all cost
records that are essential to an accurate determination of whether
the Government wasted money by entering into these contracts.
Adopting the so-called "Bristol
test," [Footnote 2/9
] the Court affirms a judgment that
limits the GAO's access to records pertaining to a contractor's
"manufacturing costs (including raw and packaging materials,
labor and fringe benefits, quality control and supervision),
manufacturing overhead (including plant
Page 460 U. S. 854
administration, production planning, warehousing, utilities and
security), royalty expenses, and delivery costs. [Footnote 2/10
The Bristol test excludes
"books, documents, papers, or records with respect to research
and development, marketing and promotion, distribution and
administration (except to the extent such data may be included in
the cost items listed above). [Footnote 2/11
The Court describes this test, perhaps inaccurately, [Footnote 2/12
] as being based on a
"direct costs v. indirect costs" or an "allocated costs v.
unallocated costs" dichotomy.
The courts that have adopted this test have no doubt been
influenced by a need to come up with some form of reasonable
limitation on the broad access demand the GAO has made. The GAO
claims it has the right to examine records pertaining to every cost
"defrayed from commingled general revenues that include the
Government's payments under the contract." I agree that the GAO's
demand is somewhat overbroad; the Court correctly observes,
at 460 U. S. 836
that it would require Merck to allow inspection of cost records
totally unrelated to the Government contracts, such as records of
expenditures for raw materials used to manufacture products other
than those sold to the Government under the contracts. [Footnote 2/13
] However, I am not
convinced that the proper conclusion is to limit the GAO to the
cost records allowable under the Bristol
court adopted its standard solely on the
basis of the cost records that the contractor was willing
Page 460 U. S. 855
to the GAO. The court felt that the contractor's offer
"reflected a responsible and reasonable effort to distinguish
directly pertinent' matter within the meaning of the access to
records clause." [Footnote 2/14]
The court thus accepted the contractor's contention that the cost
records it was not willing to disclose had "only the most general
relation, if any, to the prices charged." [Footnote 2/15]
Although cost records having, at most, only an insubstantial
relation to the price charged are not "directly pertinent" to the
contract, it is apparent that many of the records deemed
unexaminable under Bristol
relate to costs that may have
had a critical bearing on the prices charged, and that would be of
central importance to a GAO inquiry into the fairness of these
prices. In the pharmaceutical industry, it has been estimated that
"direct" or "allocated" costs constitute only about nine percent of
the sale price of individual products. The so-called "indirect" or
"unallocated" costs -- primarily research and development,
advertising and other promotion, general administrative expenses,
and taxes -- and profit are much larger and economically more
significant. [Footnote 2/16
under the Bristol
test, the GAO is denied access to
records in this category, thus making it impossible
for the GAO to make an accurate assessment of the fairness of the
prices, and thus the adequacy of the Government's procurement
technique. [Footnote 2/17
Page 460 U. S. 856
In my view, the correct rule in a case of this nature is that
any books or records that bear directly on the question whether the
Government paid a fair price for the goods or services it purchased
are "directly pertinent" to the contract of purchase. Under this
test, for example, the cost records of an advertising campaign to
promote only the particular products sold to the Government, or a
research project designed specifically to develop or improve these
products, would clearly be "directly pertinent." [Footnote 2/18
] On the other hand,
Page 460 U. S. 857
records of advertising campaigns and research projects involving
only unrelated products would lack the requisite degree of
pertinence. Of course, in many instances, a commercial
advertisement or a research project will be designed to promote or
develop both products sold to the Government and other, unrelated
products. With respect to cost records of efforts such as these,
there might be some close questions as to whether such records are
"directly pertinent" to the Government contracts. If, however, the
GAO could bear the burden of proving that the records are of costs
that likely had a direct and substantial impact on the price
charged to the Government under the contract, I would allow the GAO
access to the records.
The inquiry does not necessarily come to an end once the GAO
establishes that it has a statutory and contractual right to
inspect particular records. In addition to the statutory
Page 460 U. S. 858
"directly pertinent" limitation, the GAO's right of inspection
is further circumscribed, and the contractors' right to privacy is
further protected, by constitutional standards, such as the Fourth
Amendment reasonableness requirement.
Where, as here, the GAO wishes to see a contractor's records and
the contractor declines to accede voluntarily to a GAO request, the
GAO must issue an administrative subpoena. If the contractor
refuses to comply with the subpoena, the GAO must apply to a
district court for enforcement of the subpoena. 31 U.S.C. § 54(c)
(1976 ed., Supp. V). [Footnote
Once in the district court, a contractor such as Merck has the
benefit of all of this Court's jurisprudence limiting the bounds of
an agency's right to demand the production of a private entity's
records. Essentially, in assessing an agency's application for
enforcement of an administrative subpoena, we have insisted that
the agency's demand be reasonable. The general rule is that,
"when an administrative agency subpoenas corporate books or
records, the Fourth Amendment requires that the subpoena be
sufficiently limited in scope, relevant in purpose, and specific in
directive so that compliance will not be unduly burdensome."
See v. City of Seattle, 387 U.
, 387 U. S. 544
(1967). See United States v. Moron Salt Co., 338 U.
, 338 U. S.
-653 (1950); Oklahoma Press Publishing Co. v.
Walling, 327 U. S. 186
327 U. S. 208
(1946); 1 K. Davis, Administrative Law Treatise § 4:15 (2d
ed.1978). This standard is a flexible one that takes into account
the extent to
Page 460 U. S. 859
which the public interest will be served if the subpoena is
enforced. See v. City of Seattle, supra,
at 387 U. S.
In the present case, Merck has claimed that compliance with the
GAO's demand would entail substantial expense and disruption of its
operations. This claim is based on evidence that the proposed GAO
inspection would require Merck to allow an entire team of GAO
auditors to remain on site at Merck for over two years. [Footnote 2/20
] This, of course, is a
matter for first-instance determination by the District Court, but
if the proposed GAO inspection would, in fact, cause such a high
degree of interference with Merck's business, a credible argument
could be made that compliance would be unreasonable and unduly
burdensome and that the GAO's access should therefore be limited in
In view of the foregoing, I would remand these cases to the
District Court, with instructions to uphold the GAO's request for
access to Merck's "direct" and "indirect" cost records, but only to
the extent that: (1) the records sought by GAO related to costs
that likely had a direct and substantial impact on the prices
charged to the Government under the contracts; and (2) the request
is reasonable in scope and would not unduly burden Merck. To the
extent the GAO's demand conforms to these statutory and
constitutional standards, Merck should be required to allow the
GAO's examination to proceed. [Footnote 2/21
Page 460 U. S. 860
The Court correctly rejects Merck's contention that none of its
cost records are subject to inspection by the GAO. Merck's theory
has been emphatically rejected by every Court of Appeals that has
considered it. In addition to the opinion below in the present
case, Merck & Co. v. Staats,
214 U.S.App.D.C. 418, 665
F.2d 1236 (1981), see Smith-Kline Corp. v. Staats,
F.2d 201 (CA3 1981), cert. pending,
Nos. 81-2082, 81-2268;
United States v. Abbott Laboratories,
597 F.2d 672 (CA7
1979); Eli Lilly & Co. v. Staats,
574 F.2d 904 (CA7),
439 U.S. 959 (1978); and Hewlett-Packard
Co. v. United States,
385 F.2d 1013 (CA9 1967), cert.
390 U.S. 988 (1968). Apparently recognizing the
untenability of the argument advanced here by Merck, the
pharmaceutical manufacturer in Bristol Laboratories Division of
Bristol-Myers Co. v. Staats, 428
F. Supp. 1388
(SDNY 1977), aff'd,
620 F.2d 17 (CA2
1980), aff'd by an equally divided Court, 451 U.
(1981), did not even dispute that it was
"obliged by the terms of the contracts to provide access to
records of its manufacturing costs, records which relate to the
pricing of the products delivered and records required to verify
all data obtained during the course of the review."
428 F. Supp. at 1389.
Hearings on Relation of Cost Data to Military Procurement before
the Subcommittee for Special Investigations of the House Committee
on Armed Services, 88th Cong., 1st Sess., 8 (1963) (remarks of
Robert F. Keller, General Counsel of the GAO).
App. 23a (affidavit of Paul G. Dembling, General Counsel of the
"[t]he Comptroller General is authorized and directed to make an
expenditure analysis of each agency in the executive branch of the
Government . . . which . . . will enable Congress to determine
whether public funds have been economically and efficiently
administered and expended."
31 U.S.C. § 60.
See, e.g., National Woodwork Manufacturers Assn. v.
NLRB, 386 U. S. 612
386 U. S.
-640 (1967); Schwegmann Bros. v. Calvert
Distillers Corp., 341 U. S. 384
341 U. S. 394
In fact, it appears that it was Representative Hardy, not
Representative Hoffman, who proposed the language of the amendment
that limited the Government to "directly pertinent" records.
Representative Hoffman stated that this language was "the best he
[Representative Hardy] could think of.
" 97 Cong.Rec. 13377
(1951) (emphasis added). Apparently what happened is that
Representative Hoffman and Representative Hardy had a private
meeting, during which Representative Hoffman suggested the need for
a limiting amendment. Representative Hoffman had stronger language
in mind, which Representative Hardy refused to accept.
Representative Hardy must have then proposed the "directly
pertinent" language to placate his colleague, and Representative
Hoffman, though not satisfied, "was rather forced to accept it and
to agree with him." Ibid.
Thus, although the Court is
correct in stating, ante
at 460 U.S. 833
, that the amendment
"circumscribe[d] the inquiry the Comptroller General was authorized
to undertake," it is clear that this circumscription was only to
the extent agreeable to Representative Hardy, who, as shown by his
opposition to the Harvey amendment and his other remarks throughout
the debate, clearly would not have agreed to a sharp reduction in
the scope of his bill.
Immediately after passage of the Hoffman amendment, the House
passed the bill, as amended, 97 Cong.Rec. 13378 (1951). On the
following day, the Senate passed it without any debate whatsoever.
Accord, Merck & Co. v. Staats,
214 U.S.App.D.C. at
431, 665 F.2d at 1249 (Mikva, J., concurring in part and dissenting
in part); Eli Lilly & Co. v. Staats,
574 F.2d at 916;
Comment, 92 Harv.L.Rev. 1148, 1157-1158 (1979) ("The court [in
] correctly rejected Lilly's argument that the
insertion of the word directly' into the `directly pertinent'
formula sharply narrowed the scope of inquiry to be allowed the
The test was first adopted by the District Court in Bristol
Laboratories Division of Bristol-Myers Co. v.
Staats, 428 F.
(SDNY 1977), aff'd,
620 F.2d 17 (CA2 1980),
aff'd by an equally divided Court, 451 U.
App. to Pet. for Cert. in No. 81-1273, p. 39a. See ante
at 460 U. S.
App. to Pet. for Cert. in No. 81-1273, p. 40a. See ante
at 460 U. S.
court itself stated that the costs records
held examinable under its test are "by no means . . . limit[ed]" to
direct costs. 428 F. Supp. at 1391.
The Court is also correct in concluding, ante
460 U. S.
-839, that, because the GAO's interpretation of the
statute has not been consistent, it is not entitled to particular
428 F. Supp. at 1391.
Eli Lilly & Co., supra,
at 913; Merck & Co.
v. Staats, supra,
at 429, 665 F.2d at 1247 (Mikva, J.,
concurring in part and dissenting in part); Reekie, Price &
Quality Competition in the United States Drug Industry, 26 J.Indus.
Econ. 223, 235 (1978); Rucker, Public Policy Considerations in the
Pricing of Prescription Drugs in the United States, 4 Int'l
J.Health Services 171, 173 (1974).
For example, the Bristol
test might not allow the GAO
to examine a contractor's records of advertising costs. One would
imagine that, if the GAO were aware that a great percentage of the
cost of the products of a certain company went to support a large
advertising campaign, rather than, say, to maintain quality
control, the GAO might recommend to the contracting agency that it
not deal with that company in the future. Yet, under the
test, the GAO might not be able to obtain the
information needed to make such a recommendation.
On this point, the Court and I appear to be in agreement,
although this fact is far from clear from the Court's opinion. At
one point, the Court defines indirect costs as
"costs incurred in the areas of research and development,
marketing and promotion, distribution, and administration,
which are not directly attributable to a particular
at 460 U. S. 836
n. 11 (emphasis added). See also ante
at 460 U. S. 841
(indirect costs are those requiring "somewhat arbitrary accounting
allocations"). This definition indicates the Court agrees with me
that records of costs in these areas that are directly attributable
to the products sold to the Government -- such as the cost records
of an advertising campaign or a research project designed to
promote or develop only the specific products sold to the
Government -- should be considered "direct costs" that are subject
to examination by the GAO.
Potential confusion arises, however, in view of the fact that
the Court affirms the judgment below in its entirety, even though
that judgment can perhaps be read as denying the GAO access to
product-specific records in areas such as advertising and research.
The judgment denies access to all records in areas such as research
and advertising, "except to the extent such data may be included in
the cost items [to which the GAO is allowed access]." Merck
& Co. v. Staats,
214 U.S.App.D.C. at 428, 665 F.2d at
1246. Product-specific records in areas such as advertising and
research do not appear to be included among any of the
access-permitted cost items mentioned in the judgment, unless it
can be said that they constitute records of "manufacturing costs."
The Court adds to the uncertainty with its statement,
at 460 U. S. 840
that the GAO should be allowed access to records in such areas as
research and advertising "to the extent the contractor has
allocated these costs as attributable to the particular contract."
This language suggests that the contractor can avoid a GAO
examination of even product-specific records in these areas by
arbitrarily refusing to attribute these costs to the specific
In light of the Court's emphasis on the need for "[b]right-line
rules upon which the parties' expectations may be firmly
at 460 U. S. 841
n. 18, it is surprising that the Court is not precise on this
point. My "objection" is not, as the Court indicates, ante
at 460 U. S. 840
n. 16, that the Court ties the GAO's ability to inspect indirect
cost records to the contractor's accounting practices. Rather, my
concern is with the tension between the Court's holding and the
judgment it affirms without modification. Under the Court's
rationale, product-specific research and advertising costs are
"direct costs," and are subject to GAO inspection regardless of the
contractor's accounting practices. It is not clear that the
judgment below permits this result. Nor is it clear that the
judgment would allow the GAO to conduct a "windfall" inspection of
contractor-allocated indirect cost records, which the Court
expressly sanctions. Ibid.
The potential problem arises
mainly because the opinion speaks generally of a direct-indirect
dichotomy, although it affirms a judgment that may not break down
neatly along these lines. In any event, I read the Court's opinion
as allowing access to all records that are or must fairly be
attributed to the specific products sold to the Government.
The GAO has had this subpoena power only since 1980.
Pub.L. 96-226, § 102(c), 94 Stat. 312 (codified as 31
U.S.C. § 54(c) (1976 ed., Supp. V)). Prior to 1980, the GAO could
only sue for specific performance of its contractual right of
access. See, e.g., Hewlett-Packard Co. v. United States,
385 F.2d 1013 (CA9 1967), cert. denied,
390 U.S. 988
(1968). The GAO can still opt in favor of this latter, slower
course, but the Government does not make any claim that its rights
in a specific performance action would be any different from those
in an action for judicial enforcement of an administrative
Tr. of Oral Arg. 29-30.
At the time the GAO issued its demand for access to Merck's
records, it made identical demands to five other drug companies.
Apparently, only one of the six companies, Hoffman-LaRoche, Inc.
(Hoffman), voluntarily acceded to the GAO's request. According to
Merck, a team of GAO auditors remained on site at Hoffman from
July, 1975, to July, 1977, without completing the review, and, in
July, 1977, Hoffman terminated its voluntary participation. Of
course, even if Merck's claim as to the Hoffman precedent is
accurate, Merck would have to prove that a GAO review of its
records would require similar or greater disruption.
The Court does not explicitly discuss the degree of access
permissible to the GAO in instances where the Government enters
into a fixed-price contract in reliance on cost representations by
the contractor. There can be little doubt, however, that, in such
an instance, the GAO is entitled to inspect all of the contractor's
cost records, both direct and indirect. Under these circumstances,
the contract is "cost-based," and
"the public interest served by permitting the GAO to inspect
records supporting these claims clearly outweighs any privacy
interests the contractor possesses in those records."
at 460 U. S. 841
JUSTICE BLACKMUN, with whom JUSTICE STEVENS joins, concurring in
part and dissenting in part.
The question before us is the proper construction of the
access-to-records clauses required by law to be inserted in various
Government contracts. These clauses authorize the Comptroller
General to inspect any records that "directly pertain to and
involve transactions relating to" the contract into which the
clause was inserted. 10 U.S.C. § 2313(b); see
41 U.S.C. §
254(c) (permitting access to "directly pertinent" records
"involving transactions related to" the contracts). The Court now
holds that these clauses permit access to certain cost records even
when the contract is not cost-based, and was negotiated without
regard to costs. I cannot agree that cost records are "directly
pertinent" to non-cost-based contracts. I therefore dissent insofar
as the Court permits access to such records.
The Court correctly begins its analysis by focusing on the
language of the statute, noting that it contains
"words of limitation designed to restrict the class of records
to which access is permitted by requiring some close connection
between the type of records sought and the particular
at 460 U.S.
. But after this nod in the direction of the statutory
language, the Court, unaccountably in my estimation, fails to
examine the type of records sought, the nature of the particular
contract, and the closeness of the connection between them.
Instead, the Court wanders off to explore the general "aims
embraced by Congress in enacting the access-to-records provisions":
protecting contractors from governmental
Page 460 U. S. 861
intrusion, and equipping the General Accounting Office with a
tool to detect fraud and waste in Government contracting.
at 460 U.S.
. Given the "tension" between these "dual, conflicting
aims," the Court concludes that it must
"balance the public interest served by full GAO investigations
against the private interest in freedom from officious governmental
intermeddling in the contractor's private business affairs."
at 460 U. S.
-835. The Court then reaches what it deems an
"appropriate accommodation of the competing goals reflected in the
legislative history" by holding that the Comptroller General may
inspect records of "direct costs," but is barred from inspecting
other records except to the extent they are allocated to the
particular contract. Ante
at 460 U. S.
I agree that the legislative history reflects conflicting
congressional goals, but it appears to me that the necessary
"balancing" and "accommodation" of these goals has already been
accomplished by Congress. Congress may well have intended to give
the GAO a tool to detect fraud and waste and to improve the
procurement process, but the particular tool it crafted was a
limited one. It gave the Comptroller General access to a narrow
category of records: those directly pertinent to the contracts
between the Government and its contracting partner.
The Court asserts that Merck's records of direct costs are
directly pertinent to its contracts with the Government, because
such costs "are, by definition, readily identifiable as
attributable to the specific product
supplied under the
at 460 U. S. 840
(emphasis added). Records of indirect costs are not pertinent to
Merck's contracts, the Court says, because such records are
"completely unrelated to either the contract
the access demand or the product
procured under that
at 460 U. S. 836
(emphasis added). But, as the Court obviously recognizes, there is
a difference between records pertinent to the "contracts" by which
the Government does its purchasing, and records pertinent to
Page 460 U. S. 862
"products" ultimately purchased under those contracts. [Footnote 3/1
] In interpreting the
access-to-records statutes, we must "presume that Congress chose
its words with . . . care," FBI v. Abramson, 456 U.
, 456 U. S. 635
(1982) (O'CONNOR, J., dissenting), and Congress chose to require
pertinence to the specific "contract" at issue, not to the
It is a fundamental canon of statutory construction that,
"unless otherwise defined, words will be interpreted as taking
their ordinary, contemporary, common meaning." Perrin v. United
States, 444 U. S. 37
444 U. S. 42
(1979). In its ordinary meaning, a "contract" is a legally
enforceable bargain, formed by mutual consent and supported by
consideration. Restatement (Second) of Contracts § 17 (1979); 1 W.
Jaeger, Williston on Contracts § 18 (3d ed.1957). Particular goods
and services may be the subject matter of a contract, but the
"contract" itself is the agreement between the parties. Nothing in
the legislative history suggests that Congress intended any other
meaning by its choice of the word "contract." [Footnote 3/2
] The access-to-records statutes were
Page 460 U. S. 863
permit inspection of cost records when the negotiation of a
particular contract depended on representations about the
contractor's costs, or when the contract price itself varied
according to costs. See
97 Cong.Rec. 13198 (1951) (remarks
of Rep. Hardy). [Footnote 3/3
There is, however, no indication that Congress
Page 460 U. S. 864
intended to permit such inspection when costs were not relevant
to the contract's negotiation, its terms, or its performance.
Apparently recognizing that cost records are not accessible to
the Comptroller General unless they bear some relationship to the
actual contracts at issue, the Court asserts that direct cost
records are pertinent to non-cost-based contracts, because "the
contractor will have some regard for these costs in setting even a
catalog price in order to avoid a loss on the product." The Court
concludes that "these costs therefore have a very direct influence
on the price charged the Government." Ante
at 460 U. S. 840
] But the fact that
costs may affect a seller's decision to offer a certain price does
not make costs directly pertinent to the contract. A contract,
after all, is a meeting of the minds. Many factors may affect one
party's willingness to make an offer or the other party's
willingness to accept it, but the vast majority of these factors
are not mentioned in the bargaining process, and play no part in
the agreement ultimately reached. An unarticulated motive for one
party's assent to a bargain is not pertinent, much less "directly
pertinent," to the bargain itself
Pursuant to the contracts at issue here, Merck has promised to
provide various pharmaceutical products, and the Government has
promised to pay a certain price. The Government's promise was based
on Merck's standard catalog price for the products purchased.
Information about Merck's production
Page 460 U. S. 865
costs was not requested, and neither the contract price nor its
performance was tied to costs in any respect. Merck's costs were
thus irrelevant to the bargain reached by the parties. Because the
Government chose not to make costs an issue during the
negotiations, the terms of the contracts would have been the same
whether Merck's costs represented 1 percent, 10 percent, or 100
percent of the price the Government agreed to pay. The conclusion
seems inescapable that Merck's costs, and consequently its cost
records, are not pertinent to the agreements it entered into with
the Government. [Footnote 3/5
If the Government is concerned that it may be paying too high a
price for pharmaceutical products, it is always free to ask for
cost data in connection with any contract it negotiates in the
future. Cost records then would be pertinent, because
representations about costs would form part of the basis for the
bargain between the parties. In this case, however, costs were not
relevant to the Government's decision to contract with Merck. Cost
records do not become "directly pertinent" to these contracts
simply because the Government now wants information that did not
concern it at the time of contracting.
I would hold that, when the terms of a contract are not tied to
costs and the contractor makes no representations about costs
during its negotiations with the Government, cost records do not
"directly pertain to and involve transactions relating to the
contract," and are not subject to inspection by the Comptroller
General. The only records "directly pertinent" to such a contract
would be those necessary to verify the terms of the contract and
the representations upon which
Page 460 U. S. 866
the contract was based. In this case, the Comptroller General's
access would be limited to those records necessary to verify that
Merck actually had an established catalog price for the products it
sold, that it sold the products in substantial quantities to the
general public at the catalog price, that it delivered the product
specified, and that it received from the Government no more than
the amount due under the contract. To the extent the Court
concludes that the Comptroller General may obtain Merck's cost
records as well, I dissent.
For example, Merck's research notes, pharmaceutical formulas,
and other trade secrets might be records directly pertinent to the
"products" purchased by the Government, and might be of assistance
to the Government in evaluating the success of its procurement
policies. But unless these records were also pertinent to Merck's
contracts with the Government, they would not be available to the
Comptroller General under his access-to-records authority.
The first Court of Appeals case interpreting the
access-to-records statutes, Hewlett-Packard Co. v. United
385 F.2d 1013 (CA9 1967), cert. denied,
U.S. 988 (1968), reached a result similar to that reached by the
Court today. In Hewlett-Packard,
the Court of Appeals
recognized that, if the word "contract" were given its ordinary
meaning, to refer to "the terms and conditions of an agreement and
the procedures whereby those terms and conditions were formulated,"
cost records could not be regarded as "directly pertinent" to a
non-cost-based contract. 385 F.2d at 1016. In an effort to provide
the Government with greater access, however, the Court of Appeals
invented its own definition of the word "contract." Without
explanation or citation of authority, the Court of Appeals
"[T]he word 'contract,' as used in this 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."
The court concluded that cost records
"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
Although the Court in the present case does not explicitly adopt
this strained reading of the word "contract," it approves the
test" which was developed partly in
reliance on Hewlett-Packard
and partly in response to a
decision by one of the parties voluntarily to surrender certain
types of records. See Bristol Laboratories Division of
Bristol-Myers Co. v. Staats, 428
F. Supp. 1388
(SDNY 1977), aff'd,
620 F.2d 17 (CA2
1980), aff'd by an equally divided Court, 451 U.
(1981). The Court of Appeals in this case and the
Court of Appeals for the Third Circuit, Smith-Kline Corp. v.
668 F.2d 201 (1981), cert. pending,
81-2082, 81-2268, have applied the "Bristol
independent analysis. In adopting this test, the Court never
explains whether it agrees with the definition of "contract"
developed in Hewlett-Packard
or whether it believes some
other definition leads to the same result.
Representative Hardy, the sponsor of the legislation, gave
several examples of contracts in which the access-to-records
clauses would be useful. The first was a construction contract in
which the Government agreed to pay a fixed overhead rate "as a
proportion of direct labor costs or as a lump sum . . . based upon
the experience of the contractor in performing similar work in the
past." The second was a pair of contracts, one cost-plus and one
fixed-price, in which "the contractor was charging to the
[cost-plus] contract expenses which should have been charged to the
fixed-price contract." The third was a contract with a price
redetermination clause, authorizing "an increase or decrease in the
price payable under the contract as the work progresses or after it
has been completed." 97 Cong.Rec. 13198 (1951). In each of these
three examples, the contractor's costs were highly relevant to the
negotiation or performance of the contract, and cost records thus
would have been pertinent to the contract. But neither
Representative Hardy nor any other Member of Congress suggested
that cost records would be pertinent to a contract in which the
price was negotiated without regard to the contractor's costs.
When a contract is not cost-based, the relationship between
direct costs and prices may be tenuous. In these cases, there is
every reason to suppose that Merck's prices are not related to its
direct costs, the Court notes ante
at 460 U. S. 842
n. 20, the Government's suggestion that "direct costs may represent
as little as 9% of the sales price of a pharmaceutical product."
Merck may have taken direct costs into account in setting its
catalog price, but it may equally well have relied on other
factors, such as market surveys or prices set by its
I agree with the Court that the Hoffman amendment, adding the
word "directly" before "pertinent" in the statute, was intended to
"circumscribe the inquiry that the Comptroller General was
authorized to undertake." Ante
at 460 U.S. 833
. I find it unnecessary to
place much emphasis on this amendment, however, because I do not
regard cost records as being at all pertinent to a non-cost-based