Bowsher v. Merck & Co.
75 L. Ed. 2d 580, 460 U.S. 824, 1983 U.S. LEXIS 22 (1983)
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Rule of Law:
The statutory authority of the Comptroller General to examine records "directly pertinent" to fixed-price negotiated government contracts extends to a contractor's records of direct costs, but not to records of indirect costs such as research, marketing, and general administration.
Facts:
- In 1973, Merck & Co., Inc. (Merck) entered into four fixed-price negotiated contracts with the Department of Defense and the Veterans’ Administration to supply pharmaceutical products.
- All products supplied were standard commercial items that Merck sold in substantial quantities to the general public.
- The price for each contract was based on Merck's established catalog price, and the government did not request or negotiate based on Merck's cost data.
- Each contract included a standard statutory clause granting the Comptroller General the right to examine any "directly pertinent" records involving transactions related to the contract.
- In 1974, the Comptroller General demanded that Merck provide access to its records of direct costs (e.g., materials, labor) and indirect costs (e.g., overhead, R&D, marketing) to review the reasonableness of the contract prices.
- Merck refused to comply with the demand for its cost records.
Procedural Posture:
- Merck & Co., Inc. filed a lawsuit against the Comptroller General in the U.S. District Court for the District of Columbia, seeking a declaratory judgment that the access demand exceeded statutory authority.
- The United States intervened and filed a counterclaim to enforce the Comptroller General's demand.
- The District Court granted partial summary judgment to both parties, permitting access to records of direct costs but barring access to records of indirect costs.
- On appeal, the U.S. Court of Appeals for the District of Columbia Circuit affirmed the District Court's decision.
- Both the United States and Merck & Co., Inc. petitioned the U.S. Supreme Court for a writ of certiorari, which was granted.
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Issue:
Does the Comptroller General's statutory authority to examine records "directly pertinent" to fixed-price negotiated government contracts extend to a contractor's records of both direct and indirect costs?
Opinions:
Majority - Justice O’Connor
No. The Comptroller General’s statutory authority to examine records "directly pertinent" to fixed-price negotiated contracts extends to a contractor's direct costs but not its indirect costs. The court must balance the dual congressional aims of enabling the General Accounting Office (GAO) to detect waste and inefficiency against protecting private contractors from intrusive government "snooping." Direct costs are pertinent because they have a direct influence on the price charged, even in a fixed-price contract. However, allowing access to indirect costs would permit far-ranging scrutiny of a contractor's private, non-governmental business affairs, effectively reading the statutory limitation "directly" out of the law and contravening the legislative intent of the Hoffman amendment.
Concurring-in-part-and-dissenting-in-part - Justice White
Yes, in part. The Comptroller General's authority extends to direct costs and should also extend to any indirect cost records that the government can prove likely had a direct and substantial impact on the contract price. The majority's bright-line rule flatly barring access to all indirect cost records is an artificial distinction that improperly hinders the GAO's ability to assess price fairness and detect waste. This is particularly true in industries like pharmaceuticals where indirect costs are a significant portion of the total price, and a case-by-case approach would better serve the public interest without allowing unlimited snooping.
Concurring-in-part-and-dissenting-in-part - Justice Blackmun
No. The Comptroller General's authority does not extend to any of Merck's cost records for these contracts, whether direct or indirect. The statute permits access to records pertinent to the "contract," not the "product." Because these were non-cost-based, fixed-price contracts where costs were not part of the negotiation, bargaining, or performance, the contractor's cost records are not pertinent to the agreement the parties actually struck. Access should be limited to verifying the contract's explicit terms, such as the existence of a catalog price and proper delivery of goods.
Analysis:
This decision establishes a significant limitation on the GAO's audit power over the common procurement method of fixed-price negotiated contracts. By creating a bright-line rule distinguishing between direct and indirect costs, the Court provided certainty for government contractors but also shielded a large portion of a product's price from government review. The ruling forces the government to either negotiate for broader access rights upfront, use cost-based contracts, or seek new legislation if it wants to perform comprehensive economic analyses of pricing in industries with high indirect costs. The case serves as a key precedent balancing government oversight powers against the privacy of corporate financial records.
