UNITED STATES v. ACME PROCESS CO.

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Argument of Marshall

Chief Justice Earl Warren: Number 86, United States versus Acme Process Equipment Company.

Mr. Solicitor General.

Mr. Marshall: Mr. Chief Justice, may it please the Court.

This case is here on review of the decision and judgment of the United States Court of Claims.

The Court of Claims held that the Government was not entitled to cancel the contract with Acme Process Equipment Company for the violation of the Anti-Kickback Statute committed allegedly by key officials of that company.

In addition to Court of Claims, disagreeing with its trial commissioner in contrary we say to the traditional measure of damages permitted Acme restitutional relief, that is, it measured Acme's damages by the costs the company had expanded thus putting Acme in the position it occupied before the contract was made.

That measure resulted, we will contend in an unjustified windfall to Acme since ordinary damages would have been compensated for the loss caused by the breach.

On this hearing, we alleged two points.

The first issue, the first question to be decided is whether the Government is entitled in the case of this type to cancel a contract because responsible officials of the prime contractor have accepted kickbacks from some contractors in violation of the specific statute prohibiting such kickbacks.

And the second question is that if the Government was not justified in canceling the contract from statutory violations, then an additional issue is presented as to the proper measure of damages for the alleged breach of contract.

The salient facts surrounding the kickbacks are as follows: Acme was a company owned by Joshua Epstein, Samuel Fisher, their children and other close relatives.

They manufactured boilers and other items of the likes -- type of machinery.

In 1952, it became interested in diversifying.

And in October of that year, it hired James S. Norris and Harry J. Tucker, Jr. who represented themselves as experts in obtaining and administering government procurement contracts.

Indeed, ensure -- Norris was proposed and it was agreed that he would become the General Manager for production and Tucker was placed in charge of sales and government contracts and have proposed new addition to the Acme firm in a plant yet to be leased.

Tucker had already made arrangements with several companies under which he was to receive kickbacks on sales by the companies to customers procured by him and these would include of course Acme.

Indeed, Tucker agreed to share these kickbacks to Norris.

One of these companies develops as All Metals Industries which would become the principal subcontractor.

Tucker heard that the Army Ordinates Corps in Philadelphia was the contractor, the manufacturer of recoilless rifles, seventy five millimeter rifles; and acting on Tucker's advice that a bid of $350 per rifle would probably insure an award of contract, Acme submitted a bid of $337.23 per rifle.

Acme's bid was signed by Norris.

Sometime between the date of the bid and the award of the contracts three months later, the Army Ordinates Corps advised Acme that it was -- it might have been a mistake for them to have hired Tucker because Tucker's father was suspected of kickback activities.

But Joshua Epstein, the President of Acme, ignored this advice and made no effort to investigate Tucker despite the fact that Tucker's contract with Acme included a provision that he represent and will continue to represent firms in other lines of business.

One point I should mention on the rifles, the bid of three $337.23 was far below any other bid.

For example, the two other bids were $484 and $930 respectively.

And the two final bids were four hundred twenty three and six hundred and eighty four.

But Acme put in a bid of three hundred thirty seven and twenty-three cents.

On January 1953, the contractor for the manufacturing of 2751 recoilless rifles was awarded to Acme as the low bidder.

But the contracting officials thought Acme's bid might be too low, these were the government officials, and in view of its inexperience in this type of defense work and the Government offered to let Acme withdraw and the offer of Acme refused and let the bid in.

Of course, as most government contracts in munitions, the project was largely to be subcontracted with Acme furnishing the rifle valve and the finishing and assembling the component parts into the completed rifles.

Indeed, because of the large amounts of subcontracting, All Metals Industries, the principal subcontractor, whose subcontract was to amount to some one third of the total contract price participated in the negotiations for the prime contract, one between Acme and the Army and its subcontracting plans were reviewed by the Army itself.

Within a few weeks after the prime contract was awarded, all three of these companies which Tucker had kickback agreements with, received their subcontracts.

Ford Company which had a similar arrangement with Tucker's father also obtained the subcontract from Acme.

A fifth company got an Acme subcontract upon the recommendation of indeed another man this time, one Phillip Jagner, but he also had a kickback arrangement with the company and who was on Acme's payroll as an assistant to Norris.

Justice John M. Harlan: I don't quite understand what -- what's the consideration, supposed consideration (Inaudible)

Mr. Marshall: That they would get the contract -- that this subcontract would make a contract with Acme if Acme could get its contract with the Government.

Justice John M. Harlan: There are a subcontractor in order to (Inaudible)?

Mr. Marshall: I -- that -- there's nothing in the record to show that anybody but All Metals participated in the actual negotiation of the major contract.

But there is evidence that Tucker did and later on Tucker with Epstein's son went to All Metals and made them pay them twenty some thousand dollars more even after the kickback had been paid.

It would be I -- I would assume sir but it's not in the record that these kickbacks got into the subcontract price.

I -- it's not in the record but it's usually what happens; and then the contractor in turn passes that inflation on to the United States Government.

That's when the interest of the Government comes in.

There was no question that Tucker and Norris would take in care of Tucker and Norris, I don't think there's any question about that at the expense of anybody they could find.

The amount of money that All Metals paid was not the twenty-five thousand but the agreement was -- they ask twenty-five thousand, All Metal agreed to pay twenty-three five hundred.

But interestingly enough allegedly for a “tax gimmick” they had it paid to a dummy corporation which of course turned out to be Tucker and Norris' dummy corporation so that the subcontractor was able to cover up that by giving it to this dummy corporation.

The -- as you suspected Mr. Justice Harlan, the prime contract proved unprofitable for Acme from the beginning.

And by July of 1954, it delivered less than half of the rifles.

The average cost to Acme per rifle had become $877.77 and a substantial loss since the contract price was only $337.00.

And when the Army learned of the kickbacks, as well as the other's alleged statutory and contractor violation not relevant here because we didn't bring those up, it cancelled the contract.

There was much negotiation within the Government, the Army and other agencies and eventually this case was heard in the Court of Claims.

And it's our position, the -- of course the -- Acme says we have no right to cancel the contract.

And the kickback arrangement we say were prohibited and no question they were prohibited under the Anti-Kickback Statute which is 41 U.S.C. 51 in our brief, page two to four.

So in short, that Act makes the payment of a receipt of a kickback between a prime contractor and a subcontractor a crime.

It also makes amount of the kickback recoverable by the United States.

It does not of course -- it does not provide for cancellation of the contract.

But we contend that the right of cancellation of this contract with the additional sanction of non-enforcement of it is a necessary adjunct to the remedies specified in the Anti-Kickback Statute.

Justice William J. Brennan: Mr. Solicitor General, does it appear that the principles, would you say, they were Epstein's, some of it?

Did they know anything about these kickback arrangements of Tucker's, or does that appear --?

Mr. Marshall: The nearest the knew was one that agents of the Government told Senior -- Mr. Epstein that Tucker's father was a five-percenter and he should look into -- deceived by Tucker because -- well, more than likely, Tucker was involved.

Justice William J. Brennan: Well that -- well, that he --

Mr. Marshall: That's not all.

Oh, that the -- the other one was, they knew they had this commission agreement with them.

They knew that they were working --

Justice William J. Brennan: Well, I mean, they being Epstein and --

Mr. Marshall: Epstein and the corporation.

Justice William J. Brennan: You mean, like who had what commission agreement?

Mr. Marshall: Norris and Tucker.

Justice William J. Brennan: Had what, commission agreement?

Mr. Marshall: With Acme, that they would work on a commission and then when they signed their applications to the Government, they made two and three different statements denying this and then once, they admitted it.

So they knew that Tucker and Norris were dealing with other corporations.

Justice William J. Brennan: But -- but they did not know, you say, or at least it doesn't appear that they knew that Tucker and -- what's the other fellow's name?

Mr. Marshall: Norris.

Justice William J. Brennan: Norris were getting kickbacks from the subcontractors?

Mr. Marshall: That at the time the contract was made, no, I don't believe they did, no.

Justice William J. Brennan: Was it, they know at any time during the contract (Voice Overlap) --

Mr. Marshall: Down the -- all but -- December of the year, that they started early in the year, the Government started the coming in and showing what they had and there was discussion and indeed Norris was fired eventually, and Norris and Tucker was discharged.

Justice William J. Brennan: The reason I'm asking him -- as -- I was going to ask what -- what's the predicate of the Government's position?

That merely because Norris and Tucker, officials of Acme, assume now, without the knowledge of Epstein and the other principals were taking kickbacks; that this in and of itself would be enough to justify cancellation of the contract?

Mr. Marshall: We take the position that that in and of itself enough to provide and that was true at the time for this reason that the prime contractor was doing business with the Government and who knows that the Government has made it clear that they will not stand for kickbacks.

Two, as in respect to Dixon and Yates, it's difficult to undercover -- to uncover these people.

It's to put the responsibility on the contractor to find out who is stealing with another man that comes in the streetlight, that Norris and Tucker only offering one thing which is a fast dollar.

Justice William J. Brennan: Well that's what I want to get clear.

Mr. Marshall: That's our position.

Justice William J. Brennan: Then we should weigh the merit of the Government's position on the premise that even if Epstein and the other principals of Acme knew nothing whatever about it, nevertheless the Government's entitled to cancel the contract if indeed at the time the contract with the Government was made, Tucker and Norris had these kickback contracts or subcontracts.

Mr. Marshall: They would have the right to do it as whether the Government would do it --

Justice William J. Brennan: I'm --

Mr. Marshall: Would have the right to, the answer is “yes.”

Justice William J. Brennan: And now you're going to develop why that should --

Mr. Marshall: The reason for that is Dixon and Yates.

And that's where the -- we part three ways, four ways, the commissioner, the Court of Claims, Acme and the Government on the same case.

In the Dixon and Yates case, the government contractor, if you remember, had resulted from negotiations which became tainted by a government representative who was also connected with the bank.

Having found that these individuals' conduct to have violated the Federal Conflict of Interest Statute, this Court upheld the Government's cancellation of the contract and we think that the real test, we can argue the language was both ways.

But cancellation we urge is necessary in cases of this type, the same as Dixon and Yates to protect the integrity of the Government.

Now on the other hand, Acme and Judge Davis of the court below attempted to distinguish Dixon and Yates on two grounds.

The Conflict of Interest Statute involved in Dixon and Yates provided only a criminal sanction and did not have the recovery section and while the Anti-kickback Statute provides in addition to the criminal penalty the civil penalty.

And secondly, that in this case, the contractor cannot be held responsible for the conduct of its offending officials because it did not have specific knowledge of the kickback activity.

While in Dixon and Yates, the contractor knew of the dual status of the government representatives who was obliged to know.

Now to this contention the respondents also words that the prime contract is not tainted by the illegality because the kickbacks were paid after the contract had been signed.

Well now, we think Dixon and Yates should not be narrowly construed.

Just as in Dixon and Yates, non-enforcement may fairly be implied here as necessary to effectuate the policy underlying this federal statute preventing corruptness in the federal procurement processes.

I think it's even more important to emphasize that a part of the reason which the respondents rely on is that the Government was anxious that they should have this contract if they could do it because they were anxious in getting smaller companies into this type of business.

To be sure the statute here involved unlike that in Dixon and Yates provides a civil remedy, it sure does, so the Government could recover the amount of the kickbacks.

But that civil remedy does not obviate the principal incurious consequences of the kickbacks themselves because you don't find them out until it's too late.

A subcontractor owes his subcontractor a bribe cannot be considered fully liable and to take all the type of protection that they seem to offer.

The price of the subcontract may well be inflated by more than the amount of the kickbacks.

For a subcontractor who have -- expects to obtain a subcontract in exchange for a bribe has less incentive to make a realistic appraisal of either cost or profit.

And unless the Government is entitled to cancel, it will be bound to contracts like this one here conceived in corruptness and on that conceived and corruptness, I come back to your question, Mr. Justice Brennan, not the corruptness of Acme as such but the corruptness of people that Acme has taken in and given responsible positions.

Justice Byron R. White: And which had -- in which a -- and those people didn't -- it could be that all, to the making of the contract with the Government?

Mr. Marshall: All these -- the two people, Tucker and Norris, they got the contract, they did all of that.

Justice Byron R. White: With the Government?

Mr. Marshall: With the Government.

They did all of the negotiating and but it would appear to me that they were the ones.

You see, Acme, as I read the findings of the record, Acme wanted to diversify and they didn't know how to do it.

And simultaneously as to who brought about the meeting, that's not clear to me.

But Tucker and Norris showed up and it was just what Acme was looking for.

Justice Byron R. White: Don't we -- to agree with you, don't we have to hold of the -- that the old -- that of -- that the old Kickback Statute apply to this kind of a contract?

Mr. Marshall: I think we'd -- I don't -- I -- you don't have to but you can, I don't think there's any --

Justice Byron R. White: I know but --

Mr. Marshall: Your criminal case?

The criminal case was just a District Court case.

Justice Byron R. White: Oh, I know, it was just but then that's what the holding at the --

Mr. Marshall: It was the holding.

Justice Byron R. White: -- that this whole Kickback Statute didn't apply to this kind of a contract.

Mr. Marshall: It didn't apply to this kind of a contract if --

Justice Byron R. White: And even you contend the new con -- the new statute should be applied?

Mr. Marshall: I contend both of them apply to this.

We don't give away the old statute to all of them.

Justice Byron R. White: Or the new one?

Mr. Marshall: Or the new one.

Justice Byron R. White: Even though these events took place before the new one?

Mr. Marshall: No, I -- that's why I say I don't need the new one.

The Government doesn't need the new one.

We think that under the old one we could still come in.

Justice Byron R. White: But what if we disagree with you that the -- that either the old or the new Kickback Statute is any help to the Government?

Mr. Marshall: Well, if it's no help at all, we're out of the court.

Justice Byron R. White: You are?

Mr. Marshall: If it's no help at all.

Justice Byron R. White: There's no remedy or common law for this?

Mr. Marshall: I have doubts about remedy --

Justice Byron R. White: You're wholly -- this is you're wholly -- relying on those two statutes?

Mr. Marshall: No sir, I'm relying on Dixon and Yates.

Justice Byron R. White: Well, I know but Dixon and Yates at least held that there was a specific federal statute that was violated there, namely the Conflict of Interest Statute.

Mr. Marshall: That's right.

Justice Byron R. White: And he -- and so consequently, do you have to show that there is a violation of the specific statute here?

Mr. Marshall: To get under Dixon and Yates.

Justice Byron R. White: Alright, so what if we disagree with you on the statutes, you're out of court, is that it?

Mr. Marshall: Well, I would hate to say that because I just don't see how this Court can hold that under this statute the kick -- that the Kickback Statute has not been violated.

I don't -- it's not conceivable how or I don't think there's any question that Tucker and Norris took kickbacks.

I don't think anybody denies that.

I don't think anybody denies that Epstein's son took kickbacks.

There were kickbacks there, I don't think anybody denies it.

Justice Byron R. White: Well, even if there was a denial -- even if there was a violation the old Anti-Kickback Statute, you still have to go on and show or argue that the remedy provided by the statute has to be supplemented by the right of cancellation.

Mr. Marshall: Well, in the first place --

Justice Byron R. White: And where do you get that kind of a rule?

Mr. Marshall: We get that because all of these, well not all, but most of the cancellation law that anybody has cited as judge-made law, not statute-made law.

Justice Byron R. White: Oh, so you say there is a judge-made law on --

Mr. Marshall: On cancellation.

Justice Byron R. White: On the right of cancellation protecting kickbacks?

Mr. Marshall: No sir, on cancellations, period.

And cancellations can come about because of a statute, Dixon and Yates.

Justice John M. Harlan: (Inaudible)

Mr. Marshall: I think were -- I would hate to be driven to the common law position but I frankly don't have the answer Mr. Justice.

We have discussed the whole common law in -- it was in a footnote to back that, but I think we've been greatly difficult and I hate to be driven there.

Because in this case, it appears to me that Congress is interested in one thing, in protecting the integrity of its contracts which spends the money that it -- his trustee to handle.

Secondly, to get rid of shoddy business dealings.

And I don't think Congress, at any time, meant to take away anything; cancellation by common law or whatever you might have.

I think that when Congress passes the Kickback Statutes, the Conflicts of Interest Statutes etcetera, they expect that the Government shall use them for the purpose of cleaning up the business.

And in any case of this type, as in Dixon and Yates, and this would be the same thing, it's hard to uncover this.

As a matter of fact, despite the finding on one point and the argument of the respondents, the Government didn't have a clear cut case on this right away.

They -- the Philadelphia Ordinates State Poll went in court, eventually looks from the record, the FBI was in it, and they got to this one through the dummy corporation that Tucker and Norris had set up.

That's how we got around to it whereas, if Acme has used some judgment of responsibility once they were tipped off that Tucker was kind of -- his father was illicit five-percenter and once they found that they had these other contracts, they could have done something to find out whether or not Tucker and Norris were engaged in kickbacks.

In having failed to do it, they now say that they are now entitled to damages.

And indeed in Dixon and Yates, most of these things were --

Justice William J. Brennan: Well, let me see --

Mr. Marshall: -- pointed out?

Justice William J. Brennan: Is it at least, I gather, from what you've just said that you're suggesting that the -- this right of cancellation that the Government asserts doesn't arise at least until the principals learn of something which they should look into, is that right?

Mr. Marshall: That's this case, they did have so.

Justice William J. Brennan: No, no, I'm trying to find -- how far are you carrying a principal.

For example, let's take what I suppose might be a rather usual situation, that is, if a large government contract that negotiates contract with the Government has a subcontracting officer unknown to any principal of the --

Mr. Marshall: That's right.

Justice William J. Brennan: -- contractor, any director, any officer, this contracting officer has a kickback arrangements with some of the subcontractors and indeed he places the subcontracts only with those who will give him kickbacks.

Now, the -- this doesn't come to the knowledge of the -- any responsible officer or the contractor so long after the contract is being performed, and they do nothing when they learn about it, do I understand you to say they did nothing then, their failure to do anything would justify the Government exercising its right of cancellation?

Mr. Marshall: That would certainly do it but I don't --

Justice William J. Brennan: But if they've never learned anything about it?

Mr. Marshall: Never, well, I'd have to add Mr. Justice Brennan, they never should have learned.

Justice William J. Brennan: Alright, should've learned.

Mr. Marshall: I don't want --

Justice William J. Brennan: They -- the subcontracting officer gets away with it, nobody ever finds out of it.

Mr. Marshall: I think that in that type of case the Government just wouldn't ask for it.

Justice Byron R. White: Would they -- could get the kickback for it?

Mr. Marshall: The kickbacks should've get back under the statutes.

Justice Byron R. White: Well if you could, why couldn't you have cancelled it?

Mr. Marshall: I -- the point would be as to when you would've cancelled.

I mean -- if the -- if then it's not the question of cancelling, I think then automatically you --

Justice William J. Brennan: No, there's still have to be something performed (Voice Overlap) --

Mr. Marshall: Performed?

If that's the way it look then --

Justice William J. Brennan: But your point would be I gather that no matter how well the contract was being performed to everybody's satisfaction, once the principals of the contract have learned of this kickback operation of their subcontracting officer and did nothing about it, you'd be in the position to cancel the contract?

Mr. Marshall: You would have the -- I would say, you'd have the right to cancel it.

Justice William J. Brennan: That's why I say, I don't know why you're suggesting you'd --

Mr. Marshall: And its not a -- there is a serious of question at time as to whether you would or not.

Justice William J. Brennan: Well, forgetting that, I'm trying to get, your position is so the Government in that situation should have the right to cancel.

Mr. Marshall: I'm -- positively, that is our position and --

Justice Byron R. White: What would it have to pay, Mr. Solicitor General, to cancel the (Voice Overlap) --

Mr. Marshall: That's what I was -- get ready to in -- since my time is waved out, I'd just like to telescope it.

We've got it set out in -- pretty well in a brief and it's very well involved.

But it's our position that even if it's found that we did not have the right to cancel, that Acme shouldn't get more money than it would've gotten if it has finished the contract.

The difference is that if under the Government's theory, the commissioners found that if we cancel under the regular phrase we would owe around $314,000.

The Court of Claims says it's 673.

If you break than down, they would be getting eight hundred and some dollars per rifle.

For rifles which they agreed to sell for three hundred and some a piece.

It is our position that even if it's found that the Government did not have right -- didn't have the right to cancel the contract Acme cannot make a profit on it.

They had already been loosing money.

They should not be given back the money that they have already lost.

Justice Byron R. White: Well, are you saying that the restitution is limited by damages?

Mr. Marshall: And certainly not punitive damages.

Justice Byron R. White: Oh, I know, but you're saying that you can't recover any more than you could in a suit for damages?

Mr. Marshall: Just about.

We -- we follow, if we have to we'll prolong the commission.

Justice Byron R. White: Well, why would you ever -- what -- then what is the restitution ever amount to if it's just another damages with another label on it?

Mr. Marshall: Well, I don't believe that a man, assuming that Acme, even if it's found we don't have the right to cancel the contract, Acme was responsible for it's own problem.

It's underbid, the Government offered to let them withdraw it, they told them, “you will loose money on it.”

They insisted on doing it.

They lost their money.

Should the Government pay them for the money they lost?

There's no reason under the sun that I can I see to pay them for what they lost because of what they did.

Justice Byron R. White: If the Government cancels the contract wrongfully, Acme could sue and ask for damages or specific performance and at least they could get -- they probably couldn't recover from the Government a nickel, could they?

Mr. Marshall: They would -- they couldn't get specific performance, that's out.

Justice Byron R. White: Well, they could get -- could they make the rest of the rifles and both the Government would take them?

Mr. Marshall: $337.00 a piece.

Justice Byron R. White: But they had have to make the rifles (Voice Overlap)?

Mr. Marshall: I should think so.

Justice Byron R. White: And if they didn't make the rifles and deliver them, they could recover nothing, I suppose.

Mr. Marshall: They could -- they could recover, we -- if we have to at that stage, we agree to commissioners.

This is the amount of money that they can prove.

You see, we've been paying for these rifles all along.

Justice Byron R. White: At 337?

Mr. Marshall: Yeah, 337 as I remember.

We've been paying for these all along.

So this is proposed, as I understand the commissioner to pay them for the rest of them and deduct what they've already been paid.

But the Court of Claims comes up with these unbelievable figures of 673,000 --

Justice William J. Brennan: How much would the --

Mr. Marshall: -- in addition to what they already have been paid.

Justice William J. Brennan: How much if you had no right to cancel it, does the Government concede that it ought to pay Acme?

Mr. Marshall: That's approximately 400,000.

The -- if I may, the figure in the brief which is 77 or record 77, over $300,000 figure.

We have rechecked with the department, the division, they say they're figured because of the 400,000.

Justice William J. Brennan: That's on the theory that if they would have been allowed to finish the contract, they could've cut their losses down.

Mr. Marshall: At the rate, they will go on and they would come down slowly but they would never get down all the way.

If you look at it, you can see it.

Justice William J. Brennan: Because this and -- if you had no right to cancel, the best -- rest could be -- would be what, termination for the convenience of the Government, doesn't it?

Mr. Marshall: Well, that was what it would be except for the fact that the Court of Claims found that it was not there.

I could save a few minutes --

Justice Abe Fortas: Mr. Solicitor General, may I just ask you --

Mr. Marshall: Yes sir.

Justice Abe Fortas: -- briefly, did you or were you indicating earlier that there is a footnote in your brief relating to what the situation would be if neither statute were applicable?

Mr. Marshall: 70?

Justice Abe Fortas: If there is, would you kindly let me know later where that is.

You let me know later.

Mr. Marshall: Yes, it's on -- its page 28 and note 24.

Let me see if that's right.

I think that's it.

Justice Abe Fortas: (Inaudible)

Chief Justice Earl Warren: Mister Rephan.

Argument of Jack Rephan

Mr. Jack Rephan: Mister Chief Justice, may it please the Court.

I would like initially to clear out some of the factual statements because I think the facts here are very important.

Most importantly, the Court of Claims found as a fact that none of the responsible officials of Acme knew anything about the kickback arrangements until after the cancellation of Acme's contract.

The only people who knew about these kickback arrangements were of course the conspirators themselves, that was Tucker and Norris and Jack Epstein.

Now Norris had been discharged earlier but the reason Norris was discharged was because it was discovered that Norris had charged some personal farm expenses to the Acme contract and for this reason he was fired.

At this point, Acme had no knowledge whatsoever of the kickback arrangements.

Justice Tom C. Clark: What was Tucker's position?

Mr. Jack Rephan: Tucker's --

Justice Tom C. Clark: To the company, he had official position?

Mr. Jack Rephan: Tucker was initially hired to be an expediter and because he said that he had knowledge in the field of government contract law and commercial contracts and he was initially retained to drum up business generally for government and commercial contracts as well.

Justice Tom C. Clark: And on a commission basis?

Mr. Jack Rephan: He was initially on a commission basis.

The Court of Claims didn't directly decide there was a violation of the contingent fee covenant.

They say that this was unnecessary since the Government had waited fourteen months after obtaining knowledge of the contract with Tucker; that it was too late for the Government to then cancel for a violation of the contingent fee covenant.

Justice Abe Fortas: Well, one of the men involved in the -- I beg your pardon.

One of the men involved in the kickback arrangement was an -- at least one of them, was an employee, that is, Jack Epstein.

Mr. Jack Rephan: That's right Mr. Justice.

Justice Abe Fortas: And he was -- I don't know whether he was an officer in a technical sense.

Mr. Jack Rephan: He was not an officer.

He held some stock but it was non-voting stock.

Justice Abe Fortas: But he was a full time employee of the company.

Mr. Jack Rephan: That's true, Your Honor.

Justice Abe Fortas: And he was head of a plant, not the plant in which this work was done but in another plant, is that right?

Mr. Jack Rephan: That's correct, Your Honor.

Justice Abe Fortas: And it was his father, Joshua Epstein, who was the president of the company.

Mr. Jack Rephan: At that time, that's true.

Justice Abe Fortas: So that what we have here, as I understand it, as a minimum is two men, Tucker and Norris who were -- might be considered as the independent contractors, in a sense that they were compensated on a fee basis.

Jack Epstein, who was an important employee of the company and he was on its payroll, is that right?

Mr. Jack Rephan: That's true, Your Honor and we do not deny that he was an employee.

As to whether he was an important, there was some dispute about this.

We maintain that he was an employee but he was not a major employee.

Of course, he was the son of the president and we think the Government is trying to make quite a bit out of this but we think it's not that important under the circumstances.

Justice Tom C. Clark: Who signed the statement that Acme made with the Government that they did not have anyone on a contingent basis?

Mr. Jack Rephan: There were several statements, Your Honor.

Justice Tom C. Clark: One of the officials or did Tucker singed it?

Mr. Jack Rephan: Well, Norris was given the authority to sign contracts initially.

Most of them were signed by Mr. Norris.

Justice Tom C. Clark: You mean Norris given that authority by Acme?

Mr. Jack Rephan: To sign the bids initially.

Justice Tom C. Clark: He was working for Acme, was he not?

Mr. Jack Rephan: Well, at the time Acme hired Mr. Norris and Mr. Tucker -- of course, they had already entered into agreements with the others -- some of the other subcontractors.

However, Acme had no knowledge whatsoever of this.

I might add that the representation that they represented other firms was to the effect that they represented firms in other non-competitive lines of business.

And since it was in non-competitive lines of business, there would be no reason for Acme to inquire.

Joshua Epstein testified at the trial that the information he had, he did no consider worthy of reliance since he found both of these people to be competent employees.

And as the District Court found in the criminal prosecution of these individuals, there was no way in the world in which Acme could have protected itself.

When you have employees to determine -- to defraud their employer by whatever means they can find available.

Justice William J. Brennan: Well, what was the violation of the contingent fee covenant?

Was that -- and Tucker and the other fellow's arrangement was Acme to get business for Acme?

Mr. Jack Rephan: This was in the arrangement with Acme to get business for Acme and that's right Mr. Justice Brennan.

Justice William J. Brennan: That -- that's what the violation was which the Court of Claims said having done nothing about it over 14 months, the government can't --

Mr. Jack Rephan: For 14 months, that's correct Your Honor.

Justice William J. Brennan: -- rely on it now.

Mr. Jack Rephan: It had nothing to do with the kickback arrangements whatsoever.

Justice William J. Brennan: Yes.

Mr. Jack Rephan: This was an entirely different issue.

Justice William J. Brennan: Had nothing to do with their kickback arrangements for subcontractors.

Mr. Jack Rephan: That's true, Your Honor.

That's true.

Justice Tom C. Clark: But you said there and I thought there might be some connection between the representations of Acme to the Government that there were no five-percenters in their group, in their organization?

Mr. Jack Rephan: No, Mr. Justice Clark.

I think, although this was an issue before the Court of Claims, I believe it had nothing to do actually with the kickback arrangements.

This was something which was apart and separate and involved Acme in its subcontract and not the Government and Acme.

They were two separate issues entirely.

In fact at the time that the first representation was made, there had been no kickbacks.

So obviously, it had nothing to do with it at that point.

I think it's very important to consider the congressional purpose in enacting the Anti-Kickback Act back in the 1946.

At that time most of the defense contracts were being awarded on a cost-plus basis.

In other words, the contractor would perform work for the Government on the basis of being paid as (Inaudible) cost plus maybe a fixed fee for profit.

The general accounting office undercovered that there were kickbacks such as gifts being paid by subcontractors to employees of a prime contract to -- or which in turn it was being passed on to the Government.

Therefore it was increasing the cost of the Government and the Government obviously was getting no benefit out of these gratuities being paid by subcontractors to prime contractors.

The Congress in its committee report pointed out that at that time, it was extremely doubtful as to whether there was any way the Government could sue or otherwise recover these kickbacks.

And this is the clear stated congressional purpose in enacting the Act to prevent the Government from bearing the cost of these kickbacks to give the Government a civil remedy to sue and recover back the kickbacks.

A criminal penalty was added to further discourage kickbacks.

The Act as it was originally enacted back in '46 applied to cost-plus or cost-reimbursible type contracts.

Now, Acme's contract was a fixed-price contract although the price could be renegotiated within some very narrow limits upward and downward.

It was because of the type of contract that the District Court in the criminal prosecution of Norris and Epstein and Tucker found that the 1946 Act did not apply because this was not the type of contract which Congress had in mind when they enacted the 1946 Act.

Judge Clark in the criminal case recommended that the Attorney General propose amendatory legislation to Congress to extend the application of the Act to cover all types of contract such as the Acme contract and this was the reason why the Act was amended in 1960 to cover all negotiated contracts.

There was a decision in the Tenth Circuit, the Barnard case which the Government of course relies on but we feel it's entirely different.

There was a fixed-price contract subject to renegotiation but there was no limitation on the amount of renegotiation as far as upward or downward on prices.

Also, there was a cost-plus facilities contract for machinery where General Motors was a prime contractor.

So the Barnard case we submit is entirely different and this was recognized in the committee reports that Barnard did not settle this question and it was for that purpose in 1960 that Congress said, “We're going to make this Act applicable to all negotiated contracts.”

The Act was unchanged in all other respects.

Now the Government of course relies heavily on the Dixon and Yates case.

Dixon and Yates involved a criminal statute.

We have a criminal statute here but we also have a civil statute, a statute which says the Government shall have the right to sue and recover the kickbacks.

The Court of Claims held as one of their reasons for rejecting the Government's defense that Congress by enacting a specific civil remedy precluded any other remedy if one exist -- existed prior to the enactment of the Act.

Of course, we submit also and I think the Court of Claims so found that there was no such remedy prior to the enactment of the Anti-Kickback Acts such as contract cancellation.

Dixon and Yates we submit is entirely different for this reason.

In Dixon and Yates, we're talking about a contract which grew out of an illegal transaction.In fact, the court in Dixon and Yates cited two cases, Miller versus Ammon and Bank of the United States versus Owens, to the effect that a contract is not to be enforced when it arises out of circumstances that would lead enforcement to defend the essential purpose of the enactment.

These two cases were entirely different.

The Ammon case involved a contract of the sale of wine without a liquor license, obviously an illegal contract.

The Bank of the United States versus Owens case involved a suit on a usurious note.

Again, the contract here was illegal ab initio.

In other words it was bored form the beginning because of the illegality attached to the origination of the contract.

In Dixon and Yates, the violation of the Conflict of Interest Statute was one of the facts that led to the award of the contract, had it not been for Mr. Winzel's (ph) activities as the Court remarked, perhaps this contract would never have been awarded.

So here we have a situation where a contract arises from or grows out of an illegal bargain, a violation of a statute.

But here in Acme's case, we had no such thing.

There was no violation of a statute in the award of Acme's contract.

The Anti-kickback Act was not violated in the award of Acme's contract.

If there was any violation of the Anti-Kickback Act, and we submit there was not, then it occurred after the award of the contract to Acme.

If, as the Government says and I might point out this point too, that in the Government's amended answer, that is their answer to plaintiff's third amended petition in the Court of Claims which was not filed until 1961, should -- having been filed in 1957.

The Government for the first time relied specifically on the Anti-kickback Act, in there it was the 1960 Act.

Now, to bring the case anywhere within the Dixon and Yates case, they must refer to the criminal section of the Anti-Kickback Act that is Section 4 rather than the civil aspect of it because the civil aspect merely gives a right to sue to recover back the kickbacks.

This we submit is not only manifestly unfair and unjust since the 1960 amendment resulted from this very contract but it would also violate the constitutional prohibition against ex post facto laws, they would be relying on a criminal penalty for a violation of an act which did not exist at the time the alleged violation occurred but resulted from the amendment of a statute which occurred some seven years later.

Also --

Justice Abe Fortas: Suppose your -- I suppose your position at this point is that the Anti-Kickback Statute had no criminal provision, in other words just a civil provision, just had a civil remedy recovery of the amount involved that there is no principle of law which would enable the Government also to invoke the remedy of cancellation.

Mr. Jack Rephan: That's true Mr. Justice Fortas.

I might point out on the Davio case, the Court held that there was no constitutional barrier towards applying the Anti-Kickback Act retroactively to allow the Government to sue.

We say now to allow the Government to cancel the contract under these circumstances would be punitive in nature and that would violate the Constitution.

Justice Abe Fortas: I suppose the Government in about midway through the performance of the contract, should've find out that kickbacks are taking place as it did in this instance.

You're saying so to me, is it your position that the Government then could not lawfully cancel the contract?

Mr. Jack Rephan: Your Honor, that's exactly our position.

They could not lawfully cancel the contract.

Justice Abe Fortas: They didn't have to go ahead and let the fellow perform the contract and pay the fellow under the contract even though the situation were ripe with kickbacks.

Mr. Jack Rephan: Your Honor, they have the right to withhold payment in the amount of the kickbacks.

In other words, to the prime contractor, when they pay they can withhold money from the prime contractors so that the Government would not bear the cost of the kickbacks, and this is exactly what the Act says.

This is the remedy which Congress gave -- the Government under the Anti-Kickback Act.

They would merely withhold sums of money from the prime contractor and -- or they could bring suit against the subcontractor or the prime contractor; or the prime contractor under the terms of the Act could bring suit on behalf of the Government against the subcontractor.

This is the exact remedy which --

Justice Abe Fortas: I say, it'd be kind of an uncomfortable situation now.

Mr. Jack Rephan: I believe so Your Honor.

Justice Byron R. White: Well, did the Government ever assert the right to cancel for some convenience?

Mr. Jack Rephan: This came up at the -- there some discussions at the time as to whether -- in fact it was after the actual cancellation --

Justice Byron R. White: Oh, I'll put it this way, why has the Government precluded that this point from saying this cancellation is for the convenience of the Government pursuant to the terms of the contract?

Mr. Jack Rephan: Well, Your Honor, they made an express point of saying under no circumstances shall the contract be treated as a term “for convenience.”

This was in the directive of the Department of Army at the time the contract was cancelled.

Justice Byron R. White: What would have been -- would there been some principles of which were applicable then to determine the amount that the Government would have to pay if it were a cancellation?

Mr. Jack Rephan: Mr. Justice White, its true that under the contract, they were principles, cost principles as to how the termination cost would be determined if the Government invoked the termination for convenience clause.

Justice Byron R. White: Now has anybody has -- is there any way of figuring out at this point or knowing from this record what -- how much it would've had -- been had to pay?

Mr. Jack Rephan: The commissioner has an estimate in his findings of fact --

Justice Byron R. White: On the --

Mr. Jack Rephan: -- of approximately $300,000.

Justice Byron R. White: If it had been a convenience?

Mr. Jack Rephan: If it had been a convenience termination.

Now, the plane of ex --

Justice Byron R. White: Why wasn't the Government -- did not specify, do you know why the Government specified this should not be considered a cancellation for convenience?

Mr. Jack Rephan: Well, I think this really involved General (Inaudible) in the discussions with G4 -- at the time G4 considered this weapon obsolete, they wanted to cancel all orders for the seventy five millimeter recoilless rifle.

Justice Byron R. White: Because -- it's the difference between paying nothing and $300,000, I gather.

Mr. Jack Rephan: That's correct, Your Honor.

Justice Byron R. White: That's really the --

Mr. Jack Rephan: And the Government said -- in fact, the plaintiffs' position in the court below was that the reason this contract was really cancelled and the reason the Government really threw in the defenses of Anti-Kickback was to save itself $300,000.

The court found that there were two reasons --

Justice Byron R. White: The Government doesn't want to pay anything --

Mr. Jack Rephan: The Government doesn't want to pay one nickel, that's correct, Your Honor.

Justice Byron R. White: And if its position is upheld across the board, they won't pay anything?

Mr. Jack Rephan: On the damage question which I am about to reach, Your Honor, if the Court should hold that the Court of Claims adopted an erroneous measure of damages, under the commissioners' findings, the contractor is entitled approximately $314,000.

This --

Justice Byron R. White: That -- that's only if the cancellation was wrongful.

Mr. Jack Rephan: If the cancelling -- lation --

Justice Byron R. White: If the cancellation was wrongful.

Mr. Jack Rephan: Was wrongful.

That's true, Your Honor.

Justice Byron R. White: But if the -- they were right in doing it, the Government doesn't pay anything.

Mr. Jack Rephan: That's our position, Your Honor.

If the Government was right, of course, they did not breach the contracts.

Now, if they were right of course, it could not be a convenience termination but we submit the Government was wrong in terminating it.

Justice William J. Brennan: No, but if the Government's position were sustained by us, I gather the Government will have to pay you a nickel, would they?

Mr. Jack Rephan: That's true, Your Honor.

Justice Hugo L. Black: Have to say what?

Mr. Jack Rephan: Would not have to pay --

Justice Hugo L. Black: Yes.

Mr. Jack Rephan: -- anything if the -- if we sustained the Government's position.

Justice Hugo L. Black: Yes.

Mr. Jack Rephan: I might add that the Government knew about these kickback acts, the alleged violations prior to the time the contract was cancelled.

Justice William J. Brennan: How long before?

Mr. Jack Rephan: Approximately, two or three months?

Justice William J. Brennan: Was there a finding?

Mr. Jack Rephan: There's a finding I believe.

Justice William J. Brennan: Well, just -- don't try to -- looking for it, just what was the substance of it?

Mr. Jack Rephan: The substance was it was in between April and July that the Government --

Justice William J. Brennan: Specifically, of what kickbacks, Tucker and --?

Mr. Jack Rephan: The names particularly of the gun engineering transaction between Norris and Epstein and Tucker and this dummy corporation and All Metals, the principal subcontractor.

Justice William J. Brennan: Three months before the cancellation?

Mr. Jack Rephan: Approximately three months.

They continued to investigate at the time of cancellation.

The cancellation notice said statutory violations did not specify the Anti-Kickback Act.

It did not specify the covenant against contingent fees, the conflict of interest statute.

It merely said statutory violations.

In fact it was not made known until Act -- until about 1961 in the Court of Claims.

What the statutory violations were upon which the Government was relying and this was despite the numerable efforts of Acme to find out what violations the Government was speaking of.

I'd like to move on to the restitution issue, if I may, the court upon the plaintiffs' argument in the court below held that since the Government wrongfully terminated Acme's contract, Acme was entitled to sue for restitution of its reasonable cost rather than sue for damages for breach of contract.

In so holding, the Court of Claims recognized that restitution was an all -- an agreed remedy for a breach of contract.

Has been recognized by most of the text writers and by the majority of the courts in this country for many years, they mentioned Carbon, Willistein and the courts of the various states which said that where the breach is total, that is where one party prevents the other party from going ahead with performance, that the party may forego a suit for damages and sue for the reasonable value of the part performance.

Now, they said also that the contract price has no limitation upon the value of the services performed in their various theories set forth by the courts for this holding.

One of them is, of course, that the breaching party, which was the Government in this case, has put the contract to an end.

So, why should this party be allowed to enforce a term of the very contract which it says has ended against the innocent plaintiff?

In other words, the Government here cancelled the contract to hold the plaintiff to the contract price would be allowing the Government to enforce the very contract which it has breached.

Another reason is that --

Justice Byron R. White: Let's assume for a moment you had sued for damages, Acme had sued for damages for a breach of contract, what would you have recovered?

Mr. Jack Rephan: Mr. Justice White I believe the commissioner as far as damages is probably adopted the correct theory since it was shown that Acme could have reduced its losses, the measure of damages would be the unreimbursed cost as of the date of the breach.

Justice Byron R. White: That's $314,000.00?

Mr. Jack Rephan: Well, in substance the total would be less cost of completion or loss to complete the contract.

Now, we took exception of course to the amount of the loss.

And I know this is not before this Court because it's a factual determination.

The Court of Claims made no finding as to the amount of the money which Acme would have lost had they been allowed to complete the contracts.

Justice Byron R. White: But if you had sued for damages, you would've been starting out -- configuring from the contract price for these rifles?

Mr. Jack Rephan: Well, the contract price for the rifles which had been delivered had been paid for.

Now we have other costs, for instance setting up the plant here which is applicable to the entire contract and not just the first rifles delivered.

So we have never been paid for those costs.

We have never been paid for overhead for the entire contract.

And incidentally, the Government in awarding this contract was vitally interested in obtaining another source of supply; there was only one manufacturer of this rifle in the country at that time.

So this is one of the things which the Government recognized.

I'm sure the Government knew this bid was low.

And Acme itself admitted it was a low bid.

But again, had not there been a breach of contract, a cancellation, the relationship would have continued, so undoubtedly over a period of time, the Government would have benefited and Acme would've benefited too.

Justice William J. Brennan: Tell me, in that connection, as in the matter of eligibility for future contract, had there been a cancellation for the convenience of the Government, well, I guess, the no question Acme's eligibility to bid on future contract.

But the form of cancellation that was made was statutory violations does that have consequences as to eligibility for future contracts?

Mr. Jack Rephan: Mr. Justice Brennan, I think obviously not because the findings of facts make it clear that the Government said specifically that Acme was never considered to be in this repute in Government circles.

It was never criminally violated.

In fact the Justice Department said they recommended no criminal or civil action against Acme and this was five or six years after the cancellation of the contract.

Justice Byron R. White: Well, let's -- if the Government had said, “We cancelled the contract, one because of the Anti-Kickback Act -- activities here; or two, if that doesn't stick for our convenience, under the contract.”

Then if the kickback cancellation having split up, they -- the Government would have been remitted to the cancellation for convenience.

Now why shouldn't it be in this case?

Mr. Jack Rephan: Your Honor --

Justice Byron R. White: Just because the Government disclaimed it?

Mr. Jack Rephan: Well this --

Justice Byron R. White: After all you've agreed in the way the contract is written to let the Government walk away from the contractor a certain amount of money?

Mr. Jack Rephan: Well, why Your Honor, should the Government be allowed to do one thing and then when it's told its wrong here, they go by retroactively and say, “Well, now we're going to treat it as -- terminate it for convenience.”

In other words, they specifically said, “We are not going to terminate this contract for the convenience Government specifically.”

Now then this would be saying, “Well, they we're wrong in cancelling it for Anti-Kickback violations so now we're going to allow them to treat the contract as having been cancelled.”

Justice Byron R. White: Well, it's possible that the cancellation for convenience to the Government might give you more than the simple -- than ordinary damages.

Mr. Jack Rephan: It was approximately the same under the commissioner's --

Justice Byron R. White: Oh, I know but this might give you a little bit more and what if we held that that giving -- that giving restitution was going too far?

Mr. Jack Rephan: Well, this raise --

Justice Byron R. White: Then what should you rather have -- which would you rather have, damages or cancellation for a --

Mr. Jack Rephan: Well, Your Honor, I might point out that even restitution not -- is not necessarily more here because the court says, they're reasonable cost.

Now the Government can come in and show these costs were excessive so it's very possible that even restitution could be less.

Justice Byron R. White: Right.

The Court of Claims has already adjudged what it's going to be, what you're going to recover up?

Mr. Jack Rephan: No, Your Honor, they have not.

They merely said reasonable cost and they sent it back to the commissioner for determination as to what cause was reasonable.

They said, “We'll allow the Government to bring in evidence and show that these cost were excessive.”

So that they have not specifically awarded a judgment in a monetary amount.

Justice William J. Brennan: That's still to be decided?

Mr. Jack Rephan: That -- that's correct, Your Honor.

The total cost were six hundred and some odd thousand dollars.

Justice William J. Brennan: But this may be shaved down, we don't know how much?

Mr. Jack Rephan: This could be shaved down.

In fact the court said, “Number one the court should disallow any kickbacks.”

Justice Byron R. White: Not likely to be shaved down to $314,000, I gather?

Mr. Jack Rephan: Of course it goes back to the commissioner who made the initial determination.

Justice Byron R. White: Then either one of you would be up here instead of the shaved down readily?

Mr. Jack Rephan: Well, that's true, Your Honor, but we submit that it's grossly unfair for the Government to say, “We're not going to terminate it.”

In fact, Acme was in asking the Army, “Please, treat it as having been terminated for the convenience of the Government."

They said, “We're not going to do it.”

Now why should they be allowed to do it now if the court should decide that they were wrong in cancelling the contract?

Thank you, Your Honor.

Chief Justice Earl Warren: Mr. Solicitor General, you may have three minutes to --

Rebuttal of Marshall

Mr. Marshall: It's just two points on the question of Mr. Justice Fortas about how minor an official Norris is on page 125 of the record.

In finding 3, it was agreed that he was to be the manager of this new plant, he was no minor official.

As to the reasons he was discharged, it's on page 131 -- 148.

And one of the grounds, I believe it is not is your voluntary abandonment of your duties without exact permission and the one before that is because you're being investigated by the FBI.

And the FBI was investigating for putting some farm equipments out there.

The answer to the question as to the reason the Government chose this is on page 204 where it said that the Government was not the -- the alleged violation, instead of terminating it for convenience of the Government was not control by consideration of termination cost but rather by the Army's interest in promoting morality in public procurement.

And I say finally, and this is exactly our point --

Justice Byron R. White: Well, what if you lose on that, Mr. Solicitor General?

Mr. Marshall: We are obliging the Government to make these people stop permitting kickbacks in their business.

Justice Byron R. White: Yes, but what if we just -- what if your -- what if you just lose -- just plainly lose on that --

Mr. Marshall: Then the Government will be obliged to sit around and file a suit and try to get his kickback money back and I submit that is no deterrent.

And on the question of damages, I think it's unbelievable that the respondents are asking the Court of Claims to say that if this contract had run to its conclusion, nobody would dispute that Acme would lose money but under the decision of the Court of Claims, the contract is cut in the middle and Acme makes money.

So the Government could very well have kept on and Acme would have been broke.

Justice William J. Brennan: Well you don't know that they make money until after this adjustment on the excessive cost, do you?

Has it been --

Mr. Marshall: Well I -- that's what I'm talking about.

What they're asking for, one of the Court of Claims gives them is that they -- because of their own inefficiency which the court of Claims found, the Government has to pay them for their inefficiency.

And I submit that the judgment of the Court of Claims should be reversed.