Should a company suffer at the bottom line because it makes a product so good that the government deems it essential to national security? One of the company's most important makers of machine tools has presented that question to the U.S. Supreme Court, and thousands of manufacturers may be affected--at least potentially--by the answer.
Not surprisingly, the company says "no," if it is forced to act in the public welfare, then the public should bear the cost. But Uncle Sam is arguing that the loss in question--$434,596--was just an "expectation" of profit and that government doesn't owe anything if it never comes to pass.
Here's what happened: Kearney & Trecker Corp. makes a highly complicated and sophisticated machining device called the Five Axis Modu-Line Traveling Column Machining Center, so complex that the company can turn out only two a month and so useful in producing precise parts for machinery that K&T keeps a waiting list of manufacturers wanting the device. Lockheed-California ordered one, for use on a classified Air Force project, on Dec. 21, 1979, with delivery promised Dec. 15, 1981.
But by mid-1980, the Air Force decided it had to put more zip into the secret project, and that Lockheed would have to get the Modu-Line no later than June 30, 1981. The Air Force convinced the Commerce Department Lockheed's needs were vital to the nation, and Commerce's Office of Industrial Mobilization ordered K&T to deliver a machine to Lockheed by that date.
There's no question that Commerce has the authority to issue such an order. It is clearly spelled out in the Defense Production Act of 1950, and continues to apply in non-wartime. Kearney & Trecker never disputed the government's right to order a delivery speedup.
The only way the machine-tool builder could get a Modu-Line to Lockheed by June 1981 was to take one being made for another customer, with an earlier delivery date, and modify it for Lockheed's specific needs. As Court of Claims chief judge Daniel Friedman put it, "Rolls Royce was the unlucky commercial customer." Rolls was originally supposed to get its Modu-Line in January 1981, but the expected delivery date had already been shoved back to September of that year because of a strike at K&T. Giving up the delivery slot to Lockheed would mean that Rolls would have to wait until February 1982. It had ordered the machine in November 1979.
Rather than wait, Rolls canceled the order. K&T sued the government for the money it it would have made on the Rolls sale, had it not been forced to delay delivery and thereby lose the order.
The basis of Kearney & Recker's claim--and it is the first such ever made against the federal government--is the promise in the fifth amendment to the U.S. Constitution. That says, after listing other intrusions on private rights which the Federal government may not commit, "nor shall private property be taken for public use, without just compensation." The crux of the case is whether usurping a prized spot in a delivery schedule is, in the word the lawyers use, a "taking."
Friedman and his collegues on the Court of Claims decided it was not. Although the manufacturer's claim was unique, the judges found guidence in a 1923 Supreme Court ruling. That case was brought by Omnia Corp., which had struck a deal to buy a major amount of steel at below-market prices. Before it could take delivery, the government stepped in and requisitioned the steel. Onmia didn't get its bargain, and wanted Washington to pay for the loss. The high court turned down the bid.
The 1923 decision "makes it clear that the mere frustration of a contract resulting from the government's exercise of its power of eminent domain is not a 'taking' for which just compensation must be awarded," Friedman ruled.
But K&T's lawyer, Malcolm D. Young of Omaha, insists that the Omnia case doesn't decide the issue at all, because it was brought by a buyer whose contractural rights were frustrated by the government action. The toolmaker says it wants to be paid, not for the lost contract, but for the government's appropriating its production facilities. One of the company's "basic rights as manufacturer was to use its plant equipment to fulfill its contracts and use the incremental profit therefrom," Young told the Supreme Court in petitioning it to review the Court of Claims decision.
The government has until March 7 to answer the petition, but it will argue that the Court of Claims is correct, and that there's no need for further review of the dispute.
A dry dispute over taking, however, may not catch the fancy of the justices at all. Young is trying to paint the controversy as one over basic fairness. In a 1976 pamphlet, Commerce describes the system of demanding priority delivery of items needed for defense programs as "a very small premium we are paying for substantial insurance coverage." Young told the justices: "The issue which must be squarely faced by this court is whether that insurance premium is to be paid only by the specific manufacturer affected by a given priority directive, or whether the burden is more appropriately shared by the public at large."