Through some clever delegation of duties within the Defense Department, the government has picked up the power to get a look at internal company records that might otherwise have been kept in confidence.
Last August, the U.S. District Court in Pittsburgh told Westinghouse Electric Corp. that it had to let the Pentagon see internal audit reports. The Pentagon was concerned that it might have been charged for some costs that in fact should have been attributed to the commercial side of the company. Now, the U.S. Court of Appeals in Philadelphia has confirmed that trial court's ruling.
The decision marks the first time that any appellate court has ruled on the issue, which could have wide ramifications in the defense industries.
The issue is a tricky one legally because the Defense Contract Audit Agency, which has the primary responsibility for overseeing the propriety of cost allocations on defense contracts, has no authority to issue a subpoena. The inspector general of the Defense Department, however, does.
When Westinghouse turned down a request from the audit agency to see the reports, the agency simply asked the inspector general to take over the probe.
The inspector general complied, borrowing audit agency staffers to run the project, and then issued a subpoena to Westinghouse for the audits.
Westinghouse argued that the audit agency cannot pick up powers Congress did not give it merely by having the inspector general front for it in a particular matter. But the appellate judges explained in their decision in U.S. v. Westinghouse, issued April 14, that the inspector general could have an independent reason for being interested in the documents.
And, the judges said, whether there is such an independent reason is a matter of fact, which a trial judge must determine. Such a determination can be tossed out by a higher court only if it is clearly wrong.
That might suggest to other defense contractors that if they want to challenge such subpoenas, they have to convince trial-court judges that the inspector general is on the wrong track. But the original ruling last summer in the Westinghouse case shows just how hard that can be.
The inspector general said that he needed to find out if the internal accounting controls at Westinghouse were adequate. No evidence was needed that anything unlawful was going on, senior judge Louis Rosenberg said. Nor was there much reason for him to decide if the subpoena was likely to be fruitful. Given the fact that Congress set up the inspector general offices to poke into any corners where there might be dirt, Rosenberg concluded that it was not the role of judges to stop them from any reasonable demand they may make of a company.
In other cases, courts ruled that:
Despite the ban in the Taft-Hartley Act on companies giving money to unions, there are situations in which employers can be forced to make such payments. The U.S. Court of Appeals in the District made an exception to the general ban in telling The Washington Post that it had to make up dues that four employes did not pay to their union. The employes stopped their dues after management told the four -- all syndicated columnists -- that they no longer were members of the bargaining unit. That was an incorrect reading of the union contract, the court found. It noted that the ban on payments to unions was intended to prevent bribery or undue management influence over union officials. Because the newspaper staunchly fought having to make the payments, no one could see even a hint of impropriety in its complying with an arbitrator's decision that it make up the missed dues, the judges explained. (Washington Post v. Newspaper Guild, April 4)
The public has no right to be present at a deposition. When a lawyer, collecting material to use at a trial, sits down with a stenographer present to question a potential witness, the process is not part of the trial itself, the Arizona Supreme Court reasoned. That means no outsider has a right to be there, and that either side can stop the proceeding. The justices agreed with a doctor who refused to answer questions from the lawyer for a hospital he was suing. During the questioning, the lawyer for the state board of medical examiners -- the defendant in a separate piece of litigation being waged by the doctor -- was sitting in. (Pyle Memorial Hospital v. Arizona Superior Court, April 7)
Banks have less protection from having to pay for hazardous-waste cleanups than they had thought. The Superfund Act requires owners of dumps to reimburse the Treasury when the federal government cleans up a dangerous site. But the law specifically exempts institutions that merely hold a lien against the site title in order to protect a property loan they made. Nonetheless, the U.S. District Court in Baltimore decided that a bank that had foreclosed on a defaulted mortgage on a trash business could be forced to make payments under the act. When the bank foreclosed on the property and subsequently took title to it at a foreclosure sale, it lost the protection given a mortgage-holder and became an owner of the site, the court ruled. (U.S. v. Maryland Bank & Trust, April 9)
Privately held corporations can keep merger negotiations secret from stockholders as long as the talks are with a publicly held concern. Under Securities and Exchange Commission rules, managers of publicly traded companies need not announce impending acquisitions until a formal agreement in principle is reached. The U.S. District Court in Chicago decided that the same rule should apply to discussions between private and public companies. The result: If stockholders in a closely held outfit sell out just before a merger for much less than they could have gotten once the deal went through, they simply are out of luck, with no grounds for a damage suit. (Jordan v. Duff & Phelps, March 17) By Daniel B. Moskowitz; Moskowitz covers legal affairs for McGraw-Hill World News.