Notwithstanding earlier warnings from this committee and the passage of a bill by the House at the last session of Congress prohibiting the payment of contingent fees (which bill failed of enactment in the Senate), no real effort has been made by these agents to voluntarily adjust downward their excessive fees and commissions. So also strong pressure, and in some cases definite action on the part of the War and Navy Departments, likewise failed to make a marked impression. Strong resistance to any voluntary adjustments was noted, not only on the part of the agents, but also on the part of certain manufacturers who appeared before the committee. They felt little concern over the payment of such huge fees, particularly since the cost would ultimately not be borne by them but by the Government.

There follows a list of agents, selected from among those investigated by the committee, which shows gross earnings for the years 1939, 1940, 1941, and 1942. In most instances the 1942 figures represent earnings for only the first 7 months, figures for the entire year not being available. The figures for these 7 months, however, added to the amounts potentially due, are sufficiently startling. The list is illustrative of the fact that the evil has grown in direct proportion to the steadily mounting volume of wartime procurement. This list is representative only, and does not attempt to encompass the many hundreds of persons located in Washington and throughout the Nation who have been receiving excessive commissions in connection with Government purchasing. The total figure, if it could be determined, would stagger the imagination.

Amounts of retainer fees, reimbursements of expenses, salaries, and commissions paid to and due certain manufacturers' agents, 1939-421

Amounts of retainer fees, reimbursements of expenses, salaries, and commissions paid to and due certain manufacturers' agents, 1939-42-Continued

EXISTING REMEDIES ARE INADEQUATE

The War and Navy Departments have been acutely aware of the huge selling costs being borne by the Government, and have employed every means presently at their disposal to recapture excessive fees and commissions paid in the past and to forestall additional payments in the future. They have relied principally upon a strict interpretation of the warranty clause, and have sought to prevent the inclusion of contingent fees in the cost of future contracts.

The warranty clause, which is included in all Government contracts, provides as follows:

ARTICLE 11. Covenant against contingent fees.-The contractor warrants that he has not employed any person to solicit or secure this contract upon any agreement for a commission, percentage, brokerage, or contingent fee. Breach of this warranty shall give the Government the right to annul the contract, or, in its discretion, to deduct from the contract price or consideration the amount of such commission, percentage, brokerage, or contingent fees. This warranty shall not apply to commissions payable by contractors upon contracts or sales secured or made through bona fide established commercial or selling agencies maintained by the contractor for the purpose of securing business.

The exception in the warranty of "bona fide established commercial or selling agents maintained by the contractor for the purpose_of securing business" has given rise to considerable uncertainty. For administrative purposes, the Navy Department has adopted certain tests which, strictly applied, would except from the warranty only those agents who (1) have had a certain continuity of service, going back well before the war; (2) have represented their principals in selling to commercial customers as well as to the Government; and (3) have been employed because of their familiarity with the products

sold, not because of their knowledge of Government procedure or acquaintance with Government officials. It can be appreciated that a determination as to who can qualify within this exception presents many difficult questions of law and fact, and is necessarily a slow process. Moreover, even when agents are clearly bona fide under the warranty clause, nevertheless there is created an unjustifiable drain upon the public treasury when their fees become grossly disproportionate to the services which they render.

Even conceding that the warranty clause affords some protection to the Department under its prime contracts, no control over contingent fees can be exercised in the procurement of subcontracts. The Government is not a party to these subcontracts; neither do they contain a warranty clause. The procurement of subcontracts, however, is a necessary adjunct to Government procurement and any selling expenses paid in connection therewith must ultimately be paid by the Government.

There has been an increasing effort to eliminate, excessive fees at the time contracts are originally negotiated with the departments. This approach is not a complete solution, however, since such action can only be taken in connection with prime contracts, and subcontracts cannot be reached. Frequently the agent is unwilling to relinquish his contractual rights to the commissions: Insistence upon an adjustment at the time of original negotiation might unreasonably delay procurement. Also, contracting officers are not always aware, for various reasons ranging from oversight to concealment, of the existence of excessive fees.

Both the War and Navy Departments have been seeking to recapture excessive profits already paid or to be paid the agent by effecting an amicable adjustment between the Department, the company, and the agent, whereby the company would thenceforth pay the agent a reasonable fixed compensation, the agent would relinquish further fees payable to him on existing contracts, and the company would refund these relinquishments to the Army or Navy. These efforts have been only partially successful. The difficulty has been that any adjustments must of necessity depend upon the voluntary cooperation of those concerned.

BILL APPROVED BY DEPARTMENTS

The bill meets with the approval of the War, Navy, and Treasury Departments, and the Maritime Commission.

CHANGES MADE IN EXISTING LAW

Section 403 of title IV of the Sixth Supplemental National Defense Appropriation Act, 1942, approved April 28, 1942, as amended by section 801 of title VIII of the Revenue Act of 1942, approved October 21, 1942, with changes proposed by the present bill, is printed as follows (existing law proposed to be omitted is shown enclosed in black brackets, new matter is printed in italics, existing law in which no change is proposed is shown in roman):

"(a) For the purposes of this section

"(1) The term 'Department' means the War Department, the Navy Department, the Treasury Department, and the Maritime Commission, respectively.

"(2) In the case of the Maritime Commission, the term 'Secretary' means the Chairman of such Commission.

"(3) The terms 'renegotiate' and 'renegotiation' include the refixing by the Secretary of the Department of the contract price.

"(4) The term 'excessive profits' means any amount of a contract or subcontract price which is found as a result of renegotiation to represent excessive profits.

"(5) [The term 'subcontract' means any purchase order or agreement to perform all or any part of the work, or to make or furnish any article, required for the performance of another contract or subcontract.] The term 'subcontract' means (i) any purchase order or agreement to perform all or any part of the work, or to make or furnish any article, required for the performance of any other contract or subcontract or (ii) any contract or arrangement (other than a contract or arrangement between two contracting parties, one of which parties is found by the Secretary to be a bona fide executive officer, partner, or full-time employee of the other contracting party), (A) any amount payable under which is contingent upon the procurement of a contract or contracts with a Department or of a subcontract or subcontracts thereunder, or determined with reference to the amount of such a contract or subcontract or such contracts or subcontracts, or (B) under which any part of the services performed or to be performed consists of the soliciting, attempting to procure, or procuring a contract or contracts with a Department or a subcontract or subcontracts thereunder: Provided, That nothing in this sentence shall be construed (1) to affect in any way the validity or construction of provisions in any contract with a Department or any subcontract thereunder, heretofore at any time or hereafter made, prohibiting the payment of contingent fees or commissions; or (2) to restrict in any way the authority of the Secretary to determine the nature or amount of selling expenses under subcontracts as defined in (ii) herein, as a proper element of the contract price or as a reimbursable item of cost, under a contract with a Department or a subcontract thereunder. The term 'article' includes any material, part, assembly, machinery, equipment, or other personal property.

"For the purposes of subsections (d) and (e) of this section, the term 'contract' includes a subcontract and the term 'contractor' includes a subcontractor.

"(b) Subject to subsection (i), the Secretary of each Department is authorized and directed to insert in any contract for an amount in excess of $100,000, hereafter made by such Department—

"(1) a provision for the renegotiation of the contract price at a period or periods when, in the judgment of the Secretary, the profits can be determined with reasonable certainty:

"(2) a provision for the retention by the United States from amounts otherwise due the contractor, or for the repayment by him to the United States, if paid to him, of any excessive profits not eliminated through reductions in the contract price, or otherwise, as the Secretary may direct;

"(3) a provision requiring the contractor to insert [in each subcontract for an amount in excess of $100,000] in each subcontract described in subsection (a) (5) (ii) and in each subcontract for an amount in excess of $100,000 described in subsection (a) (5) (i) made by him under such contract (i) a provision for the renegotiation by such Secretary and the subcontractor of the contract price of the subcontract at a period or periods when, in the judgment of the Secretary, the profits can be determined with reasonable certainty, (ii) a provision for the retention by the contractor for the United States of the amount of any reduction in the contract price of any subcontract pursuant to its renegotiation hereunder, or for the repayment by the subcontractor to the United States of any excessive profits from such subcontract paid to him and not eliminated through reductions in the contract price or otherwise, as the Secretary may direct, and (iii) a provision for relieving the contractor from any liability to the subcontractor on account of any amount so retained by the contractor or repaid by the subcontractor to the United States, and (iv) in the discretion of the Secretary, a provision requiring any subcontractor to insert in any subcontract made by him under such subcontract, provisions corresponding to those of subparagraphs (3) and (4) of this subsection (b); and

"(4) a provision for the retention by the United States from amounts otherwise due the contractor, or for repayment by him to the United States, as the Secretary may direct, of the amount of any reduction in the contract price of any subcontract under such contract, which the contractor is directed, pursuant to clause (3) of this subsection, to withhold from payments otherwise due the subcontractor and actually unpaid at the time the contractor receives such direction.

"The provision for the renegotiation of the contract price, in the discretion of the Secretary, (i) may fix the period or periods when or within which renegotiation shall be had; and (ii) if in the opinion of the Secretary the provisions of the contract or subcontract are otherwise adequate to prevent excessive profits, may provide that renegotiation shall apply only to a portion of the contract or subcontract or shall not apply to performance during a specified period or periods and may also provide that the contract price in effect during any such period or periods shall not be subject to renegotiation.

"(c) (1) Whenever, in the opinion of the Secretary of a Department, the profits realized or likely to be realized from any contract with such Department, or from any subcontract thereunder whether or not made by the contractor, may be excessive, the Secretary is authorized and directed to require the contractor or subcontractor to renegotiate the contract price. When the contractor or subcontractor holds two or more contracts or subcontracts, the Secretary in his discretion, may renegotiate to eliminate excessive profits on some or all of such contracts and subcontracts as a group without separately renegotiating the contract price of each contract or subcontract.

"(2) Upon renegotiation, the Secretary is authorized and directed to eliminate any excessive profits under such contract or subcontract (i) by reductions in the contract price of the contract or subcontract, or by other revision in its terms; or (ii) by withholding, from amounts otherwise due to the contractor or subcontractor, any amount of such excessive profits; or (iii) by directing a contractor to withhold for the account of the United States, from amounts otherwise due to the subcontractor, any amount of such excessive profits under the subcontract; or (iv) by recovery from the contractor or subcontractor, through repayment, credit or suit, of any amount of such excessive profits actually paid to him; or (v) by any combination of these methods, as the Secretary deems desirable. The Secretary may bring actions on behalf of the United States in the appropriate courts of the United States to recover from such contractor or subcontractor, any amount of such excessive profits actually paid to him and not withheld or eliminated by some other method under this subsection. The surety udder a contract or subcontract shall not be liable for the repayment of any excessive profits thereon. All money recovered by way of repayment or suit under this subsection shall be covered into the Treasury as miscellaneous receipts.

"(3) In determining the excessiveness of profits realized or likely to be realized from any contract or subcontract, the Secretary shall recognize the properly applicable exclusions and deductions of the character which the contractor or subcontractor is allowed under Chapter 1 and Chapter 2E of the Internal Revenue Code. In determining the amount of any excessive profits to be eliminated hereunder the Secretary shall allow the contractor or subcontractor credit for Federal income and excess-profits taxes as provided in Section 3806 of the Internal Revenue Code.

"(4) Upon renegotiation pursuant to this section, the Secretary may make such final or other agreements with a contractor or subcontractor for the elimination of excessive profits and for the discharge of any liability for excessive profits under this section as the Secretary deems desirable. Such agreements may cover such past and future period or periods, may apply to such contract or contracts of the contractor or subcontractor, and may contain such terms and conditions as the Secretary deems advisable. Any such agreement shall be final and conclusive according to its terms; and except upon a showing of fraud or malfeasance or a wilful misrepresentation of a material fact, (i) such agreement shall not be reopened as to the matters agreed upon, and shall not be modified by any officer, employee, or agent of the United States; and (ii) such agreement and any determination made in accordance therewith shall not be annulled, modified, set aside, or disregarded in any suit, action, or proceeding.

"(5) Any contractor or subcontractor who holds contracts or subcontracts, to which the provisions of this section are applicable, may file with the Secretaries of all the Departments concerned statements of actual costs of production and such other financial statements for any prior fiscal year or years of such contractor or subcontractor, in such form and detail, as the Secretaries shall prescribe by joint