B-153681, MAR. 18, 1965, 44 COMP. GEN. 564

B-153681, MAR. 18, 1965, 44 COMP. GEN. 564

PERSONAL SERVICES - DETECTIVE EMPLOYMENT PROHIBITION - EXCEPTIONS - SUBSIDIARY OF DETECTIVE AGENCY SINCE THE POLICY CONSIDERATIONS WHICH GAVE RISE TO THE ENACTMENT OF THE SO-CALLED ANTI-PINKERTON LAW PROHIBITING THE USE OF EMPLOYEES OF PINKERTON AND OTHER DETECTIVE AGENCIES, 5 U.S.C. 53, SOME 70 YEARS AGO, DO NOT HAVE A BEARING ON THE CURRENT PRACTICE OF THE GOVERNMENT CONTRACTING FOR GUARD SERVICES, THE EXTENSION OF THE APPLICATION OF THE ACT TO REQUIRE THAT A FIRM FURNISHING GUARD SERVICES TO THE GOVERNMENT WHICH IS A PRIMA FACIE SEPARATE SUBSIDIARY OF A DETECTIVE AGENCY CORPORATION BE CONSIDERED THE SAME AS THE PARENT CORPORATION IS NOT JUSTIFIED AND, THEREFORE, SUCH A FIRM WHICH IS A WHOLLY OWNED, STATE APPROVED, SUBSIDIARY OF A DETECTIVE AGENCY CORPORATION WITH ITS OWN OPERATING PERSONNEL, SEPARATE BOOKS, ACCOUNTS AND FINANCIAL TRANSACTIONS FROM THE PARENT CORPORATION IS REGARDED AS A SEPARATE ENTITY, EVEN THOUGH PARENT AND SUBSIDIARY SHARE ADMINISTRATIVE PERSONNEL, AND WAS PROPERLY AWARDED A CONTRACT TO FURNISH GUARD SERVICES. (B-153681, JUNE 22, 1965; 8 COMP. GEN. 89; 38 ID. 881, SUSTAINED ON BASIS OF MODIFICATION OF REASONS.)

TO SYDNEY C. BERDE, MARCH 18, 1965:

BY LETTER OF DECEMBER 14, 1964, ON BEHALF OF MIDWEST BUILDING SERVICES, INC., YOU REQUESTED THAT WE RECONSIDER AND WITHDRAW OUR DECISION OF JUNE 22, 1964, B-153681, TO THE CHAIRMAN OF THE ATOMIC ENERGY COMMISSION CONCERNING APPLICATION OF THE SO-CALLED ANTI PINKERTON LAW, 5 U.S.C. 53. THE CIRCUMSTANCES LEADING TO YOUR REQUEST AND THE ISSUES DRAWN THEREBY MAY BE SUMMARIZED AS FOLLOWS.

SECTION 53 TITLE 5, U.S.C. PROVIDES THAT:

NO EMPLOYEE OF THE PINKERTON DETECTIVE AGENCY, OR SIMILAR AGENCY, SHALL BE EMPLOYED IN ANY GOVERNMENT SERVICE OR BY ANY OFFICER OF THE DISTRICT OF COLUMBIA.

THIS OFFICE HAS UNIFORMLY RULED THAT THE ANTI-PINKERTON LAW IS A PROHIBITION AGAINST THE EMPLOYMENT IN GOVERNMENT SERVICE OF EMPLOYEES OF DETECTIVE AGENCIES AND IS APPLICABLE TO CONTRACTS WITH DETECTIVE AGENCIES AS FIRMS OR CORPORATIONS AS WELL AS TO CONTRACTS WITH OR APPOINTMENTS OF INDIVIDUAL EMPLOYEES OF SUCH AGENCIES. 8 COMP. GEN. 89, 38 ID. 881. AND WE HAVE ALSO HELD THAT THE CHARACTER OF SERVICES RENDERED BY A DETECTIVE AGENCY OR EMPLOYEES THEREOF MAY NOT BE RELIED UPON TO WORK AN EXCLUSION FROM THE PROHIBITION BUT THAT CONTRACTS WITH PROTECTIVE AGENCIES AND THEIR EMPLOYEES AS DISTINGUISHED FROM DETECTIVE AGENCIES ARE NOT WITHIN THE PURVIEW OF THE LAW. 26 COMP. GEN. 303, 41 ID. 819. IT WAS AGAINST THIS BACKGROUND THAT WE CONSIDERED, IN OUR DECISION TO THE CHAIRMAN, AEC, THE QUESTION OF WHETHER A CONTRACT FOR PROTECTIVE SERVICES COULD PROPERLY BE AWARDED TO THE FIRM WACKENHUT SERVICES, INCORPORATED.

WACKENHUT SERVICES IS A WHOLLY OWNED SUBSIDIARY OF WACKENHUT CORPORATION. "CORPORATION" IS A DETECTIVE AGENCY CLEARLY BARRED FROM GOVERNMENT CONTRACTS UNDER THE ACT AS CONSTRUED BY THE CITED DECISIONS. "SERVICES" IS ORGANIZED AS A PROTECTIVE AGENCY WHICH UNDER ORDINARY CIRCUMSTANCES WOULD NOT BE BARRED BY THE ACT FROM CONTRACTING WITH THE GOVERNMENT. HOWEVER, WE WERE REQUESTED TO RULE UPON THE ELIGIBILITY OF SERVICES BECAUSE OF ITS RELATIONSHIP TO CORPORATION. IN ADDITION TO ITS STATUS AS A WHOLLY OWNED SUBSIDIARY, CERTAIN ADDITIONAL ASPECTS OF SERVICES' RELATIONSHIP TO CORPORATION ARE PERTINENT. THE SAME PERSONS ACT AS OFFICERS OF BOTH COMPANIES. SERVICES DOES NOT HAVE ITS OWN ADMINISTRATIVE PERSONNEL, OBTAINING ITS REQUIRED ADMINISTRATIVE SUPPORT FROM CORPORATION. WITH A COMMON SET OF OFFICERS, IT IS DIFFICULT TO DISTINGUISH THE MANAGERIAL DECISIONS AND OPERATING POLICIES AND PROCEDURES OF SERVICES FROM THOSE OF CORPORATION. BOTH COMPANIES ENGAGE IN FURNISHING GUARD SERVICES BUT WHEREAS CORPORATION FURNISHES GUARD AND DETECTIVE SERVICES, ITS SUBSIDIARY FURNISHES ONLY GUARD SERVICES. AND FOR WHATEVER REASONS SERVICES MAY HAVE BEEN INITIALLY ORGANIZED--- THERE IS EVIDENCE THAT ITS ESTABLISHMENT WAS NOT RELATED TO THE ANTI-PINKERTON MEASURE--- IT IS ADMITTEDLY BEING MAINTAINED BY THE OWNERS OF CORPORATION FOR THE PRIMARY IF NOT SOLE PURPOSE OF BEING ELIGIBLE FOR AWARD OF GOVERNMENT CONTRACTS AS A COMPANY NOT ENGAGED IN OR AUTHORIZED TO ENGAGE IN FURNISHING DETECTIVE SERVICES.

NOTWITHSTANDING THE ABOVE, WE CONCLUDED THAT THE CORPORATE AFFAIRS OF THE TWO COMPANIES WERE MAINTAINED ON A SUFFICIENTLY SEPARATE BASIS TO REGARD THEM AS SEPARATE ENTITIES. OUR BASIS FOR THIS CONCLUSION WAS THAT WITH RESPECT TO THEIR OPERATING PERSONNEL, THEIR BOOKS OF ACCOUNT, THE RECORDING OF THEIR TRANSACTIONS, THE SEGREGATION OF THEIR ASSETS, THE HANDLING OF THEIR TAX AND INSURANCE MATTERS, ETC., THE TWO COMPANIES OPERATE AS WHOLLY INDEPENDENT CORPORATIONS. AND WHILE SERVICES DOES NOT HAVE ITS OWN ADMINISTRATIVE PERSONNEL, THE VALUE OF ADMINISTRATIVE SUPPORT FURNISHED IT BY CORPORATION AND A PRO RATA SHARE OF OFFICERS' SALARIES ARE CHARGED AS EXPENSES TO THE SUBSIDIARY.

BASED UPON OUR ADVICE TO THE CHAIRMAN, AEC, THE COMMISSION, AFTER ANALYSIS OF SEVERAL CONTRACT PROPOSALS, INCLUDING THOSE OF YOUR CLIENT, AWARDED A CONTRACT FOR GUARD SERVICES AT ITS NEVADA TEST SITE TO WACKENHUT SERVICES, INCORPORATED. YOUR INTEREST LIES IN DISQUALIFYING SERVICES TO ALLOW FURTHER CONSIDERATION OF MIDWEST'S REJECTED PROPOSAL.

YOU STATE THAT OUR CONCLUSION AS TO SERVICES' ELIGIBILITY AS A SEPARATE AND DISTINCT ENTITY IS PREDICATED UPON ACCEPTANCE OF WHAT AMOUNTS TO MERELY PRO FORMA FORMALITIES OF SEPARATE CORPORATE EXISTENCE. YOU CONTEND, IN VIEW OF THE ACKNOWLEDGED PURPOSE UNDERLYING THE VERY EXISTENCE OF SERVICES, THAT THE CRUCIAL QUESTION IS WHETHER CORPORATION SO DOMINATES, MANAGES, AND CONTROLS SERVICES AS TO MAKE THE LATTER A MERE AGENCY, INSTRUMENTALITY, OR DEPARTMENT OF THE FORMER. TO STATE IT ANOTHER WAY, IT IS YOUR VIEW THAT THE FUNDAMENTAL QUESTION TO BE ADDRESSED IS WHETHER THE CORPORATE PAPERS, BOOKS AND OPERATION OF SERVICES OPERATE ONLY TO CAMOUFLAGE ITS TRUE NATURE AS AN INSTRUMENTALITY OF A LARGER ENTERPRISE OR THE REAL FACT THAT ITS OPERATIONS ARE SO INTERMINGLED WITH THOSE OF A LARGER ENTERPRISE AS TO HAVE LOST ITS OWN IDENTITY. SEE FLETCHER CYCLOPEDIA CORPORATIONS (1963) SEC. 43 AND 47 COL. L.R. 343. IN THIS CONNECTION, YOU STATE THAT SERVICES HAS NO INDEPENDENT FINANCIAL STRENGTH APART FROM CORPORATION, AND THAT IN DEALING WITH SERVICES ONE DEALS, IN REALITY, WITH CORPORATION. YOU URGE, IN CIRCUMSTANCES SUCH AS THOSE WHICH PREVAIL HERE, THAT NOTWITHSTANDING THE WELL-ESTABLISHED LEGAL DOCTRINE OF SEPARATE CORPORATE PERSONALITY, THE APPROPRIATE RULE FOR APPLICATION IS THAT SET FORTH IN SECTION 45 OF FLETCHER CYCLOPEDIA CORPORATIONS, VOLUME 1, REVISED 1963, AT PAGE 240:

WHERE THE CORPORATE FORM OF ORGANIZATION IS ADOPTED OR A CORPORATE ENTITY IS ASSERTED IN AN ENDEAVOR TO EVADE A STATUTE OR TO MODIFY ITS INTENT, COURTS WILL DISREGARD THE CORPORATION OR ITS ENTITY AND LOOK AT THE SUBSTANCE AND REALITY OF THE MATTER * * *.

IN SUPPORT OF THE APPLICABILITY OF THIS RULE TO THE FACTS UNDER CONSIDERATION, YOU CITE A NUMBER OF CASES IN WHICH THE COURTS REFUSED TO RECOGNIZE THE SEPARATE CORPORATE STATUS OF A DOMINATED AND CONTROLLED SUBSIDIARY WHERE TO RETAIN THE SEPARATE ENTITY WOULD HAVE RESULTED IN CIRCUMVENTION OF THE INTENT OF A PROHIBITORY OR REGULATORY CONGRESSIONAL OR STATE ENACTMENT. ALSO, YOU SET FORTH REASONS AS TO WHY THE CASE OF SCHENLEY DISTILLERS CORP. V. UNITED STATES, 326 U.S. 432, UPON WHICH WE RELIED IS INAPPOSITE.

WE HAVE REVIEWED THE CASES YOU CITE AND A HOST OF OTHERS TOGETHER WITH VARIOUS TREATISES ON THE SUBJECT OF SEPARATE CORPORATION IDENTITY. AS YOU ARE WELL AWARE, THE CASES ARE LEGION AND THE AVAILABLE TEXT MATERIALS ARE VOLUMINOUS. WHILE WE DO NOT BELIEVE THAT THE RELATIONSHIP OF THE TWO WACKENHUT COMPANIES IS SUCH AS TO CATEGORICALLY REQUIRE THE CONCLUSION YOU DESIRE, WE CAN ADMIT THAT AN EXHAUSTIVE EXAMINATION OF THE CASES AND MATERIALS IN LIGHT OF THE FACTS AND OF THE ARGUMENTS YOU PRESENT LEADS US TO AGREE THAT YOURS IS A VERY PERSUASIVE POSITION SO FAR AS CONCERNS THE GENERAL LAW IN THE MATTER. HOWEVER, WE DO NOT BELIEVE IT NECESSARY TO ANY USEFUL PURPOSE THAT WE EXAMINE THE CASES IN DETAIL. FOR WE BELIEVE YOU WILL AGREE THAT ALL OF THE CASES PROCEED FROM THE BASIC CONCEPTION THAT THE STATE'S APPROVAL OF A CORPORATE FORM SETS UP A PRIMA FACIE CASE OF SEPARATE IDENTITY AND THAT ANY CHALLENGE OF THE CORPORATE FORM IS INQUIRED INTO ON A "NEGATIVE" BASIS IN TERMS OF WHETHER SUFFICIENT REASON EXISTS TO DISREGARD THIS PRIMA FACIE SEPARATENESS. IT IS CLEAR, FROM THE RELATIONSHIP BETWEEN CORPORATION AND SERVICES AS OUTLINED ABOVE, THAT AT LEAST THE PRO FORMA ELEMENTS OF SEPARATE CORPORATE IDENTITY ARE BEING MAINTAINED. THEREFORE, REGARDLESS OF ANY DIFFERENCES OF OPINION CONCERNING WHETHER THERE IS, IN FACT, ANY ,REAL" SEPARATE CORPORATE EXISTENCE AND REGARDLESS OF OUR PRIOR CONCLUSION IN THE MATTER, THE CRITICAL QUESTION WHICH WE MUST FACE IS WHETHER THE PROHIBITION OF THE ANTI-PINKERTON STATUTE AND ITS UNDERLYING POLICY CONSIDERATIONS AFFORD SUFFICIENT REASON TO LOOK BEHIND THE PRIMA FACIE DISTINCTION BETWEEN THE TWO COMPANIES.

IN THE FIRST SESSION OF THE EIGHTY-EIGHTH CONGRESS, SENATOR MCCLELLAN INTRODUCED S. 1543 WHICH PROPOSED TO REPEAL THE ANTI PINKERTON STATUTE. THE OUTRIGHT REPEAL PROVISION OF THE BILL WAS LATER AMENDED TO PRECLUDE ONLY THE EMPLOYMENT OF DETECTIVE PERSONNEL FOR THE PURPOSE OF PROVIDING INVESTIGATIVE SERVICES; AND AS AMENDED, THE BILL PASSED THE SENATE WITHOUT MUCH DISCUSSION. 109 CONG. REC. 19743. IN THE HOUSE, THE BILL WAS NOT REPORTED OUT OF COMMITTEE. THE REPORT ON THE BILL FROM THE SENATE COMMITTEE ON GOVERNMENT OPERATIONS, S. REPT. NO. 447, DATED AUGUST 20, 1963, IS MOST INSTRUCTIVE WITH RESPECT TO THE CIRCUMSTANCES LEADING TO ENACTMENT OF THE ANTI PINKERTON LEGISLATION IN THE FIRST INSTANCE AND AS TO THE REASONS FOR PROPOSING ITS REPEAL. WE QUOTE THE CONCLUSIONS DRAWN BY THE COMMITTEE, APPEARING AT PAGE 7 OF THE REPORT:

AS INDICATED EARLIER, S. 1543 WOULD REPEAL A PROVISION OF LAW WHICH WAS ADOPTED ORIGINALLY 71 YEARS AGO, AS A TEMPORARY LIMITATION IN AN APPROPRIATION MEASURE, AND WAS MADE PERMANENT THE FOLLOWING YEAR. ITS ENACTMENT AROSE OUT OF PUBLIC AND CONGRESSIONAL CONCERN RESULTING FROM THE USE BY STEEL AND RAILROAD CORPORATIONS OF EMPLOYEES OF THE PINKERTON AND OTHER DETECTIVE AGENCIES AS ARMED GUARDS, LABOR SPIES, AND STRIKEBREAKERS IN LABOR DISPUTES, GIVING RISE TO BLOODSHED, LOSS OF LIFE, AND DESTRUCTION OF PROPERTY.

AN EXAMINATION OF THE LEGISLATIVE HISTORY OF THE PROVISIONS REVEALS THAT, IN ITS ORIGINAL FORM, IT WOULD HAVE PROHIBITED THE FEDERAL GOVERNMENT AND THE GOVERNMENT OF THE DISTRICT OF COLUMBIA FROM ENTERING INTO ANY CONTRACTS WITH FIRMS OR CORPORATIONS WHICH EMPLOYED AS ARMED GUARDS EMPLOYEES OF THE PINKERTON OR SIMILAR DETECTIVE AGENCIES. THIS PROVISION WAS FELT BY THE CONGRESS TO BE TOO DRASTIC, UNDER THE CIRCUMSTANCES, SINCE ITS EFFECT MIGHT HAVE BEEN TO REQUIRE THE GOVERNMENT TO TERMINATE VARIOUS DEFENSE CONTRACTS THEN IN EFFECT. FURTHERMORE, IT WAS FELT THAT SUCH ACTION, IF APPROPRIATE, SHOULD BE ACCOMPLISHED BY POSITIVE LEGISLATION, FOLLOWING THE REPORTS AND RECOMMENDATIONS OF SENATE AND HOUSE COMMITTEES INVESTIGATING THESE ACTIVITIES, RATHER THAN BY MEANS OF A RIDER TO AN APPROPRIATION ACT.

FOLLOWING NUMEROUS SENATE-HOUSE CONFERENCES ON THE PROVISION IN QUESTION, THE PRESENT LANGUAGE WAS ADOPTED AS A COMPROMISE, ON THE LAST DAY OF THE 1ST SESSION OF THE 52D CONGRESS. THE SAME PROVISION WAS INCLUDED IN AN APPROPRIATION MEASURE THE FOLLOWING YEAR, WITHOUT ANY FLOOR DISCUSSION OR DEBATE.

LABOR-MANAGEMENT RELATIONS TODAY ARE FULLY REGULATED BY FEDERAL AND STATE STATUTES, AND ALL OF THE FEDERAL AGENCIES CONCERNED AGREE THAT THERE IS NO LONGER ANY JUSTIFICATION FOR THE CONTINUANCE OF THIS PROHIBITION. FURTHERMORE, IT APPEARS THAT IT DISCRIMINATES AGAINST THOSE DETECTIVE AGENCIES WHICH FURNISH BOTH INVESTIGATIVE AND PROTECTIVE SERVICES, AND IS DETRIMENTAL TO THE BEST INTERESTS OF THE GOVERNMENT, SINCE IT ELIMINATES FROM COMPETITIVE BIDDING NUMEROUS MAJOR DETECTIVE AGENCIES WHICH WOULD OTHERWISE RESPOND TO GOVERNMENT INVITATIONS TO BID ON CONTRACTS FOR THE FURNISHING OF SUPPLEMENTARY GUARD SERVICE. FINALLY, THE COMMITTEE HAS IN ITS FILES, COPIES OF LETTERS FROM OFFICIALS OF VARIOUS UNIONS HAVING CONTRACTS WITH THE PINKERTON AND SIMILAR AGENCIES, ENDORSING THE ENACTMENT OF AN IDENTICAL BILL WHICH WAS PENDING IN THE HOUSE OF REPRESENTATIVES IN 1960, AS WELL AS INFORMATION SHOWING THAT THE PINKERTON DETECTIVE AGENCY, AS OF 1960, HAD CONTRACTS WITH UNIONS THROUGHOUT THE COUNTRY.

IT IS THE VIEW OF THE COMMITTEE THAT THE PRESENT PROHIBITION SERVES NO USEFUL PURPOSE WHATEVER, IS DETRIMENTAL TO THE BEST INTERESTS OF THE GOVERNMENT, AND DISCRIMINATES AGAINST A CLASS OF DETECTIVE AGENCIES WITHOUT ANY JUSTIFICATION. ACCORDINGLY, THE COMMITTEE URGES ENACTMENT OF S. 1543.

THESE CONCLUSIONS AND THE UNDERLYING DETAILED REVIEW OF THE ANTI PINKERTON MEASURE HISTORY CONTAINED IN THE COMMITTEE'S REPORT LEAVE NO DOUBT BUT THAT WHATEVER MAY HAVE BEEN THE OVERRIDING POLICY CONSIDERATIONS LEADING TO ENACTMENT OF THIS LEGISLATION SOME 70 YEARS AGO, THEY DO NOT HAVE MUCH, IF ANY, BEARING ON THE CURRENT PRACTICE OF THE GOVERNMENT CONTRACTING FOR GUARD SERVICES OF THE TYPE HERE INVOLVED.

WHILE WE SHALL OF COURSE BE REQUIRED TO APPLY THE LITERAL PROVISIONS OF THE ANTI-PINKERTON STATUTE FOR SO LONG AS IT REMAINS IN FORCE, WE DO NOT CONSIDER THAT IT EMBODIES SUCH ELEMENTS OF A POLICY NATURE AS TO REQUIRE THAT WE PIERCE THE CORPORATE VEIL IN SITUATIONS COMPARABLE TO WACKENHUT CORPORATION AND ITS SUBSIDIARY WACKENHUT SERVICES, INCORPORATED. APPLICATION OF THE STATUTE IS ITSELF SOMEWHAT AMBIGUOUS IN LIGHT OF THE INTENTION OF THE CONGRESS WHICH ENACTED IT, EVEN WHEN CONSIDERED IN CONJUNCTION WITH THE ACTIVITIES OF THE PARENT COMPANY. TO FURTHER EXTEND ITS APPLICATION TO THE SUBSIDIARY COMPANY CARRIES THE INJUNCTION TOO FAR FROM ITS ORIGINALLY INTENDED PURPOSE FOR THIS OFFICE TO CONCLUDE THAT THE PARENT AND SUBSIDIARY ARE ONE AND THE SAME. WE UNDERSTAND THAT A NUMBER OF SUBSIDIARIES OF DETECTIVE AGENCIES NOW HOLD AND HAVE HELD GOVERNMENT CONTRACTS FOR GUARD SERVICES. OVERRULING OUR PRIOR DECISION WOULD DOUBTLESS REQUIRE PROTRACTED CONSIDERATIONS OF EACH CASE TO ASCERTAIN THE EXACT RELATIONSHIP OF EACH CONTRACTING COMPANY TO ITS PARENT AND THE QUESTION OF WHETHER OR NOT ITS CURRENT CONTRACTS SHOULD BE CANCELED AT THE COST OF MUCH DISRUPTION TO THE GOVERNMENT'S BUSINESS. WE DO NOT BELIEVE WE WOULD BE JUSTIFIED IN SUBJECTING THE GOVERNMENT TO SUCH DISRUPTION OF ITS ACTIVITIES ON THE BASIS OF SO EQUIVOCAL A POLICY AS UNDERLIES THE 70 YEAR OLD ANTI-PINKERTON STATUTE AS IT RELATES TO THE FURNISHING OF GUARD SERVICES TO THE GOVERNMENT TODAY. ACCORDINGLY, WE SUSTAIN OUR PRIOR RULING IN THE MATTER WITH MODIFICATION OF THE REASONS THEREFOR AS SET FORTH IN THIS OPINION.

IN LIGHT OF THE CONCLUSIONS REACHED HEREIN WE DO NOT CONSIDER IT NECESSARY TO TREAT SEPARATELY EACH AND EVERY CONTENTION WHICH YOU SET FORTH.