Government Contracts Legal Forum : Government Contracts Lawyers & Attorneys for Litigation & Counseling

Two years ago, GSA reached a $128 million settlement with Network Appliance, now known as NetApp Inc., based on a whistleblower False Claims Act (“FCA”) suit that alleged the company had failed to comply with the Price Reduction Clause of the contract. The settlement amount was, and continues to be, the largest Schedule contract fraud settlement reached by GSA.

While the company might have thought it had put the pain and expense of dealing with the lawsuit behind it, it now faces another legal action stemming from the FCA case. On August 9, 2011, Amalgamated Bank filed a complaint in Delaware state court seeking to compel inspection of NetApp’s books and records related to the company’s performance of its GSA Schedule contract. 

Amalgamated Bank serves as trustee of certain mutual funds which own shares of NetApp. Its complaint makes clear that the bank is searching for evidence of possible breaches of fiduciary duties by NetApp’s Board of Directors, specifically by “approving of and/or acquiescing in, and/or failing to monitor and prevent a course of systemic and sustained misconduct that allowed the [c]ompany consciously to ignore NetApp’s obligations to comply with federal procurement law . . . .”

The bank draws upon the facts alleged in the whistleblower’s complaint as a basis to demand books and records related to the company’s representations made to GSA concerning its compliance with contract requirements; the company’s compliance efforts and internal controls related to the Price Reduction Clause and Industrial Funding Fee provisions; any internal investigation or audit concerning the company’s contract compliance; and other related documents.

Whether or not the bank’s pursuit of NetApp’s Board of Directors will succeed is unknown at this time. But the fact that a company could face legal action by shareholders as a result of an FCA settlement is yet another indicator of the importance of avoiding FCA allegations in the first instance. While it is likely impossible to entirely remove the risk of having an FCA case filed against a company, particularly by a whistleblower, taking fundamental compliance steps, such as implementing and educating employees on policies, procedures, and internal controls specific to the requirements of the GSA Schedule contract (or any government contract), as well as conducting periodic internal reviews or audits to identify potential noncompliances will go a long way. In addition, instituting reporting mechanisms for employees to report concerns about contract compliance, and charging management with the responsibility to address and, if necessary, resolve reported concerns, will help companies prevent FCA allegations, particularly by disgruntled employees who believe, either accurately or mistakenly, that the company is not performing its government contracts appropriately.

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Professional whistleblower Brady Folliard’s most recent False Claims Act suit against technology vendors alleging violations of the Trade Agreements Act (“TAA”) has survived a motion to dismiss with respect to two defendants (GovPlace and Government Acquisitions, Inc.), but otherwise has been dismissed for the other six defendants (which include Hewlett Packard and GTSI Corporation).

In this case, Mr. Folliard alleged that the defendants violated the False Claims Act by listing Hewlett Packard and Cisco products on their respective GSA Schedule and NASA Solution for Enterprise-Wide Procurement (“SEWP”) contracts that were manufactured in TAA non-compliant countries, that the defendants were aware that the products were not compliant and consciously misrepresented that fact to the Government, and that they submitted claims for money from the Government based on that misrepresentation. 

The district court dismissed the complaint against six of the defendants based on the False Claims Act’s “first-to-file” bar, finding that essentially the same allegations were leveled against the six defendants in United States ex rel. Crennen v. Dell Marketing L.P., 711 F. Supp. 3d 157 (D. Mass. 2010), which was filed prior to this case (and was subsequently dismissed). The court also determined that Mr. Folliard’s complaint was precluded on res judicata grounds as to defendant Hewlett Packard by a previous False Claims Act case Mr. Folliard had filed against that company, which was dismissed for failure to state a claim and failure to plead fraud with particularity (United States ex rel. Folliard v. Hewlett-Packard Company, 272 F.R.D. 21 (D.D.C. 2011).

Defendants GovPlace and Government Acquisitions, Inc. were the only defendants in this case who had not previously been sued by Mr. Folliard or another whistleblower alleging the same violations as in this case. While these defendants argued that the complaint should be dismissed against them based on Mr. Folliard’s failure to plead fraud with particularity, the court determined that the complaint contained sufficient information to meet the pleading requirements for a fraud case. Unlike other cases filed by Mr. Folliard, including the case against Hewlett Packard and United States ex re. Folliard v. CDW Technology Services, Inc., 722 F. Supp. 2d 20 (D.D.C. 2010), the court here determined that the complaint contained sufficient detail about the alleged misrepresentations of product compliance and identified specific procurement orders for non-compliant products.

This latest Folliard case is yet another reminder of the importance of ensuring from the outset that products listed for sale on GSA Schedule contracts as well as other government contracts are compliant with the Trade Agreements Act, putting measures in place to routinely re-affirm the country of origin during contract performance, and promptly removing non-compliant products. It is also a reminder that individuals beyond those who meet the typical whistleblower profile(i.e., disgruntled employees or ex-employees) are on the lookout for any indication of possible TAA non-compliance and could seize upon such information and file a False Claims Act case against you.

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Home Depot was sued in 2008 by two whistleblowers claiming that the company had violated the False Claims Act by selling products that did not comply with the Trade Agreements Act (“TAA”) to the U.S. government through its GSA Schedule contract. The United States has not intervened in the case. Home Depot recently moved for reconsideration of the court’s denial of its motion to dismiss the allegations. In denying Home Depot’s second attempt to get the complaint dismissed, the court carefully walked through the elements of False Claims Act liability and determined that the complaint was properly pled. U.S. ex rel. Scott v. Actus Lend Lease, LLC et al., Case No. 2:08-cv-07940 (Apr. 22, 2011 C.D. Cal.).

For example, the court determined that the complaint sufficiently alleged facts demonstrating the submission of false claims, by finding that the qui tam relators (i.e., whistleblowers) had provided a spreadsheet listing 118 representative examples of transactions involving products sold to particular government customers that were manufactured in non-designated countries. The court rejected Home Depot’s argument that its claims for payment themselves did not explicitly misrepresent compliance with the TAA, and relied on well-established case law holding that requesting payment for goods or services of lesser quality than those ordered by the government or that failed to meet contractual requirements or specifications can also constitute false claims for payment. Note that this case differs from other recent False Claims Act actions against GSA Schedule contractors alleging TAA non-compliance, e.g., the Folliard case, which were dismissed because the relators failed to show that the government had actually purchased the non-compliant products. 

The court then determined that the complaint contained facts to support the allegation that Home Depot knowingly presented the false claims to the government because the relators had alleged that, although Home Depot knew that its GSA Schedule contract required compliance with the TAA and that it sourced products from China, a TAA non-designated country, the company knowingly failed to “institute any mechanism” to ensure that TAA non-compliant items were not sold off its Schedule contract to the government. 

It is vitally important for GSA Schedule contractors to ensure, both at the start of contract performance and on a regular basis throughout the life of the contract, that items offered for sale to the government are compliant with the Trade Agreements Act. Implementing a process through which a Schedule contractor investigates at regular intervals the source of products listed for sale on its Schedule contract is advisable. Often times companies change suppliers, or suppliers themselves change their sources of products, so even if a Schedule contractor ensures at the start of its contract that all listed products are TAA compliant, it should not assume its Schedule is TAA compliant going forward. Particularly given the five year (or more) duration of a GSA Schedule contract, there can be numerous changes in the supply chain leading to TAA non-compliance. Conducting regular and on-going due diligence on the country of origin of products offered for sale on a GSA Schedule contract will go a long way toward protecting the contractor from a viable False Claims Act allegation.

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Verizon Communications, Inc. recently paid the U.S. government $93.5 million to resolve False Claims Act allegations that it overcharged the government on voice and data telecommunications services contracts.  In addition to the significance of the amount paid, the case is notable for both the government’s aggressive enforcement of FAR provisions and the fact the alleged fraud occurred in the midst of a massive and complex telecom merger. Both underscore the need for timely and astute Government Contracts counseling.

Verizon subsidiary MCI Communications Services Inc. dba Verizon Business Services (“MCI”) is alleged to have invoiced the General Service Administration (“GSA”) for a variety of federal, state and local taxes and surcharges in violation of the contracts or applicable regulations in connection with the FTS2001 and FTS2001 Bridge contracts to provide voice and data telecommunications to an array of federal agencies.  The Department of Justice’s (“DoJ’s) joint investigation with GSA’s Office of the Inspector General found that Verizon and MCI submitted false claims under the contracts for the reimbursement of property taxes, common carrier recovery charges and unallowable surcharges -- charges that the government alleges are not directly reimbursable under the FTS2001 contracts.

According to the complaint in United States ex rel. Stephen M. Shea and 2Probe LLC v. Verizon Communications, Inc., MCI began submitting fraudulent invoices to GSA in 1999 that included surcharges for federal, state and local taxes, as well as certain duties, bundled into line items that “conceal the true nature of the charges.”  FAR 52.229-04, among other provisions governing the FTS2001 contract, states, “[u]nless otherwise provided in this contract, the contract price includes all applicable Federal, States and local taxes and duties.”  Since the FTS2001 contract did not provide for tax-related surcharges, MCI’s surcharges violated the reg, according to the complaint.

The government alleged the fraud lasted from 1999 to 2010.  In 2006, Verizon acquired MCI for $6.75 billion during a period of frenzied consolidation in the telecom industry. Verizon inherited the FTS2001 contract --and the government alleges the fraudulent billing continued unabated.

The government learned of the alleged fraud from relator Stephen Shea, a telecom consultant who assisted corporations in managing telecom costs. According to the complaint, Shea first noticed the errant surcharges in the communications bills of his corporate clients. (The other relator, 2Probe LLC, is owned by Shea and a Delaware-based corporate litigator.) GSA’s Inspector General and DoJ then jointly investigated the matter.  DoJ announced the settlement on April 5. Verizon agreed to $92.7 million plus interest; the whistleblowers’ share has yet to be decided.

“This $93 million recovery should make contractors realize that we are firmly committed to ensuring the integrity of corporate billing practices with respect to government programs,” said U.S. Attorney for the District of Columbia Ronald C. Machen, Jr., in a statement.

The case offers lessons. First, it pays to closely scrutinize the myriad regulations incorporated into government contracts. And such scrutiny is all the more crucial during fast-moving corporate deals, when contractual details can get lost in the shuffle. 

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The United States has intervened in yet another False Claims Act suit against GSA Schedule contractors alleging violations of the Trade Agreements Act. On November 24, 2010, the United States filed its Complaint in Intervention in U.S. ex rel. Navarro v. Divine Imaging, Inc. et al.  The complaint alleges that four different office supply companies with Schedule 75 contracts with GSA offered for sale and actually sold products that did not comply with the TAA. Unlike other recent False Claims Act cases against GSA Schedule contractors involving alleged TAA violations, this complaint appears to have evidence that the Government did, indeed, purchase non-compliant products. Earlier cases, such as the Folliard matter, were dismissed due to lack of evidence that the government actually purchased the non-compliant products listed for sale on the contractors’ Schedule contracts.

The Navarro case was initially filed as a qui tam action by Vanessa Navarro against over 50 office supply companies. The Government’s complaint in intervention, filed against only 4 of the original 50 defendants, does not provide any insight into Ms. Navarro’s relationship, if any, with the defendants. Perhaps she is a current or former employee of one of the companies, or works for a competitor and possesses industry-specific information about the origin of the defendants’ products, or perhaps she has no relationship with the defendants and simply conducted some research of publicly available information to develop her claims. The important point to keep in mind as a GSA Schedule contractor is that your price list, which identifies the products and services for sale, is usually publicly available on GSA’s website, so anyone – including a competitor or a member of the general public – can develop information from your price list and other public sources to bring an action alleging non-compliance with the Trade Agreements Act.

It is vitally important for GSA Schedule contractors to ensure, both at the start of contract performance and on a regular basis throughout the life of the contract, that items offered for sale to the government are compliant with the Trade Agreements Act. Conducting regular and on-going due diligence on the country of origin of products offered for sale on a GSA Schedule contract will go a long way toward protecting the contractor from a viable False Claims Act allegation.
 

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As discussed in my blog post in June, the Department of Justice intervened in a False Claims Act case filed by a whistleblower against Oracle which alleged that the company had failed to accurately disclose its commercial pricing practices to the government in association with its GSA Schedule contract. DOJ has now filed its complaint (.pdf) in this case.

The complaint largely tracks the allegations in the complaint filed by the whistleblower, who is a former Oracle employee. For example, DOJ’s complaint alleges that Oracle provided false, incomplete, and inaccurate information to the government during its negotiation of the Schedule contract. Not only does this allegation assert that Oracle’s actual discounting practices to its commercial customers were not fully or accurately reflected in its disclosures to the government, but also DOJ asserts that Oracle’s actual commercial pricing practices did not distinguish between different classes of commercial customers, even though the company’s disclosures to the government had included one set of discounts for “national accounts” customers and a different set for “commercial end users.” 

The complaint also alleges that the company actively took steps to ensure that its commercial sales to its basis of award customers did not trigger the Price Reductions Clause by means such as increasing the order size to exceed the contract’s maximum order threshold, arranging for the sale through a reseller rather than directly from Oracle, or changing the terms of the software license sold to the commercial customer so that it differed from the terms of the licenses on the GSA Schedule contract.  It will be interesting to watch the development of this allegation in particular, because, typically, Schedule contractors can legitimately distinguish certain of its commercial sales to its basis of award customers from those sales that trigger the Price Reductions Clause.       

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On June 16, 2010, the media reported that a False Claims Act case had been filed by a whistleblower against Oracle Corporation alleging that the company had failed to disclose deep discounts given to the most favored commercial customers. The Department of Justice has intervened and unsealed the relator’s complaint. The Government has not yet filed its complaint but is expected to do so this summer.

GSA Schedule contractors are clearly in the hot seat for fraud allegations: Recall the NetApp settlement of $128 million reached a year ago that was based on a relator’s allegation of failure to comply with the Price Reductions Clause. Then there were the Folliard and United States ex rel. Crennen v. Dell Marketing LP (__ F. Supp. 2d. __, 2010 WL 1713633 (D. Mass. Apr. 27, 2010)) decisions issued a few months ago, both alleging that sales of products purportedly non-compliant with the Trade Agreements Act resulted in the submission of false claims by Schedule contractors. Just last month, the EMC settlement was announced, resolving allegations of false claims and improper fee payments to encourage the sale of EMC’s products off its Schedule contract. Of course, Oracle settled a prior False Claims Act case in 2006 that alleged that commercial discounts had not been properly disclosed to GSA on PeopleSoft’s (later acquired by Oracle) Schedule contract. 

This new Oracle complaint again reminds us of the risk of fraud allegations when performing a GSA Schedule contract.  Particularly because many GSA Schedule contract holders have little to no other federal government business, they apply for a Schedule contract with little consideration of the unique requirments with which they will be expected to comply -- particularly the disclosure and pricing requirements.  These fraud cases underscore the importance not only of disclosing the required commerical pricing information and negotiating a workable Most Favored Customer for Schedule performance, but also of having workable internal policies and procedures that allow the contractor to comply with the Schedule contract's requirements without compromising its commercial business pursuits.  Does your company have the policies and procedures it needs to ensure compliance with Schedule requirements?   

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On May 25, 2010, the Justice Department announced an $87.5 million settlement with EMC  for alleged false claims associated with EMC’s GSA Schedule contract. The settlement comes out of a series of qui tam suits filed against IT companies and systems integration consultants by relators Norman Rille and Neal Roberts in the Eastern District of Arkansas in 2004. The Justice Department intervened in the cases.

While some of the allegations were unique to each defendant, the common thread throughout the cases was the allegation that the IT companies’ improperly made payments of “finders fees,” “influencer fees,” rebates, and the like to companies (referenced in the complaints as systems integration consultants or alliance partners) who made recommendations to the U.S. Government about which IT products and services to procure. The relators’ asserted that such payments were kickbacks that violated the Anti-Kickback Act, and also resulted in false claims being submitted to the Government.

The recent EMC settlement serves as a reminder to government contractors, particularly those in the IT community, that payments to third parties for influencing Government purchases of one’s products or services – particularly when such payments are not disclosed to the Government – are risky at best. The settlement is interesting, though, for a second reason. It contains a clause  addressing EMC’s solvency that the Justice Department has not, to date, typically included in its settlement agreements: 

“EMC warrants that it has reviewed its financial situation and that it currently is solvent . . . , and shall remain solvent following payment to the United States of the Settlement Amount. . . .”

Is the Government worried that EMC’s payment of the settlement amount could prejudice other creditors under the bankruptcy laws? Is this clause going to be a standard clause in settlement agreements with the U.S. Government going forward? Will it be effective in precluding creditors from challenging settlements with the Government?

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