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

GSA has now topped the $128 million settlement it reached in 2009 with NetApp – then the largest settlement reached in an FCA action against a GSA Schedule contractor – by settling with Oracle Corporation and Oracle America Inc. this past week in the amount of $199.5 million plus interest. The settlement resolves an FCA action brought by former Oracle employee, Paul Frascella, under the qui tam provisions of the statute, in which the Department of Justice intervened.

The Government’s and relator’s complaints had alleged that Oracle provided false, incomplete, and inaccurate information to the government during its negotiation of the Schedule contract; failed to disclose deep discounts given to the most favored commercial customers; and submitted false certifications. The Government’s complaint also alleged that Oracle actively took steps to ensure that its commercial sales to its basis of award customers did not trigger the Price Reduction 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. 

While it would have been interesting to watch the outcome of the case had it been litigated, given the unusual allegations of fraudulent schemes to circumvent the Price Reduction Clause, the settlement amount indicates there were sufficient facts supporting at least some of the allegations, such that the company chose to settle rather than fight the case.

How to avoid being GSA’s (or a whistleblower’s) next target for a fraud action:

• Ensure your commercial pricing disclosures are current, accurate, and complete
• Negotiate a Basis of Award customer that your company can competently and consistently monitor with respect to discounts and changes in commercial pricing
• Implement a rigorous tracking system to ensure that price reductions given to the Basis of Award customer(s) are also given to Government customers
• Ensure that any certifications signed and submitted to the Government are 100% accurate
• Implement internal controls and policies that require company personnel – from the sales force to the managers of the Schedule contract – to comply with the contractual requirements
• Require mandatory training of company personnel to educate individuals on the contractual requirements and the importance of compliance
• Implement a reporting system that allows employees to report concerns about the company’s compliance with the contract requirements and that ensures such concerns are properly addressed and resolved.   

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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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I will be participating in a webinar on June 1, 2011, to discuss GSA Schedule contracting. This webinar will provide an informative overview of the key contract requirements and compliance obligations, including pricing disclosures, the Price Reduction Clause, Trade Agreements Act, labor qualifications, and payment of the Industrial Funding Fee. It will also provide insightful discussion of recent enforcement actions against GSA Schedule contractors, the creative fact finding and legal theories underlying these actions, and ways to minimize compliance risks and avoid large settlements to resolve contractual noncompliances. Please register for this webinar by going to: http://www.straffordpub.com/products/gsa-schedule-contracts-opportunities-and-legal-risks-2011-06-01.

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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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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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Almost five years ago, a number of large office products companies with GSA Schedule contracts settled allegations that they had submitted false claims when selling office products to the U.S. Government that were not compliant with the Trade Agreements Act (“TAA”). The allegations came not from a government audit or from employees of these companies, but from employees of a competitor who also sold office products to the Government through its own GSA Schedule contract. The Government investigated the allegations and came away with sizeable settlement amounts from each of the companies involved. Moreover, the competitor’s employees – the qui tam relators – received over a million dollars. 

Now, another competitor has pursued a False Claims Act case against a fellow GSA Schedule holder. In United States ex re. Folliard v. CDW Technology Services, Inc., an employee of a competing reseller filed a qui tam False Claims Act suit against CDW Government Inc. and its parent, CDW Technology Services, Inc., for including products on both its GSA Schedule contract and NASA Solutions for Enterprise-Wide Procurement (“SEWP”) contract that are manufactured in countries other than TAA-designated countries. 

The genesis of the case against CDW is interesting because both CDW and the company for which Folliard, the qui tam relator, works are resellers of Hewlett Packard equipment, and both have GSA and SEWP contracts. According to the court’s decision on CDW’s motion to dismiss, HP provides its resellers with country of origin information for its products. Therefore, Folliard was able to determine which HP products offered for sale on CDW’s GSA and SEWP contracts were not TAA compliant. While the court determined that Folliard did not plead sufficient facts to make out a False Claims Act case against CDW with respect to its GSA contract, Folliard’s allegations that CDW submitted false claims when selling HP products off its SEWP contract survived CDW’s motion to dismiss. 

This case will be instructive to watch as it unfolds, and serves as a reminder for government contractors that your competitors are keeping an eye on how you conduct your government business. Given the potential monetary windfall for False Claims Act relators, your competitors and their employees will be tempted to capitalize on publicly-available information indicating possible violations and noncompliances. And given the success of past relators with TAA-related allegations, combined with GSA’s continued focus on TAA compliance for its Schedule contractors, companies should take a close look at their product offerings on the GSA Schedule and other government wide acquisition vehicles to ensure they comply with the TAA requirements.

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In addition to making specific recommendations for Services contracts, the Multiple Award Schedule (“MAS”) Advisory Panel’s Final Report  (.pdf) recommended a number of actions to be taken by GSA related to the acquisition of Solutions (a specific combination of services and products defined by each customer’s needs). 

The Panel recommended:

• Do not apply the Price Reduction Clause to the acquisition of solutions, and instead require competition at the task and delivery order level;
• Update MAS program guidance to make clear that prices for solutions must be determined to be fair and reasonable at the order level;
• Require orders for solutions to be firm-fixed-price and performance based;
• Evaluate the applicability of the MAS program policies and guidance to the acquisition of solutions.

Throughout the Report, the Panel recognized the difficulty of applying the existing GSA Schedule rules and guidance to the acquisition of Solutions, due to the uniqueness – both to the government and the vendor – of each Solutions acquisition. With the fourth recommendation above, the Panel does not advocate the outright removal of Solutions acquisitions from the Schedule program, but does make clear that the existing regulatory and contractual framework does not fit well with the acquisition of Solutions. Can the GSA Schedule program be modified for Solutions acquisitions to achieve fair and reasonable pricing, competition, and transparency that the Panel desires, and if so, how?

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The Multiple Award Schedule (“MAS”) Advisory Panel presented a series of recommendations (.pdf) to the new GSA Administrator on March 10, 2010 related to the structure, use and pricing of the GSA MAS Program.  The Panel’s charge was to focus on the “most favored customer” and price reduction provisions in Federal Supply Schedule (“FSS) contracts (also known as GSA Schedule contracts). The MAS Panel’s recommendations focus on improving vendors’ pricing to the government through increased competition and transparency.

Many of the recommendations focus specifically on the delivery of Services and Solutions (a combination of services and product). For Services contracts, the Panel recommended:

• Eliminate the Price Reduction Clause and require competition at the task and delivery order level;
• Ensure GSA policy is clear that the government’s pricing objective is to pursue the lowest overall cost alternative at the time of contract formation;
• Disclose within the government GSA’s determination that offered prices are fair and reasonable, to enable ordering agencies to better evaluate vendor quotes;
• Explore the use of cost-type contracts.

To what extent the Panel’s recommendations will be implemented by GSA is uncertain. Certainly, competition at the task and delivery order level will be achieved, because, independent of the Panel’s recommendations, Section 863 of the National Defense Authorization Act of 2009 (.pdf) requires such competition – for both defense and civilian agency acquisitions above the simplified acquisition threshold and using multiple award contracts.  The proposal for disclosure within the government of vendors’ pricing information submitted to GSA, for the purpose of enabling ordering agencies to better evaluate quotes for individual orders, should be carefully watched, because the wider the dispersal of this highly-proprietary information, the greater the chance of inadvertent disclosure to competitors. 

Stay tuned for a discussion of the Panel’s recommendations specific to Solutions in Part II of this blog.

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