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.