False Claims Act Settlements Serve as Reminder on Pricing

Recent settlements of allegations brought under the False Claims Act of defective pricing serve as a reminder to companies doing business with the government to tighten up their procedures around pricing.

Cisco Systems and Westcon Group North America agreed to pay $48 million to settle claims they made misrepresentations to the General Services Administration and other federal agencies in violation of the False Claims Act.

The civil settlement announced by the Justice Department Sept. 7 resolves allegations that that Cisco and Westcon knowingly provided incomplete information to GSA contracting officers during negotiations related to Westcon's contract with the GSA, resulting in defective pricing of Cisco products and submission of false claims to the government, according to the DoJ press release.

The settlement is part of a continued trend by DoJ to crack down on defective pricing by contractors. Federal contracts generally require companies to give the government the best price they give any customer. Failure to do so violates the False Claims Act. Under the Act, whistleblowers who report fraud against the government can become qui tam relators and collect a piece of any recovery, which can sometimes be worth millions of dollars.

In announcing the settlement, Tony West, assistant attorney general for the DoJ's Civil Division, warned that, "When contractors provide incomplete and untruthful information to the government, we will take action to restore the integrity of the procurement process and protect taxpayer dollars."

Likewise, GSA Inspector General Brian Miller said the agency's auditors and special agents "keep vigilant watch to ensure contractors stay honest."

Joseph Warin, a partner in the law firm Gibson, Dunn & Crutcher, says the type of settlement announced by Cisco and Westcon "is not new, but it certainly is consistent" with past FCA enforcement activity.

In August, Hewlett-Packard agreed to pay the DoJ $55 million to settle claims it defrauded the GSA and other federal agencies. That settlement resolved FCA allegations that HP knowingly paid kickbacks, or "influencer fees," to systems integrator companies in return for recommendations that federal agencies purchase its products, and claims that HP's 2002 contract with the GSA was defectively priced because HP provided incomplete information to GSA contracting officers during contract negotiations. EMC Corp. agreed to pay $87.5 million to settle similar claims in May.

Warin says it's not hard for companies with large sales forces selling various products and services around the world to inadvertently fly afoul of the GSA regulations.

"As the sophistication and diversity of the products, add-ons, and services become more varied, it becomes harder for companies to provide an apples-to-apples pricing comparison," he says. "It's a reminder that corporations with huge sales forces located in all four corners of the globe need to have an internal controls system that centralizes pricing and doesn't allow for exceptions and variations."

As a part of the Cisco Westcon settlement, the government agreed to dismiss a whistleblower lawsuit filed in 2004 in an Arkansas District Court, United States ex rel. Rille. v. Cisco Systems, Inc.