'Price Reduction Clauses' Raise False Claims Act Perils

A record $200 million False Claims Act settlement that the General Services Administration reached this month with Oracle is putting a spotlight on price- reduction clauses that can cause compliance troubles for government contractors.

Oracle’s settlement, announced by the Justice Department on Oct. 6, is the latest in a handful of recent cases alleging defective pricing by contractors. The Oracle settlement resolves allegations that the software giant knowingly provided inaccurate and incomplete information to GSA contracting officers, resulting in defective pricing of Oracle’s software licenses and technical support to government entities.

Every contract with the GSA must include a price-reduction clause, which requires companies to give the government their best customer price. The government saves money, and the benefit to companies is a streamlined process of selling to hundreds of separate government purchasers under one central contract.

In the Oracle case, the federal government alleged that the IT giant failed to provide a price that it was giving another customer. The compliance issue? That in industries like software, where pricing is complex, companies may not even know the true pricing for comparable customers, especially if discounts are offered.

Oracle denies any wrongdoing. “Oracle never committed any fraud whatsoever,” Oracle spokesperson Deborah Hellinger said in a statement. “The company has always had strong controls in place to ensure that the government agencies who purchased from the GSA schedule received fair pricing.”

Hellinger added that the events surrounding this case relate to a contract dating back to 1998, so Oracle has agreed to settle “to avoid the distraction and high cost of litigating this case.”

The stripped-down GSA contract process might reduce paperwork for contractors, but simpler compliance processes do not necessarily ensue. “The fact that it’s an easier contract to get awarded, perhaps an easier contract to administer on the surface, doesn’t necessarily mean it’s an easier contract vehicle to be able to maintain compliance with,” says Sajeev Malaveetil, a partner with the business consulting group Argy, Wiltse & Robinson.

“Companies need to pay considerable attention to the price-reduction clause, because it is a complicated issue,” says Alan Chvotkin, executive vice president of the Professional Services Council, a national trade association for government contractors. “It is hard to maintain compliance with, and it is a huge risk to the company if you’re not in compliance.”

Controversial Components

For Oracle and other government contractors, one of the more controversial parts of the government contract negotiation process, especially as it applies to intellectual property, is in establishing a “basis of award” customer—that is, the company (or companies) established by the vendor and the GSA as the most appropriately representative benchmark. Then, if a price reduction is offered to that benchmark customer, the government must receive that discount as well.

“Companies need to pay considerable attention to the price-reduction clause, because it is a complicated issue.”

—Alan Chvotkin,

Executive Vice President,

Professional Services Council

Determining a “basis of award” customer is getting harder to define. Prior to the mid-1990s, most government sales were for physical goods, so it was easy to track marketplace prices and gauge where price reductions occurred. As the government has moved into buying services rather than products, the price-reduction clause has become more challenging to follow, Chvotkin says.

What’s more, the government is increasingly buying from smaller companies that might not have robust compliance systems. “They’re not your traditional government contractors, so they’re not going to have the compliance department or the oversight that you’d expect the traditional government contractor to have,” Malaveetil says.

To complicate matters, the price of IT or consulting services is routinely based on factors other than commodity-based pricing, such as by gigabytes of memory or number of users; compliance systems “are not necessarily designed to track discounts and prices to commercial customers,” Malaveetil adds.

In fact, the GSA acknowledged that the price-reduction clause is “difficult to apply to service contracts,” in a report issued in August in response to an Obama Administration order to identify rules that may be obsolete or excessively burdensome. Nonetheless, the agency concluded that the clause is a necessary mechanism. The GSA sees it as a “tool in their toolkit for enforcement,” Chvotkin says.

DOJ ON ORACLE SETTLEMENT

Below is an excerpt from the Justice Department’s announcement of the Oracle settlement:

Oracle Corp. and Oracle America Inc. have agreed to pay $199.5 million plus interest for failing to meet their contractual obligations to the General Services Administration (GSA), the Justice Department announced today. This is the largest False Claims Act settlement that the GSA has ever obtained. Oracle, which is based in Redwood City, Calif., develops, manufactures, markets, distributes, and services database and middleware software, applications software, and hardware systems.

This settlement relates to a contract Oracle entered into in 1998 to sell software licenses and technical support to government entities through GSA’s Multiple Award Schedule (MAS) program. The MAS program provides the government and other GSA-authorized purchasers with a streamlined process for procurement of commonly used commercial goods and services. To be awarded a MAS contract, and thereby gain access to the broad government marketplace and the ease of administration that comes from selling to hundreds of government purchasers under one central contract, contractors must agree to disclose commercial pricing policies and practices, and to abide by the contract terms.

The settlement resolves allegations that, in contract negotiations and over the course of the contract’s administration, Oracle knowingly failed to meet its contractual obligations to provide GSA with current, accurate and complete information about its commercial sales practices, including discounts offered to other customers, and that Oracle knowingly made false statements to GSA about its sales practices and discounts. The settlement further resolves allegations that Oracle knowingly failed to comply with the price reduction clause of its GSA contract by not disclosing to GSA discounts Oracle gave to its commercial customers when they were higher than the discounts that Oracle had disclosed to GSA, and by failing to pass those discounts on to government customers. Because of these allegedly fraudulent dealings, the United States alleges that it accepted lower discounts and ultimately paid far more than it should have for Oracle products.

“Companies that in engage in unlawful or fraudulent practices to secure government business undermine the integrity of the procurement process and create an unfair advantage against the majority of companies that are playing by the rules,” said Tony West, assistant attorney general for the Civil Division of the Department of Justice. “Resolutions like this one—the largest GSA false claims settlement in history—demonstrate our commitment to ensure taxpayers are not overpaying for the products and services they receive.”

“To get access to hundreds of government purchasers, companies participating in the Multiple Award Schedule program must disclose their best prices,” said Neil H. MacBride, U.S. attorney for the Eastern District of Virginia. “Today’s agreement shows that we are committed to protecting taxpayer money by ensuring that these companies live up to their end of the bargain.”

“It’s more important now than ever before to make sure that taxpayer dollars are not wasted on higher prices,” said U.S. GSA Inspector General Brian Miller. “We will not let contractors victimize the taxpayers by hiding their best prices.”

The settlement resolves a lawsuit filed on behalf of the U.S. government by former Oracle employee, Paul Frascella, who will receive $40 million as his share of the recovery in the case. Under the whistleblower provisions of the False Claims Act, private citizens can bring lawsuits on behalf of the United States and share in any recovery obtained by the government.

This settlement was the result of a coordinated effort by the Commercial Litigation Branch of the Justice Department’s Civil Division, the U.S. Attorney’s Office for the Eastern District of Virginia and GSA’s Office of Inspector General in investigating the allegations and litigating the case.

The Justice Department’s total recoveries in False Claims Act cases since January 2009 exceed $7.8 billion.

Source: DoJ Press Release on Oracle FCA Settlement.

 

The admission that price-reduction clauses are a complex issue hasn’t stopped the GSA from aggressive enforcement of the rule, either. More and more, the GSA is expanding its existing practice and “looking at the next echelon down of government contractors” to make sure they also are in compliance, says Larry Allen, president of federal contracting consulting firm Allen Business Partners. “The government is taking an increased look at your compliance,” he says. “Don’t say you weren’t warned.”

Increasingly, the federal government is finding misconduct; Allen says it almost always does. The former president of the Coalition for Government Procurement, a non-profit government contractor association, says that the government is auditing companies with the preordained belief that it’s going to find fraud wherever it looks. “We have to be careful with that type of mentality,” he says, which is “exactly the mentality the [Justice Department] has.”

Practical Measures

Above all, a GSA schedule contractor must have a compliance system that monitors the company’s overall sales of items and services—not just sales to the government—to identify discounts in commercial list prices. “Many companies fail to aggressively monitor sales in the commercial marketplace and just look at sales in the government marketplace,” Chvotkin said. “I think that’s a real compliance gap.”

For IT services companies, in particular, they “just don’t have the infrastructure to do that,” Malaveetil says. “That’s why they get into these problems.” In addition to Oracle, other IT companies that have settled with the GSA in recent years include storage hardware solutions provider EMC Corp., and data storage and management firm NetApp.

Another area of great confusion: instances where companies lower or discount their prices to basis-of-award customers, but keep the basis-of-award price higher than the schedule price. Not every discount offered in the commercial marketplace necessarily triggers a price reduction to the government.

For example, if a company has leftover product and offers a specific buyer a 1 percent discount for the next 10 days if the buyer moves quickly, the company doesn’t have to offer that discount to the government. If the company offers all its commercial customers a 1 percent discount the last 10 days of the month as part of the company’s sales practice, however, that qualifies as a price reduction that must be offered to the government, Chvotkin explains.

Joe McCaffrey, a manager at Argy, Wiltse & Robinson, recommends that companies have a training plan in place for “anyone who’s involved in the sales process.” This includes anybody who works on the pricing, administrating, and performing of the contracts, such as salespeople, contract negotiators and fulfillment, and senior executives who approve contract orders, “so everyone knows what transaction triggers a price reduction,” he says.

Some argue the government has a part in building trust, and it should pursue those that violate the spirit of the law, not just the letter of the law. The government should distinguish “between the companies that have invested the time and effort in trying to do the right thing,” says Allen, “and the companies who have been just happy to have the cash register ring and not pay much attention to the other stuff.”