Federal contractor scrutiny on the rise

The Justice Department’s decision to join a false claims act lawsuit against one of the largest federal contractors is yet another sign of the increased scrutiny vendors are coming under.

“This is a time in our contracting lives where the Department of Justice is anxious to attach its name to any case that it feels has merit or likelihood of a cash return to government, whether or not there’s actually a basis for the case is another matter,” says Larry Allen, President of the Coalition for Government Procurement, an industry association.

“There are misunderstandings or a general lack of knowledge about commercial business practices particularly as they pertain to software. What this really is about is trying to have some people seeing if they can hold contractors feet to fire. This is kind of a season in which it is open season on contractors.”

Justice announced Thursday that it believes the Oracle Corporation defrauded the government by charging agencies more for products and services on their General Services Administration’s schedule than what it charged its commercial customers from 1998 to 2006.

DoJ joins a Qui Tam, or whistleblower suit, filed by a former Oracle director of contract services, Paul Frascella. He contends that the software giant knowingly “misrepresented its true commercial sales practices, ultimately leading the government customers receiving deals far inferior to those Oracle gave commercial customers,” Justice says in a release.

Several e-mails requesting a comment from Oracle were not returned.

Oracle received about $3.6 billion in contracts from the government, according to USASpending.gov. Most of the company’s sales are direct to the government, but more than $600 million come through resellers. The Navy, the Army and GSA’s Federal Technology Service are Oracle’s largest customers, accounting for almost $2 billion.

Bill Shook, a partner with Shook Doran Koehl, LLP, which represents companies in contracting matters against the government, says that cases like Oracle’s are becoming more common.

“We are seeing an increase in pre-award audits for renewals of GSA schedule contracts, which come up every five years,” he says. “The GSA inspector general has increased the number of pre-award audits, and that entails looking at past performance of the last five years and using that evidence to suggest that perhaps there were violations of the price reduction clause and the price and disclosure clause.”

These clauses basically require vendors to ensure the government is receiving the lowest cost possible. GSA is considering a recommendation to do away with the price reduction clause made by the Multiple Award Schedule Advisory Panel in June 2009.

Shook says many companies find the price reduction clause confusing and difficult to determine exactly when it applies.

“If you take a very narrow view of when it’s applicable based on disclosures made to GSA, then it doesn’t present a problem,” Shook says. “If you take a very broad view, which DoJ and the IG have in the past done, then you can find possible violations of it fairly easily.”

Justice has gone after several companies over the past few years. EMC Corporation settled a False Claims Act suit by paying the government $87.5 million in May. Network Appliance paid DoJ under a similar settlement of $128 million in March 2009.

Oracle also settled a false claims complaint in 2006 for almost $99 million.

One source, who requested anonymity in order to speak more freely about this topic, says a lot of scrutiny is in response to the Bush administration’s lack of oversight. The source says there are problems, but the aggressiveness by which Justice and the IG are going after companies seems out of whack.

Allen says these cases and other aggressive actions by the IGs and Justice are causing a lot of concern among vendors.

“It may not take specific adverse findings before some companies will just decide to get out ahead of the punitive curve and decide maybe best way to sell into the government marketplace is indirectly through system integrators or other resellers,” he says. “There are some significant costs here. They will have to do a cost benefit analysis to see whether or not continuing to do business as prime contractor in this market makes good business sense.”

Shook and Allen offer some advice for companies to stay out of trouble.

Allen says vendors should spend as much on compliance as they do on business development.

“Companies should be sure they understand and acknowledge what the requirements are and have good compliance programs in place,” he says. “They also should provide regular training to their employees on these issues.”

Shook says vendors should see the Oracle case as a warning.

“Companies need to be completely compliant and clear when negotiating a GSA contract,” he says. “They need to be careful to understand when the price reduction clause will apply. Not all contractors have been careful with disclosures and making sure they understand the price reduction clause and how it’s implemented.”

He adds that companies should test their own commercial sales practices by understanding all their sales factors, including whether or not sales people can reduce prices for certain customers.

As for Oracle, its fate is unclear.

“DoJ must think there is something there and a fairly good sized return on the litigation,” says a former government official, who requested anonymity because the official didn’t receive permission to talk about this issue. “This is bad for Oracle, particularly if a government’s debarment official decides to suspend or debar them pending the outcome of the litigation. A suspension or debarment could impact both their government and commercial sales adversely – just ask IBM about their experience last year.”

In March 2008, the Environmental Protection Agency suspended IBM from contracting for about a month.

A suspension is unlikely, however, because of the footprint Oracle has in the government, several experts say.

Shook and others say there are several things that could happen to the company.

Oracle could go to court and win the case. It could go to court, and lose and end up paying millions in damages and possibly face suspension or debarment. Or, Shook believes, Oracle eventually will settle the case and pay some kind of fine.

Oracle could face hundreds of millions of dollars in damages and fines. The False Claims Act says a guilty verdict could cost the company three times the amount of money the court finds the company defrauded the government of, as well as a penalty of $5,000 to $11,500 per claim.

“We have not seen any cases that have gone to trial of late on these allegations,” Shook says. “It certainly would be nice to see a case go to trial so a court could rule on the interpretation of the solicitation and requirements. We don’t have specific recent cases on that point so settlement, from a perspective of a contractor, always a possibility.”

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