On July 29, 2010, the United States filed a complaint against Oracle Corporation and Oracle America, Inc. (collectively “Oracle”) alleging False Claims Act violations and other theories of common law breach of contract and fraud in connection with Oracle’s Multiple Award Schedule (MAS) contracts with the United States General Services Administration (GSA). The suit was originally filed under the qui tam provisions of the False Claims Act by a former employee who worked as Oracle’s Senior Director of Contract Services. Although still in its initial stages, the government’s intervention in this case and its allegations against Oracle provide an important reminder to contractors of the requirements and potential pitfalls associated with GSA Schedule contracts.
In general, a MAS contract solicitation requires offerors to provide GSA with information about their commercial sales and practices, including price and discount information. The GSA uses this information to negotiate MAS contract prices and, as a matter of policy, will seek to obtain the offeror’s best price (i.e., the best price given to the offeror’s most favored customer). Before awarding a contract, the GSA and the offeror agree upon the customer or, more typically, category of customers that will be the basis of award and establish the government’s discount relationship for the duration of the contract.
If a contractor offers prices, discounts or other terms that are better than those previously offered to the basis of award customer, the prices that are offered to the government must be adjusted accordingly, pursuant to the Price Reductions clause. Furthermore, under the Price Adjustment — Failure to Provide Accurate Information clause, the government may recover any overcharges resulting from the contractor’s failure to submit proposal information that was current, accurate and complete.
In the Oracle case, the government has alleged that Oracle: (1) provided false, incomplete, and inaccurate information to the government regarding commercial pricing practices during contract negotiations with GSA; (2) breached contractual obligations to report to GSA that they had offered higher discounts to commercial customers than had been disclosed to GSA during contract negotiations, and provide these higher discounts to government purchasers, (3) manipulated commercial sales to avoid an obligation to reduce prices offered to government agencies consistent with reduced prices given to commercial customers; and (4) in connection with contract modifications, failed to inform the government of higher discounts offered to commercial customers by reiterating allegedly false statements made during contract negotiations. The government alleges that, as a result of its false statements and conduct, Oracle knowingly submitted and caused to be submitted false or fraudulent claims for payment to the government for products sold to federal agencies.
In its complaint, the government alleges that Oracle informed the GSA that its standard discounts to “Commercial End Users” were 15 to 20 percent and proposed that the government would be aligned with these purchasers under the Price Reductions clause. The government, however, cited an internal Oracle document suggesting that discounts under the Price Reductions clause apply to commercial end users and may apply to “National and Corporate Accounts,” which was inconsistent with the information disclosed to the GSA.
Citing other internal documents, the government’s complaint also alleged that Oracle did not offer standard discounts in the ranges disclosed to the GSA. For example, an Oracle handbook dated two months prior to the effective date of the contract authorizes discounts to commercial end users ranging from 40 to 70 percent, or greater with approvals, contradicting Oracle’s assertion that a 20 percent discount was the standard discount for commercial end users. Using data provided by Oracle to an outside consulting firm, the government argued that Oracle routinely provided discounts to all classes of customers that were outside the ranges in its disclosures to the government.
The government cited several company emails to support its allegations that Oracle manipulated transactions to avoid obligations under the Price Reductions clause. Under its contract, Oracle agreed to monitor sales of software licenses to commercial end users worth $200,000 or less to ensure that GSA received a discount as high as the basis of award customer. The government alleges that, instead of informing GSA whenever a commercial end user received a discount greater than 20 percent on a sale under $200,000, Oracle reworked the proposed sales so GSA would not have to be informed or provided the higher discount. The government contends this “manipulation” occurred in various ways, including increasing order values to over $200,000, changing the terms of a software license so the license was not similar to Oracle’s MAS schedule item and selling the same license through a reseller. To support these allegations, the government cited emails discussing “workarounds” and sales representatives “growing” certain orders to put them above $200,000 and make them “GSA compliant,” using certain licenses as a vehicle because those licenses were not on a GSA schedule, and sending commercial business through channel partners or resellers to avoid providing greater discounts to the government.
The Oracle case shows the government’s continued enforcement focus on GSA Schedule contractor liability for defective pricing and civil false claims. Although this case is far from over, contractors should consider the following when evaluating their compliance with GSA Schedule contract requirements:
- To comply with the Price Reductions clause, a contractor should have a tracking system that monitors sales to the basis of award customer to ensure the government is receiving appropriate prices and discounts. Pricing or discount arrangements better than those previously offered to the basis of award customer must be reported to the GSA within 15 days and the government’s pricing adjusted accordingly.
- The Price Reductions clause is not implicated where the government is not purchasing items under similar terms and conditions. The Price Reductions clause also makes exceptions for sales to commercial customers in excess of the maximum order threshold specified in the GSA Schedule contract, to federal agencies, to state and local government entities when the order is placed under the GSA Schedule contract (and the state or local government entity is the basis of award customer) and when the sale was caused by an error in quotation or billing. The government’s allegations that Oracle manipulated orders by changing the terms of a software license so the license was not similar to the item on Oracle’s MAS schedule suggest the government will scrutinize commercial sales to determine whether a contractor is circumventing the Price Reductions clause.
- Violating the Price Reductions clause, failing to disclose discounts and other sales data, and making false or misleading statements when negotiating a GSA Schedule contract or contract modifications can create liability under the False Claims Act, making the contractor potentially liable for up to three times the damages that result and a penalty of $5,500 to $11,000 per claim.
- Because of the potential liability under the False Claims Act, contractors should be attentive to employees raising questions about discount and pricing practices in connection with GSA Schedule contracts. In the Oracle case, the government cited emails from an employee who was “uncomfortable” with the discounts and expressed concerns about GSA discovering certain transactions. Contractors must have a mechanism for investigating whether such concerns are credible and whether there is evidence of potential violations of the contract, criminal statutes, or the civil False Claims Act. Government contractors and subcontractors are now required to disclose to the government whenever they have credible evidence of certain criminal violations or a violation of the civil False Claims Act in connection with the award, performance, or closeout of a government contract or subcontract. A contractor may also be suspended or debarred for a knowing failure by a principal to timely disclose to the government credible evidence of certain criminal violations, a violation of the civil False Claims Act or a “significant overpayment.”