On April 13, 2009, the Department of Justice announced the largest settlement to date involving the U.S. General Services Administration’s (GSA’s) popular Multiple Award Schedule program. The $128 million settlement eclipses the previous high of $98.5 million and is the latest in a series of developments highlighting the risks associated with the schedule program.  

Background  

The federal government is the largest purchaser of goods and services in the world. As a means to facilitate the government’s acquisition of commercial goods and services, the GSA, through its schedule program, establishes long-term, government-wide contracts that contain pre-negotiated prices and terms. Government agencies directly purchase supplies and services from these contracts using the program’s streamlined acquisition procedures. In FY 2008, the government purchased more than $36 billion of supplies and services through schedule contracts.  

A vast number of the commercial suppliers and service providers that sell to the government hold schedule contracts. Overall, GSA administers more than 17,000 contracts under the program. From the contractor’s perspective, the program’s popularity stems in part from the ability to sell to the entire government and other GSA-authorized purchasers through a single, central contract.  

Schedule contracts, however, come with significant compliance obligations. Chief among these are the pricing-related requirements associated with the program’s Commercial Sales Practices (CSP) Format and Price Reductions Clause (PRC). The CSP Format requires contractors to disclose their commercial sales practices (that is, their written discounting policies or standard practices, and deviations from those polices/practices) to GSA during contract negotiations and at other points during contract performance. The PRC, in turn, requires contractors to lower their GSA pricing whenever an agreed upon relationship between the contractor’s GSA pricing and the pricing it provides to a “basis of award” category of customer is disturbed. This pricing relationship is negotiated up front and is intended to provide pricing protection to GSA through the term of the contract.  

The NetApp, Inc. Settlement  

The April 13 settlement resolved allegations pertaining to NetApp’s schedule contract that included hardware, software, and storage management services. The underlying lawsuit, United States ex rel. Kapuscinski v. Network Appliance, Civ. No. 06-000675 (RMU), was filed under the qui tam provisions of the False Claims Act, 31 U.S.C. §§ 3729 et seq., by a former NetApp employee charged with administering the contract.  

The allegations centered on NetApp’s CSP disclosures and its administration of the PRC. More specifically, the government and the qui tam relator alleged that NetApp failed to provide GSA with “current, accurate, and complete” CSP disclosures and allegedly made false statements to GSA regarding its sales practices and discounts during contract negotiations and during contract performance. For example, NetApp allegedly completed the CSP Format by indicating that its proposed GSA pricing was equal to or better than its best price offered to any other customer acquiring the same items. NetApp also allegedly indicated in the CSP Format that any deviations from its disclosed commercial sales practices never resulted in better discounts or concessions than those indicated. This information, along with other NetApp representations regarding its highest commercial discounts, allegedly was false.  

Regarding the PRC-related allegations, the government and the relator alleged that NetApp failed to monitor its sales to commercial customers for compliance with the PRC. According to the complaint, NetApp had agreed to a very broad basis of award category of customer, all commercial customers, for purposes of PRC compliance. The government maintained that such a very broad basis of award required NetApp to give the government the benefit of higher discounts provided to any commercial customer. The relator’s complaint alleged multiple instances of higher discounts granted to commercial customers that far exceeded the discounts provided to GSA. The complaint further alleged that the relator had notified management of the need to monitor the PRC and give the government appropriate price decreases, but the company failed to take action.  

The $128 million settlement amount is staggering by GSA standards. The previous highest settlement amount was $98.5 million, which was agreed to in 2006 and also pertained to defective pricing allegations. The relator in the NetApp case will receive a $19.2 million share of the recovery.  

Related Developments  

The NetApp settlement is the latest in a series of developments signifying the risks involved with schedule contracting. The settlement comes on the heels of the government intervening in several other False Claims Act cases involving schedule contractors and allegations of defective pricing. At least several other cases currently remain filed under seal in the U.S. district courts.  

Moreover, the GSA Office of Inspector General (OIG) recently released a summary of audit findings suggesting a program plagued with compliance and/or contract interpretation issues. Specifically, the OIG reported findings indicating that 70 percent of contractors’ CSP disclosures were not “current, accurate, and complete,” and 34 percent of contracts reviewed had unreported price reductions. The GSA OIG conducted more than 90 audits in FY 2008, and the number is expected to increase in FY 2009. The GSA OIG has demonstrated a strong inclination to refer cases to the Department of Justice for prosecution under the civil False Claims Act when the dollar amounts are significant.  

These developments underscore the importance of having accurate and complete CSP disclosures and negotiating PRC terms that are workable considering the manner in which the contractor conducts its commercial business and the controls the contractor is willing to implement and maintain to ensure compliance. Furthermore, these developments reflect the importance of maintaining a strong compliance program and addressing problems in a timely manner, or else risk seeing potential liability cascade into substantial amounts depending on schedule sales volume. Indeed, the damages and penalties provisions of the False Claims Act can have draconian consequences – treble damages and penalties of up to $11,000 per “false claim,” which some courts have applied on a per invoice basis.