On April 15, 2009, the U.S. Department of Justice entered into an agreement with NetApp Inc. and NetApp U.S. Public Sector Inc. (collectively, “NetApp”) to settle allegations that NetApp submitted false claims to the U.S. government and violated the terms of Price Reductions Clauses included in its contracts with the U.S. government. NetApp neither admitted nor denied any of the allegations involved, but agreed to pay the U.S. government $128 million plus interest, the largest contract fraud settlement in General Services Administration (“GSA”) history.

From 1997 to 2005, NetApp provided computer hardware, software, and data storage management services to various government entities through the GSA’s Multiple Award Schedule (“MAS”) program. The U.S. government alleged that during contract negotiations and throughout the course of the contracts’ administration, NetApp knowingly failed to meet its obligations to provide the GSA with current, accurate, and complete information regarding its sales practices and that NetApp knowingly made false statements to the GSA about its discounts to other customers. By failing to disclose and offer to the government discounts that it gave to commercial customers, NetApp violated the Price Reductions Clauses included in its contracts with the GSA. The GSA allegedly relied on these fraudulent acts and, as a result, accepted lower discounts and paid more than it should have for NetApp products and services.

The lawsuit was initially filed under the False Claims Act on behalf of the U.S. government by former NetApp Manager of Administration and Procurement, Igor Kapuscinski, who will receive a 15 percent share of the recovery, or $19.2 million. The settlement agreement alleges that a GSA analyst contacted Kapuscinski in February 2003 for assistance with reviewing several NetApp orders. Kapuscinski notified NetApp senior managers of the GSA’s request, pointing out that NetApp had failed to give the GSA the same price decreases that it had offered to commercial customers. The NetApp senior managers allegedly dismissed Kapuscinski’s concerns, and threatened him with a demotion if he continued to press for the relevant records. At that point, Kapuscinski filed his complaint in U.S. District Court in Washington, D.C. under the False Claims Act, sparking the Department of Justice investigation.

The investigation was conducted by the Department of Justice’s National Procurement Fraud Task Force, an entity established by Deputy Attorney General Paul J. McNulty in 2006. The thoroughness with which this investigation was pursued by the Task Force and the unprecedented settlement amount demonstrate increased attention and commitment to enforcing government contract compliance via False Claims Act actions. As such, government contractors must take all steps to ensure that they provide the government with current, accurate, and complete information regarding sales practices, and must make certain to comply with the Price Reductions Clause.