VMWare, Carahsoft to pay $75.5M to settle False Claims Act allegations

The technology companies join a growing list of GSA Schedule vendors who get caught up in whistleblower lawsuits claiming the vendor overcharged the government ...

The Justice Department and the General Services Administration can add another False Claims Act settlement to its ever growing list.

Justice announced today VMWare and Carahsoft Technology agreed to pay $75.5 million to resolve allegations that it misrepresented their commercial pricing practices and overcharged the government on VMware software products and related services under the GSA schedule.

DoJ said Dane Smith, a former vice president of the Americas at VMWare, filed suit as a whistleblower. Smith alleged VMWare and Carahsoft made false statements to the government on the sale of VMWare products under Carahsoft’s multiple award schedule contract. Smith claimed these false statements allowed the companies to overcharge the government between 2007 and 2013.

As a whistleblower, Smith is entitled to between 15 percent and 30 percent of the total recovery from the settlement with VMWare and Carahsoft.

Justice said Smith’s share of the recovery hasn’t yet been determined.

“VMware cooperated fully with the DoJ and GSA in connection with their multi-year investigation regarding VMware’s government sales practices covering the period between 2007 and 2013,” said Michael Thacker, a VMWare spokesman in an email to Federal News Radio. “VMware believes that its commercial sales practice disclosures to the GSA were accurate and denies that it violated the False Claims Act. The company nevertheless elected to settle this lawsuit rather than engage in protracted litigation with one of its important customers — the federal government.”

Jennifer Aubel, a principal consultant with Aronson LLC, said the settlement is an interesting one for several reasons.

“Since the multi-million dollar settlements by Sun, Oracle, etc. about 4-5 years ago, many major IT companies have moved from holding their own schedule to going through resellers such as Carahsoft or Immix, ostensibly to reduce their risks under the Price Reductions Clause and the False Claims Act,” she said. “These contracts are BIG business — according to GSA Schedule Sales Query, Carahsoft reported $553.7 million in GSA sales and ImmixGroup reported $420.1 million in sales in FY14 alone. When a manufacturer places its products on another company’s GSA Schedule contract, it is required to provide the contractor with a Letter of Supply. Additionally, if the reseller does not have substantial commercial sales of the manufacturer’s products on its own, the manufacturer must provide a Commercial Sales Practices disclosure with the LOS. This CSP is an auditable document.”

The reason why the CSP is a big deal is because many resellers such as Carahsoft or the ImmixGroup don’t sell directly to the commercial market, leaving GSA to rely on the CSP to make a pricing reasonableness determination.

“In this case, that is why both VMWare and Carahsoft were both held accountable even though the contract itself is in Carahsoft’s name,” Aubel said. “This case should serve as a warning to manufacturers who go the reseller route that, if they submit a CSP, they are subject to the same audit risk as if they held the contract themselves.”

VMWare and Carahsoft become the latest in an ever-growing list of contractors who face allegations of violating the False Claims Act.

Justice and GSA have been aggressively pursuing these allegations over the last decade.

Other companies who settled with DoJ and GSA amid allegations of violating the False Claims Act include Oracle, Symantec, SAIC, Lockheed Martin and many others.

“We will continue to look into all allegations of false claims in GSA contracts,” said GSA acting Inspector General Robert Erickson in a release. “I appreciate the hard work of our auditors, our agents and the attorneys on this complex case that has resulted in a large amount of money being returned to the United States.”

Justice reported that it recovered almost $6 billion, including almost $4 billion alone from cases involving whistleblowers, in 2014 across all categories that fall under the False Claims Act.

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