WT Business Beat

By Nick Wakeman

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Nick Wakeman

False Claims Act prosecutions aren't always about lowest price

The General Services Administration’s inspector general’s office has several responsibilities involving oversight and investigations, but it is probably best known for the role it plays with False Claims Act violations on the GSA schedules.

We’ve seen several cases over the years where companies have paid millions to settle claims that they didn’t offer the government the best prices for their products. The most recent example dealt with VMware and Carahsoft Technology Corp., who paid the government $75.5 million to settle a whistleblower case claiming they overcharged the government.

I recently had the opportunity to talk to Kevin Donohue, deputy counsel to GSA’s inspector general about what the office is looking for, and what cases they pursue. Along the way, he talked about several misconceptions about what the IG is doing and how contractors can keep themselves from running afoul of the law.

Washington Technology: So, how do you pick what cases to pursue?

Donohue: There are three major inputs. Sometimes our own audits and investigations will spark some curiosity that we’ll investigate further. We also have a disclosure program.

And the third way is the qui tam process, where you have a relator or what is sometimes called a whistleblower, who files a case in a sealed complaint in the federal court system. When that happens, it is the Justice Department who actually brings the case to us if they decide to get involved. They ask us to participate in the investigation and analysis.

WT: What typically pushes a case over the edge to a False Claims Act case?

Donohue: You have to have a contractor whose recklessness is so extreme and so gross that the company should have reasonably known there was a false claim.

It’s infrequent, but we know it when we see it. You have somebody who’s deliberately, willfully, making false statements to the government to further their own profits.

When we see that, it’s time for a really serious discussion.

WT: You mentioned the disclosure system. Do a lot of cases come from that?

Donohue: It’s a small number. Since December 2008, there have been over 150 disclosures, but just a handful have become cases.

But if a contractor is concerned and doesn’t know what to do, they can follow the directions in the disclosure program. You send us and the contracting officer a letter stating they have credible evidence or a False Claims Act fraud, we’ll take that as a willing good-faith effort to pay the government back.

If it turns out there is an overcharge, we’ll handle that at the administrative level.

WT: Until the Fraud Enforcement and Recovery Act passed in 2009, technology manufacturers could shield themselves by not directly holding a government contract and working solely through a reseller. But that’s no longer the case. Can you explain?

Donohue: A common fact pattern was a manufacturer with no direct contract with the government. It would do all of its government sales through a distributor or reseller. But the FEAR Act put everyone on notice that you don’t have to be in a direct relationship with the government to be found liable under the False Claims Act.

WT: Is there something about the relationship between the manufacturer and distributor that can lead to trouble?

Donohue: When you have more players involved, there’s room for things to break down.

The manufacturer is the one completing the commercial sales practices disclosures for the distributor. The manufacturer provides the distributor with the letter of supply, which has a bunch of obligations that the manufacturer has taken on with regard to pricing.

In some cases, you’ll have a distributor who doesn’t know what’s in the commercial sales practices disclosure. It's implausible for a manufacturer who's invested in getting his or her product into the government product stream to claim that they weren't making representations that we relied upon in trying to get the best‑value products and services for the taxpayers.

WT: I guess the point is that the government wants to make sure it is getting the best price. How is best price determined?

Donohue: There is a myth that we hear frequently. Our goal is to get the best price. It’s our goal. It’s our objective, and that’s where we start, but we can accept a price that’s not the most-favored customer price. And there are a number of reasons for that, such as there’s something unique about the value added for the government that’s not in the commercial product. Or there’s some unique relationship with regards to the volume of products sold.

The most-favored customer price isn’t required, but what is required is that we secure the best value.

WT: How do you determine best value?

Donohue: It can be a combination of technical components for whatever the product or service is. It’s a trade-off. You look at the price. You look at quality. Are you getting a higher reliability rating or better warranties? There are a wide range of values the contracting officer can look at beyond the price.

WT: So, where do companies get in trouble?

Donohue: Most contractors aren’t making substantial mistakes. They are operating in good faith. But there are exceptions, and those get further scrutiny. When it comes to False Claims Act cases, we see two or three fact patterns.

You see companies that have lost control of the pricing system. They are not keeping up with the customer’s actual prices paid. They aren’t matching the commercial pricing with the government pricing.

Normally, these are price reduction clause violations.

Sometimes you’ll see a private entity that deliberately through business decisions and their strategy finds a way to get all the margin they can on their government sales. Sometimes that shows itself through incomplete disclosures about a commercial program. Or there is a lack of follow-up to give the government the appropriate discounts.

We determine whether or not there’s a loss to the taxpayer.

The most common fact patterns we see are around defective pricing and price reduction clause violations or some combination.

WT: Are there early warning signs of trouble that companies can try to spot?

Donohue: We have seen cases where the top leadership didn’t build a culture of dealing in good faith with the government and may have turned the company in another direction.

You have people dealing with our contracting officers who are complying with the letter but not the spirit of things like the price reduction clause.

They’ll come in and make an agreement with a contracting officer, who is handling 50 or 100 contracts and would have no way of knowing the agreement really won’t work. It won’t result in the government getting the best price. There are a hundred different ways that game can be played.

These same companies will say, "People in the government don’t understand how commercial sales work." But there are 100,000 different ways commercial sales work. That’s why we ask about your discounts, your prices and your concessions. We want to know who gets this treatment and who gets that, so we can understand how you do it.

We want to understand, but in return, we expect you to understand how the government system works.

Posted by Nick Wakeman on Sep 29, 2015 at 9:31 AM

Reader Comments

Tue, Sep 29, 2015 Mel Ostrow

u may have misunderstood or misused terminology. FCA prosecutions, which are criminal proceedings, are extremely rare. almost every FCA case that DOJ takes over or originates is a civil matter. criminal FCA is truly rare. the outcomes of civil FCA proceedings are "settlements," often without admissions of guilt by the company concerned. the vast majority of FCA cases are in health care/pharma. over time, more may arise, deservedly, from federal acquisition contracts for services and hardware.

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