Government Contracts Monitor

Violation of Price Reduction Clause Leads to Record Settlement by GSA Contractor

April 20, 2009

NetApp (formerly Network Appliance) has agreed to pay $128 million to settle a lawsuit alleging that it violated the False Claims Act (FCA), 31 U.S.C. §3729 et seq., by failing to offer the Government its best commercial pricing in violation of the terms of its General Services Administration (GSA) schedule contracts. The settlement was finalized April 15, 2009.

The contract’s price reduction clause (see GSAM 552.238-75) required NetApp to offer GSA the same price discounts it provided its "most favored" commercial customers. According to the lawsuit – filed by a former employee of the data-storage company, Igor Kapuscinski, and later joined by the Department of Justice and the GSA Inspector General – NetApp knowingly withheld this information from the Government between 1997 and 2005. As a consequence, NetApp allegedly made false statements and presented false claims for payment to the Government.

Although the recently-formed GSA Multiple Award Schedule Advisory Panel recommends eliminating the price reduction clause, at least one group has already cited the NetApp settlement as proof that the clause has an enduring role "protecting taxpayers."

The $128 million settlement is the largest-ever fraud settlement involving violations of a GSA schedule contract. While the settlement constitutes neither an admission nor a denial of culpability, it releases NetApp from all civil FCA liability relating to the matter. Additionally, since the case was filed as a qui tam action, Kapuscinski is entitled to 15% of the final settlement – a whopping $19.2 million.

While the NetApp settlement may be an egregious example of contractor misconduct, it also serves as reminder to contractors holding GSA Federal Supply Schedule contracts of the necessity of establishing a thorough, contract-specific compliance plan. A well-rounded compliance system will help prevent pricing violations from occurring, and mitigate the harmful effects in the event the contractor is the subject of an investigation or qui tam action. As evinced by the NetApp matter, the Government is becoming more aggressive in enforcing the price reduction clause. Vendors must be vigilant in establishing and implementing an effective pricing system for both government and commercial sales.