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DOJ involvement in whistleblower case turns up heat on Oracle

Federal cases alleging overpricing on IT products aren't unusual

June 21, 2010 06:00 AM ET

Computerworld - WASHINGTON -- The involvement of the U.S. Department of Justice in a whistleblower case that charges Oracle Corp. with overcharging government customers significantly raises the legal stakes for the software vendor.

When the DOJ gets involved in a whistleblower case, it means that it has found merit in the allegations. The government applies its resources in gathering additional evidence, effectively taking over the case.

It is not uncommon for IT vendors to get ensnared in accusations of contract overcharging. Their typical course of action is to move relatively quickly to resolve them.

For instance, the Justice Department last year charged that EMC Corp. gave kickbacks and overpriced some of its products. Last month, about a year after the government brought its charges, the company paid $87.5 million to settle the case but continued to deny the allegations.

In 2008, IBM was suspended by the U.S. Environmental Protection Agency from seeking U.S. government work after it became the subject of an investigation into possible violation of procurement rules. That suspension, however, only lasted a week.

IBM moved quickly to resolve the situation, said Ray Bjorklund, a vice president at consulting firm Federal Sources Inc. in McLean, Va. "I gave IBM a lot of credit for admitting that there was probably an issue to deal with and spending the time to deal with it," he said.

Large companies that take a constructive approach in responding to the government "are going to be more successful in the long run," said Bjorklund. The government "needs the offerings that many of those large companies provide because they've got a business to run."

U.S. agencies, including the Defense Department, spent $189 million on Oracle products in 2009, and $197 million in 2008, according to data on the USAspending.gov Web site.

The whistleblower lawsuit was filed by Paul Frascella in May 2007. He was a contract specialist at Oracle but no longer works for the company, his attorney, Christopher Mead, confirmed.

The lawsuit alleges that Oracle failed to disclose the discounts it offered to its most favored customers, resulting in overcharges to the federal government totaling tens of million dollars.

The lawsuit cites a number of examples of Oracle providing discounts to customers, some of which go back a decade or more. In one comparison, the lawsuit says that the Chicago Mercantile Exchange (CME) was given a 65% discount on purchases that grew to 70% if its purchases exceeded $2 million. The lawsuit alleges that the federal government should have been entitled to a discount of 70% on its aggregate purchases as well, "because it was a far more significant aggregate purchaser of Oracle's products than CME."

"If Oracle was willing to retroactively amend previous contracts to allow commercial customers to take advantage of the deeper discount levels in the previous contracts, Oracle should have offered that same opportunity to each government agency," the lawsuit alleges.

Oracle was required to update the General Services Administration when commercial discounts were improved, and then offer the same improved discounts to government purchasers, according to a DOJ spokesperson.

Oracle declined comment on the government action. The case was filed in 2007 and unsealed in April.

Patrick Thibodeau covers SaaS and enterprise applications, outsourcing, government IT policies, data centers and IT workforce issues for Computerworld. Follow Patrick on Twitter at Twitter @DCgov, or subscribe to Patrick's RSS feed Thibodeau RSS. His e-mail address is pthibodeau@computerworld.com.

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