Oracle Corp., the world’s second- biggest software maker, may face total damages of $1 billion in a U.S. Justice Department lawsuit claiming it overcharged the government, legal experts said.
Oracle induced the General Services Administration to buy $1.08 billion in software from 1998 to 2006 by falsely promising the same discounts offered to favored commercial customers, the U.S. claimed in a complaint filed July 29 in federal court in Alexandra, Virginia. Oracle instead gave companies discounts of as much as 92 percent, while the government’s cuts ranged from 25 to 40 percent, the U.S. said.
“It looks to me like this could be a $1 billion verdict after trebling,” Frederick M. Morgan Jr., an attorney at Morgan Verkamp LLC in Cincinnati who isn’t involved in the case, said in an interview.
The U.S. intervened in a 2007 lawsuit filed under the False Claims Act by Paul Frascella, a former Oracle employee. The law lets citizens sue on behalf of the government and share in any recovery. The U.S. can triple any damages won at trial and collect as much as $11,000 for each false billing.
“You could easily have $1 billion worth of fines come out of this,” said Patrick Burns, a spokesman for Taxpayers Against Fraud, a Washington-based advocacy group. “That’s assuming that Oracle overcharged by 35 percent or more, which is well within what it appears to be in the complaint.”
Deborah Hellinger, a spokeswoman for Redwood City, California-based Oracle, didn’t return a phone call and e-mail seeking comment. Oracle reported net income of $6.14 billion on sales of $26.8 billion for the year ended in May.
Morgan, who specializes in federal False Claims Act cases, estimated that tripled damages might reach $1 billion based on the size of the contract and U.S. claims in the complaint that Oracle overbilled by 50 percent or 60 percent in several instances.
Oracle fell 31 cents, or 1.3 percent, to $24.18 at 11:12 a.m. New York time in Nasdaq Stock Market trading.
The case will probably end through negotiation, not trial, since about 98 percent of False Claims cases in which the U.S. intervenes are settled, said attorney John T. Boese of Fried, Frank, Harris, Shriver & Jacobson LLP in Washington. Boese isn’t involved in the Oracle case.
Under the contract, Oracle promised discounts to the government at scheduled rates. In return, it didn’t have to bid each time it sold software to 21 agencies, including the State, Defense and Treasury departments. The GSA helps manage federal properties and assists other agencies in buying goods and services.
The government claims Oracle lied about the GSA discounts before entering into the contract, and knowingly failed during the accord to give complete information about price cuts extended to private customers.
Boese, who has defended so-called GSA Multiple Award Schedule cases, said companies typically argue that contract rules are hard to follow.
“The rules under the GSA schedule contracts are incredibly complicated and obtuse,” Boese said. “You defend on the grounds that the rules are nuts and my interpretation is just as reasonable as yours.”
Last year, data-storage provider NetApp Inc. paid $128 million to settle a False Claims case tied to a GSA contract. Whistleblower Igor Kapuscinski collected $19.2 million.
Oracle paid $98.5 million in 2006 to settle a case over GSA pricing at PeopleSoft Inc., a software maker Oracle bought the previous year for $10.3 billion. Last week, Hewlett-Packard Co., the world’s largest maker of personal computers and printers, said it will settle a U.S. probe of false billings, trimming third-quarter earnings by 2 cents a share.
Calculating damages in a GSA case may hinge on a product’s popularity, its sales concentration, and the contract’s details, said Kapuscinski’s lawyer, Vincent McKnight of McKnight & Kennedy LLC in Washington.
“The defendant will argue that the products we sold you worked and you got the benefit of the bargain,” McKnight said. “The battle is analyzing the benefit of the products versus the tainted contract.”
The case is U.S. v. Oracle Corp., 1:07-cv-00529, U.S. District Court, Eastern District of Virginia (Alexandria).
— By David Voreacos – Aug 5, 2010 – BLOOMBERG L.P., ALL RIGHTS RESERVED.