EMC Settles Federal Pricing Fraud Lawsuit for $87.5 Million

By Chris Preimesberger  |  Posted 2010-05-25

EMC, the world's largest independent storage hardware and software producer, has paid the U.S. Treasury $87.5 million to settle out of court a lawsuit charging that it illegally overcharged a federal agency and violated two federal laws: the False Claims Act and the Anti-kickback Act.

The announcement was made May 25 by the U.S. Department of Justice.

In the settlement made on May 7, 2010, the Department of Justice alleged that, by misrepresenting its commercial pricing practices, EMC fraudulently induced the General Services Administration to sign a contract with prices that were higher than they would have been had the company not made false representations.

Here is a copy of the settlement agreement.

Specifically, the DOJ alleged that the Hopkinton, Mass.-based storage company represented during contract negotiations that, for each government order under the contract, EMC would conduct a price comparison to ensure that the government received the lowest price provided to any of the company's commercial customers making a comparable purchase. 

According to the DOJ, EMC knew that it was not capable of conducting such a comparison, and so EMC's representations during the negotiations - as well as its subsequent representations to GSA that it was conducting the comparisons - were false or fraudulent.

The DOJ also alleged that EMC engaged in an illegal kickback scheme designed to influence the government to purchase the company's products. 

EMC maintained agreements whereby it paid consulting companies fees each time the companies recommended that a government agency purchase an EMC product. 

These kickback allegations are part of a larger investigation of government technology vendors that has resulted in settlements to date with three other companies, with several other investigations and actions still pending. The kickback investigation was initiated by a lawsuit filed under the qui tam, or whistleblower, provisions of the False Claims Act, which allow private citizens to sue for fraud on behalf of the United States and share in any recovery.

"Misrepresentations during contract negotiations and the payment of kickbacks or illegal inducements undermine the integrity of the government procurement process," Tony West, assistant Attorney General for the Civil Division of the Department of Justice, said in a press statement. "The Justice Department is acting to ensure that government purchasers of commercial products can be assured that they are getting the prices they are entitled to."

The lawsuit, initially filed in the Eastern District of Arkansas, was transferred to the U.S. District Court for the Eastern District of Virginia where it is captioned United States of America ex rel. Rille and Roberts v. EMC Corporation, Civil Action 1:09-cv-00628 (E.D. Va.).

"Companies should not keep charging higher prices to the government when costs go down. The American taxpayers deserve a better deal," said GSA Inspector General Brian D. Miller.

The case was handled by the Justice Department's Civil Division and the U.S. Attorney for the Eastern District of Virginia, with the assistance of the General Services Administration Office of the Inspector General, the Department of Energy Office of the Inspector General, the U.S. Postal Service Office of the Inspector General, the Defense Criminal Investigative Service, and the Treasury Department's Inspector General for Tax Administration.

EMC spokesman Patrick Cooley told eWEEK in a statement that the company "has always and will continue to deny any liability for the allegations made in the case."

"We are pleased to have the distraction, expense and uncertainty behind us," Cooley said, adding that the matters at issue were "historical in nature." Some of the events in the case were nearly 10 years old, he said.

Some perspective from Pund-IT

Veteran IT analyst Charles King of Pund-IT added some perspective on the issue for eWEEK.

"First, it's important to note that settlements like this can take years to negotiate," King said. "The contracts related to EMC's situation date to 1999, and in 2008 the company announced that it was putting aside $87 million to address the complaint while continuing to negotiate in good faith.

"That doesn't lessen the gravity of the charges, but it does point to the fact that the allegations and settlement were anything but a surprise," King said.

In addition, King said, the company has had years to correct the issues leading to the complaint and should suffer few, if any, financial ills from its conclusion.

"Finally, while I wouldn't call the practice common, the DOJ has pursued and won similar cases against IBM/PwC (2007) and NetApp (2009). In fact, the DOJ called its $128 million settlement with NetApp 'the largest contract fraud settlement the General Services Administration has obtained to date,'" King said.

Editor's note: This story has been updated to include the analyst's perspective.

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