presented by thomas p. barletta and paul r....

Presented by Thomas P. Barletta and Paul R. Hurst

October 22, 2014

Webinar Sponsored By:

GSA Schedule Contracts and the False Claims Act

Webinar with Steptoe & Johnson LLP

© 2014 Steptoe & Johnson LLP, All Rights Reserved.

© 2014 Steptoe & Johnson LLP, Paul R. Hurst. Presenter. All Rights Reserved.

Proprietary Overview of GSA Schedule Contracts

Opportunities for Commercial Companies:

GSA Schedules Program provides Federal agencies a simplified

acquisition process to purchase commonly used commercial goods and

services, from office supplies to professional services.

Represents billions of dollars in annual sales, with reported sales close to

15% of overall Federal procurement spending.

Offerors must submit proposals that agree to GSA terms & conditions and

that disclose commercial sales practices/policies for offered items

(including discounts)

GSA negotiates pricing in exchange for nominal guaranteed minimum

order and access to a government-wide market.

– Less administrative burdens because pricing has already been deemed

“fair and reasonable.”

– But when a Federal agency places an order, it is encouraged to

negotiate a further discount.

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Proprietary Civil False Claims Act and GSA Schedules

Burdens of GSA Schedules: Schedules impose significant obligations on contractors – a failure to comply

presents numerous risks, including exposure under the Civil False Claims Act

(“FCA”).

– Risk is high because GSA Schedules often involve commercial companies not

accustomed to unique requirements of contracting with the U.S. Government.

Some reputable Fortune 500 companies have made significant settlement payments

based on FCA allegations arising from GSA Schedules.

– In 2011, one company paid $199.5M – “the largest False Claims Act settlement

that the GSA ever obtained.”

– Other companies have made significant settlement payments based on FCA

allegations arising from GSA schedules:

• $128M, $98.5M, $87.5M, $60.2M, $55M, $48M . . .

Companies can also face various other risks and exposures, such as contractual

remedies for price reductions, criminal liability, suspension and debarment from

federal contracting, shareholder lawsuits, damage to reputation, etc.

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Proprietary Civil False Claims Act (31 U.S.C. §§ 3729-3733) Overview

– A person/corporation is liable if it “knowingly”:

• presents, or causes to be presented, a false or fraudulent claim for payment or approval; or

• makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim.

Elements to Prove a Violation

– Person must make a record or statement in support of a false claim;

– The record or statement must be false;

– Person must act knowing that the record or statement is false; and

– The false record or statement must be material to the false claim.

Intent: “Knowingly” broadly defined to include “actual knowledge” of falsity, but also recklessly disregarding or deliberately ignoring the truth.

– To err is human: Mistakes, even negligent ones, do not violate FCA.

– But . . . companies might have significant difficulty convincing the Justice Department that a mistake was made if it resulted in company getting money.

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Proprietary Civil False Claims Act (cont.)

Claim is also defined broadly.

It means any request or demand for money or property that is

presented to an officer, employee, or agent of the U.S. or is made to a

contractor, grantee, or other recipient, where the money or property is

to be spent or used on the Government’s behalf or if the Government

provides any of the money demanded or will reimburse the contractor

or grantee.

– Includes invoices, but liability also could attach to statements that

are material to getting payment from the Government (e.g.,

commercial sales practices disclosures).

– Liability under the statute could attach even if the claim or

statement is not presented “directly” to the government – e.g., a

false claim knowingly submitted by a subcontractor to a prime

contractor can be a basis for liability.

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Damages Can Add Up Quickly

– Damages incurred by the Government because of the violation, multiplied by

three (“treble damages”).

– Penalties – Imposes penalties between $5,500 to $11,000 “per false claim.”

• E.g., every invoice under GSA Schedule.

– Nearly $50 billion recovered since 1986 ($5B in FY2012 and $3.8B in FY 2013).

Criminal FCA

– Similar to Civil False Claims Act, but Government must show actual knowledge

or “knowing claim to be false, fictitious, or fraudulent”

– Higher burden of proof and standard of intent make criminal prosecutions less

common than civil cases.

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Civil False Claims Act (cont.)


Proprietary

Qui Tam (“Whistleblower”) Provisions

– In addition to Department of Justice (“DOJ”), hundreds of mini-special

prosecutors or whistleblowers are enforcing the FCA.

– Complaint filed under seal to provide DOJ opportunity to investigate

and decide whether to pursue.

– DOJ may decline to formally join, in which case whistleblower may

pursue to recover damages/penalties on behalf of U.S.

– Strong incentives, including share in recovery (15% to 25% if DOJ

intervenes; 25% to 30% if it does not) plus attorney fees and costs if

successful

– Over 700 qui tam complaints filed in 2013 (primarily health care)

In GSA-FCA cases, FCA lawsuits have been initiated by the

Government (due to post-award audits or referrals to the IG by the CO)

and qui tam plaintiffs (e.g., former or current employee, employee of

reseller, competitor).

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Civil False Claims Act (cont.)


Proprietary

FCA Risks Under the GSA Schedule Contracts

Risks

– Defective Pricing based on CSPs

– Price Reduction Clause

– Trade Agreements Act

– Resellers

– Kickbacks

– Non-Compliant products or services

Examples

Disclaimer: Examples and risks are based on information in complaints or

settlements and do not reflect any agreement that FCA violation occurred or that

such facts are credible evidence of FCA violation.

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Proprietary

Defective Pricing – Commercial Sales Practices

Commercial Sales Practices Disclosure

Offerors must submit with proposal “CSP-1” – a disclosure of the Company’s “Commercial

Sales Practices.”

Among other things, it asks two key questions:

– First Question: “3. Based on your written discounting policies (standard commercial

sales practices . . . .), are the discounts and any concessions which you offer the

Government equal to or better than your best price (discount and concessions in any

combination) offered to any customer acquiring the same items regardless of quantity

or terms and conditions? YES_____ NO ____.”

The Solicitation broadly defines the following terms:

– “Customer” as “any entity, except the Federal Government, which acquires supplies or

services from the Offeror.”

– “Discount” means any “reduction to catalog prices (published or unpublished)” or “[a]ny

net price lower than the list price,” e.g., rebates, quantity discounts, etc.

– “Concession” means a benefit, enhancement or privilege (other than discount) that either

reduces the overall cost or encourages the purchase, e.g., freight allowance, extended

warranty, extended price guarantees, free installation, bonus goods, etc.

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Defective Pricing – Commercial Sales Practices

Instructions based on answer to Question 3:

– If answered “YES,” then identify customer who receives your best discount:

– If “NO,” then disclose policies or standard sales practices for “all customers or

customer categories” who receive price that is “equal to or better than the

price(s) offered to the Government . . . .”

– “Indicate the best discount . . . without regard to quantity; terms and

conditions of the agreements under which the discounts are given; and

whether the agreements are written or oral.” (emphasis added.)

Second Question: “4(b). Do any deviations from your written policies or

standard commercial sales practices disclosed in the above chart ever result in

better discounts (lower prices) or concessions than indicated? YES __ NO__ .”

– If “YES,” then “provide an explanation of the circumstances” where company

deviates from “written policies or standard commercial sales practices” and

“how often they occur.”

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Defective Pricing – Commercial Sales Practices DOJ places little responsibility on GSA CO, advocating literal interpretation of CSP:

In addressing predecessor to CSP-1, one court described DOJ’s reliance on the

literal language as “requiring [the offeror] to reveal every price discount it provided

any of its customers ever.” U.S. v. Data Translation, Inc., 984 F.2d 1256, 1261 (1st

Cir. 1992):

– “Consider, for example, an office supply firm, or a furniture company, or a computer parts

manufacturer, operating in a competitive industry. Such a firm, selling its products to tens of

thousands of different customers, through a host of different sales personnel, might vary

prices considerably, in response to shifting competitive pressures, from market to market,

from time to time, or from one customer to another . . . To require a paper report of every

such variation is to require a paperwork blizzard, even assuming that the company keeps

track, on paper, of every variation, not only in the price, but also in the price-related

terms and conditions of sale.”

Data Translation court advocated a practical reading to avoid “ambiguity and

incomprehensibility” created by “the exhaustiveness of the disclosure that the

language literally demands . . . creates ambiguity and incomprehensibility.”

BUT: DOJ often seeks to distinguish this case and no company wants to end up in

the same place as Data Translation – in litigation 10 years after its contract award.

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Defective Pricing: Real World Examples

Answering Question 3 with Yes and Question 4B with No

– But responses were not true.

Attempts to simplify discounting practices, e.g., chart reflecting commercial

practice of increasing discounts to correspond with increasing dollar value

of sales.

– But this was oversimplification: sales data showed that smaller orders

received the same or higher discounts as larger sales.

Representing that discounts varied based on customer classifications, e.g.,

National & Corporate Accounts, State & Local Government.

– But, in practice, such classifications were not relevant to actual

discounting policies/practices.

Failure to update CSP disclosures during negotiations (new data or newly

discovered inaccuracies in data previously provided).

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Defective Pricing: Real World Examples (cont.)

Issues with statements about “frequency” of higher discounts.

– “Non-standard discounts are used in less than 5 percent of the total number

of commercial transactions,” but data did not seem to support statement.

– “Standard” vs. “Non-Standard” Discounts. When should a discount practice

be characterized as “standard” vs. “non-standard”? How frequently is

“standard”?

– DOJ contends that higher discounts (typically disclosed as “non-standard”)

should have been characterized as “standard” discounts.

Discounts reflect percentage off from commercial list price, but offeror failed to

disclose multiple commercial price lists or price list was not actually used in

commercial sales.

Contract modifications, e.g., adding products, and making statements that

commercial sales practices have not changed since the last submission.

– But statements did not reflect different sales practices for different product

line, or

– Did not reflect changes in the commercial sales practices.

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Defective Pricing – Real World Examples (cont.) Failing to disclose a practice of special discounts or concessions based on certain

circumstances, e.g.:

– 8% credit for attending training on the product.

– Concessions (discounts) for single purchase of multiple products lines.

Unsupportable data reflected in CSP, presenting, e.g., analysis of commercial sales,

such as average discounts or discounts based on high volume products, but:

– CSPF failed to disclose critical assumptions made in those calculations (i.e.,

excluding certain customers, types of sales, or geographic sales); or

– No documentation to support calculations.

Making promises that the offeror cannot (or won’t) keep.

– Commitment to monitor certain sales to ensure that the Government received the

lowest price, but offeror actually lacked the capability to do this.

Delegating responsibility for completing CSP disclosures to the wrong person – i.e.,

not familiar with commercial sales practices, not trained in GSA schedule contracting,

or lacking organizational influence to obtain appropriate attention to disclosures.

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Damages Under Defective Pricing Cases In case of inadequate commercial disclosures, DOJ typically contends that the

damages reflect the price Government paid minus the price the Government would

have paid if the CSPFs had been accurate and complete, i.e., GSA would have

negotiated higher discounts/lower GSA prices.

GSA regulations provide for GSA to consider “relevant” data and to “seek to obtain

the offeror’s best price (. . . given to the most favored customer),” but also

recognize that “the terms and conditions of commercial sales vary and there may

be legitimate reasons why the best price is not achieved.” GSAR 538.270(a).

But, in “make believe world” of “what would the parties have negotiated” based on

different CSPFs, DOJ has freedom to contend, for example:

– That all sales are relevant to what the GSA would have negotiated;

– That CO would have sought to align the GSA with the absolute best discounts

extended to other customers regardless of terms; and

– That access to the Federal Government market would have warranted discounts

in line with the contractor’s very best discounts.

Treble damages, plus penalties per invoice, which can add up quickly in case of

GSA schedule contracts.

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CSPF – Compliance Considerations Think hard before answering Question 3 with “Yes” and Question 4B with “No.”

Assign senior personnel to manage CSPF to ensure appropriate organizational

attention and provide training.

– GSA consultants are not an inoculation – they do not have first-hand knowledge

of sales practices or access to data.

Consider adequacy of, or improvements to, order-entry systems to capture/track

sales data and practices by customer classes, including pricing and terms.

In presenting commercial sales practices, consider and identify limitations in sales

data and disclose those limitations to GSA.

Err on side of over-inclusion and do not exclude data or sales, e.g., foreign or

irrelevant sales, without disclosing to GSA.

Avoid oversimplifications or generalizations – there are always exceptions in sales

and those exceptions may provide fodder for FCA claim.

Implement effective compliance plan, including code of ethics, training and

communication to employees, internal reviews, disciplinary mechanisms, and

corrective actions (such as self-reporting or cooperation).

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CSPF – Compliance Considerations

Consider defining vague or ambiguous terms (i.e., frequency) and avoid

adopting CSPF terms that are not meaningful to your company.

Document and maintain documentation of the negotiations and sales data

analyses – FCA issues often arise years after the submission of CSPFs

and the GSA CO will likely be unwilling to take your side over DOJs.

Consider integrity of commercial price lists.

– “Nobody pays retail anymore.”

– Is the commercial price list meaningful?

Avoid pressure to state that commercial sales practices have not changed

when adding products or extending contracts – disclosures apply across

all customer categories and practices or policies might have changed or

might apply differently by product line.

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Price Reductions Clause (GSAR 552.238-75) (“PRC”)

Before award, parties will negotiate a customer (or category of customers) as the

“Basis of Award” and the Government’s “price or discount relationship” to that

customer (or category of customers).

The clause requires that “relationship shall be maintained” and any change “which

disturbs this relationship shall constitute a price reduction.”

– In other words, reducing prices to the “Basis of Award” customer can trigger a

price reduction, if it disturbs the relationship (or narrows the gap) between Basis

of Award customer price and GSA price – even if the net price to “Basis of Award”

customer remains higher.

As relevant to the FCA, the clause requires the contractor to report all price

reductions to the “Basis of Award” customer and a “price reduction shall apply” if the

Contractor extends special discounts or otherwise offers a price that “disturbs the

price/discount relationship” of the Government to that customer.

Contractor required to offer same price reduction (or maintain the relationship) with

the same effective date, and for the same time period (with a few exceptions

including sales to Federal agencies).

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Proprietary Price Reduction Clause: Real World Examples Contractors failed to have an effective system in place to monitor compliance with PRC (and,

in some cases, no system whatsoever).

– Another company allegedly had a monitoring system in place, but regularly ignored flagged

transactions and overrode them to make the commercial sale.

An overly broad “Basis of Award” customer, e.g., “Commercial End Users and Dealers,” “All

End Users,” and even “All Customers.”

“Ad-hoc” discounts that were not passed on to the Government.

– Resulting from a lack of controls over discounting or significant authority granted to sales

reps in the field.

New “discounts” or “concessions” – broadly defined – that the company did not recognize as

triggering a price reduction.

– E.g., promotions in the form of credit for future sales or free products.

“Manipulating” commercial sales “to avoid the contractual requirement to reduce the prices

offered to the Government.”

– For example, contractor agreed to monitor certain sales below a dollar threshold

($200,000) to ensure that the GSA received the same discounts.

– DOJ alleged, however, that sales were manipulated to avoid PRC by, inter alia, increasing

the order size to above $200,000 or changing the terms of the already negotiated sale

(e.g., changing the license terms).

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Damages Under Price Reduction Clause

Typically, alleged damages will be the price paid by the Government for

the product minus the price the Government should have paid if the

discount was passed on to the Government, plus treble damages and

penalties.

Other possible collateral risks based on aggressive DOJ tactics:

– The PRC notification might have impacted subsequent negotiations to

add products or services to the GSA Schedule

• If the GSA CO had known about it, she might have used this

information to negotiate lower prices for new products or services.

– DOJ has even asserted questionable and unsupportable position that

price reduction applies beyond the particular product, but to the entire

line of products included on a GSA contract.

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PRC – Compliance Considerations

Pay careful attention to negotiation of “Basis of Award” customer

Establish effective system to monitor and enforce discounting to Basis of

Award customers and providing PRC notifications to the GSA.

– “Mind the Gap”: Such systems should take into account the relationship

between GSA pricing and “Basis of Award” pricing.

– Also remember that even if PRC does not apply to non-Basis of Award

customers, company will have to disclose discounting practices extended to

those customers in the next CSPF.

Procedures to review sales over the contract’s “Maximum Order Threshold” to

ensure that they comply with requirements applicable to that exception to the

PRC: “firm, fixed-price definite quantity contracts with specified delivery.”

Establish process to notify GSA of commercial list price changes and

promotions or other concessions extended to customers.

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The Trade Agreements Act (“TAA”) The TAA applies to acquisitions of supplies or services by the U.S. Government (over

certain dollar thresholds).

The GSA applies the threshold on a schedule-wide basis and, therefore, applies the TAA to all orders under a schedule contract.

As a result, all products and services purchased under the GSA Schedule must be from the U.S. or “a designated country” and offerors must make a certification to this effect.

The TAA permits end products from “designated countries” to be treated the same as U.S.-made products for government procurements.

“Designated countries” are Caribbean Basin countries, WTO GPA countries, Free Trade Agreement Countries, and certain “least developed” countries as listed in FAR 52.225-5.

Otherwise, the TAA prohibits the acquisition of end products from other, non-designated countries.

Major suppliers of goods or services to the U.S. market, such as China, India, Malaysia, and Thailand, are not “designated countries” and are not eligible for purchase under the GSA schedule.

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Proprietary Whether Product Is “U.S. Made” or from “Designated

Country”

The TAA applies a rule-of-origin requirement. The product must be:

– “Wholly the growth, product or manufacture” of the U.S. or of a designated

country;” or

– “Substantially transformed [in the U.S. or a designated country] . . . into a new

and different article of commerce with a name, character, or use distinct from

that of the article or articles from which it was transformed.” See FAR 25.003.

To the extent a contractor is relying on “substantial transformation,” this can

present complex issues of interpretation and application that must be considered

on a case-by-case basis, based on determinations of the Bureau of Customs

and Border Protection.

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TAA: Real World Examples

False certifications – certain companies appear to have known that the products

were made in a foreign country, but still certified the product as U.S. Made.

– Some could have presented “substantial transformation” issues.

– Although the GSA’s TAA certification in certain schedules permit offerors to

identify non-U.S. made or non-designated country products, this listing does not

permit a contractor to include those end products in a GSA sale.

Products were made in non-designated country and only “repackaged” in the

United States.

The lack of tracking systems for foreign-made products or the lack of segregation

between U.S. and foreign-made products, resulting in the “commingling” of

foreign-made products with U.S. made products.

– No basis to certify that the products actually sold to the U.S. Government

qualify.

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Damages Under TAA

Damages could be calculated based on the price the

Government paid for the non-compliant product minus the price

the Government would have paid for the compliant product, plus

treble damages and penalties.

– But, this could result in “no damages.”

In case of non-compliant products or services, DOJ has taken

an aggressive and questionable position that the damage to the

Government is the entire value of the ineligible products sold to

the Government.

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TAA: Compliance Considerations

The TAA should be addressed prior to proposal submission and award,

to avoid risk of FCA liability or other non-compliance issues.

Systems should be in place to track the origin of the products – offerors

must have a factual basis on which to make a certification.

If faced with a country of origin issue, an entity could seek either an

“advisory ruling” or a “final determination” from Customs as to specific

products or representative classes of products.

– A final determination from Customs gives the highest degree of

assurance regarding TAA status.

Alternatively, a supplier could make a self-assessment based on publicly

available Customs rulings, but because those rulings are based on the

specific facts and legal issues presented to Customs by the

manufacturer/importer, care must be taken in relying on them as applied

to other products and processes.

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Proprietary Indirect Sales through Resellers Commercial Sales Practice Disclosures.

If the dealer or reseller holding the GSA Schedules does not have “significant sales to the

general public,” then GSA requests disclosures of Commercial Sales Practices from the

manufacturer/supplier for the products offered.

Manufacturer/supplier is also requested to grant GSA access to sales records to verify the

information submitted.

Price Reductions Clause

Unless “flowed down” to supplier, the PRC is a contractual obligation between the GSA and a

Schedule Contract holder.

But manufacturers/suppliers still have certain price reduction reporting notifications under

GSA’s form “Letter of Supply” to notify the contract holder of:

– Reductions in the commercial price list;

– A decrease in “reseller cost;” and

– Temporary price reductions, rebates, and/or promotions

Trade Agreements Act

GSA’s “Letter of Supply” also provides for a TAA certification from the manufacturer or

supplier, requiring certification to reseller that the products are U.S. made or designated

country end products.

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Compliance Considerations – Reseller Sales

For compliance purposes, manufacturers and suppliers should apply the same compliance policies and procedures for direct and indirect sales under the GSA Schedule.

It is not inconceivable that DOJ might contend that the FCA applies to false statements made to resellers for purposes of getting products on reseller’s GSA Schedule, although there is not a direct contractual relationship with the Government and there are potentially significant hurdles to overcome before applying the FCA in such cases.

Manufacturers/suppliers might also have independent risks of exposure to the reseller or dealers.

Although the PRC might not apply to a manufacturer, the manufacturer or supplier will need to disclose its discounting practices and policies to the reseller the next time a CSP is required and will have to disclose discounting practices in general.

The manufacturer/supplier should also consider terms of agreement with dealer or reseller to fully understand any other price notification requirements or GSA Schedule clauses incorporated by reference.

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Proprietary Other Issues to Consider Product and Labor Substitutions.

– Substitutions may impose liability -- occurs when Contractor delivers product or service that

does not totally conform with product or service identified in contract or delivery order.

• May not unilaterally deliver a substitute product (even if it is technically superior or cheaper).

• May not substitute personnel who do not meet minimum qualifications for labor category.

Using the “GSA Price” in other federal or state/local contracts.

– Some GSA-FCA Settlements are based on impact of defective pricing on other federal

transactions – “[t]he defective pricing information . . . was subsequently relied on by [other

agencies in negotiating contracts with contractor and resellers].”

Due Diligence when acquiring companies with GSA Schedule Contracts.

– Several companies have been hit with FCA liability where they acquired it from another

company holding a GSA contract.

– Companies should consider appropriate due diligence to assess FCA risks, including those

arising under GSA schedules, and include contractual protections (e.g., indemnity).

FAR Clause 52.203-13 (Contractor Code of Business Ethics and Conduct).

– Clause provides for contractor to “timely disclose, in writing” to IG “whenever, in connection

with the award [or] performance . . . Contractor has credible evidence” that it committed

FCA violation.

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Thank You!

Steptoe & Johnson LLP

Thomas P. Barletta

[email protected]

(202) 429-8058

Paul R. Hurst

[email protected]

(202) 429-8089

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presented by thomas p. barletta and paul r....

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