What Can You Learn From the Justice Department Suing Oracle?

Quick answer: selling software to the government means living by your own disclosed pricing. Oracle learned that the hard way. On July 29, 2010 the Department of Justice sued it for overcharging federal agencies, and in October 2011 Oracle paid $199.5 million to settle, the largest False Claims Act recovery the GSA had ever obtained. If you sell on a government Schedule, your Commercial Sales Practices disclosures are the whole ballgame.

I track cases like this because the lessons apply to any software or SaaS vendor chasing public-sector revenue. As a software licensing attorney, here is the background and what you should take from it.

Background: How Selling Software to the Government Works.

• The CSP-1. To sell meaningful volume to federal agencies, you get on a GSA Multiple Award Schedule, and that starts with a CSP-1 (Commercial Sales Practices Format) chart. You describe your products, services, pricing tiers, and most importantly your discount practices. The government’s core concern is simple: it does not want to pay more than your favored commercial customers for a similar deal.
• What Oracle allegedly did. On a 1998 GSA Schedule contract, Oracle allegedly failed to give the GSA current, accurate, and complete information about the discounts it gave other customers, and billed agencies at prices worse than those commercial deals. A former Oracle employee filed the case under seal in 2007 under the False Claims Act, and the government investigated for years before intervening.
• The numbers. Oracle settled for $199.5 million in 2011, and the whistleblower received $40 million of it. Whistleblowers can recover up to about 30% of the award under the qui tam provisions of the False Claims Act (31 U.S.C. section 3730), a powerful incentive for insiders to report. Earlier comparables tell the same story: Oracle paid $98.5 million in 2006 for PeopleSoft, EMC paid $87.5 million, and NetApp paid $128 million in 2009.

So what can a software vendor actually learn from this?

1. Your Commercial Sales Practices Chart Is the Whole Deal.

One person should own the CSP-1: drafting it, updating it, and ensuring you actually comply with it. The Oracle complaint reads like a company that was confused about what its own disclosures covered. Liability under the False Claims Act attaches to knowingly inaccurate disclosures, so treat the chart as a living compliance document, not a one-time form.

2. You Can and Will Be Audited.

The government looks retroactively at your transactions and discounts. A deal you papered years ago can resurface in an audit, which is the same reason how you handle pricing matters across all your contracts, not just the federal ones.

3. Get Expert Help Early.

Work with an experienced government-contracting consultant or lawyer. This gets complex fast. There are legitimate ways to write a commercial practices chart that explains which transactions get a better price than the government, but you have to know how. Writing these is more art than science, and the cost of getting it wrong is measured in nine figures.

4. The Government Now Understands Software Discounting.

Federal enforcers are fluent in software licensing and discount practices in a way they were not fifteen years ago. Expect scrutiny to tighten, not loosen. The same “do not take more than your deal allows” discipline shows up in private disputes too, like the Oracle v. SAP case and the broader license-restrictions fights.

Frequently Asked Questions.

What is a CSP-1? The Commercial Sales Practices chart you file to get on a GSA Schedule. It discloses your pricing and, critically, the discounts you give other customers, so the government can judge whether it is getting a fair deal.

Why did a whistleblower bring the case? The False Claims Act lets insiders sue on the government’s behalf and keep up to roughly 30% of the recovery. That is why an Oracle employee filed it and walked away with $40 million.

I am a small vendor. Does this apply to me? Yes, if you sell on a federal Schedule. The dollar amounts scale with your sales, but the disclosure and audit rules are the same.

If you are moving into public-sector sales, get the CSP-1 right before you sign. Trust me on this one.

Resources:

• What Not to Do to a Competitor (Oracle v. SAP).
• Is Your Software Pricing Confidential?
• Restrictions in Software License Agreements.

Disclaimer:

This post is for informational and educational purposes only, and is not legal advice. You should hire an attorney if you need legal advice, which should be provided only after review of all relevant facts and applicable law.