Oracle Faces a Big Bad Government Pricing Slap Down

Last Updated Jun 17, 2010 1:38 PM EDT

The U.S. government has filed suit alleging that Oracle (ORCL) overcharged it for software. Given federal procurement laws, this could become a nightmare for the company, making its effort to acquire Sun Microsystems seem like an afternoon in an ice cream parlor.

Federal contracts typically require a vendor like Oracle to give the government its best price. If another customer gets a lower price, the government is supposed to receive the same deal. According to the InfoWorld story, Oracle had a so-called multiple award schedule (MAS) contract with the U.S. General Services Administration. What triggered the whole issue was a 2007 action filed by Paul Frascella, an Oracle employee and whistleblower:

However, Frascella learned that Oracle was finding ways around the GSA restrictions in order to give commercial customers even deeper discounts, according to the complaints. One alleged practice saw Oracle "selling to a reseller at a deep discount ... and having the reseller sell the product to the end user at a price below the written maximum allowable discounts," it states. Overall, Oracle's actions cost U.S. taxpayers "tens of millions of dollars," it adds.
Frascella filed under the False Claims Act, which allows people to sue companies on behalf of the government over charges of fraud.

The potential pain for Oracle is significant. Last fall, I spoke with Gail Zirkelbach, a partner with McKenna Long & Aldridge and an expert in government contract issues. If a company knows of a federal pricing problem, it could face treble damages for the overcharge as well as statutory penalties of between $5,500 and $11,000 for each false claim, which translates into each invoice.

But there's a bigger problem for Oracle. Zirkelbach said a company that lands on the wrong side of a false claims action can face suspension from contracts or even disbarment, making it illegible for future contracts. That's a much bigger potential loss than even triple damages for what may have happened before.

Image: Flickr user Cosmic Kitty, CC 2.0.

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    Erik Sherman is a widely published writer and editor who also does select ghosting and corporate work. The views expressed in this column belong to Sherman and do not represent the views of CBS Interactive. Follow him on Twitter at @ErikSherman or on Facebook.