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VMware Agrees To Pay $75.5M To Settle Illegal Pricing Allegations

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In a significant settlement that could embolden American employees who witness company misconduct, VMware and government contractor Carahsoft Technology Corporation agreed to pay the $75.5 million today to settle illegal pricing allegations.

The Department of Justice accused the companies of violating the Fair Claims Act and overcharging the government, in a case brought in conjunction with a former VMware executive. VMware steadfastly denied any wrong-doing in the case.

The Act states that companies that appear on the General Services Administration pricing schedule agree to offer the rock bottom price to the federal government in exchange for the substantial business that being on the schedule brings a company. That means it can’t offer private client any better price.

The case was one of the top five figures by a technology company under the Fair Claims Act.

The action was filed in 2010 after Dane Smith, the former Vice President of Americas Sales for VMware made company officials aware they were charging the federal government more than they were other large clients. They fired him for his trouble, one of his attorneys, Niall McCarthy from the firm Cotchett, Pitre & McCarthy, LLP told TechCrunch.

According to the complaint filed by Smith’s attorneys, VMware was giving the government a discount as low as 12 percent while offering commercial clients discounts as high as 72 percent (see pages 10 and 11 of the complaint). What’s more, Smith’s attorneys cited emails in which VMware officials openly discussed questions about the ethics and legality of the prices the company was offering the government (see pages 22 to 25 of the complaint).

VMware shared the following statement by email denying all of the allegations:

VMware cooperated fully with the DOJ and GSA in connection with their multi-year investigation regarding VMware’s government sales practices covering the period between 2006 and 2013. VMware believes that its commercial sales practice disclosures to the GSA were accurate and denies that it violated the False Claims Act. The Company nevertheless elected to settle this lawsuit rather than engage in protracted litigation with one of its important customers – the federal government.

The vast majority of cases filed under this act involve medicare fraud. It’s highly unusual for a technology company to be involved, but McCarthy believes that the VMware case could be the tip of the iceberg.

“Silicon Valley is driven more by money than innovation. As a result companies with contracts with government routinely overcharge.”

Smith is entitled to between 15 and 25 percent of the settlement or between $11,325,000 and $18,875,000. McCarthy said the number is typically in the middle or around 20 percent. The government will get the remainder.

VMware will also be responsible for all legal fees accrued by Smith’s attorneys over and above the settlement. Smith’s lawyers could also get a percentage of his settlement, but that will have to be negotiated, McCarthy said.

Smith worked with the law firm Cotchett, Pitre & McCarthy, LLP and the Department of Justice along with the law office of Jeffrey F. Ryan. It took five years to to reach this settlement.

His lawyers plan to file a wrongful termination suit after this is settled.