June 16th 2010 © 2010 MGI RESEARCH, LLC
Yesterday, a lawsuit alleging violations of GSA software contracts by Oracle became public. The case was orginally filed in 2007 by a former Oracle employee turned whistleblower under the the False Claims Act which lets private citizens bring claims against vendors on behalf of the government and collect substantial reward fees in the process. The US DOJ joined the case on April 2nd 2010 and brought forward claims of overcharging to the tune of tens of millions of dollars. Violations of this sort typically involve disputes over what is commonly called the "Most Favored Nation" pricing that requires suppliers to provide the client with the lowest pricing for identical product offerings.
Without commenting on the actual merits of the case, given Oracle's track record with these matters, we would expect this to be settled out of court. For example, Oracle previously settled a GSA pricing dispute involving PeopleSoft, a company Oracle acquired, as well as a separate dispute with the State of California. Even if Oracle does have a strong defense, it may not want to harm its long term relationship with the US Federal Government which is one of its largest clients. The potential size of the settlement in this case could well exceed the prior cases.
Given the current economic climate and the budget challenges facing governments at all levels, we would not be surprised to see more cases like the one in question to be brought forward by other jurisdictions and involving other vendors. The lesson for vendors is that there is a need to keep accurate contractual records to avoid accidental violations of GSA pricing clauses. The lesson for investors is that cash rich tech companies with meaningful governmental business could be easy targets for GSA-like audits and legal claims and thus one should not be surprised to see above average volatility for such equities. This also calls for a more realistic valuation of tech companies focused primarily on government business.