12 Shocking Allegations From The VMware-Carahsoft Government Overcharging Lawsuit

Reading Between The Lines

Dane Smith, VMware's former vice president of Americas sales, filed a civil lawsuit in 2010 against VMware and reseller partner Carahsoft for allegedly overcharging the federal government over a period of several years. That now-settled lawsuit remained sealed until this week, when the Department of Justice published details of the allegations.

VMware and Carahsoft allegedly gave commercial customers better discounts than government customers, and recommended that the government buy more software than it actually needed, according to the publicly available lawsuit document in the case. By allegedly providing inaccurate pricing and other information to the government, VMware and Carahsoft were accused of violating the False Claims Act, a law that dates to the Civil War. VMware and Carahsoft paid $75.5 million to settle the case, but VMware denies any wrongdoing.

Smith, for his part, claims that VMware management retaliated against him, and eventually fired him, after he reported the alleged fraud to his superiors.

Neither Smith nor Carahsoft responded to CRN's requests for comment.

A VMware spokesman provided the following statement on the matter: "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 2007 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."

Following are 12 shocking allegations from Smith's lawsuit documentation.

1. Overcharging Of Government Customers

Smith's lawyers, in a lawsuit document outlining his allegations, claimed that VMware and Carahsoft have "knowingly defrauded" the government since 2000 by not offering it the same discounts on products and services that it provides to private-sector customers.

VMware and Carahsoft "knowingly submitted false claims, made false statements, and conspired to defraud the federal government," according to the lawsuit document.

This includes providing "inaccurate pricing, inaccurate disclosures, and incomplete information about the sales of VMware software, licenses and related maintenance, professional and educational services" to the General Services Administration, the purchasing arm of the federal government.

This means the federal GSA schedule had "falsely inflated prices" for VMware products sold by Carahsoft, according to the lawsuit.

2. Dramatically Bigger Discounts For Commercial Customers

While VMware's list price for products is the same for both government and commercial customers, the discounts the vendor and Carahsoft offered varies greatly between the two, according to the lawsuit document.

For VMware's server virtualization software -- its most popular product -- GSA pricing represents a 12 percent discount from the list price. However, VMware provided discounts of up to 72 percent for the same product when selling to commercial customers, according to the lawsuit document.

3. Giving Better Discounts To Foreign Governments

VMware and Carahsoft allegedly offered deeper discounts to foreign government customers than it did to U.S. government customers, and concealed the details of those discounts inside of enterprise licensing agreements.

According to the lawsuit document, VMware did an ELA for the U.K. Ministry Of Defense that "was far more favorable" than a larger ELA it did with the U.S. Navy Marine Corps Internet (NMCI) during the same time period.

Jeff Littlejohn, then director of systems integrators and outsourcing at VMware, alerted his superiors -- Aileen Black, former vice president and general manager of VMware's public sector business, and Carl Eschenbach, then-executive vice president of worldwide field operations and current co-president and COO -- that this was going on, according to the lawsuit document.

Eschenbach's response was: "On ELAs we do not disclose discounting, it's a black box pricing model," according to the document. Black left VMware in December 2013 after more than 9 years at the company.

4. Advising Government Customers To Buy More Software Than Needed

VMware and Carahsoft gave the GSA false information about the capabilities of VMware's server virtualization software so that government customers would buy more software than they actually needed, according to the lawsuit document.

That includes false information about "consolidation ratios," or the number of virtual servers that can run on a physical server, according to the lawsuit. VMware and Carahsoft allegedly routinely recommended a 6:1 consolidation ratio for commercial customers -- and even higher in some cases. But they also allegedly recommended a 4:1 consolidation ratio for government customers, which meant the latter would have to buy more software.

Most government IT purchasers "lack the negotiating leverage, and the knowledge" to challenge VMware and Carahsoft's claims on consolidation ratios, the lawsuit stated.

5. VMware Higher-Ups Were Aware Of Consolidation Ratio Discrepancies

VMware and Carahsoft's executives were allegedly aware of the differences between the consolidation ratios they recommended for commercial and government customers. This included former VMware CEO Paul Maritz, Susan Insley, VMware's vice president of audit and compliance, and the Audit Committee of VMware's board of directors, according to the lawsuit document.

The VMware executives knew the false information on consolidation ratios was "potentially problematic" but thought that concealing the terms in ELAs would prevent government customers from finding out, according to the lawsuit document. The VMware executives referred to ELAs as having "black box" pricing, meaning no one could see the details of the agreements.

6. VMware Allegedly Used Carahsoft As Shield From Government Legal Action

Instead of listing itself on the GSA schedule, VMware made its reseller partner Carahsoft the GSA schedule holder for VMware products in 2007, according to the lawsuit document. This made Carahsoft the exclusive seller of VMware products to the federal government.

In doing so, VMware set up Carahsoft as a "sham" to attempt to avoid False Claims Act liability, according to the lawsuit document.

"Oracle had a huge fine this week due to not handling this properly ... if we set this up now correctly we will avoid difficult issues for the future," Aileen Black, vice president and general manager of VMware's public sector business, allegedly said in a weekly report on Nov. 17, 2006.

Black allegedly sent an email to VMware Co-Founder Diane Greene and other top executives in which she said the Carahsoft arrangement "provides VMware with some added protection from the legal issues regarding best pricing practices to the government."

7. Better ELA Terms For Commercial Customers

In September 2007, VMware and Carahsoft offered eBay a contract for 1,000 server virtualization licenses at a 53 percent discount from list price, and also let eBay add unlimited software licenses for the duration of the two-year deal, according to the lawsuit document.

The eBay contract represented an 8:1 consolidation ratio, which is far more advantageous than the 4:1 consolidation ratio VMware and Carahsoft recommended for government customers, according to the lawsuit document. VMware allegedly did not offer deals with the same terms to government customers.

In addition, VMware typically charges commercial customers for ongoing maintenance and support for its products based on the discounted pricing, while government customers had to pay based on the list price, which further padded their bills, according to the lawsuit.

8. VMware's Public Sector Chief Pushed For Even More Control Over Discounts

VMware Public Sector Chief Aileen Black, in an email to then-CEO Diane Greene, noted the differences in commercial versus government pricing, according to the lawsuit document. "BTW the max discount on this program is much less than the non-federal program (46% vs 67%)," Black allegedly said in the email.

Because of the discrepancy, "Federal margins have been significantly higher than commercial margins in the U.S.," Black allegedly said in the email.

In the email, Black allegedly proposed a new discount program that would convert "automatic Government discounts into discretionary discounts," thereby giving her even more control over government customer discounts, according to the lawsuit document. Black didn't respond to CRN's request for comment.

VMware and Carahsoft also published government-specific product SKUs and presented them as being different from VMware's regular commercial product SKUs, when they were in fact the same, the lawsuit stated.

9. Some VMware Execs And Partners Tried To Alert Management

Leigh Madden, VMware's director of public sector partner sales at the time, and Steve Houck, vice president of worldwide channels at the time, held off on implementing Black's new pricing program and launched an investigation of VMware's federal pricing practices, according to the lawsuit document.

But Black and her boss, Eschenbach, allegedly "expressed great frustration at the delay" and asked why they wanted to investigate.

Houck responded in an email that he, Madden and some VMware partners had concerns about "the ethics and legality of our pricing practices" in the federal government space, and about charging government customers more than commercial ones, according to the lawsuit document.

In another email, Madden allegedly said to Houck: "Our higher pricing to the US Government is not the industry norm and regularly results in questions from our partners as to why we charge the Government more than commercial customers." Madden and Houck didn't respond to a request for comment.

10. VMware Execs Were Nervous About Resellers Quoting Commercial Pricing To Government Customers

Black was allegedly upset that VMware resellers were quoting commercial discounts to government customers in order to close deals. In a weekly public sector report to Dane Smith and his management team in August 2007, Black allegedly warned of the potential consequences of this activity.

"GSA is spending more time finding companies to fine (just ask Sun, EMC and Oracle) than working on their day job. It is very profitable when you fine folks $100 million. This is serious. The times have changed and they are cracking down and cracking down hard," Black allegedly wrote in the report.

11. VMware Execs Allegedly Retaliated Against Whistleblower Smith

Smith allegedly reported VMware federal sales pricing practices to the company's human resources, internal audit, compliance, and ethics departments. VMware executives responded by "threatening, discriminating against, and ultimately discharging" him, according to the lawsuit.

In August 2009, Smith allegedly testified on VMware's federal pricing practices in a case filed by former VMware employee John Wheeler, echoing many concerns he'd already raised with VMware management.

On Jan. 10, 2010, Smith sent an email to Susan Insley, VMware's vice president of audit and compliance, and the Audit Committee of VMware's board of directors, outlining alleged "numerous retaliatory acts" that Eschenbach and other VMware employees had made against him after he'd reported VMware's federal pricing practices, acccording to the lawsuit. Four days later, VMware allegedly terminated Smith. Shortly thereafter, Houck was allegedly "forced to resign from VMware" because of his role in the investigation of its government pricing practices. "In fact, everyone who conducted the 2008 investigation led by Houck was forced out of VMware," according to the lawsuit document.

12. Smith Allegedly Feared For His Safety During Investigation

At the height of the investigation into VMware and Carahsoft's government pricing practices, "Smith was told to watch out and be careful around Eschenbach and [Scott Aronson, vice president of global accounts] because Eschenbach suspected that Smith had reported fraudulent federal pricing practices at VMware and blamed him for getting investigated in the first place," according to the lawsuit document.

Smith even gave his wife "specific written instructions" to follow in case he was "harmed during a business trip to Europe," the lawsuit stated.