VMware, Carahsoft Pay $75.5 Million To Settle Government Overcharging Lawsuit

VMware and reseller partner Carahsoft have agreed to pay $75.5 million to settle a civil lawsuit alleging overcharging of the federal government for VMware products and services over a six-year period, the U.S. Department of Justice said in a news release Tuesday.

Dane Smith, a former VMware executive who was vice president of Americas sales from 2005 to 2008, filed the lawsuit after leaving the vendor in 2010. The suit -- which Smith filed on behalf of the U.S. General Services Administration (GSA), the purchasing arm of the federal government -- had remained sealed by the DOJ until Tuesday.

From 2007 to 2013, VMware and Carahsoft were alleged to have provided "inaccurate pricing, inaccurate disclosures, and incomplete information" about VMware products and services to the GSA, Cotchett, Pitre & McCarthy, the law firm representing Smith, said in a separate news release.

[Related: VMware's Army ELA: Weapon Of Mass Confusion?]

Sponsored post

VMware and Carahsoft allegedly gave private-sector customers better pricing and discounts on VMware products and services than it offered government customers, according to a document outlining the lawsuit allegations.

VMware and Carahsoft also allegedly gave the GSA inaccurate information about "consolidation ratios," or the number of virtual machines that can run on a physical server. VMware recommended a 6:1 VM-to-server ratio to commercial customers, and a 4:1 ratio for government customers, according to the complaint.

As a result, government agencies bought more VMware server virtualization software than they actually needed, according to the complaint.

The lawsuit alleges that VMware and Carahsoft violated the False Claims Act, a piece of legislation that dates back to the Civil War that lets private citizens sue companies and individuals for defrauding the government. It's often called the "Lincoln Law" because President Abraham Lincoln supported it as a way of stopping shady contractors from ripping off the Union Army during the war.

According to Cotchett, Pitre & McCarthy, the VMware-Carahsoft settlement is "one of the five largest recoveries against a technology company in the history of the False Claims Act."

A VMware spokesman told CRN the vendor denies the allegations and decided to settle the case to avoid a lengthy legal battle.

"VMware believes that its commercial sales practice disclosures to the GSA were accurate and denies that it violated the False Claims Act," the spokesman said in an email. "[VMware] nevertheless elected to settle this lawsuit rather than engage in protracted litigation with one of its important customers – the federal government."

Representatives from Carahsoft, Reston, Va., didn't respond to a request for comment.

The allegations Smith raised in his lawsuit are similar to ones stemming from VMware's $78.1 million enterprise licensing agreement with the U.S. Army, which began in September 2013 and ended March 30 of this year. The Army is currently operating without a VMware support contract.

As first reported by CRN last month, the VMware ELA has led to higher-than-expected costs for some Army commands, in part because VMware required them to download suites of products in order to get commonly used ones like vSphere server virtualization and View desktop virtualization.

The Army National Guard has had a moratorium on VMware purchases since last July, and an official told CRN last month that isn't expected to lift until sometime during the federal government's fiscal 2016.

John Slye, a research analyst at Deltek, a Herndon, Va.-based software vendor that works with the federal government, told CRN he sees the settlement as a sign of the government's growing scrutiny of its relationships with technology vendors.

"This settlement serves as the latest reminder to vendors that the fed is watching and that the pressure on rooting out improper contracting practices will remain," Slye said. "The stakes only get higher as competition for federal contracts increases."