VMware pays $75.5M for whistleblower claim: Local tech giant settles False Claims Act case, one of largest in history

July 1, 2015
San Mateo Daily Journal

One of the world’s largest software companies has agreed to pay $75.5 million to settle a whistleblower retaliation lawsuit alleging Palo Alto-headquartered VMware defrauded the government through an illegal pricing scheme.

VMware, a market leader in cloud-based virtualization technology, was sued by the U.S. Department of Justice and its former sales executive Dane Smith, who was represented by the Burlingame-based firm Cotchett, Pitre & McCarthy.

The settlement is the result of a nearly five-year investigation unsealed Tuesday and represents one of the largest False Claims Act resolutions against a tech company in history, said Niall McCarthy.

In the 2011 suit, Smith alleges he was unfairly terminated and even feared for his life after raising concerns to his superiors that the company was violating federal law by charging the government more than its commercial clients.

McCarthy hailed the settlement against one of San Mateo and Santa Clara counties’ largest employers as a win for Bay Area tech workers and taxpayers.

“The overarching issue here is Silicon Valley is driven more by money than by innovation. So as a result, companies in Silicon Valley who have contracts with the government routinely overcharge the government. This case, to me, is paving the way for other whistleblowers in tech companies to come forward and expose fraud,” McCarthy said.

The lucrative government contacts with the U.S. General Services Administration and U.S. Department of Defense, earned VMware nearly $142 million in three years alone, according to the suit. However, the actual amount in question is somewhere between $50 million and $100 million, McCarthy said.

VMware reported $6 billion in revenue last year and employs nearly 18,000 people across the globe, according to its website.

The settlement was not an admission of guilt and VMware fully cooperated with the U.S. Department of Justice’s investigation covering its practices between 2006 and 2013, a VMware spokesman wrote in an email.

“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 spokesman wrote.

Based on the False Claims Act, VMware should have disclosed its inconsistent pricing to the government so as to ensure taxpayers receive the best available savings, according to the suit.

VMware paid the settlement Tuesday and Smith is entitled to between 15 percent and 25 percent of the award. The exact amount Smith will receive has yet to be negotiated and the remainder will go to the federal government, McCarthy said.

A resident of Southern California, Smith has since changed careers. After alerting his superiors of what he perceived to be illegal company practices, Smith began to fear for his safety and even told his wife where he had hidden evidence and what to do with it if something were “to happen to him” while on a business trip, McCarthy said.

Carahsoft Technology Corporation, a distributor and alleged subsidiary of VMware, is also named in the lawsuit that claims the secondary company was intentionally created to protect the Palo Alto firm from liability.

Citing a slew of emails from top executives and even an internal survey asking employees whether they believed there was misconduct, the lawsuit alleges the firm intentionally defrauded the government... (To read the entire article, please click HERE)