Former Employee Alleges That Office Depot Overcharged Gov. Agencies

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Former Employee Alleges That Office Depot Overcharged Gov. Agencies
Office Depot Lawsuit Set for Mediation

By Marcia Heroux Pounds, Sun Sentinel

Office Depot is heading to mediation in a 5-year-old lawsuit filed by a former employee who alleged that the company overcharged government agencies.

David Sherwin, a former business account manager, died March 16 at age 59 after a long illness. But his estate and the state of California — the two plaintiffs in the suit — continue to pursue it.

 

The parties will go to voluntary mediation June 25, Office Depot revealed in a recent filing with the U.S. Securities and Exchange Commission. If a settlement can't be reached, a trial is scheduled in California Superior Court in July 2015.

"Office Depot denies the allegations set forth in this lawsuit, and we intend to vigorously defend it," Karen Denning, spokeswoman for Boca Raton-based Office Depot, said in an e-mail.

The Phillips & Cohen law firm, lead counsel for Sherwin, had no comment on the lawsuit.

The lawsuit alleges that Office Depot violated its contract for notepads, calendars, binders, furniture and other office supplies from 2001 to 2011. Under the contract, Office Depot provided supplies to cities, counties, school districts and other public entities.

Office Depot warns in its SEC filing that California and Sherwin's estate might demand payments during mediation that would "have a material adverse effect on our results of operations and cash flows."

The nation's No. 2 office-supply retailer is trying to stabilize its business after two years of losing money. New chief executive Roland Smith announced in May that Office Depot would close 400 U.S. stores by 2016.

Among other things, Smith inherits the California lawsuit and similar allegations from other government agencies, including a U.S. Department of Justice investigation launched in 2011. Office Depot said it is cooperating in that investigation.

Sales of office supplies to government agencies has been a major component of Office Depot's U.S. business, the company noted in its SEC filing last month.

Denning said Office Depot several years ago instituted procedures to monitor public-sector contracts "to ensure that we enter into agreements that are clear and unambiguous."

Sherwin said he was fired in 2008 after reporting to his superiors that Office Depot was overcharging. Office Depot declined to comment on why Sherwin left the company.

In 2010, a top Office Depot executive took Sherwin to task in a YouTube video, after the company reached a $4.5 million settlement with Florida on overcharging allegations.

Steve Schmidt, who headed the government contracting division, called Sherwin a "disgruntled employee" in the video. He said Sherwin was taking credit for resolving an issue that the company had previously identified and sought to correct.

Sherwin e-mailed a response to the Sun Sentinel that day, saying the important thing was that "taxpayers are getting their money back."

Schmidt currently runs the company's international division.

California and Florida were not the only states that complained about overcharging. Office Depot began acknowledging in regulatory filings in 2009 that it was cooperating with investigations by attorneys general in Florida, Texas and Missouri in "civil investigations regarding our pricing practices that relate primarily to government customers."

Office Depot settled with Florida without admitting or denying wrongdoing. Other state and city auditors began checking their records and making similar claims. In May, New York State said it reached a $475,000 settlement with Office Depot on allegations of improper charges for office supplies.

Most of the state and city complaints arose from a national purchasing agreement brokered through a nonprofit called U.S. Communities Government Purchasing Alliance, based in Walnut Creek, Calif. The contract was supposed to save government agencies money by piggybacking onto deals already established with Office Depot.

Sherwin's lawsuit claims Office Depot violated its contract by charging higher prices to parties through the contract than it offered other public entities in California.

The contract guaranteed the "most favorable public entity pricing," but Office Depot shifted customers to more expensive options, misrepresented prices, failed to apply manufacturer rebates and discontinued core items they knew would be ordered under the more expensive wholesale price, according to the lawsuit.

Denning, Office Depot's spokeswoman, declined to comment on specific allegations in the lawsuit.

The lawsuit was brought under the California False Claims Act, which allows a whistle-blower — or in this case, the estate — to be awarded a percentage of damages if funds are recovered for the government. The lawsuit seeks triple damages sustained by the parties and a $10,000 penalty for each violation of California law.

Morningstar analyst Liang Feng said he's not overly concerned about the outcome of the lawsuit.

"Even if it's a multimillion-dollar fine, it's not material to a multibillion-dollar corporation," he said.

But the outcome could affect a government agency's future decision about where to buy its office supplies.

"The next time the government looks at a contract, they might be more willing to look at Staples," he said.

After Houston's auditor alleged overcharges up to $6.6 million from 2006 to 2010 by Office Depot, the city switched to competitor OfficeMax, the Houston Chronicle reported in 2012.

Last year, Office Depot merged with OfficeMax.

Former Employee Alleges That Office Depot Overcharged Gov. Agencies
Office Depot Lawsuit Set for Mediation

By Marcia Heroux Pounds, Sun Sentinel

Office Depot is heading to mediation in a 5-year-old lawsuit filed by a former employee who alleged that the company overcharged government agencies.

David Sherwin, a former business account manager, died March 16 at age 59 after a long illness. But his estate and the state of California — the two plaintiffs in the suit — continue to pursue it.

 

The parties will go to voluntary mediation June 25, Office Depot revealed in a recent filing with the U.S. Securities and Exchange Commission. If a settlement can't be reached, a trial is scheduled in California Superior Court in July 2015.

"Office Depot denies the allegations set forth in this lawsuit, and we intend to vigorously defend it," Karen Denning, spokeswoman for Boca Raton-based Office Depot, said in an e-mail.

The Phillips & Cohen law firm, lead counsel for Sherwin, had no comment on the lawsuit.

The lawsuit alleges that Office Depot violated its contract for notepads, calendars, binders, furniture and other office supplies from 2001 to 2011. Under the contract, Office Depot provided supplies to cities, counties, school districts and other public entities.

Office Depot warns in its SEC filing that California and Sherwin's estate might demand payments during mediation that would "have a material adverse effect on our results of operations and cash flows."

The nation's No. 2 office-supply retailer is trying to stabilize its business after two years of losing money. New chief executive Roland Smith announced in May that Office Depot would close 400 U.S. stores by 2016.

Among other things, Smith inherits the California lawsuit and similar allegations from other government agencies, including a U.S. Department of Justice investigation launched in 2011. Office Depot said it is cooperating in that investigation.

Sales of office supplies to government agencies has been a major component of Office Depot's U.S. business, the company noted in its SEC filing last month.

Denning said Office Depot several years ago instituted procedures to monitor public-sector contracts "to ensure that we enter into agreements that are clear and unambiguous."

Sherwin said he was fired in 2008 after reporting to his superiors that Office Depot was overcharging. Office Depot declined to comment on why Sherwin left the company.

In 2010, a top Office Depot executive took Sherwin to task in a YouTube video, after the company reached a $4.5 million settlement with Florida on overcharging allegations.

Steve Schmidt, who headed the government contracting division, called Sherwin a "disgruntled employee" in the video. He said Sherwin was taking credit for resolving an issue that the company had previously identified and sought to correct.

Sherwin e-mailed a response to the Sun Sentinel that day, saying the important thing was that "taxpayers are getting their money back."

Schmidt currently runs the company's international division.

California and Florida were not the only states that complained about overcharging. Office Depot began acknowledging in regulatory filings in 2009 that it was cooperating with investigations by attorneys general in Florida, Texas and Missouri in "civil investigations regarding our pricing practices that relate primarily to government customers."

Office Depot settled with Florida without admitting or denying wrongdoing. Other state and city auditors began checking their records and making similar claims. In May, New York State said it reached a $475,000 settlement with Office Depot on allegations of improper charges for office supplies.

Most of the state and city complaints arose from a national purchasing agreement brokered through a nonprofit called U.S. Communities Government Purchasing Alliance, based in Walnut Creek, Calif. The contract was supposed to save government agencies money by piggybacking onto deals already established with Office Depot.

Sherwin's lawsuit claims Office Depot violated its contract by charging higher prices to parties through the contract than it offered other public entities in California.

The contract guaranteed the "most favorable public entity pricing," but Office Depot shifted customers to more expensive options, misrepresented prices, failed to apply manufacturer rebates and discontinued core items they knew would be ordered under the more expensive wholesale price, according to the lawsuit.

Denning, Office Depot's spokeswoman, declined to comment on specific allegations in the lawsuit.

The lawsuit was brought under the California False Claims Act, which allows a whistle-blower — or in this case, the estate — to be awarded a percentage of damages if funds are recovered for the government. The lawsuit seeks triple damages sustained by the parties and a $10,000 penalty for each violation of California law.

Morningstar analyst Liang Feng said he's not overly concerned about the outcome of the lawsuit.

"Even if it's a multimillion-dollar fine, it's not material to a multibillion-dollar corporation," he said.

But the outcome could affect a government agency's future decision about where to buy its office supplies.

"The next time the government looks at a contract, they might be more willing to look at Staples," he said.

After Houston's auditor alleged overcharges up to $6.6 million from 2006 to 2010 by Office Depot, the city switched to competitor OfficeMax, the Houston Chronicle reported in 2012.

Last year, Office Depot merged with OfficeMax.

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June 12, 2014 at 11:50 AM