Houston, we have a problem

Texas city is the latest public sector customer to accuse Office Depot of overcharging.

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An  audit from the city of Houston in the US has identified overcharging of up to $6.6 million by Office Depot. A report released on 7 December by Houston’s City Controller said that overcharges in a four-and-a-half-year period to the end of 2010 ranged from $1.7-$6.6 million. The high end of that figure represents over 34% of the total contract spend.

Houston purchased its office supplies using Depot’s US Communities contract which has been at the centre of numerous overcharging claims in the last four years, and also has a whistleblower case and Department of Justice investigation hanging over it.

In his report, Houston Controller Ron Green accused Depot of “a lack of cooperation”, delaying its responses to requests for information and “discrepancies, anomalies and inconsistencies in the data provided”, which forced his team to adopt three different methods to carry out the audit.

“Clearly, the data provided to us during the audit was incomplete to the extent that we had to modify our test work,” said Green in a press release, adding: “Regardless of the methodology, the city is owed a significant amount of money from the vendor.”

‘Pulling teeth’

Speaking to the local press, Houston’s Auditor David Schroeder said that trying to get information out of Depot was like “pulling teeth”, although the reseller claims it had “cooperated”. Depot – as in the past – also disagreed with the audit’s findings.

“The City of Houston auditor’s assertion that the city was entitled to certain additional discounts is simply wrong,” the company stated. “The auditor’s report rehashes old claims, originally made by a disgruntled former employee, that are based on inaccurate legal interpretations of Office Depot’s former contract that the city was not a party to. These very claims were considered and expressly rejected by the Florida Attorney General’s office back in 2010, after it conducted a two-year investigation into the same allegations.”

Depot has hired big-hitting Washington law firm Williams & Connolly to represent it. Houston’s Schroeder said he felt that the whole audit process “was set up for litigation”

Historically, Depot has reached out of court settlements with public agencies, but now may be ‘make-or-break’ time over the question of whether Depot was in compliance with the ‘most favoured’ government pricing provision in its US Communities contract. That is one of the key issues in David Sherwin’s whistleblower lawsuit and a ruling on this question is going to have to be made eventually, most likely in the next few months, if that case goes to trial. With $500 million potentially at stake, and Williams & Connolly on board, it looks like Depot could be bracing itself for a legal showdown.

Contract interpretation

Controversially, in its response to the Houston audit, Williams & Connolly contends that most favoured government pricing on the US Communities contract was only applicable to LA County, the lead agency, and not to other participating agencies. 

Houston’s audit division retorted: “To take the position that LA County had more favourable terms than the participating agencies makes the [cooperative contract] of no benefit to any public agency.” 

The Williams & Connolly response also stated that Depot conducted its own analysis of the Houston contract and determined that “genuine price discrepancies resulted in a small number of overcharges” amounting to less than 1% of total purchases. Furthermore, these overcharges were “dwarfed” by discrepancies resulting in “substantially larger undercharges”. However, “as part of its commitment to pricing accuracy and customer satisfaction” Depot would reimburse the overcharges.

That sounds like the door is still open for a settlement, but there is a big gap between Depot’s ‘gesture’ to refund around $190,000 and Houston’s claim of $6.6 million.

The audit refers on several occasions to the fact that Depot agreed to pay the city of San Francisco around 80% of its reported claim, so perhaps Houston will hold out for a payment of around $5 million.

It’s unlikely that Houston would want to begin onerous legal proceedings, but perhaps Depot would now see that as the preferred option if it feels that it has no choice but to try to obtain a favourable ruling on the most favoured government pricing issue.

Hiring a powerhouse law firm that defended Oliver North in the Iran-Contra scandal and US President Bill Clinton at his impeachment trial might be the signal that Depot intends to do just that.