State of California ex. rel David Sherwin v. Office Depot, Inc., Case No. BC 410135 (Los Angeles County Superior Court): In 2009, David Sherwin, a former Account Manager III at Office Depot’s Business Solutions Division, filed under seal a qui tam action on behalf of the State of California alleging that Office Depot violated the California False Claims Act, Government Code section 12650 et seq (CFCA), by overcharging for office and classroom supplies pursuant to a contract with the U.S. Communities Government Purchasing Alliance (U.S. Communities). The court recently unsealed the action, and public entities on whose behalf Sherwin brought the action intervened and filed their own complaints in intervention largely adopting the relator’s original allegations and adding claims for breach of contract and fraud.
The complaints in intervention allege that U.S. Communities selected Los Angeles County to negotiate and manage on its behalf a contract with Office Depot pursuant to which state and local public entities purchased office and classroom supplies from Office Depot (USC Contract) and Office Depot earned $122 million in annual revenue. Intervenors allege five different practices by which Office Depot overcharged the public entities pursuant to the USC Contract.
First, the USC Contract guaranteed the public entities “most favored public entity” pricing, fixed price discounts and protections against price increases. The public entities relied on these guarantees both in their marketing of the USC Contract and adoption of it without competitive bidding. However, Office Depot negotiated separate contracts with other public entities outside U.S. Communities at prices lower than those charged pursuant to the USC Contract. Office Depot did not incorporate these lower prices into the USC Contract.
Second, Office Depot marketed an alternative pricing model under the USC Contract that it knew was more expensive than the USC Contract’s original pricing model, and sometimes switched the public entities to the more expensive model without their knowledge or consent.
Third, Office Depot overstated its costs for certain items, allowing it to charge the public entities its minimum “floor” price for those items, when it should have charged them its normal discount price. Specifically, Office Depot padded its invoiced cost from the manufacturer with other costs and failed to factor in manufacturer rebates that it received for the items.
Fourth, Office Depot increased its list prices more than twice a year, as permitted by the USC Contract.
Finally, Office Depot improperly discontinued heavily discounted items knowing that the public entities would order the same items at the more expensive discounted wholesale price.
According to the complaints in intervention, the above five practices rendered the claims that Office Depot presented to the public entities pursuant to the USC Contract false and fraudulent in violation of the CFCA. Further, the public entities allege that Office Depot knowingly failed to disclose material facts in order to obtain payment and approval from the public entities, and knowingly made and used false records and statements, which omitted material facts in order to induce the public entities to pay the false and fraudulent claims. The public entities seek three times the amount of damages that they sustained and a $10,000 penalty for each false claim.
On February 8, 2013, Office Depot moved to dismiss Sherwin’s and Intervenors’ CFCA and fraud claims on the grounds that they failed to allege false claims or comply with the particularity requirements of Federal Rule of Civil Procedure 9(b). Office Depot also moved to dismiss Intervenors’ breach of contract claims. The parties fully briefed the motion, and, on April 22, 2013, three days before the hearing date, the court denied the motion without prejudice because the briefing was “too cumbersome” and it did not appear that “the parties made a good faith effort to resolve any of the disputed issues.” The court ordered the parties to meet and confer about Office Depot’s challenges to the complaint to narrow and crystallize the issues to be presented in any future motion to dismiss. The court also held that it was not persuaded that it had subject matter jurisdiction, and ordered Office Depot and Sherwin to show cause, in writing, by May 2 establishing the basis for the court’s subject matter jurisdiction.