Dennis Herrera Throws Down – Office Depot Audit Reveals Millions in Overcharges

San Francisco’s recent audit of office materials supplier Office Depot has prompted City Attorney Dennis J. Herrera to take action today. See the deets below and the .pdf after the jump.

And follow all the action on the Twitter.

San Francisco’s Happy Warrior certainly is unhappy with the Office Depot today.

Herrera Issues Demand Letter to Office Depot in Wake of S.F. Controller’s Audit

City Attorney prepared to ‘vigorously pursue’ $5.75 million in overcharges plus interest, costs and attorney’s fees

City Attorney Dennis Herrera has issued a demand letter to Office Depot expressing his intention to “vigorously pursue” at least $5.75 million in overcharges together with interest, attorney’s fees, and costs incurred by the City in conducting the audit. The demand letter follows the release of an exhaustive audit report by the Office of City Controller Ben Rosenfield. The Controller’s 96-page audit concluded that, among other overcharges, the Boca Raton, Fla.-based office products supplier failed to provide the City with contractually mandated discounts for items covered by the 5-year contract, which was valued at some $18 million.

Wrote Herrera: “Any resolution of this matter must include compensation to the City for the costs of the audit, and for attorney’s fees, as well as full reimbursement for price overcharges, with interest…If the City is unable to obtain a satisfactory informal resolution of this matter, I will not hesitate to pursue the matter in court. Further, if court action becomes necessary, rest assured that my office will vigorously pursue the City’s claims to the fullest, including seeking civil penalties and debarment, if appropriate.”

CiTY AND COUNTY OF SAN FRANCISCO OFFICE OF THE CiTY ATTORNEY
 

 DENNIS
 

 

 
 

 
J. HERRERA
 
 

City Attorney
 

December 21, 2009

Stephen Calkins 
 

General Counsel
Office Depot
6600 North Military Trail
Boca Raton, FL 33496
Re: Office Depot Contract With City
Dear Mr. Calkins:
On December 18, the Controller ofthe City and County of San Francisco issued an audit
report ofthe City’s contract with Office Depot. A copy ofthe report is enclosed. The audit
report concludes that Office Depot has overcharged the City by at least $5.75 million over the
course of 5 years on an $18 million contract. On the basis of my review ofthe audit report,
including Office Depot’s written responses, and consultation with the City’s Office of Contract
Administration, I now write to demand that Office Depot reimburse the City the total amount of
the overcharges, with interest, plus the costs the City incurred in conducting the audit, and
attorney’s fees.
The audit report concludes that at least $4.4 million, the majority ofthe overcharges,
resulted from Office Depot’s failure to provide the contractually mandated discount for all items
covered by the contract. The contract provides for only 2 pricing structures for items purchased
under the contract: (l) a list of enumerated “Section A” items, for each ofwhich the contract
specifies a price that was to remain unchanged over the term ofthe contract; and (2) all other
items to be purchased under the contract – “Section B” items – for which the price was to be
determined by reference to a specified percentage discount offthe manufacturer’s list price for
each of 16 categories of supplies. During the course ofthe contract, Office Depot unilaterally
created a third, contractually-unauthorized structure for pricing a large number of items
purchased by the City. These items – which constitute half ofthe City’s total purchases under
the contract – were entitled to the average weighted discount of 70% for Section B items. But
Office Depot billed the City for these miscategorized items at an average of only a 46% discount.
Office Depot responded to the draft audit report by asserting that it “understood that the Contract
permitted the sale of items that were not part of the Contract” and “thus, Office Depot was
entitled to determine a price for these items.” However, both the contract and correspondence
between Office Depot and the City’s Office of Contract Administration firmly establish that the
parties did not intend that the contract would permit such a practice. Section 21.b ofthe contract
states that the City and its employees and officers are not authorized to request Office Depot to
provide materials that are beyond the scope agreed upon in the contract unless the agreement is
amended in writing, and further provides that the City is not required to reimburse the Contractor
for supplies which are beyond the scope agreed upon in the contract. Contemporaneous
correspondence from Office Depot representatives to the Office of Contract Administration
states the parties’ understanding that the on-line ordering website established by Office Depot
under the contract would include only Section A and Section B items available under the
contract, and that non-contract items would be purchased separately pursuant to the Office of
Contract Administration’s purchase order guidelines.   
 

In addition, Office Depot has overcharged the City by at least $1.3 million for Section B

 

items by imposing an improper and undisclosed price floor that had the effect of reducing the 
percentage discount required by the contract. Beginning in February 2007, without notifying the
City, Office. Depot began imposing price floors on the items entitled to discounts of at least 70%.
The City first learned ofthe price floors in mid-2008 when Office Depot cited them in its
response to an informal audit ofthe City’s Office Depot contract by one of Office Depot’s
competitors. Office Depot’s response to that competitor’s audit spurred the Controller and the
Office of Contract Administration to initiate the audit that was released on December 18, 2009.
Office Depot did not include price floors in its bid for the contract in 2004. If it had done so, the
Office ofContract Administration would have taken the price floors into account when
determining the low bidder for the contract, and it is possible that Office Depot would not have
qualified as the low bidder and been awarded the contract. Moreover, the contract provides that
imposition of “a ‘floor’ above cost after [bid] submittal will automatically disqualify the vendor
from an award or accordingly be subject to immediate termination ofthe contract.” Office Depot
has failed to provide data to the auditors showing that the floors it imposed were not above cost.
The Controller’s audit finds that Office Depot breached the contract in other ways as well,
including increasing prices without proper notification to the City as required by the contract,
charging higher prices for Section A items than were authorized by the contract, and’failing to
ensure that Section A items or acceptable alternatives remained available for purchase at Section
A prices during the term ofthe contract. Further, the audit’s figure of$5.75 million does not
include overcharges that occurred during August 1,2009 through November 30, 3009, as the
auditors did not have data for the City’s purchases during these fmal4 months ofthe contract.
Moreover, the City has incurred the cost of conducting a detailed audit ofthe tens of
thousands ofpurchases made under the contract. Any resolution ofthis matter must include
compensation to the City for the costs ofthe audit, and for attorney’s fees, as well as full
reimbursement for price overcharges, with interest. My office has asked the Controller to
provide a statement of costs ofthe audit. I will notify you ofthis figure, as well as the total
attorney’s fees incurred to date, in a future letter.
If the City is unable to obtain a satisfactory informal resolution of this matter, I will not
hesitate to pursue the matter in court. Further, if court action becomes necessary, rest assured
that my office will vigorously pursue the City’s claims to the fullest, including seeking civil
penalties and debarment, if appropriate.
 

 

/s/ Dennis J. Herrera

  

cc: Heather Stern (by first class mail
e-mail: Heather.Stern at www.officedepot.com ) (with enclosure)Ben Rosenfield, Controller (without enclosure) 


 

 

 

Bill Jones, Assistant Director of Purchasing (without enclosure)

 

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