WEB EXCLUSIVE: Lawsuit against Grainger says distributor violated false claims and trade acts

by Industrial Distribution staff -- Industrial Distribution, 2/11/2008 6:33:00 AM

W.W. Grainger Inc. is accused of violating two federal trade acts and the False Claims Act in a lawsuit filed by a former employee, according to a copy of the lawsuit obtained by INDUSTRIAL DISTRIBUTION.

The federal government has also joined the action and will file its own claims against Grainger within the next six months, the lawsuit states.

The suit, USA et al VS. W.W. Grainger Inc., which was filed by former employee Brian Holbrook in November 2006, alleges that Grainger gouged the federal General Services Administration (GSA) by routinely charging more than the 26 percent markup called for in its contract.

The suit also claims that the Lake Forest, Ill.-based broad-line MRO distributor sold private-labeled products from countries such as China and Taiwan, in violation of the federal Buy American and Trade Agreements acts.

Grainger responded to the lawsuit in a statement Feb. 8, saying the company was notified of the contract non-compliance issue on Dec. 13, 2007, by the Civil Division of the U.S. Department of Justice. According to the statement, the Justice Department cited its concern that Grainger had not complied with the GSA contract’s disclosure obligations and pricing provisions and had potentially overcharged government customers under the contract.

The company said the Justice Department indicated its willingness to discuss the matter and that the company expects a meeting to be scheduled soon.

“The company takes this allegation seriously. Although Grainger believes the company has fully complied with its contract, it intends to carefully review the allegations to ensure it meets its obligations to its customers,” the company said in the statement.

Grainger spokesman Robb Kristopher told ID that the company is "working through the process" with the Justice Department.

"We believe we are in compliance," Kristopher said. "We are—and always will be—committed to doing what is right by our customers."

Holbrook’s lawyer, Alan Olson, did not reply to a request for comment.

According to the lawsuit, Holbrook was Grainger’s district sales manager of government sales for Wisconsin, Minnesota, Iowa, Nebraska, North Dakota and South Dakota. That territory accounted for $18 million in annual government sales, 2.4 percent of Grainger’s total sales to the government of roughly $750 million.

Holbrook discovered in July 2005 that the company sold a laser marking machine to the government for $27,134.10—a 97 percent markup over the $18,000 Grainger paid for the device and far in excess of the 26 percent, $4,680 markup called for in the GSA contract, according to the suit.

Holbrook then “made repeated efforts in the course of fulfilling his job duties to specifically identify each fraudulent sale by Grainger to the government, but was prevented by Grainger from accessing the records he needed,” according to the lawsuit.

He complained to his supervisor and other Grainger managers about the allegedly fraudulent sales in July and August of 2005, asking the company to audit its government sales, inform the Government Contracting Officer of the alleged violations and specify any remedial action Grainger planned to take, the lawsuit states.

The company responded to Holbrook’s complaints by crediting about 40 randomly identified accounts, but in at least one case issued the credit to a government credit card it knew to be invalid, the lawsuit claims.

The suit also accuses the company’s Hong Kong-based Grainger Global Sourcing (GGS) business, which is a direct importer of more than 4,500 products, of violating federal trade acts that prohibit the sale of items made in certain countries to the government.

“Grainger re-labels products manufactured in non-Trade Agreement countries, publishes them for sale in their catalogs, and sells them to the U.S. government on an ongoing basis,” the lawsuit states, adding that brands including Westward, Condor, Blackhawk, LumaPro and Dayton are made in China, Taiwan and other countries not approved as reciprocal trade partners in the Trade Agreements Act or the Buy American Act.

The lawsuit seeks damages for the U.S. government of three times the amount sustained by the plaintiffs and an award of 15 percent to 25 percent of any proceeds or settlement from the case for Holbrook. It also seeks payment from Grainger of “reasonable expenses” and legal fees for Holbrook.

Grainger ranked fourth on INDUSTRIAL DISTRIBUTION’s 2007 Big 50 list of distributors, with 2006 sales of $5.9 billion.