Sodexo, Inc. settled with the New York Attorney General’s office for $20 million this July in a case Sodexo had been keeping rebates that should have gone back to New York state government programs.
John Carciero filed the lawsuit in 2006, along with his brother Jay, who is deceased. Both were general managers for Sodexo in Massachusetts.
After John Carciero blew the whistle internally on Sodexo’s unlawful retention of rebates, the company fired him. Jay Carciero was retaliated against, demoted and later fired for the same reason. In 2006, the brothers filed a ‘qui tam’ whistle-blower lawsuit against Sodexo under the federal False Claims Act and added claims under similar state laws, including New York’s.
Their claims that Sodexo had defrauded New York government programs were resolved as part of the settlement.
The rebates, known as ‘off-invoice rebates,’ were not passed on to Sodexo’s contracted clients in the health care, corporate, government or education areas and, in at least one instance, Binghamton University. There was not a specific mention of the costs BU incurred as a result of these practices.
‘The millions of dollars from the rebates should have gone back to schools and other government clients,’ John Carciero said. ‘Sodexo betrayed the trust of the clients it was supposed to serve, and hurt taxpayers at the same time.’
Although rebates are generally mentioned in agreements with Sodexo and its customers, Sodexo did not regularly report the rebate amounts or the vendors that paid them from 2004 to 2009. Investigations in 2009 from the office of the attorney general of New York revealed that Sodexo failed to inform clients ‘ particularly in the K-12 and SUNY system ‘ of certain rebates from food suppliers and vendors as required by their contracts.
This allowed Sodexo, in some cases, to receive hundreds of thousands of dollars in financial benefits that reduced its cost of providing food and services, but made customers pay more than they had to for food and supplies, including school lunch programs and other food services.
‘One of the significant negative outcomes of the kickbacks is in the hidden costs,’ said Colette Matzzie, an attorney from Phillips & Cohen LLP, a law firm specializing in representing whistle-blowers. ‘The cost of the kickbacks is often passed on to consumers, ending up with inflated prices, but not much improvement in quality.’
Matzzie was one of two lawyers who represented the Carcieros in the settlement.
‘Our lawsuit alleges that Sodexo takes advantage of its market position to enrich itself with hidden side payments and kickbacks,’ Matzzie said. ‘New York law prohibits food vendors from retaining such rebates, recognizing that vendors would otherwise have an incentive to steer their clients to purchase products from companies with the largest off-invoice rebates rather than those with the best products at the lowest prices.’
Katrina Miner, Sodexo’s marketing manager at BU, referred all questions on the matter to Sodexo’s corporate headquarters, Sodexo, Inc. USA.
Monica Zimmer, public relations director at Sodexo, Inc. USA, wrote in an official response that consumer trust is important to Sodexo and that the company fully cooperated with the attorney general’s investigation in New York.
‘Sodexo takes our responsibility to public school districts seriously,’ Zimmer wrote in an e-mail. ‘The main issue raised in New York was that due to an error in administration, Sodexo inadvertently operated three private schools outside of its compliance requirements for school districts which participate in the national school lunch program. Sodexo has corrected that matter.’
According to the settlement agreement between the Carcieros and Sodexo, the accounts of three overcharged K-12 schools were transferred from Sodexo’s Corporate Services to its School Services division, which specialized in school lunch service.
In addition to the $20 million to be paid to the state of New York, Sodexo has agreed to hire an independent consultant for the next three fiscal years to examine the pass-through of rebates to K-12 grade schools in New York. An additional fee of $50,000 or less will be paid to the consultant if Sodexo is still believed to retain rebates.
New York is not the only state where Sodexo accepts rebates, Matzzie noted.
‘With so many state and local governments short on funds, we hope that other governments will look to what New York has done for its citizens and make sure that Sodexo and other food vendors pass along savings to those who are paying the bills,’ she said.