Date of Settlement:

December 13.

Type of Action:

Civil and administrative.

Injuries:

Breach of contract.

Plaintiffs Attorneys:

Shelley R. Smith, city solicitor, City of Philadelphia Law Department.

Defense Counsel:

John C. Ryan, Aramark, Philadelphia.

Comment:

A branch of the food services provider Aramark and a minority-owned business have settled a lawsuit with the city of Philadelphia for $400,000 after the city alleged the companies engaged in a “circular billing” scheme in which Aramark overstated the amount of business it drove to Strother Enterprises to meet the city’s minority-business requirements and anti-discrimination policies.

As part of the settlement, both Aramark Correctional Services and Strother denied fault for inaccurate data provided to the city regarding the amount of business for which Aramark used Strother in a contract with the city’s prison system.

According to a settlement agreement signed by Aramark’s senior vice president and associate general counsel, John C. Ryan, on December 13, Aramark agreed to pay the city $352,000. Strother will pay the other $48,000.

ACS agreed to change its reporting to the city to “more clearly explain its financial relationship with Strother.” Additionally, ACS has put in place a more strict compliance program regarding identifying, retaining and paying qualified minority business for its contracts with the city.

According to a press release from the city, the Office of Inspector General started investigating ACS and Strother in October of last year after the City Controller’s Office noticed evidence of the circular billing arrangement.

The city required ACS to meet a minority, women and disabled business (M/W/DSBE) entity participation range of 20 to 25 percent, the release said. If the food services giant made a good-faith effort, the release said, the city could have granted it a reduction.

“However, ACS did not attempt to demonstrate a good-faith showing, according to the OIG’s investigation, nor did the company apply for a participation reduction,” the release said. “Instead, the OIG found, ACS used a circular billing arrangement to create the appearance of compliance.”

The circular billing arrangement, according to the agreement, resulted from ACS making payments to Strother “to compensate Strother for payments it made to ACS for costs of food purchased from ACS.”

The payments did not increase the city’s costs, but they did overstate Strother’s participation (overstating Strother’s revenue by more than $2 million, the release said), which apparently allowed ACS to circumvent the city’s participation requirement between the summer of 2009 and the summer of 2010.

The settlement agreement, released on the city of Philadelphia’s website, said the city believed it had “certain civil and administrative claims” against Aramark Correctional Services and Strother for the conduct.

ACS and Strother, however, deny any wrongdoing. According to the settlement agreement, ACS maintained that Strother’s purchase of food from the provider was an appropriate way to meet the contract it had with the city’s prison system, particularly those related to prison security and consistency served at Philadelphia Prison System facilities.

A spokesperson for Aramark provided this statement: “Aramark Correctional Services worked cooperatively with the Inspector General’s Office to resolve a reporting discrepancy related to our contract with Philadelphia Prison System (PPS). We have corrected the issue and implemented a comprehensive compliance program concerning the use of M/W/DSBEs. Aramark fully supports M/W/DSBE ordinances and believes they are vital in fostering the growth of minority, women and disabled-owned businesses.”

In an emailed statement, Strother President Robert Strother said: “To avoid delay, inconvenience, and the expense of protracted litigation, Strother Enterprises Inc. agreed to sign a no fault settlement agreement with the OIG and ACS. SEI fully cooperated with all requests of the OIG and maintains an open, transparent relationship with all of its customers. While SEI has resolved this matter, SEI violated no law. Further, SEI has not and will not compromise its stellar reputation earned over a 20-year period.”

Ben Present can be contacted at 215-557-2315 or bpresent@alm.com. Follow him on Twitter @BPresentTLI.