1994 — A look into the past: Kmart faces class action lawsuit

(Editor's Note: This story is part of our #TireBiz30 in which we feature one archived story every day of September to celebrate Tire Business' 30th anniversary. Each story represents one of the most relevant news story published in our pages for that year.)

TULSA, Okla.—A lawsuit charging Kmart Corp. with deliberately defrauding automotive service customers across the country has been granted class action status by an Oklahoma judge.

If successful, the suit could cost the nation's second-largest retailer billions of dollars in damages.

Tulsa County District Judge Ronald Shaffer entered an order on Aug. 26 certifying a national class action on the basis of allegations by a pair of Oklahoma women and a Texas man that Kmart "engaged in a systematic scheme of fraud relating to the sale of automotive repairs and services" in its more than 1,000 automotive repair centers nationwide.

Kmart has more than 2,500 retail stores nationwide, but not all provide auto service.

Included in the class action are all businesses or consumers who purchased vehicle repairs-including parts and services-from Kmart's automotive division from July 7, 1988, to the Aug. 26 date.

During that period, Kmart's repair centers averaged nearly $400 million in sales to more than seven million customers annually, the suit said.

The giant retailer, based in Troy, Mich., reported total sales in excess of $35 billion for 1992.

Last November, the U.S. District Court in Dallas consolidated into one action a suit filed July 9, 1993, against Kmart by a Tulsa, Okla., attorney, and a similar one filed in Austin, Texas.

The class action also named Joseph E. Antonini, president, CEO and chairman of Kmart, charging that he directed a "corporate-wide fraudulent scheme" that included pay incentives and a quota system for mechanics.

A spokeswoman said Kmart believes "the trial court's decision is in error and we plan to immediately ask the Oklahoma Supreme Court to review the case."

Shawn Kahle, Kmart's divisional vice president for corporate and international communications, emphasized that the lower court's decision "has nothing to do with whether or not there was any wrongdoing on Kmart's behalf."

She said the company "has never had any sort of significant problems in our auto service areas, and we have very specific and longstanding company policies that would forbid any kind of dishonest behavior."

Kmart is hoping the state Supreme Court will rule that the case has no merit, she added.

Court papers identified the original plaintiffs as Tulsa residents Lorine Bunch and Patty Walker, and Ron Jones of Austin, Texas.

According to the lawsuit, Ms. Bunch brought her auto to a Tulsa Kmart auto service center because of a water leak and was told the car needed new hoses and a new water pump.

She was charged $227.04 for installation of a water pump she alleges was never installed.

A Kmart repair center allegedly told Ms. Walker her car's brakes were in such bad condition they could cause her to have an accident. She authorized a brake job.

She claims a Kmart mechanic called later saying her car also needed new struts and shocks. Because she had a warranty on the struts and shocks from a Goodyear shop, she refused the Kmart mechanic's recommendation.

Instead, she returned to the Goodyear store where, she said, the struts and shocks were again inspected and found to be in perfect condition.

Mr. Jones, who operates Handy Andy Janitorial, claims he had in excess of 16 business vehicles serviced and repaired by Kmart, at a cost of more than $10,000. The suit alleges he was overcharged as well as charged for unnecessary parts and services.

Now that the suit has cleared the class action hurdle, an attorney handling the case for the plaintiffs said he will submit to the Tulsa court a plan to notify the public of the class action.

Within two weeks, James Clinton Garland, counsel to the Tulsa law firm Frasier & Frasier, said he expects approval to begin advertising the suit in 17 of the country's largest newspapers.

He also will mail notices to thousands of individual Kmart auto service customers and fleet accounts he has been able to identify from an extensive search of Kmart corporate records.

The newspaper ads, he said, "will bring out literally hundreds of thousands of people."

Mr. Garland also has a motion pending with the court to force Kmart to produce numerous documents he said the retailer has refused to provide.

"They've got a hell of a lot to hide," Mr. Garland told TIRE BUSINESS, "and I can't much blame them for not wanting to give (the documents) to us. But they're going to, one way or another."

Among the almost 4 million documents Mr. Garland has already obtained from Kmart-and he is seeking approximately 80 million more, including computer records-are internal auditors' reports to Kmart's management.

He claims those reports, which cover only a two- to three-year period from a sampling of Kmart stores, show that "some 26 percent of their stores were consistently overcharging auto service customers. We're convinced it's even greater than that.

"Kmart's own auditors were bringing it to the board's attention, and they didn't do a damn thing about it. They've analyzed their own thefts internally and encouraged them. But we're going to undress (them) now."

Although Kmart attempted to retrieve those reports, Mr. Garland said a judge in Dallas recently ruled that the documents are admissable as evidence.

Meanwhile, the attorney said the discovery process continues.

For months he and a team have sifted through a staggering amount of material from Kmart, while attempting to analyze service data from at least 101 Kmart auto centers across the nation.

He said he has identified tens of thousands of consumers who have been "ripped off" by Kmart.

The service fraud allegedly falls into three categories:

Basic overcharges-"Sometimes the labor rates that are charged, depending on how far behind in their quotas Kmart's mechanics are, may be 300 to 400 percent of what they base their labor charges on," he said.

No specifications listed on invoices-"Almost universally" Kmart does not put specifications on invoices for what is needed on a vehicle before a customer's order is taken, he charged. "They do not do that because, if they sell a full brake job that includes all of the (parts) connected to the repair, they might just put brake shoes on and charge for everything else."

Work billed but not done-"We've discovered many, many instances where Kmart sells items that they don't even put on a car," he said, "but still charge the customer as if the work was done."

The attorney claimed he has also uncovered what he called one of Kmart's "favorite notations" on its auto service invoices: a nondescript code listed as CAR.

That stands for "clean and replace," he said-"make the old part look nice and shiny and put it back on the vehicle," but charge the customer for a new part.

Mr. Garland said Kmart mechanics admitted to him this situation has occurred. "We have (interviewed) over 100 current Kmart employees and ex-employees who have laid it out for us like it is.

"We didn't contact a one of them. When they (heard about) the lawsuit, they contacted us from all over the country."

The litigation came about by chance, when the attorney took on the wrongful discharge case of a former 27-year Kmart employee who asserted he was pressured to quit after repeatedly complaining to the company about its auto repair practices.

Mr. Garland's conservative estimate was that monetary damages against Kmart could easily reach at least $1.5 billion.

The lawsuit seeks customer reimbursement for the costs and expenses of completing any repairs that may still be necessary on vehicles, as well as the refund to class members of all sums paid for unnecessary or inappropriate parts and services.

It also asks for restitution for all amounts paid by the plaintiffs for repairs, together with interest from the date of payment for the services rendered.

Mr. Garland anticipates the case will be tried next spring.