A San Diego nutritional-supplement company is accusing Walgreens of coupon fraud, saying the nation’s largest drugstore chain sought to get reimbursed for coupons that had never been used by customers and appeared “freshly minted.”

Many of the coupons purportedly redeemed by customers were also in consecutive order when they arrived in bundles at the office of Rancho Bernardo-based Imagenetix.

Imagenetix is claiming in a federal lawsuit that the drugstore chain never got the coupons into customers’ hands, as promised, and printed them only to make money for its bottom line — claims the company denies.

“Although we don’t generally comment on the details of pending litigation, we take any allegations of misconduct seriously and investigate them thoroughly,” said Walgreens spokeswoman Vivika Panagiotakakos in an email from the company’s headquarters in Deerfield, Ill. “At this time, we have no reason to believe these allegations are true.”


Celadrin is a product developed by Imagenetix, a Rancho Bernardo business. The company sought to promote the nutritional supplement through Walgreens' in-house coupon program but now believes the program was mismanaged. — Earnie Grafton

The one-week promotion was aimed at getting customers to try Celadrin Inflame Away softgels, a healthy-joint supplement, essentially for free. A normally $20.99 bottle of capsules was on sale for $10 at the chain’s 8,000 stores. Customers who purchased it received a coupon, printed at the register, for $10 off a future Walgreens purchase.

The drugstore chain then billed Imagenetix for $533,000 “for coupons purportedly redeemed” plus $188,000 for scanning fees, states the lawsuit filed Nov. 18 in U.S. District Court.

The evidence in the case includes stacks of white, paper coupons without creases or marks that Walgreens said customers had redeemed in stores.

“We have a lot of confidence in this case,” said Daniel Kotchen, a Washington, D.C.-based attorney hired by Imagenetix. “We believe in it, and we think it’s an important case for the industry at large.”

Panagiotakakos declined to provide an explanation for why the coupons would be in pristine condition, saying there would be no further comment.

An estimated 1,500 products are featured in the Walgreens’ in-house couponing program each year, Kotchen said. The lawsuit is seeking class-action status and states that damages could exceed $5 million from Walgreens, an industry leader with $72 billion in total annual revenue, according to its investor website.

Imagenetix has seven employees and annual revenue of $7 million.

No one else has filed a similar suit against Walgreens. Unlike some vendors, Imagenetix didn’t use a clearinghouse to process the coupons, and its office manager was the first to raise questions about their validity.

Coupon trend

“We thought that this was a good program that would get Celadrin into the hands of maybe 50,000 people,” said William Spencer, CEO of Imagenetix. But the lawsuit alleges that customers never got to try the patented product.

The case raises issues of credibility at a time when coupon use is at an all-time high. Nearly 80 percent of consumers report using coupons regularly. Shows such as “Extreme Couponing” on TLC depict shoppers filling carts with cereal, deodorant and hand soap for pennies on the dollar.

In 2010, marketers distributed a record 332 billion coupons valued at $3.7 billion for consumer packaged goods, 7 percent growth over the previous year, according to NCH Marketing Services Inc., a coupon clearing house.

The business of couponing has an honest reputation, said attorney Edward Kabak, chief legal officer for the Promotion Marketing Association, a nonprofit trade group in New York. “It’s unusual that a major corporation like Walgreens would be accused of doing this kind of activity,” he said after reading through the complaint. Typically, such corporations have policies and procedures for their employees, and shared values of integrity and honesty, to ensure that promotions are handled properly, said Bonnie Carlson, the association’s president.

With the interest in coupon use, it’s not surprising that some scandals have made headlines. Several fraud cases reported in the past year include a New York college student charged with creating counterfeit coupons on the Internet and four Texas supermarket cashiers charged with felony theft, allegedly for using a “coupon override function” to set high coupon values and pocket the money.

One of the largest coupon-fraud cases is in progress in Wisconsin, where 11 executives from a coupon processor were indicted in 2007. The executives are accused of stealing more than $15 million from manufacturers by seeking reimbursement for fraudulent coupons. (Kotchen’s firm is handling a civil case against the coupon processor.)

“There has to be legitimacy when it comes to dollars that flow through the couponing program because there are a lot of dollars at stake,” Kotchen said. “Vendors like Imagenetix are relying on the good-faith efforts of retailers like Walgreens to ensure the legitimacy of the couponing program.”

‘Freshly minted’

The Walgreens promotion took place during one week in March 2011. Shortly afterward, the boxes of bundled coupons showed up at the company’s office, along with Walgreens’ bill.

Debbie Spencer, office manager for Imagenetix, was in charge of logging coupons. She noticed that most were not creased. Then she found duplicates and triplicates, even though each coupon was supposed to be unique. And some of the bundles were in numerical order the way they were printed, even though they were supposed to be collected in the order of redemption.

“It took a while for people to listen to me,” said Spencer, who is married to William. “These coupons were like they had been freshly minted. They had never been out in the public, in someone’s pocket or purse or bag.”

Walgreens also claimed an “implausibly high redemption rate,” the lawsuit said, saying that more than 95 percent of the coupons issued were used. Coupon redemption rates vary widely but are typically much lower than that, said the PMA’s Carlson. “Ninety-five percent is exceedingly high,” she said.

An audit of the coupons revealed that more than 1,000 stores claimed to have issued more coupons than the number of bottles they had in stock, the lawsuit said. Stores typically had eight to 10 bottles in stock, but seven stores had issued more than 100 coupons each. One store issued a whopping 1,306 coupons.

Spencer said he paid part of the bill and contacted Walgreens, but no one from the company acknowledged there was a problem. When the bill wasn’t fully paid, Walgreens deducted money from an account it held in reserve for Imagenetix, he said.

Walgreens still sells Celadrin, but Imagenetix doesn’t deal with the drugstore chain directly.
http://www.utsandiego.com/news/2012/jan/13/walgreens-accused-coupon-fraud/