Home Depot's Shoplifting Shakedown Problem Is Much Worse Than It Sounds

Last week a Home Depot (NYSE:HD) customer sued the chain for shaking down suspected shoplifters. That's the way Bloomberg described it in its headline, and the details of what happened should be a red flag for all retailers when it comes to their Loss Prevention policies—but especially to large chains.

The lawsuit, filed by California Home Depot customer Jemin Chen, came after Chen was accused—wrongly, he says—on June 6 of shoplifting two pairs of $3.99 work gloves from a Home Depot store. Four days later, Chen got a letter from a Florida law firm demanding $350 to settle the shoplifting claim. On July 5, he got a second letter, this time demanding $625. Both letters threatened legal action if Chen didn't pay.

Instead, he sued. His class-action complaint says this law firm sends out more than a million letters a year to U.S. consumers accused of shoplifting by Home Depot. That's legal, but it does start to sound like Home Depot has turned Loss Prevention into a profit center.

But that's not the red flag. The red flag comes in Chen's more complete account of what happened on June 6. According to the lawsuit, Chen and a friend went to the Home Depot store to buy lumber. Before loading it into the cart, they put on work gloves. When they checked out, all the merchandise was scanned except for the $7.98 worth of gloves, which Chen had belatedly added to the pile. He paid $1,445.90 with his Home Depot credit card.

Here's Bloomberg's description of what happened next, distilled as concisely as a police report: "As he and his friend were walking toward the door, they were stopped by a security guard, who accused Chen of stealing the gloves, according to the complaint. Chen was taken to what he calls a "stew room" and questioned; while there he suffered an asthma attack, became agitated, and was handcuffed, he said in the complaint. After about 30 minutes he agreed to sign a document promising to stay out of the store for 90 days. He also provided contact information."

Got that? A customer who just paid for $1,400 in merchandise was accused, detained, handcuffed after an asthma attack, and compelled while in medical distress to sign a document that may have been effectively a confession.

That wouldn't happen in any store where a store manager made decisions on loss prevention. A $1,400 loyalty customer? Most store managers would gladly accept the explanation about the gloves. A few would throw in the gloves for free. A few others would try to upsell the customer to more expensive gloves.

But presumably the store manager was never in the loop. Many large chains use outside contractors for LP, and that's in part because only half their job is to watch out for shoplifting by customers. The other half is to watch out for theft by employees—including store managers. As a result, LP guards don't report to store managers and don't consult with them, even though customers will undoubtedly pin whatever abuse they suffer from LP on the retailer.

And that's the red flag. What's obvious in hindsight is that Chen would have been better off demanding that the LP guards call the police, or calling them himself. At the point where customers begin to understand that they're better off arrested by real police than being led away by what appears to be a retailer's private police force, chains are in trouble—and not just from bad PR.

Demand letters due to forced confessions are just the tip of the legal liability iceberg. Allegations of abuse by LP contractors could be the next big plaintiffs' jackpot.

What's the solution? The easiest first step may be to require a manager to be present whenever a customer (or employee) is detained by LP, to look out for the chain's interests. Right now, with contract LP guards, no one is.

Would that raise legal and logistical issues? Probably. But at this point, Home Depot already has a cartload of LP-related legal issues to face. Unless something changes with contract LP for both Home Depot and other chains, things are only going to get worse.