On Thursday, September 20, 2018, Overstock.com lost a jury trial in Delaware over dormant gift cards.
This trial is the current result from a qui tam lawsuit filed in June 2013 against Card Compliant, Overstock.com, and multiple other retailers.
The retailers entered into contracts with CardFact and then its successor, Card Compliant, for CardFact to be the holder of and issue gift cards in the retailers' names. CardFact would issue the cards and hold the liability in an entity formed or organized in such states as Ohio or Florida where gift cards were not required to be reported as unclaimed property.
Sean French, as the plaintiff-relator, alleged that the transactions were shams and that the property was never transferred to the CardFact/Card Compliant entities. In this case, the property not transferred was (1) cash or equivalents from the outstanding unredeemed balances on gift cards that were not dormant at the time of transfer and (2) cash or equivalents from the subsequently purchased gift cards. According to French, this required transfer, along with other formalities of the agreements between the retailers and Card Compliant, were not followed, resulting in sham transactions designed to deprive Delaware from unclaimed property that it was rightfully owed.
Since the initial filing, the case was removed to and then remanded from federal court. Several of the original retailers which had been through a Delaware unclaimed property audit or voluntary disclosure were dismissed from the case. Overstock.com went to trial and the jury returned its unanimous verdict against the company on September 20.
Superior Court judge Paul Wallace still has to determine the amount of damages owed by Overstock.com. Under Delaware's False Claims and Reporting Act, a qui tam lawsuit may result in treble damages. Reports put the breakage from the unredeemed gift cards from 2010 to 2013 as approaching $3 million.
Gift Card Issuer Take-Aways
Now the question for gift card issuers is what's next? Is gift card planning still a viable business opportunity for retailers incorporated in the State of Delaware?
Barganier says that yes, gift card planning is still viable, even with the current Delaware climate. In fact, it is more important than ever for Delaware incorporated parent companies!
The details of how the gift card structure is established and then maintained will determine whether the gift card planning is successful against a Delaware challenge. Card Compliant clients, including Overstock.com, did not follow the terms of the contracts, nor corporate formalities, in the execution of their gift card plans.
In light of the verdict in Overstock.com, Barganier recommends that retailers take a close look at their current and future gift card planning opportunities. Proper policies and procedures should be established to ensure that corporate and contractual formalities are followed. Once established, retailers should undertake annual reviews to ensure compliance with these formalities, policies, and procedures.
If you have questions, please reach out to Patricia Barganier or Kimberly DeCarrera to discuss further.