On June 28, 2019, the Superior Court of Delaware issued an Order for Entry of Final Judgement for damages and penalties in The State of Delaware, ex. rel. William Sean French v. Overstock.com, Inc. (C.A. No. N13C-06-289 PRW CCLD).
In September 2018, a jury found that Overstock had knowingly violated the Delaware False Claims Act by failing to report and remit dormant gift card balances (totaling just under $3 million) to Delaware. The “giftco” gift card structure entered into by Overstock and CardFact (now Card Compliant) was held to be a sham and the unredeemed gift card balances should have been reported by Overstock, as the true holder and issuer of the gift cards, to Delaware, as its state of incorporation. By contracting with CardFact, an Ohio based entity, to issue the gift cards and act as the holder of the gift cards, Overstock was said to have evaded its unclaimed property reporting obligations, as gift cards are exempt from reporting in Ohio. Under the Act, Overstock was liable for treble damages plus statutory fines and attorneys’ fees.
In the Order, the Court ruled against Overstock, rejecting the argument that the treble damages award was “inappropriate and excessive,” finding that the amount of $7,266,412.94 “was not grossly disproportionate to Overstock’s level of culpability and the harm it caused.” The Court ordered Overstock to pay an additional $22,000.00 in civil penalties and reserved judgement for attorney’s fees and costs pending review of evidence to be submitted support the Plaintiffs’ initial request of $3,535,881.83.
Judge Paul R. Wallace did not mince words when stating that “Overstock was found to have engaged in not just a single violative act or omission under the Act; Overstock’s was a years-long pattern of activity. And while Overstock may give short shrift to the economic impact of its false claims violations, wrongfully withholding millions from escheatment deprived all Delaware citizens the opportunity to derive the benefits from the funds it retained. The trial evidence convincingly demonstrated that Overstock did this not for the rightful owners of its unredeemed gift cards, but for its own economic gain.”
Gift card issuers, particularly those utilizing “giftco” structures, should carefully reconsider such structures and ensure compliance with the escheat provisions.
The Order can be viewed in its entirety here: https://www.leagle.com/decision/indeco20190703068