Keane's Unclaimed Property Blog

Verdict Rendered Against Overstock in Qui Tam Litigation Over Unclaimed Gift Card Balances

On September 20, 2018, following a one week jury trial, the jury in the State of Delaware ex. rel. William Sean French v., Inc.[1] found Overstock liable under the False Claims Act for the failure to report approximately $2.9 million in unredeemed gift card balances to Delaware.  Overstock was the sole defendant at trial, as the other two dozen retailers had either settled or had their cases dismissed (to the tune of $25-35 million) prior to trial. After awarding treble damages,  the total estimated liability is over $7 million, not counting attorney fees.

The jury found that the “giftco” gift card structure entered into by Overstock and CardFact (now Card Compliant) was a sham and that unredeemed gift card balances issued between 2004 and 2007 should have been reported by Overstock, as the true holder and issuer of the gift cards, to Delaware, 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 unclaimed property reporting in Ohio.

Implications of the Decision & Next Steps for Retailers

Even if Overstock appeals the verdict, Overstock and all of the retailers that were a party to the litigation could face further action by Delaware. The state had tried to bring in an additional four years (2008-2012) where unredeemed gift card balances were purportedly not escheated to Delaware, but the judge ruled earlier in the case that the plaintiffs had failed to do so in a timely manner and thus those years were excluded. These retailers could face a separate lawsuit brought by Delaware to account for these years, or the state could choose to pursue the funds by way of audits.

The verdict against Overstock likely means that Delaware will further scrutinize companies utilizing similar giftco structures and could possibly subject them to litigation or audit, even forcing some to re-domesticate outside of Delaware to avoid such scrutiny.  Gift card holders should be overly cautious and be prepared to defend their organizational structures to the state.

In addition to audit enforcement, Delaware may now arm itself with the threat of litigation in order to force companies into large settlements instead of costly trials, which appears contrary to the nature and ultimate goal of unclaimed property – to reunite the owner with his lost property.

Go from Verdict Rendered Against Overstock in Qui Tam Litigation Over Unclaimed Gift Card Balances

[1] The State of Delaware ex. rel. William Sean French v., Inc. (Superior Court of Delaware C.A. No. N13C-06-289 PRW CCLD).

Gift Card Escheatment, Litigation

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