In ruling on Delaware’s Motion to Dismiss on September 17, 2019, which was granted in part, and denied in part, the US District Court for the District of Delaware (federal court) passed on deciding the case, leaving the issue (again) in the hands of the Delaware Court of Chancery (state court).
In connection with an audit notice sent in 2015, Kelmar had demanded that Univar produce records dating back to 1991. A total of 22 states have since joined the audit. Citing concerns with the confidentiality of its records in the hands of the state, Univar has repeatedly refused to comply. In October 2018, Delaware issued an administrative subpoena for the records. The law granting the state such subpoena power was not effective until 2017. Univar filed a Complaint in federal court, citing multiple constitutional violations relating to, among other things, (a) the retroactive application of the subpoena power, and the use of estimation for a period of time when holders were not required to retain records; (b) the contingent-fee arrangement with Kelmar as a self-interested third party; and (c) Kelmar’s estimation methodology generally. Univar also maintained that the multi-state audit potentially exposed its confidential information to other states because of the states’ public disclosure laws.
Delaware in turn filed a Complaint in state court, seeking enforcement of the subpoena. The state court’s decision to stay the proceedings pending resolution of the constitutional issues in federal court was upheld on appeal – but now the federal court has chimed in – with a non-decision deferral back to the state court. The federal court found that only two of Univar’s claims survived the ripeness standard (the procedural due process and equal protection claims) set forth by the Third Circuit in the Marathon and Plains cases, then stayed the proceedings pending the state court’s decision as to the enforceability of the subpoena.
With respect to the procedural due process claim, the federal court took note of the fact that Kelmar is a third party auditor, that is paid based on the amount of unclaimed property it finds and is escheated, that it had targeted Univar for audit, and that it had taken the affirmative steps to begin the audit. The court also found that Univar’s equal protection claim was ripe, based on its claim that Kelmar targets large, wealthy corporations for audit. It was not, as the state represented, a “non-neutral adjudicator,” and the court found that the state had not offered any legitimate purpose for such selection other than to raise revenue.
The Court concluded that until the state court rules on the enforceability of the subpoena, Univar’s additional claims were not yet ripe and stayed the proceeding in federal court, noting that if the subpoena is enforced, Univar’s other constitutional claims may become ripe. In the meantime, Univar has not been subjected to the audit and can continue to refuse to comply with the subpoena.