Litigation Update

Heather Gabell, J.D., Director of Compliance

December 19, 2019

State of Delaware ex rel. William Sean French v. CVS Health Corporationet al.
Qui Tam Action Involving Gift Card Structure Dismissed

This qui tam action was brought by a former employer of CardFact under the Delaware False Claims and Reporting Act in 2017[1].  Plaintiff-relator French alleged that CVS Health Corporation (CVS), along with several other defendants, including Card Fact, LLC, had intentionally failed to escheat unclaimed gift cards to Delaware, and had conspired to represent Card Services and its related entities, as the holders of the gift cards, violating Delaware’s unclaimed property law and defrauding the state.

CardFact Ltd. was incorporated in the State of Ohio and sold its gift card services business to Card Compliant, LLC in 2009.  CVS Pharmacy, a Rhode Island corporation and a wholly owned subsidiary of CVS Health, a Delaware corporation, entered into a Card Services Agreement with CardFact Ltd in 2008, under which employees of CVS Health managed the gift card program with Card Services.

CVS Health received a Notice of Examination in September 2013, informing the company that Kelmar would be conducting an audit to determine compliance with the Delaware’s unclaimed property law.  They requested that CVS Health issue a litigation hold notice so that all gift card records could be included within the scope of the audit.  In December 2017, CVS Health entered into a Voluntary Disclosure Agreement (VDA) with the state.

CVS Health successfully argued in its Motion to Dismiss that French’s claims were barred under 6 Del C. § 1206, which prohibits actions that are based upon the same allegations or transactions that are the subject of an administrative proceeding.  The court agreed that because CVS Health was already under audit at the time of the filing of the lawsuit, the administrative proceedings bar applied.  The court also dismissed the allegations against the Card Services defendants based on the same principle.  CVS Health also cited an earlier case with the same relator and nearly identical facts – “Card Compliant II.”[2]

The Court also noted that under the doctrine of collateral estoppel, because French had already litigated the same issues and lost in the prior action, he was collaterally estopped from litigating same issues in the instant case (even though CVS was not a party to the original action).

Yee v. ClubCorp Holdings, Inc. – Remand Order
An Unexpected Victory for Holders

The California Controller’s Office filed two separate actions against ClubCorp and its affiliated subsidiaries, seeking an injunction to perform an unclaimed property audit, and a declaratory judgment that ClubCorp’s membership initiation deposits, which are to be contractually refunded after 30 years, constitute unclaimed property.  In ClubCorp I[3], filed in May 2019, the Controller alleges that as a holder, ClubCorp must escheat the membership deposits 3 years after they are payable or distributable.

Filed in June 2019 as ClubCorp II[4], the people of California alleged that ClubCorp violated the Unfair Competition Law and California’s False Claims Act, which are based upon ClubCorp’s alleged violation of the unclaimed property law.

ClubCorp moved both actions to federal court on the basis that the state’s claims raised substantial questions of federal law, based on the federal common law rules established in the Texas v. New Jersey[5]trilogy, which determine escheat jurisdiction.

The US District Court for the Northern District of California granted the Controller’s motion to remand on October 3, 2019[6].  While the court did not find that ClubCorp’s arguments were proper for a removal jurisdiction case, the judge took special note of the following arguments made by ClubCorp as follows:

  • The Supreme Court’s decisions impact what property a state may escheat, and may not be superseded by states and naturally affect every state’s escheatment laws. “In order to adjudicate escheatment claims, then, all states necessarily have to apply federal common law.”[7]
  • The California provision permitting the state to establish that an owner resides in the state based on tax records, etc. may be preemptive and violative of federal common law and can be raised as a defense.

[1] 2019 WL 4668353 (Del. Super. Ct. Sept. 24, 2019).
[2] 2017 WL 1483523 (Del. Super. Ct. Apr. 21, 2017).
[3] Yee v. ClubCorp Holdings, Inc., et al., Case No. 3:19-cv-03953-WHA.
[4] People of the State of California v. ClubCorp Holdings Inc. et al., Case No. 3:19-cv-03972-WHA.
[5] 379 U.S. 674 (1965), together with Pennsylvania v. New York, 407 U.S. 206 (1972), and Delaware v. New York, 507 U.S. 490 (1993).
[6] Yee v. ClubCorp Holdings Inc., et al., 2019 WL 4866370 (U.S. D Court, N.D. California, Oct. 3, 2019).
[7] Id at 3.

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