After remaining under seal for close to a year, an unusually exciting – well, exciting for lawyers, anyway – whistleblower ("qui tam") case involving unclaimed gift cards in Delaware has now been unsealed and released to the public after Delaware state prosecutors independently investigated the claims and joined the case in March 2014. The lawsuit was originally filed in June 2013 by William Sean French, a former officer of the primary defendant, Card Compliant LLC, against the company and 33 major retailers, including Ulta, Houston's, The Apple-American Group, Homeaway.com, Il Fornaio, and Benihana, as well as the National Restaurant Association.
The allegations in the complaint state that the defendants violated the Delaware False Claims and Reporting Act ("DFCRA") by knowingly failing to report and remit the value of unredeemed gift card balances in an effort to deprive the State of Delaware of hundreds of millions of dollars due to the State under its unclaimed and abandoned property laws. Allegedly, in establishing the gift card avoidance scheme, the defendants created "sham" contracts identifying Card Compliant as the holder of the gift cards in exchange for an annual fee, when in reality the gift cards were always in the possession, custody and control of the card-issuing companies. According to the allegations, Card Compliant and the shell corporations it purportedly created in Ohio and Florida were never the holders or issuers of the gift cards, and if unredeemed gift cards were never issued or held in an exempt state like Florida, Ohio or Virginia and names and addresses of each holder were not maintained, then the unredeemed balances were reportable to each company's state of incorporation.
The consequences of this lawsuit could be significant for the named defendants and the entire gift card industry. The rules for which state has priority in in claiming "abandoned" or unclaimed gift card balances are complex and closely studied by companies that issue such cards to consumers. In stark contrast with its reputation as a corporation-friendly state, Delaware has been extremely aggressive and unfriendly when it comes to auditing for unclaimed gift cards. Indeed, Delaware has been criticized in the past for its use of third-party auditors as "bounty hunters" to perform such audits on the state's behalf in return for a percentage of the amount recovered; the plaintiff in the Card Compliant action, William Sean French, reportedly worked for one of those third-party auditors, Kelmar Associates, after working for Card Compliant. In joining a whistleblower with ties to a third-party auditor in a suit against a large group of companies incorporated in the state, the Attorney General's Office seems to be sending a decidedly hostile, anti-corporate message.
Regulatory scrutiny of gift card programs has never been higher, in Delaware and elsewhere. Companies selling gift cards should follow developments like these closely. If your company is using a third party to report unclaimed gift cards, or if you have incorporated a gift card subsidiary in an exempt state, you should take care to ensure that the entity is a true holder or issuer sufficient to withstand regulatory scrutiny.
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