Gift card statutes governing expiration dates and inactivity fees already pose cumbersome regulations for retailers. But gift card sellers should be wary of another source of regulation: state escheatment laws.
In the ongoing case State of Delaware ex rel. French v. Card Compliant, LLC, et al., Delaware asserts that unclaimed gift card balances belong to the state. In December, the federal district court remanded the case back to the Superior Court of the State of Delaware, New Castle, rendering defendants’ dismissal motions moot.
Many states have escheatment laws, which provide for abandoned or unclaimed property to escheat, or revert, to the state. Traditionally, these laws allowed states to take ownership of property when decedents passed without heirs or when owners abandoned property.
In recent years, Delaware and other states have explicitly broadened escheatment laws to allow them to collect unredeemed gift card balances. Under Delaware’s escheatment law, “abandoned property” includes gift cards that have expired or been dormant for 5 years. The law requires the “holder of abandoned property” to report to the state when funds become abandoned and then to deliver them to the state.
Delaware is attempting to enforce this law in an unprecedented action against more than a dozen retailers, restaurants, and entertainment companies who used gift card services provided by a third party vendor, Card Compliant. A former officer of Card Compliant originally filed the lawsuit as a whistleblower action. Delaware joined the suit and has asserted violations of its Unclaimed Property Law and False Claims and Reporting Act.
Delaware alleges that the companies, with the direction and help of Card Compliant, engaged in a scam to avoid having to turn unclaimed gift card balances over to Delaware. In some cases, these balances amount to millions of dollars. The complaint alleges that the defendants falsified records and hid funds in shell organizations in states such as Florida and Ohio, which are not subject to the same gift card escheatment laws. Based on Delaware’s allegations, these companies now face treble damages plus civil penalties.
Whistleblower incentives may increase companies’ exposure to suits like this. The high pay-outs from whistleblower statutes likely encouraged French, the original plaintiff and a former officer of Card Compliant, to aid the Delaware Attorney General’s Office in the investigation and ensuing legal action. French allegedly sold Card Compliant’s gift card services to a number of the defendants and other companies.
Delaware corporations are not the only ones at risk. Because many states have similar escheatment laws, companies may soon see other state attorney general’s offices follow suit.
In the wake of French, retailers should closely scrutinize their procedures for reporting and remitting unclaimed gift card balances to the state. A comprehensive corporate compliance policy should consider state escheatment laws and false reporting regulations. Retailers who use third party vendors may be even more susceptible and should work closely with their vendor to report unclaimed balances. Additionally, companies who hold subsidiaries in an exempt state should ensure that those entities do not hold funds that may still be subject to another state’s escheatment laws.