The Delaware Supreme Court reversed a lower court decision to impose a $7.3 million judgment against Overstock.com for concealing gift card balances from the Delaware Escheator. The Court determined that the lower court misapplied the Delaware False Claims and Reporting Act (“DFCRA”) and incorrectly instructed the jury that Overstock’s failure to file their annual escheat reports was equivalent to making a “false statement” under the law. The decision clarifies that absent an affirmative false statement or the submission of false records to the state, plaintiffs cannot state a claim under the DFCRA. That said, the case also serves as a reminder that companies must implement a strategy to address escheat obligations when holding unused gift cards.
State escheat laws generally require companies holding abandoned property on behalf of others to transfer ownership of that property to the state if the owner fails to claim that property within a given period of time. In many states, escheat obligations apply to unused gift cards among other types of property. Although determining which state’s laws apply to abandoned property often requires a complicated analysis, in certain cases, a state’s escheat laws apply to abandoned property held by a company incorporated in that state. Escheat obligations can vary by state, but in Delaware, the company holding the abandoned property must file annual escheat reports.
In Overstock, Inc. v. the State of Delaware, William French, the Court considered whether Overstock knowingly violated the DFCRA when it failed to report and escheat unused gift card balances to the State of Delaware. Under the DFCRA, a person may be found liable for making a false claim if the person: (i) “knowingly makes, uses, or causes to be made or used a false record or statement material to an obligation to pay or transmit money or property to the Government,” or (ii) “knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the Government.” At trial, the lower court instructed the jury that to “knowingly” fail to file escheat reports when required to do so was no different than actively making a false statement. The jury found Overstock guilty and the lower court subsequently entered an order for treble damages, increasing the damages to over $7 million.
On appeal, the Delaware Supreme Court reversed the lower court, concluding that Overstock’s failure to file an escheat report was not considered a false record or statement under the DFCRA. The Court concluded that in order to be found liable under the DFCRA, an entity must have submitted an actual false record or statement that suggested it owed the State less money than was required. In other words, “[t]he absence of a record or statement cannot form the basis of a reverse false claim under [the DFCRA].”
Although Overstock avoided liability under the DFCRA claim in this case,Delaware’s efforts to enforce its escheat laws underscore the need for companies to assess their compliance with the patchwork of escheat laws, including its handling of unused gift cards, which, in many states, constitute abandoned property.