Del. Says Netflix, Overstock Hid Gift Card Balances From State
Share us on: By Jonathan Randles
Law360, New York (September 08, 2014, 4:24 PM ET) -- Delaware regulators on Friday defended the state's lawsuit over unclaimed gift card balances, saying card companies, retailers and restaurants, including Netflix Inc. and Overstock.com Inc., deliberately concealed unclaimed card balances that belonged to the state through “sham” business arrangements.
The Delaware Department of Justice filed a brief responding to motions to dismiss the complaint brought last month by a group of retailers and gift card companies detailing the lengths these companies took in order to conceal the unclaimed balances and transport the amounts to states with more lax abandoned property laws — a service retailers agreed to for a “modest annual fee.”
Delaware said the accused companies, which include Netflix, Overstock.com and California Pizza Kitchen Inc., have attempted to deflect blame for the alleged misconduct by raising more technical arguments about escheat law to challenge the complaint. The lawsuit, Delaware suggested, is about widespread use of deceptive business practices in the gift card industry.
“This is not a case about which state has priority on a competing escheat claim. Nor is it a case about whether or not the State owns the funds at issue,” Delaware said. “It is a case about concealing, avoiding, or decreasing an obligation to pay or transmit money to the government in violation of a Delaware statute.”
The suit was filed by William Sean French, a former employee of defendant Card Compliant LLC, which allegedly managed the gift card programs of a slew of other defendants including Overstock, Sketchers USA Inc., Sony Electronics Inc. and Ralph Lauren Corp. French said those corporations used Card Compliant to skirt abandoned-property laws in Delaware and reroute unclaimed balances to themselves.
Since Delaware is among the states to include unclaimed gift card balances in their definition of abandoned property that must be turned over to the state after a period of time, retailers, restaurateurs and other companies allegedly outsourced their gift card programs to third-party or captive card companies, incorporated in states in which unclaimed gift card balances are not subject to abandoned-property laws.
Delaware said its complaint is based on inside information French has provided the state. According to the brief, retailers paid annual fees to gift card service companies which, in turn, created “sham contracts portraying themselves as the 'holders' of unredeemed gift cards.”
The gift card companies created shell corporations in Florida and Ohio to hold the value of the gift cards because those states do not consider unredeemed gift card balances as abandoned property, Delaware said. Despite the contracts, Delaware said the funds were never truly transferred or held by the card service companies. Instead, the retailers had control of the unclaimed funds at all times, the state says.
To conceal this from Delaware regulators, the state said the contracts provide for handling fees “that are directly proportional to the outstanding unredeemed value on the gift cards (i.e., the higher the unredeemed value, the higher the fees).” This set up returned the unclaimed funds to retailers in the form of trademark licensing fees, Delaware said.
The state is requesting a federal judge deny the motions to dismiss the case and order discovery.
Messages sent Monday to Card Compliant and Netflix were not immediately returned.
French is represented by Stuart M. Grant, Mary S. Thomas and Reuben A. Guttman of Grant & Eisenhofer PA and by Douglas R. Sprong and Christopher A. Hoffman of Korein Tillery LLC.
Delaware is represented by Thomas E. Brown and Edward K. Black of the Delaware Department of Justice.
Card Compliant is represented by Richard M. Zuckerman, Sean C. Cenawood and Melanie A. McCammon of Dentons and Stephen E. Jenkins and Toni-Ann Platia of Ashby & Geddes PA.
Einstein Noah Restaurant Group Inc. is represented by Lauren J. Garraux, David A. Rammelt and James M. Reiland of K&L Gates LLP.
Netflix is represented by Brian M. Rostocki, Joseph M. Grieco, Michael J. Wynne, Sara A. Lima and Adam P. Beckerink of Reed Smith LLP.
Current counsel information for Overstock.com was not immediately available.
Tesoro Refining & Marketing Co. LLC and Homeaway.com are represented by Weston C. Loegering, James A. Cox and David E. Cowling of Jones Day.
Apple American Group LLC, California Pizza Kitchen Inc., CBC Restaurant Corp., Houlihan's Restaurants Inc., Il Fornaio (America) Corp., Noodles & Co., Ralph Lauren Corp., Ruth's Hospitality Group Inc., Shutterfly Inc., Skip Barber Racing School LLC and The Pantry Inc. are represented by Ethan D. Millar of Alston & Bird LLP.
Shell Oil Co. and Skechers USA Inc. are represented by Kendall L. Houghton of Alston & Bird LLP.
Wolverine World Wide Inc. is represented by John L. Coalson Jr. of Alston & Bird LLP.
The case is Delaware ex rel. French v. Card Compliant LLC et al., case number 1:14-cv-00688, in the U.S. District Court for the District of Delaware.
--Editing by Chris Yates.
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