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Overstock.com Conceals Abandoned Gift Card Balances

The Delaware Superior Court recently issued a final order against Overstock.com for violating Delaware’s Abandoned and Unclaimed Property Law and False Claims and Reporting Act by failing to report and remit nearly $3 million in abandoned gift card balances to Delaware’s revenue agency.

Overstock was ordered to pay Delaware over $7 million in triple damages.

Delaware’s Abandoned and Unclaimed Property Law

Under Delaware’s Abandoned and Unclaimed Property Law, companies must file a report of abandoned property with the State and pay or deliver such property to the State Escheator. Delaware then takes custody of the property and publishes it in a list of property being held by the State in an attempt to reunite the property with its rightful owner. Unredeemed gift card balances are deemed abandoned when they lay dormant for five years.

Overstock’s Violation

In September 2018, a jury found Overstock guilty of concealing dormant gift card balances from the State of Delaware from 2010 to 2013. Overstock entered into a card services agreement with an “unclaimed property protection business” called Card Compliant LLC, formerly CardFact Ltd. Card Compliant was based in Ohio, where unredeemed gift card balances are not subject to state escheat. Under the agreement, Overstock was to issue its gift cards through Card Compliant and transfer all liability associated with the gift cards to Card Compliant. This transaction, known as a giftco structure, is generally permissible; however, Overstock did not adequately transfer its liability. Instead, Overstock continued to redeem and retain control over the unused balances on the gift cards. Accordingly, Overstock was not relived of its obligations under Delaware’s Abandoned and Unclaimed Property Law. The court noted in its decision, “Unfortunately for Overstock, the jury did not accept its self-serving, after-the-fact accounting of what should have been reported, what was redeemed, or what should have been transmitted to Delaware.” The court concluded that wrongfully withholding millions of dollars from escheatment deprived all Delaware citizens of the opportunity to derive benefits from the funds Overstock retained.

Primary Takeaway

Although jury decisions are not given precedential value, Delaware may still use this verdict to challenge gift card structures in the future. Given this, companies who have entered into third-party giftco structures to shift their unclaimed property liability should review their agreements and practices to ensure that such liability is adequately transferred.

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