Delaware Supreme Court Reverses Overstock.com Verdict on Unclaimed Property
July 2, 2020
In a decision that might significantly affect the State of Delaware’s enforcement of matters related to unfiled Delaware unclaimed property reports, on June 24, 2020, the Delaware Supreme Court reversed a Delaware Superior Court jury verdict in Overstock.com, Inc. v. The State of Delaware ex. rel. French, C.A. No. N13C-06-289 (Del. Super. Ct. June 24, 2020). In reversing the verdict that was in favor of the State of Delaware, the Delaware Supreme Court ruled that the jury had been improperly instructed regarding the conduct necessary to support a claim under the Delaware False Claims Act (6 Del. C. § 1201 et seq.). At the trial level, the jury had been instructed that “a knowing failure to file a [Delaware] escheat report was no different than actively making a false statement.” The Delaware Supreme Court ruled that such instruction was incorrect as a matter of law. Thus, the mere knowing failure to file a Delaware annual unclaimed property report was insufficient to support a claim by the State of Delaware against Overstock.com under the Delaware False Claims Act. Accordingly, the jury verdict against Overstock.com, which had awarded treble damages of $7.2 million to the State of Delaware, was reversed.
The claim against Overstock.com related to its failure to report and escheat the unredeemed balances on gift cards to the State of Delaware under the Delaware escheat statute. The claim had been originally brought by a whistleblower under the Delaware False Claims Act in mid-2013. The state intervened in the matter in 2014. In general, false claims act statutes were initially enacted to address cases where persons were found to have fraudulently presented a false claim for payment by the government. See, e.g., 12 Del. C. § 1201(a)(1). However, those statutes were generally amended to also encompass so-called “reverse false claims” whereby a person:
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 knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the Government.
12 Del. C. § 1201(a)(7). Accordingly, wide-ranging government filing obligations such as individual and corporate tax returns and annual escheat returns can be the subject of false claims litigation. A person that is found to have engaged in a false claim is subject to liability under the Delaware False Claims Act equal to three times the underlying liability, as well as other civil penalties. See 12 Del. C. § 1201(a).
In general, under Delaware escheat law, a Delaware-formed entity must escheat a portion of the unredeemed balances on gift cards for which such Delaware entity is the obligor after such unredeemed balances have gone dormant. Under Delaware escheat law, such unclaimed gift card balances generally go dormant after five years of inactivity. While Delaware generally requires the escheat of unredeemed gift card balances, many other states specifically exempt gift card balances from escheat. In this case, seemingly to avoid escheatment to Delaware, Overstock.com had entered into certain third-party contractual arrangements which purported to transfer liability for Overstock.com’s gift card obligations to non-Delaware formed entities; entities formed under the laws of a state that does not require the escheat of gift card balances. As a result of such contractual arrangements, Overstock.com took the position that it had no unclaimed property liability to the State of Delaware for unredeemed gift card balances and ceased filing annual unclaimed property reports to the State of Delaware. A key aspect of Delaware escheat law is that a holder is only obligated to file an unclaimed property report to the extent that it has something to report and remit to Delaware. Even a Delaware-formed entity is not obligated to file an annual Delaware unclaimed property report if it does not owe anything. Accordingly, for years subsequent to entering the third-party contractual arrangements, Overstock.com did not file an annual escheat report with the State of Delaware.
In general, for a person to have committed a false claim under an applicable false claims statute, it must have utilized and submitted a false record or false statement. In this case, the State of Delaware had argued that the knowing failure to file a Delaware unclaimed property report was no different than actively making a false statement to the State of Delaware. The Superior Court judge instructed the jury consistently with the State of Delaware’s argument. As a result, the jury returned a verdict of treble damages in favor of the State against Overstock.com. However, the Delaware Supreme Court disagreed with such jury instruction, concluding that a knowing failure to file a return is not the equivalent of making a false statement to the government. Thus, even a knowing failure to file a Delaware unclaimed property return is not a sufficient act to support a false claims case. Since there was no evidence that Overstock.com had submitted any other false record to the State in connection with its gift card escheat reporting position, the Delaware Superior Court verdict in favor of the State was reversed.1
The Delaware Supreme Court’s reversal of this verdict is significant. To the extent that the State of Delaware could have argued that a knowing failure to file was fraudulent and subject to a potential triple liability under the Delaware False Claims Act, it would have both (i) provided tremendous and potentially uneven negotiating leverage to any holder under audit, and (ii) abrogated Delaware’s existing failure to file statutory penalties. Delaware could have also taken a similar position in connection with all Delaware tax administration matters.
Lastly, it is interesting to consider the possible effect of a recent addition to the Delaware escheat statute on the above analysis. First enacted as part of Delaware’s statutory revision of its escheat law, Section 1170 of Title 12 provides that when a person does not file an annual Delaware unclaimed property report, the Delaware State Escheator may require such person to file a verified report of its Delaware unclaimed property liability to the Escheator in a prescribed form. As such verified report would constitute an affirmative filing with the State of Delaware, the Escheator could make such request in the case of a non-filer resulting in a different fact pattern than the Overstock.com case, where no filings were made with the State Escheator. I note that we do not anticipate, and there is no indication, that the Delaware State Escheator intends to use such provision for such purpose.
To discuss this or any other Delaware unclaimed property issues, please contact Stanford Stevenson at firstname.lastname@example.org or 302-651-7707.
1 It is unclear whether the State of Delaware will continue to argue that Overstock.com still owes Delaware unclaimed property liability with regard to unredeemed gift cards both with regard to the years at issue and prospectively. The Delaware Supreme Court only addressed the “false claims” aspect of the state’s claim and not whether the third-party contractual arrangements had the desired effect of causing a non-Delaware-formed entity to be the obligor on gift cards related to Overstock.com.