What challenges to gift card companies may mean for you

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States can claim jurisdiction over unclaimed property that can’t be matched to an owner’s address, thanks to rules formed by several longstanding U.S. Supreme Court decisions. If the addresses of owners of unclaimed property are unknown, the state of incorporation (or organization, or in some cases, principle place of business) of the holder (the person or entity in possession, custody or control of property that is due to the owner) has jurisdiction over the property.

Many states, including Delaware, consider gift cards that haven’t been used for a period of time to be unclaimed property. Often gift cards are sold by merchants, the holder, that don’t know the names or addresses of the gift card purchasers. Relying on the U.S. Supreme Court rule that only the holder’s state of incorporation has jurisdiction over unclaimed property, gift card issuers are often incorporated in states that don’t consider unused gift cards to be escheatable. Sometimes merchants will pay third-parties to issue gift cards on their behalf. These third-party gift card issuers are also often incorporated in states with favorable escheat laws. However, a recently announced court filing in Delaware should alert merchants to review their gift card programs.  

A qui tam (whistleblower) case, Delaware ex rel. French v. Card Compliant et al., was unsealed on March 26, 2014. In the complaint, filed in 2013, a former employee of a third-party gift card issuer alleged that the agreements made between many Delaware-incorporated merchants and the third-party service provider, which was incorporated in a state with a gift card exemption, lacked economic substance and were simply accounting shams designed to circumvent Delaware’s escheat law. The complaint listed alleged examples of how the underlying accounting, flow of funds and lack of the parties’ change of economic position pointed to a lack of economic substance.

Although the complaint directly affects only the named companies, in light of the groundbreaking litigation, merchants with gift card companies should revisit their gift card programs.

Kevin Herzberg

David Glad

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