Overstock.com, Inc. v. State
| Decision Date | 24 June 2020 |
| Docket Number | No. 327, 2019,327, 2019 |
| Citation | 234 A.3d 1175 |
| Parties | OVERSTOCK.COM, INC., Defendant Below, Appellant, v. The STATE of Delaware, EX REL. William Sean FRENCH, Plaintiff-Relator Below, Appellees. |
| Court | United States State Supreme Court of Delaware |
Michael P. Kelly, Esquire, Matthew J. Rifino, Esquire, and Hayley J. Reese, Esquire, McCarter & English, LLP, Wilmington, Delaware, and Matthew Wright, McCarter & English, LLP, Esquire, Washington, D.C. for Appellant, Overstock.com, Inc.
Thomas E. Brown, Esquire, Edward K. Black, Esquire, and Stephen G. McDonald, Esquire, Deputy Attorney Generals, Wilmington, Delaware for Appellee, State of Delaware.
Laina M. Herbert, Esquire, and Vivek Upadhya, Esquire, Grant & Eisenhofer, Wilmington, Delaware, for Appellee, William Sean French.
Before SEITZ, Chief Justice; VALIHURA, VAUGHN, TRAYNOR, and MONTGOMERY-REEVES, Justices, constituting the Court en Banc.
The Appellant, Overstock.com, Inc. (Overstock), a Delaware corporation, appeals from a Superior Court judgment awarding the Appellees, Plaintiff-Relator William Sean French and the State of Delaware (Plaintiffs), $22,000 in civil penalties and $7,266,412.94 in treble damages for violations of the Delaware False Claims and Reporting Act (the DFCRA or the Act). Overstock is a retail company that sells a wide range of consumer products online. Plaintiffs allege that Overstock engaged in what they describe as a scam to evade its obligation to escheat balances owed on abandoned gift cards to the Delaware State Escheator. It did so, they allege, by making it falsely appear that its gift cards were held by an Ohio company, not Overstock. It is undisputed that Overstock did not file escheat reports or pay the money value of abandoned gift cards to the Delaware Escheator during the years in question.
The case was tried before a jury on a theory that Overstock violated § 1201(a)(7) of the Act in the years 2010 through 2013.1 During those years, § 1201(a)(7) provided that:
Any person who: [k]nowingly makes, uses, or causes to be made or used a false record or statement to conceal, avoid or decrease an obligation to pay or transmit money or property to the Government shall be liable for a civil penalty ... plus 3 times the amount of damages which the Government sustains because of the act of that person.2
The jury returned a verdict finding that Overstock violated § 1201(a)(7).
Overstock raises several claims on appeal, but we find it necessary to address only one. Overstock contends that the Superior Court misinterpreted the Act and erred by instructing the jury that the knowing failure to file escheat reports when required to do so was no different than actively making a false statement. It contends that the failure to file such reports does not satisfy the Act's requirement that a false record or statement be made or used to avoid, conceal or decrease an obligation to pay money to the Government. It further contends that it did not make or use any false record or statement in connection with gift cards that violated the Act. We agree that the evidence fails to establish the making or use of a false record or statement in violation of the Act. Accordingly, we reverse the judgment of the Superior Court.
Delaware requires the holders of abandoned property to file annual escheat reports with the State Escheator and pay or deliver to the Escheator the abandoned property described in the report.3 Abandoned property is defined as property "against which a full period of dormancy has run."4 A full period of dormancy ordinarily means a "full and continuous period of 5 years" during which an owner has "ceased, failed or neglected to ... assert a right of ownership" over property.5 An entity is deemed a "holder" of abandoned property if it has "possession, custody or control of the property."6 Where the abandoned property is a debt which has gone unclaimed by a creditor, such as the obligation to honor a gift card bought by a customer, the state having the right to the escheat of such debt is determined according to rules laid down by the United States Supreme Court in a trilogy of cases known as the Texas trilogy.7 Under those rules, the state having the right to apply its escheat laws to abandoned gift cards is usually the state of incorporation of the company considered the debtor of the cards.8
Because retailers are potentially liable to state escheators for money received in exchange for gift cards that are later abandoned, some were prompted to create special purpose entities known as "giftcos."9 In the typical arrangement, the giftco is a subsidiary of the retailer and is created for the express purpose of issuing the retailer's gift cards. The retailer incorporates the subsidiary giftco in a state which exempts gift cards from escheat laws or otherwise has escheat laws that are more favorable to the retailer than those of the retailer's home state of incorporation.10
The theory is that using the giftco as the issuer of the cards shields the retailer from liability to its home state escheator for abandoned gift cards.
CardFact, Ltd., an Ohio limited liability company, and its affiliates (collectively, CardFact), provided a new twist on the classic giftco. Instead of creating its own subsidiary giftco, a retailer could contract with CardFact to handle its gift card program. In Ohio, the state in which CardFact was organized, abandoned gift cards are not subject to escheat.11
In 2006, CardFact's founder, Ted Ziegler, entered into discussions with Overstock to explore whether Overstock would be interested in using CardFact's services. The discussions proved fruitful, and Overstock and CardFact entered into an agreement. The agreement, known as the Card Services Agreement (the CSA), provided that CardFact would handle Overstock's gift card program. Under the terms of the agreement, the CSA was to be governed by Ohio law. Among other things, the CSA provided that CardFact, not Overstock, was the "holder" of the gift cards, and CardFact, not Overstock, would be liable to customers who acquired gift cards for the debt which the gift cards represented.12 CardFact was authorized to issue and market Overstock's gift cards in exchange for certain licensing and handling fees and other reimbursements.13 Overstock undertook to register and record gift card issuances and transactions and periodically report to CardFact certain details, including the cash value of all gift cards issued and the cash value of all gift card redemptions in a reporting period.14 Overstock agreed to make periodic payments to CardFact consistent with its reports.15 The CSA also provided that Overstock and CardFact recognized that the gift cards would be used to purchase Overstock's merchandise only.16 Under the parties’ contractual arrangement, Overstock could continue to sell gift cards as it always had with minor modifications, and Overstock would continue to receive the purchase price for the cards.17
In 2009, Ziegler sold CardFact to Card Compliant LLC, a Kansas limited liability company. Card Compliant continued to conduct CardFact's business.
Ziegler's brother-in-law, William Sean French, worked for Ziegler at CardFact from 2007 to 2009. In 2011 he joined Kelmar Associates LLC, the agent with which Delaware contracts to carry out unclaimed property audits on its behalf.
In 2013, French brought this qui tam action under the DFCRA against numerous retailers, including Overstock, and Card Compliant and related card service companies.18 The State of Delaware intervened. In an amended complaint, French and the State alleged that agreements like the one between Overstock and Card Compliant were schemes to evade Delaware's escheat laws. In Count I of the amended complaint, they alleged a violation of 12 Del. C. § 1201(a)(7) in that "Defendants knowingly made, used, or caused to be made or used, false statements to conceal, avoid, or decrease an obligation to pay or transmit money to the Government."19
In a motion to dismiss the complaint, Overstock contended that it had not made or used a false record or statement to conceal, avoid or decrease an obligation to pay money to the Government.20 The plaintiffs had a two-fold response to this argument. First, they argued that the CSA itself and Overstock's books and records were themselves a "false record or statement" which satisfied that element of the statute. In addition, they argued that "filing no [escheat] report at all" was the equivalent of "filing a false report."21
In denying the motion, the Superior Court rejected Overstock's contention that Plaintiffs had not adequately pleaded that it made or used a false record or statement. It reasoned, "the CSAs, credit memos, invoices, yearly true-ups, and company books, recited in the Complaint, coupled with Defendants’ alleged failure to file escheat reports and the State's detailed allegations of a specific scheme, create a strong inference that false reports (including not filing required reports) were submitted to the State."22
At trial, the Superior Court provided the jury with the following instruction explaining the meaning of "false record or statement" under § 1201(a)(7) of the Act:
As to the second element, plaintiffs must prove that Overstock used or made a false record or statement to avoid or decrease an obligation to the State. ... [M]aking or using ... a false record or statement in addition to its ordinary meaning includes other activity under Delaware's False Claims and Escheat law. Under that law, the failure to report or causing the absence of an otherwise obligated record or statement that creates a similar false impression of the obligation to pay or transmit money or property is no different than actively making a false statement. When the alleged violation of a False Claims Act is based on an alleged failure to report or causing the absence of an otherwise obligated record or statement, it may be referred to as a ... reverse false claim. A...
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