Unclaimed Gift Card Balances
By Breton Leone-Quick and Steve Ganis
Are the amounts of unredeemed balances on your company’s gift cards being tracked, reported and paid over to your state of incorporation?
If the answer is no, you could be at risk for significant liability, depending on the outcome of a case currently pending in Delaware. Every company with a gift card program should be aware of this case, titled State of Delaware v. Card Compliant, et al, which could have wide-ranging implications for how unredeemed balances on gift cards must be treated.
Every state has a series of statutes that are commonly referred to as abandoned property laws. These laws include a definition of what constitutes abandoned property, and they also create requirements for the reporting and payment of that property to the state.
In Delaware, and in numerous other states, the abandoned property laws specifically include balances on unredeemed gift cards within the definition of abandoned property. These balances are considered “abandoned property” after five years, and the statute requires any person or company holding abandoned property to pay that property over to the State of Delaware.
But, in practice, most companies are not paying unredeemed gift card balances to their state of incorporation. This is because the general practice has been for companies to hire a third-party program manager to run their gift card program. The program manager is responsible for issuing the gift cards, tracking their sales and redemptions, and providing other administrative support. The third party is also identified as the holder or owner of unredeemed gift card balances, and is typically incorporated in a state that does not include unredeemed gift card balances in its definition of abandoned property.
To date, the understanding has been that the applicable abandoned property laws are those of the state of incorporation of the program manager. And because those laws do not include unredeemed gift cards in their definition of abandoned property, there was no need to report or pay over unredeemed gift card balances to any state.
But the Card Compliant case challenges this basic assumption. The central allegation in the case is that even though companies contract with a program manager, the program manager is not really the holder of unredeemed gift card balances. Rather, the sponsoring company itself is the actual holder. Under this theory, it is the abandoned property law of the sponsoring company’s state of incorporation — not that of the program managers’ state of incorporation — that controls how unredeemed gift cards must be treated.
Although the Card Compliant litigation is in its early stages, it raises several implications:
• This theory could be applicable to non-Delaware corporations. Even though the Card Compliant case is brought against Delaware corporations under Delaware state law, it could still impact companies incorporated in other states. This is because the abandoned property laws in numerous states other than Delaware include unredeemed gift card balances in their definition of abandoned property.
• This may increase state audits. Most state abandoned property laws provide the state an opportunity to conduct audits of companies to determine if those companies are properly reporting and paying over abandoned property to the state. The Card Compliant litigation may prompt the State of Delaware to conduct specific audits of other companies that are not defendants in the Card Compliant suit.
• States have powerful incentives to conduct these audits. First, there is significant money at stake. One study cited in the Card Compliant complaint estimates that there is potentially up to $8 billion of “abandoned” unredeemed gift card balances that states could argue belong to them. Second, seeking recovery of unredeemed gift card balances administratively is cheaper for states than bringing actions under their false claims acts.
• The scope of potential exposure is much more than the face value of the unredeemed cards. Companies should be aware that their potential exposure under the theories advanced in the Card Compliant litigation could far exceed the face value of their unredeemed gift cards.
In addition to understanding these implications, companies should assess their level of potential exposure under the Card Compliant theory and analyze options for restructuring their gift card programs in case the plaintiff’s theory is adopted. These proactive steps can help minimize any adverse impacts that may flow from the ultimate decision in the case.
Breton Leone-Quick is a member in the litigation practice of Mintz, Levin, Cohn, Ferris, Glovsky, and Popeo, P.C., a full-service law firm based in Boston. Steve Ganis is counsel at the firm.