Business Victorious in Unclaimed Gift Card False Claims Case

By , and on June 26, 2020
Posted In Delaware

The Delaware Supreme Court gave Overstock.com a win in a False Claims Act (FCA) suit alleging the retailer failed to remit unclaimed gift card funds to the state. Overstock.com Inc. v. the State of Delaware and French, DE Sup. Ct., No. 327,2019 (June 25, 2020). A jury previously found Overstock liable for approximately $7.3 million. The Delaware Supreme Court, interpreting the FCA statute in effect for the years at issue, determined the trial court judge improperly instructed the jury that the knowing failure to file unclaimed property reports was the making of a false statement as required to succeed on an FCA claim. Contrary to the trial judge’s instructions, the Supreme Court determined that to meet the FCA standard in effect for the years at issue, some document incorporating the alleged false claim must have been provided to the government. Failure to file a report was by definition not a false record or statement because there was not record or statement.

Based on this interpretation of the FCA statute, the jury verdict was reversed because Overstock did not file any unclaimed property reports with Delaware. Absent a filed report, there was no false claim. The plaintiffs alleged other documents were sufficient to meet the submission of a “false record or statement” element of the relevant FCA: (a) Overstock’s books and records and (b) statements to the SEC. The Supreme Court rejected these arguments. Overstock’s books and records were not sufficient because these documents were not submitted to the State and the SEC filings were not submitted in order to avoid the alleged unclaimed property liability.

Delaware, like many states, adopts the same language as the federal FCA statute. The federal government made amendments in 2009 to include language imposing liability if someone “knowingly conceals or knowingly and improperly avoids or decreases an obligation.” Delaware amended its FCA statute in 2013 to include this language.

Practice Note:
This win does not provide any guidance on the substantive issue asserted by the plaintiffs at trial regarding whether and under what facts contracting with another entity to issue gift cards imposes unclaimed property obligations on the issuer rather than the retailer. This is a narrow victory as it applies to a prior version of Delaware’s FCA statute. However, companies confronted by FCA suits – for both unclaimed property and tax liability, should look at when or if the state at issue amended the FCA to adopt the modern version and whether they have a filing history. It is interesting that a company that did not file any report is potentially better off under the historic FCA language than one who did. While this a victory based on a narrow issue, a victory is a victory.

Diann SmithDiann Smith
Diann Smith focuses her practice on state and local taxation and unclaimed property advocacy. Diann advises clients at any stage of an issue, including planning, compliance, controversy, financial statement issues and legislative activity. Her goal is to find the most effective method to achieve a client's objective regardless of when or how an issue arises. Diann emphasizes the importance of defining a client's objective - whether it is finality of a frequently audited issue, quick resolution of a stand-alone tax liability, or avoiding competitive disadvantages in the application of a tax. The defined objective then governs the choice of the path to a solution. Read Diann Smith's full bio.


Stephen P. KranzStephen P. Kranz
Stephen (Steve) P. Kranz is a tax lawyer who solves tax problems differently. Over the course of his extensive career, Steve has acquired specific skills and developed a unique approach that helps clients develop and implement holistic solutions to all varieties of tax problems. He combines strategic thinking with effective skills for the courtroom, the statehouse and the conference room. Read Stephen P. Kranz's full bio.


Eric CarstensEric Carstens
  Eric D. Carstens focuses his practice on state and local tax matters, assisting clients with state tax controversy, compliance and multistate planning across all states for a variety of tax types and unclaimed property. Eric engages in all forms of taxpayer advocacy, including litigation, legislative monitoring and audit defense. He works closely with several of the Firm's taxpayer coalitions focused on specific state tax policy issues such as the taxation of digital goods and services and unclaimed property. Read Eric D. Carstens' full bio.

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