Retail Companies Could Soon Be Required to Pay Unredeemed Gift Card Balances
By Breton Leone-Quick and Steve Ganis
What are you currently doing about unredeemed balances on your company’s gift cards? Are these amounts being tracked, reported and paid over to your state of incorporation? If the answer to these questions 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 broad and 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 general understanding has been that the applicable abandoned property laws are those of the state of incorporation of the program manager, and because – as discussed above – 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 Key Allegations from the Card Compliant Complaint
The central allegation in the Card Compliant 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.
The key allegations in support of this general theory are:
• Certain of the corporate defendants retained possession of the proceeds from gift card sales;
• Certain of the corporate defendants recorded unredeemed gift card balances as revenue after a few years;
• The consumer was never informed that the gift card manager was the obligor with respect to the card;
• The value of unredeemed balances came back to the corporate defendants in the form of trademark or licensing and handling fees; and
• The program managers assumed historic liability for all unredeemed gift card balances.
The complaint claims that the failure to report and pay unredeemed gift card balances to Delaware (their place of incorporation), violates not only Delaware’s abandoned property laws, but also its False Claims and Reporting Act.
Understanding the Practical Implications of the Card Compliant Case
The Card Compliant litigation is in its very early stages and an initial substantive decision on plaintiff’s legal theory is likely months away. But prior to a final decision on the merits of this theory, there are several practical implications this litigation raises that are ripe for consideration:
• 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.
• Increased 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. Many states provide for penalties and interest for any abandoned property that is not paid over to the state in a timely manner. For example, Delaware abandoned property laws provide for penalties on unpaid amounts from 50% of the amount past due, up to 75% in cases involving fraud. With respect to interest, Delaware imposes interest at .5% a month on late payments (capped at 50%). Most state false claims acts also provide for treble damages, a per occurrence penalty, and imposition of costs and attorneys’ fees.
In addition to understanding these implications, companies should both assess their level of potential exposure under the Card Compliant theory, and also analyze options for restructuring their gift card programs in case 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 employing approximately 450 attorneys worldwide with headquarters in Boston.
Steve Ganis, of counsel at the firm, has over 20 years of government and private-sector experience as a financial services regulatory lawyer.
Three Lessons Digital Retailers Can Learn From Fishing
Now that the dog days of summer are here, it’s a perfect time to go fishing. While fishing may be the opposite of work (at least if done properly), there are still valuable lessons digital retailers can take from the ocean, lake or stream back to the office. Here are a few fishing-related digital retail tips even non-anglers can follow.
Fresh water fishing aficionados know that fish swimming in lakes and ponds like structure, or changes in contour and depth along the bottom of the body of water. Structure can include man-made features like the remains of a boat, as well as natural changes in the surface. Knowing where the structure is can make a huge difference in the success of a fishing expedition.
Likewise, digital retailers need to be aware of online “structure” that attracts consumers who are likely to buy their products. This includes blogs, social media pages, video channels, online communities, coupon and deal sites, digital shopping and auction platforms, and popular RSS feeds. By carefully using structure to help target high-value consumers with relevant messages, offers and information, digital retailers can land new customers instead of mourning the ones who got away.
Even the hardiest of old salts realizes that highly sophisticated, GPS-enabled fish finding technology makes locating elusive marine quarry much easier. While fish finding systems do not negate the value of human instinct and expertise that can only be honed by years on the water, they complement gut feeling nicely and also allow even non-expert anglers to increase their catches.
Digital retailers can similarly buttress the know-how of in-house merchandising and marketing experts with the use of advanced IT solutions that track the behavior, purchase habits and even location of shoppers in near-real or real time. Thus retailers can make much more precisely targeted offers via text, email, automated coupon, or other digitally enhanced means at the moment when customers are most likely to take advantage of them. And the user-friendly interfaces of most modern IT applications means that the functionality to deliver highly personalized and timely offers can be distributed to store associates and customer service representatives as well as to senior marketing and technology personnel.
Simply throw a worm on a hook, toss your line in the water, and get ready for… a lot of waiting and watching. Different fish require different bait, which may be live or manmade and vary by a dizzying array of other crucial features. In addition, how you cast, the type of rod and line you use, and numerous other factors are critical to successfully catching the type of fish you are after.
Digital retailers also need to realize that different types of omnichannel “bait” work best for different types of customers. Tech-savvy, rushed Millennials may react well to location-based, time-sensitive texts, while slower-paced Boomers may prefer an email notifying them of a personalized deal well in advance. Women may like participating in cooperative social games while men may want online recognition on a leaderboard for competitive achievements. Just remember that even knowing where your digital customers congregate and what they’re doing at a given moment won’t produce results if you don’t know who they are and what they want.
RuMe adds former Groupon exec to board
RuMe, an earth friendly lifestyle brand, has appointed Farhan Yasin to its board of directors. Yasin joins RuMe’s board to provide strategic guidance on the company’s continued innovation and expansion within e-commerce, business operations and managing its rapid growth.
Yasin is the co-founder and CEO of DataClover, formerly Snehta, a sales and marketing software provider that manages customer acquisitions and retention by delivering relevant connections between businesses and consumers. Prior to founding DataClover, Yasin served as the chief operating officer of Groupon, focusing on international growth and sales strategies. Prior to his tenure at Groupon, he served as the president of CareerBuilder’s EMEA group, directing its international strategy.
"Farhan is a world-class operating executive and we look forward to leveraging his expertise to further develop our lifestyle brand," said Jae Lee, RuMe’s CEO. "Like RuMe, Farhan is focused on innovation and operations and we anticipate his insights to be exceptionally valuable for our e-commerce efforts and managing RuMe’s growth."
"RuMe already has an impressive line-up of products that are highly functional, aesthetically pleasing and sustainable," said Yasin. "I am excited to be involved with an innovative organization that is on the cutting edge of the reusable products industry, to help navigate and further spur its growth."
Denver, Co. based RuMe, short for ReUseMe, launched on Earth Day 2008 by a husband and wife team, Jae and Katy Lee, with a mission of making eco-consciousness easy. RuMe’s diverse portfolio of products offers sustainable solutions for a broad range of users.