A Delaware jury has returned a $3 million verdict in a whistleblower suit against Overstock.com, finding after just one hour of deliberation that the online retailer had avoided reporting abandoned gift card balances to state officials.
The verdict, which followed a six-day trial, is likely to lead to an automatic trebling of damages, plus an award of attorney fees, bringing Overstock’s potential liability to as much as $10 million in the four-and-a-half year-old case, an attorney for whistle blower William Sean French said on Monday.
In 2014, French, who had previously worked for Ohio-based CardFact, accused his former employer of creating shell companies and conspiring with retailers to evade its obligation report and return the funds to Delaware, which relies on unclaimed property for its third-largest source of revenue.
Attorneys from the Delaware Department of Justice quickly moved to intervene on behalf of the state, alleging that CardFact, now known as Card Compliant, had worked with retail companies to deprive the state of hundreds of millions of dollars in unclaimed gift card balances, in a “scheme” dating back to 2005.
In a 116-page complaint, the state alleged that CardFact and the retailers attempted to circumvent reporting requirements by forming shell companies in Ohio and Florida, where unredeemed gift card balances can’t revert to state coffers. CardFact and the retailers would then issue gift cards or contractually assign the retailer’s existing obligation to cardholding customers to the alleged shell companies and terminate the retailers’ obligations, attorneys said.
The defendants moved for summary judgment, seeking dismissal of all claims last year. In court documents, the companies said that the assignments to non-Delaware entities were valid because the retailers had no duty to pay the value of the gift cards under the state’s unclaimed property laws. Their actions, they argued, were “objectively reasonable” because Delaware had issued no definitive guidance to the contrary.
Delaware Superior Court Judge Paul R. Wallace denied the motion, paving the way for trial this month.
Stuart M. Grant, who represented French along with a team of attorneys from the Wilmington plaintiffs’ firm Grant & Eisenhofer, said CardFact settled the case along with about a dozen other retailers, which had been accused of engaging in the scheme. The exact terms of those settlements are confidential, but Grant said they had secured between $25 million and $30 million, collectively.
Overstock was the only defendant to go to trial in the civil action. Argument wrapped up around 1 p.m. Sept. 20, and a panel of 12 jurors returned their verdict shortly after 2 p.m. that same day, Grant said.
“We are not surprised that the jurors had no trouble seeing through the scam that Overstock tried to pull,” Grant said in a statement last week announcing the verdict. “This case was simple and straightforward. Overstock had a legal obligation to report and turn over almost $3 million dollars from unused gift cards to the state. The company knew the law and instead of following it, they intentionally tried to evade their obligation.”
According to Grant, the case only involved actions Overstock had taken between 2005 and 2007. However, the company is also accused of similar violations that occurred between 2008 and 2012.
It would be up to the state to decide how to proceed with those allegations, Grant said. Officials could decide to either file another lawsuit or initiate an audit to recover any disputed funds. But if the company were to resist an audit, that would lay the groundwork for a separate lawsuit, he said.
Attorneys for Overstock were not immediately available to comment on Monday.
Grant & Eisenhofer attorneys Mary S. Thomas, the firm’s director, and associate Laina M. Herbert also represented French in the case, captioned Delaware v. Card Compliant.
Deputy Attorneys General Thomas E. Brown, Edward K. Black and Stephen G. MacDonald of the Delaware DOJ represented the state.
David S. Eagle and Michael W. Yurkewicz of Klehr Harrison Harvey Branzburg and Martin I. Eisenstein, David Swetman-Burland and Stacy O. Stitham of Brann & Isaacson represented Overstock.