How Do False Claims Act Laws Impact Unclaimed Property?

Gavel and cash on a wood deskRecent cases have showcased a novel way to attack a company’s unclaimed property compliance efforts. Or highlight the lack of unclaimed property compliance in some cases.

Find out what you can do to reduce your risk from False Claims Act lawsuits, their treble damages and private right of actions. Yes, that’s right – plaintiffs don’t have to wait until a state administrator comes after you. If someone has knowledge that your company is not in compliance, they can bring the lawsuit themselves. And recover handsomely for doing so.

What is a False Claims Act?

According to the Legal Information Institute, run by the Cornell Law School, a False Claims Act is a “statute setting criminal and civil penalties for falsely billing the government, over-representing the amount of a delivered product, or under-stating an obligation to the government. The [Federal] False Claims Act may be enforced either by the Justice Department or by private individuals in a qui tam proceeding.”

Companies are typically at risk for “under-stating an obligation to the government” when it comes to unclaimed property. Since unclaimed property obligations are based on state law, it is individual state False Claim Acts that are of concern and very rarely will the Federal False Claims Act come into play.

How Do False Claims Acts Proceed?

In most cases, False Claims Act lawsuits proceed based on a qui tam suit. A qui tam action is where a private party, the relator, brings the lawsuit on behalf of the government who is the real plaintiff.

The qui tam lawsuit is initially filed under seal. And the defendant is not aware of the lawsuit. Instead, the government is notified and given an opportunity to intervene. At the end of the intervention period, plus any extensions that were granted, the government will decide whether to intervene. If they do, they will take over the prosecution of the case. If not, it is up to the relator, the private party that brought the lawsuit, to continue to prosecute the case.

After the government makes its decision on whether to intervene, then the case will proceed like other cases. The complaint is unsealed, the defendant is served, and the litigation proceeds like a normal case, with an answer, discovery, motions to dismiss and summary judgment, and possibly trial.

If the qui tam lawsuit is successful, then the relator is eligible for a portion of the compensation. Under federal law, that can be between 15-30% of the award or settlement from the case. State laws vary, but can be up to 50% under the new California bill should it become law.

However, the catch is that the damages can far exceed the original amount in controversy. False Claims Acts often have treble (fancy lawyer word for triple) damage awards which can drastically increase the liability for companies and the incentive for relators to come forward with a qui tam lawsuit.

Recent False Claims Act Unclaimed Property Lawsuits

Over the last several years, there have been several qui tam unclaimed property lawsuits brought under state False Claims Act statutes.

The most notable was a lawsuit brought against a large number of retailers in Delaware.

Delaware Gift Cards, Qui Tam, and Overstock.com

In Delaware ex rel. French v. Card Compliant et al, French brought a qui tam action under the Delaware False Claims Act against dozens of retailers and a service provider called CardFact for the management of their gift card programs.

CardFact entered into contracts with the retailers to serve as the issuer of the retailers’ gift card programs. CardFact would then form a gift card company (“Giftco”) in states with favorable unclaimed property treatment for gift cards. The qui tam complaint alleged that these giftcos were sham contracts made to create a “false paper trail” to conceal the true holder and liability of the unused gift cards. Under the CardFact scheme, the money from the gift cards remained with the retailers, was never transferred to the Giftco or CardFact, and according to the complaint, the breakage should have been reported to Delaware as the retailers’ state of incorporation.

All but one retailer was either dismissed based on fact specific situations or settlements. However, Overstock proceeded to trial after unsuccessfully attempting to have the case dismissed. Following a six day trial, the jury found Overstock liable for almost $3 million in unredeemed gift cards. With the treble damages, the final award was $7.2 million.

Why not $9 million? Delaware unclaimed property law does not require that retailers report 100% of gift card breakage. Instead, the amount reportable is “the amount representing the maximum cost to the issuer of the merchandise, goods, or services represented by the card.” ยง 1133(14) So the original $3 million in unredeemed gift cards would be adjusted downwards for this cost of goods sold to determine the liability owed to the State of Delaware and then the damages would be trebled.

Overstock has appealed the case.

New York, Qui Tam, and JPMorgan Chase

Another recent qui tam False Claims Act case is out of New York, where some investigators found properties that were reported late by the financial institution JPMorgan Chase.

The relator argued, and the court has thus far agreed in denying JPMorgan’s motion to dismiss, that the holders were required to self-assess interest when reporting properties late.

This case is discussed in more detail at New York Interest on Late Reported Unclaimed Property and is currently under appeal.

If the case goes forward, the relator will have to prove that JPMorgan willfully or recklessly violated the law in failing to self-assess interest on late reported property and whether the violation was material.

Defenses to False Claim Act Lawsuits

In the Card Compliant/CardFact case in Delaware, many retailers were dismissed from the case based on a legal defense.

Under the Delaware False Claims Act, an action is barred if the underlying transaction was subject to an action or administrative proceeding that the government was already a party to.

In many cases, the fact that the holder was either under audit or had already completed an audit where the state review the gift card program, was a defense against the qui tam action.

Those retailers were never so happy to have been through the arduous process of an unclaimed property audit, right?

Another defense is when the actions were previously publicly disclosed, by government action or hearing or the news media. False Claims Acts are designed to uncover fraud, not to punish fraud that has already been uncovered.

Implications for Unclaimed Property Holders

Historically, False Claims Act actions have been intended to ferret out wasteful spending on government contracts and certain tax disputes. False Claims Act damages have been set so high to deter people and companies from knowingly committing fraudulent acts.

Now, False Claims Acts are moving into areas in unclaimed property that are common practices – waiting on the state to assess interest, planning gift card companies, and more.

And if it is about the underlying property, and not say interest, is the money really owed to the government? Unclaimed property belongs to the owner, not the state.

But that won’t stop potential relators from seeking possible action against companies. Treble damages and the whistleblower’s potential windfall is too attractive to stop future actions.

How To Protect Your Company from False Claims Act Suits

There is no way to guarantee that a company will never be the defendant in a False Claims Act lawsuit when it comes to unclaimed property.

Fortunately, there are some ways to reduce your risk:

  1. Have a comprehensive compliance program that complies with every state’s unclaimed property laws.
  2. Document the unclaimed property policies, along with statutory references that you are relying on.
  3. Take advantage of voluntary disclosure agreement opportunities where they exist.
  4. Obtain legal counsel for any gray areas or conflicts between the states’ laws.
  5. Seek direction or instruction from state unclaimed property administrators, treasurers, or the state attorney general’s office, if necessary.
  6. Document all aspects of an unclaimed property audit so that you can show the issue has been addressed in a prior administrative proceeding.
  7. Listen to employees. They are the closest to your data and may uncover potential issues. Address them promptly.

False Claims Act lawsuits highlight the need for comprehensive, documented unclaimed property compliance programs. If your company needs assistance establishing or maintaining an unclaimed property program, defending against an unclaimed property False Claims Act lawsuit, or defending against a state unclaimed property audit, please contact Kimberly DeCarrera for assistance.