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State ex rel. French v. Card Compliant, LLC

Superior Court of Delaware

April 21, 2017

THE STATE OF DELAWARE, ex rel. WILLIAM SEAN FRENCH Plaintiff-Relator,
v.
CARD COMPLIANT, LLC, et al, Defendants.

          Submitted: January 24, 2017

         Upon Defendants, Ralph Lauren Corp., Ruth's Hospitality Group, Inc., and Shell Oil Co.'s Motions to Dismiss or, in the Alternative, for Summary Judgment, GRANTED.

          Thomas E. Brown, Esquire, Edward K. Black, Esquire (argued), Stephen G. McDonald, Esquire, Deputy Attorneys General, Delaware Department of Justice, Wilmington, DE, Attorneys for the State of Delaware.

          Stuart M. Grant, Esquire, Mary S. Thomas, Esquire (argued), Diane Zilka, Esquire, Vivian Upadhya, Esquire, Grant & Eisenhoffer P.A., Wilmington, DE, Attorneys for Plaintiff-Relator William Sean French.

          Kenneth K. Nachbar, Esquire, Michael Houghton, Esquire, Matthew R. Clark, Esquire, Barnaby Grzaslewicz, Esquire, Morris, Nichols, Arsht & Tunnell LLP, Wilmington, DE, Ethan D. Millar, Esquire, Of Counsel (pro hac vice), J. Andrew Howard, Esquire, Of Counsel (pro hac vice), Alston & Bird LLP, Los Angeles, CA, William R. Mitchelson, Jr., Esquire, Of Counsel (argued) (pro hac vice), Jason D. Popp, Esquire, Of Counsel (pro hac vice), Alston & Bird LLP, Atlanta, GA, Attorneys for Defendants Ralph Lauren Corporation and Ruth's Hospitality Group, Inc.

          Colm F. Connolly, Esquire, Jody C. Barillare, Esquire, Morgan, Lewis & Bockius LLP, Wilmington, DE, Gregory T. Parks, Esquire, Of Counsel (pro hac vice), Ezra D. Church, Esquire, Of Counsel (pro hac vice) (argued), Morgan, Lewis & Bockius, Philadelphia, PA, Attorneys for Defendant Shell Oil Company.

          MEMORANDUM OPINION AND ORDER

          PAUL R. WALLACE, JUDGE

         I. INTRODUCTION

         The State of Delaware and a foreign private citizen charge that dozens of Delaware's corporate citizens collectively attempted to cheat Delaware out of its portion of unused gift card balances via use of out-of-state "shell" entities devised to hold these funds. Plaintiff-Relator William Sean French ("French") first brought this action in June 2013 pursuant to Delaware's False Claims and Reporting Act, alleging violations of Delaware's Abandoned and Unclaimed Property Law.[1] The State of Delaware (for ease of reference referred to hereinafter as "the State, " both individually and collectively with French) filed a Motion to Intervene on March 26, 2014.[2]

         Before the Court are three Defendants' - Ralph Lauren Corporation ("Ralph Lauren"), Ruth's Hospitality Group, Inc. ("Ruth's"), and Shell Oil Company ("Shell") - Motions to Dismiss, or in the Alternative, for Summary Judgment. They allege this Court has no subject matter jurisdiction over the State's claims because its (adopted) Complaint is precluded by 6 Del. C. § 1206(b), the DFCRA's Administrative Proceedings Bar.[3] Even if subject matter jurisdiction exists, Defendants urge dismissal because, in their view, the State failed to adequately comply with its statutory obligation to investigate the factual allegations of its (adopted) Complaint.

         Defendants argue that the State's case is precluded by the Administrative Proceedings Bar because its Complaint's claims are "substantially based upon allegations or transactions which are the subject of the State's previous or current audits or inquiries of the Defendants. The Court agrees. Because the State's case is "substantially based upon transactions" that are, and have long been, the subject of ongoing State administrative proceedings, these three Defendants' motions to dismiss are GRANTED.

         II. FACTUAL AND PROCEDURAL BACKGROUND

         Plaintiff-Relator William Sean French resides in Columbus, Ohio. He claims to be an "original source" with personal knowledge of non-public facts central to the State's case.[4] This means that he claims to have "direct and independent knowledge of the information on which the allegations are based."[5] French claims to have, at some time, maintained the alleged out-of-state "shell" entities' books and records. He claims to have copies of the entities' marketing materials, contracts, and correspondence with the Defendants. This includes, most importantly here, reports of amounts of unredeemed gift card values.[6] But it appears that well prior to French's involvement, the State had already begun actions to investigate or audit Ralph Lauren, Ruth's, and Shell.

         In June 2008, the State employed Kelmar Associates LLC ("Kelmar"), an auditing company with expertise in unclaimed property, to institute Audit proceedings against Shell to see if it was in compliance with Delaware's escheat laws.[7] This Audit was to include gift cards.[8] French was offered employment with Kelmar, the State's auditing company, more than three years later, on July 25, 2011.[9] He began to work at Kelmar in August 2011 and was terminated less than three months later.[10]

         On December 21, 2012, Ruth's submitted a notification of intent to enter into the Voluntary Disclosure Program with Delaware.[11] The State countersigned and accepted the notice of intent, admitting Ruth's to the Program on January 7, 2013.[12] This program included an investigation into all unredeemed gift card balances.[13] And so information relating to gift cards was provided by Ruth's to the State on March 28, 2013.[14]

         On February 6, 2013, the State notified Ralph Lauren that it was commencing an Audit to see if Ralph Lauren was in compliance with Delaware's escheat laws.[15] This Audit also included gift cards.[16]

         On June 28, 2013, while the Audits and voluntary disclosure matters were ongoing, French filed his Complaint under seal. In it, he alleged that, among others, Ralph Lauren, Ruth's, and Shell employed various methods to avoid escheat obligations to the State. In his Complaint, French expressly stated that his qui tarn action was not based on allegations or transactions that were the subject of an ongoing administrative proceeding.[17] The State intervened and his Complaint was unsealed on March 26, 2014.[18]

         Prior to intervening, the State did not investigate whether or not any of the defendants in the qui tarn action were undergoing administrative proceedings.[19] The State is under a statutory obligation to investigate these claims prior to intervening and proceeding with a qui tarn complaint.[20] The State admits it did not do so.[21] If it had, it would have learned that Ralph Lauren, Ruth's, and Shell were all undergoing administrative proceedings nearly identical to those Pantry, Inc. was subjected to, in which the Court previously found necessitated dismissal of that co- defendant in this very action.[22]

         Ralph Lauren is a Delaware corporation with its principal place of business in New York City. Ruth's is a Delaware corporation with its principal place of business in Winter Park, Florida. And Shell is a Delaware corporation with its principal place of business in Houston, Texas.

         Defendants have sold countless gift cards. These cards' holders use them to purchase Defendants' services or products. If a holder does not use the entire value of a card, the unused value remains available on the card for later use. According to the State, five years after the initial issuance of Defendants' gift cards, Delaware is entitled to any remaining balance on the gift card under the DAPL.[23]

         The State alleges that Defendants intentionally failed to report and transfer the value of the unredeemed gift card balances to Delaware.[24] The State claims they did so by organizing, or contracting with co-defendants who organized, shell entities in Ohio and Florida to "hold" the value of unredeemed gift cards. Why? Because those states do not include unredeemed gift card values in their definitions of abandoned property.[25] The State claims Defendants created the relationships with various shell corporations in those states to issue the gift cards via contracts with two common central components: (1) a Card Services Agreement, and (2) a Trademark Licensing Agreement.[26] The Card Services Agreement states that a card servicer is responsible for manufacturing, marketing, and selling the gift cards, while the Defendants receive and hold money from the gift cards sold but not yet redeemed. The Trademark Licensing Agreement outlines payment between a card servicer and the Defendants. For the three Defendants here, the card servicer was co-defendant CardFact, Ltd. ("CardFact").

         A. Delaware Audits Ralph Lauren

         On February 6, 2013, the State Escheator contacted Ralph Lauren via letter. In the letter, he informed Ralph Lauren that Delaware was commencing an examination and audit of Ralph Lauren's books and records to see if it was complying with Delaware's escheat law.[27] This examination included gift certificates and gift cards.[28] The State's letter instructed Ralph Lauren to "issue a litigation hold notice so that all records, including, but not limited to . . . gift certificate issuances and redemptions, etc. will be retained. . . ."[29] The letter also noted that the audit would be conducted on the State's behalf by Kelmar.

         On March 6, 2013, Kelmar demanded a number of documents from Ralph Lauren, including anything related to unclaimed property Voluntary Self-Disclosure Agreements ("VDAs") between Ralph Lauren and any state.[30] Kelmar regularly collects such information during an audit, as the terms of the VDA may impact the type and scope of review Kelmar undertakes. Ralph Lauren promptly informed Kelmar that they had completed a VDA with Delaware in 2002. Ralph Lauren made payments to Delaware pursuant to that VDA for unredeemed, abandoned gift certificates and merchandise credits between 2003 and 2006.[31] No payments were made in 2006. This is because on December 31, 2006, Ralph Lauren transferred all liabilities related to existing and prospective gift cards to CardFact pursuant to a Card Services Agreement.[32] Ralph Lauren suggested that the gift cards issued by, or assigned to, CardFact under the Agreement should not be included in the audit.

         On August 23, 2013, Kelmar sent an e-mail to Ralph Lauren with an agenda and binder of materials for an opening conference to be held on August 27, 2013.[33] The binder included a section entitled "Basic Abandoned and Unclaimed Property, " stating that property subject to the escheat laws included "unredeemed gift certificates and store credits."[34] The property types discussed during that opening conference were the same property types listed in the agenda materials; this included gift cards.[35] So, gift cards are a focus of Delaware's Audit.

         Delaware's Audit of Ralph Lauren is currently ongoing. There has been no resolution regarding any potential liability to Delaware for outstanding gift card balances.[36]

         Back on March 26, 2014, Delaware intervened in the current action brought by French.[37] The State alleges that Ralph Lauren's Card Services Agreement with CardFact is an artifice through which the parties intended "to hide . . . revenue from the State by creating sham contracts portraying themselves as the 'holders' of unredeemed gift cards in exchange for an annual fee from the [Defendants]."[38] Upon intervening, the State ordered Kelmar to suspend the Audit as to gift cards.[39] This Motion to Dismiss followed on August 25, 2016.

         B. Ruth's Voluntary Disclosure Agreement

         On December 26, 2005, Ruth's entered into a Card Services Agreement with CardFact.[40] The Agreement named CardFact "the holder of any unclaimed property with respect to any now existing Cards or Cards issued [after 2001]."[41]

         In 2009, Louisiana conducted an unclaimed property audit of Ruth's. It intended to resolve unclaimed property issues associated with "(1) any unredeemed gift cards with no known customer address issued by any [Ruth's] Company that was incorporated in Louisiana and (2) any unredeemed gift cards issued to customers located in Louisiana."[42] Ruth's disclosed the December 2005 CardFact agreement to Louisiana. Louisiana did not require Ruth's to report or remit any unclaimed property to Louisiana from the time period after entering into the CardFact agreement, but did require it to report anything prior to that.

         The Louisiana audit ended in a Uniform Release Agreement between Louisiana and Ruth's, whereby Ruth's reported and remitted all qualifying property from before 2001 to Louisiana. Louisiana then released Ruth's from any further liability.[43]

         In November 2010, Ruth's retained PricewaterhouseCoopers, LLC ("PwC") to assess any potential outstanding unclaimed property obligations in other states.[44] At PwC's advice, Ruth's entered into the Delaware Voluntary Disclosure Agreement ("VDA") program on December 21, 2012.[45] Under 12 Del. C. § 1177, this VDA program authorizes Delaware "to resolve and compromise claims for abandoned property otherwise owing to the State Escheator."[46]

         On January 7, 2013, Delaware authorized the required documentation allowing Ruth's entry into the VDA program.[47] The document reflected Delaware's intent to examine Ruth's books and records to find "all abandoned property related to all transactions years beginning January 1, 1996 ... to present."[48] Gift certificates and cards were expressly included.[49]

         On March 28, 2013, Ruth's submitted a VDA memorandum to Delaware outlining its gift card program. The memorandum explained the CardFact Agreement and included a copy of the Agreement. It stated that there were no unredeemed gift cards sold by Ruth's that were escheatable to the State due to the Agreement.[50] The State agreed with this conclusion. On May 14, 2013, a VDA Administrator stated that the "analysis was sound" and "we agree that the gift card liability, if any, for gift cards 'sold' by [Ruth's] . . . appears to rest with CardFact or its successor in interest. . ., not [Ruth's]."[51]

         On March 28, 2014, the State intervened in the instant action. The State alleges that Ruth's knowingly avoided escheat obligations related to gift cards and that the CardFact agreement is a "sham."[52] After intervening, the State directed its examiners to take no further action in any audits involving the Defendants.[53] The State believed that the same applied to any VDA proceedings.[54]

         Yet one month after the State intervened here, its VDA administrators requested additional information regarding the CardFact Agreement and structure along with Ruth's gift card program. They claimed it was to expedite the VDA process for Ruth's. Ruth's provided the requested information to the State. Yet there has been no resolution regarding Ruth's potential liability for gift card balances under the VDA. Ruth's has neither withdrawn from the VDA program nor obtained a release from the State for any unclaimed property included in the VDA.[55] The VDA proceedings are suspended during the pendency of the instant litigation.[56]

         C. Delaware Audits Shell

         In June 2008, the State began an Audit of Shell to determine if it was in compliance with Delaware's escheat laws and to see if it was the holder of any unclaimed property.[57] The Audit was to "relate to all property subject to escheat, " including gift cards and gift certificates.[58] Kelmar conducted the Audit on Delaware's behalf, just as it did with Ralph Lauren.[59]

         On September 16, 2011, Delaware began requesting specific documents and information related to Shell's gift card program and its work with CardFact.[60] Shell identified CardFact as the operator of its gift card program and provided Kelmar with its Card Services Agreement.[61]

         Mid-2012, Kelmar inquired as to whether Shell entered into any agreements that "transferred any gift card revenue, expense, asset, or liability to any other related or unrelated entity" and how gift card related entries appeared in Shell's books.[62] Shell informed Kelmar that all of that information was contained in the CardFact Agreement that it already provided. In March 2013, Shell identified for the State that CardFact was the "Card Owner/Issuer" and again explained the structure of its CardFact Agreement.[63] Shell also provided the number and value of gift cards activated and data for those gift cards with remaining balances.[64]

         In November 2013, Kelmar requested detailed transactional level data from Shell. Shell told Kelmar that it could not provide that data because it did not maintain such records.[65] But it said that CardFact would have all such records because it was the "sole obligor of all gift cards that were either sold or had a last activity date after January 1, 2002."[66]

         While the Delaware Audit was ongoing, French filed his Complaint, and Delaware intervened. On June 2, 2014, Kelmar informed Shell that the State instructed it to suspend the gift card portion of the Delaware Audit during the pendency of this litigation.[67] Regardless of the suspension, Shell is still required to retain all records pertaining to gift cards.[68]

         III. STANDARD OF REVIEW[69]

         Pursuant to Delaware Superior Court Civil Rule 12(b)(1), the Court must dismiss an action for lack of subject matter jurisdiction if it appears from the record that the Court does not have jurisdiction over the claims.[70] "The burden of establishing the Court's subject matter jurisdiction rests with the party seeking the Court's intervention."[71] "When reviewing a claim for lack of subject matter jurisdiction, the Court 'need not accept Plaintiffs factual allegations as true and is free to consider facts not alleged in the complaint."'[72]

         IV. DISCUSSION

         Defendants argue that the DFCRA's Administrative Proceedings Bar precludes the Court from exercising subject matter jurisdiction over the State's claims here. The State argues that its claims are not barred under the Administrative Proceedings Bar because the Defendants have not been the subject of any prior or ongoing "administrative proceeding."

         Defendants are correct; the Court does not have subject matter jurisdiction over the State's claims in this action due to the Administrative Proceedings Bar.

         A. DFCRA's Administrative Proceedings Bar

         The Superior Court has jurisdiction over all violations of the DFRCA.[73] However, DFCRA § 1206(b) states that "[i]n no event may a party bring an action under this chapter which is substantially based upon allegations or transactions which are the subject of a civil suit or an administrative proceeding in which the Government is already a party."[74]

         So Section 1206(b) carves from the Court's jurisdiction any action brought by any party if it is substantially based on allegations or transactions that are the subject of an administrative proceeding in which the State is already a party. Where "the Court lacks jurisdiction of the subject matter, the Court shall dismiss the action."[75] In turn, this subject matter jurisdiction issue is a threshold one that must be determined before the case against these three Defendants may proceed further.[76]

         At issue here are DFCRA § 1206(b)'s two requirements for its application to bar litigation: first, whether there are prior or ongoing administrative proceedings against the Defendants in which the State was a party; and, second, whether the DFCRA claims are substantially based upon transactions or allegations that are or were the subject of the prior or ongoing administrative proceedings. Accordingly, for the bar to apply here, this Court must find: (1) that the Audits and the VDA are administrative proceedings; and, (2) that the subject matter of the Audits and the VDA are the same as the instant litigation. The Court has been here before in this case.

         B. Application of the Administrative Proceeding Bar to Pantry, Inc.'s Dismissal and Prior Audit Actions

         In 2015, when a different judge was assigned, this Court applied 6 Del. C. § 1206(b) and dismissed Pantry, Inc. from this suit.[77] Pantry, Inc. had moved to dismiss, arguing Delaware's Audit of it to determine escheatable property was an administrative proceeding. Delaware audited Pantry, Inc. and determined that defendant's obligations prior to May 2011.[78] The State responded, arguing "that there was no administrative proceeding because the parties never ended-up in the Court of Chancery, " and "even if there was, § 1206(b) only bars the transactions Kelmar [on behalf of Delaware] examined during its audit."[79]

         The judge observed that § 1206(b) "bars not only 'transactions, ' but also 'allegations' that were the subject of [Delaware's] [A]udit."[80] Because the Complaint and Delaware's Audit were substantially based upon the same allegations or transactions, he found that the questioned property - unredeemed gift card values - cannot be the subject of the State's suit here.[81]

         The Court's analysis then must inform the Court's interpretation of the Administrative Proceedings Bar now.[82] This is because "[a] successor judge overruling a decision of a predecessor judge of the same Court is strongly disfavored."[83] "Such a situation is guided by the doctrine of the law of the case so as to promote 'fundamental fairness and . . . judicial efficiency.'"[84] "This is to ensure that, especially where the case is taken on by a successor judge, the parties are not 'entrapped by varying philosophies of different judges of the same Court in the case.'"[85] Yet unlike res judicata, the "law of the case doctrine is not inflexible ... it is not an absolute bar to reconsideration of a prior decision that is clearly wrong, produces an injustice or should be revisited because of changed circumstances."[86] But here there is nothing to suggest either a change in circumstances or that injustice would ensue by applying the prior law of the case. To the contrary, nothing has been suggested by the State that convinces the Court it should abandon the general law-of-the-case principle: it should be applied "in all instances except in those extraordinary circumstances where justice demands revisiting the merits of the parties' claims."[87] The Court finds no such extraordinary circumstances exist.

         C. What's an "Administrative Proceeding" with the State "Already a Party" Under Delaware's 2012 Version of the Administrative Proceedings Bar?

         The DFCRA does not define the term "administrative proceeding." So the Court must determine what was meant to bar DFCRA claims under § 1206(b). At issue here are two Delaware-directed Audits and one VDA.

         1. Delaware's Abandoned or Unclaimed Property Audit Process

         Twelve Del. C. § 1155 begins the Abandoned or Unclaimed Property Audit process by allowing the State to gather information from a person (or organization) who may be holding abandoned or unclaimed property "to determine whether the person [or organization] has complied with" the provisions of the DUPL.[88] Once this process is complete, the Audit Manager provides a Report with the Audit's findings.[89] If Delaware decides that the information gathered by the Audit Manager shows "that a holder has underreported abandoned or unclaimed property due and owing, " the Auditor mails a statement of findings and requests payment from the holder.[90] After the holder receives the statement of findings and payment request, it has 60 days to file a protest.[91] The holder can submit additional documentation if needed, but no later than 30 days after the protest.[92] The Audit Manager then makes a written determination on any protest within 60 days if no additional information is filed and within 90 days if additional information is filed.[93] If the holder is not satisfied with that determination, it may appeal to the Secretary of Finance, who will appoint an independent reviewer to the appeal of the Audit Manager's findings.[94] Either party may then appeal to the Court of Chancery.[95]

         2. Delaware's Abandoned Property VDA Process

         Twelve Del. C. § 1177 controls the Delaware Abandoned Property VDA process.[96] The statute allows the Secretary of State to "resolve and compromise claims for abandoned property otherwise owing to the State Escheator" via a voluntary disclosure agreement process.[97] When doing so, the Secretary has "full and complete authority to determine and resolve all such claims.''[98] And "any unclaimed property disclosure agreement accepted by the Secretary of State shall be deemed as waiving the right of [the State] to seek payment of any amounts of property pursuant to [the audit provisions]" unless there is fraud or willful misrepresentation by the party making the disclosure."[99] If the Secretary is unable to resolve the claims, he may refer the resolution to the State Escheator at any time.[100] Thus, once the party enters into a VDA with the State, it remains engaged in the process until a resolution is reached by either the Secretary of State or the State Escheator.

         A holder of abandoned property, as a disclosing party, initiates Delaware's VDA process by filing with the Secretary of State a Disclosure and Notice of Intent to Voluntarily Comply with Delaware's Abandoned Property Law.[101]Within about 30 days, the State's VDA Administrator "returns a countersigned [confidentiality and non-disclosure agreement], " follows-up the discloser's prior submissions, and "prompts [the discloser] on expectations for [the] next phase."[102]

         Within 90 days of entering the initial document, the disclosing party self-reviews documents and must present those review findings to the VDA Administrator.[103] The disclosing party is obliged to perform "a detailed, transaction-level review of the available records" and "check-in with [the VDA] Administrator on the methods used and/or all assumptions made during this process."[104] The discloser must then present the VDA Administrator with a final report, which the VDA Administrator reviews and follows up as needed.[105] During this process, the State's VDA Administrator confirms and tests the disclosing party's conclusions. Delaware and the disclosing party then execute a final report and summary schedule and Delaware generates a demand letter to prompt the voluntary discloser to remit payment.[106] This discharges the disclosing party from all obligations arising from the years included in the VDA.

         3. Both the Delaware Audits and VDAs Defendants Have Endured Here are Administrative Proceedings Under the Then-Extant § 1206(b)

         "When there is a dispute over the meaning or effect of a statutory provision, a Court conducts a search for legislative intent."[107] In seeking such intent, "Delaware courts utilize the plain meaning rule."[108] Because there is no specific definition of an "administrative proceeding" in the statute, the Court looks to ordinary sources to define the term.[109] Black's Law Dictionary says an "administrative proceeding" is "[a] hearing, inquiry, investigation, or trial before an administrative agency, usually adjudicatory in nature but sometimes quasi-legislative."[110]

         For sure, each process at issue here - a § 1155 Audit and a § 1177 VDA - is an "inquiry" or "investigation" directed by an administrative agency of the State. Both have compulsory aspects. Both are invasive and time-consuming. And in both the State 'inquires' into and 'investigates' the target's books and records.

         The federal analogue to the DFCRA is informative when deriving the proper definition of "administrative proceeding" under our statute.[111] Thirty-one U.S.C. § 3130(e)(3) states that "[i]n no event may a person bring an action under [the Federal False Claims Act] which is based upon allegations or transactions which are the subject of a civil suit or administrative civil money penalty proceeding in which the Government is already a party."[112] This language is nearly identical the DFCRA's.[113] The federal statute was enacted "to continue the prohibition against strictly parasitic lawsuits."[114] It was a "congressional effort[] to walk a fine line between encouraging whistle blowing and discouraging opportunistic behavior. . . . ...


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