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State ex rel. French v. CVS Health Corp.

Superior Court of Delaware

September 24, 2019

CVS HEALTH CORPORATION, et al. Defendants. ex rel. WILLIAM SEAN FRENCH, Plaintiff-Relator,

          Submitted: July 2, 2019

         Upon Defendant CVS Health Corporation's Motion to Dismiss, GRANTED.

         Upon Defendants Card Compliant, LLC, Card Compliance Holding Company, LLC, Card Compliance, LLC, Card Fact Acquisition Co., LLC, and Card Fact 25, Inc.'s Motion to Dismiss, GRANTED.

         Upon Defendants Vacation Properties United, Ltd. and The Factoring Company's Motion to Dismiss, GRANTED.

          Bruce E. Jameson, Esquire, Samuel L. Closic, Esquire, Wilmington, Delaware, Prickett, Jones & Elliott, P.A., Justin S. Brooks, Esquire, Guttman, Buschner & Brooks PLLC, Wilmington, Delaware, Elizabeth H. Shofner, Esquire (pro hac vice), Guttman & Buschner & Brooks PLLC, Washington, D.C., Attorneys for Plaintiff-Relator William Sean French.

          Kenneth J. Nachbar, Esquire, Michael Houghton, Esquire, Matthew R. Clark, Esquire, Barnaby Grzaslewicz, Esquire, Morris, Nichols, Arsht & Tunnell LLP, Wilmington, Delaware, Ethan D. Miller, Esquire (pro hac vice), Jason D. Popp, Esquire (pro hac vice), Gavin Reinke, Esquire (pro hac vice), Alston & Bird LLP, Attorneys for CVS Health Corporation.

          Stephen E. Jenkins, Esquire, Catherine Gaul, Esquire, F. Troupe Mickler, IV, Esquire, Ashby & Geddes, Wilmington, Delaware, Attorneys for Card Compliant, LLC, Card Compliance Holding Company, LLC, Card Compliance, LLC, CardFact Acquisition Co., LLC, and CardFact 25, Inc.

          Brian E. Farnan, Esquire, Farnan LLP, Wilmington, Delaware, Attorneys for Vacation Properties United Ltd. and The Factoring Company.



         On August 7, 2017, Plaintiff-Relator William Sean French filed this qui tarn civil action under the Delaware False Claims and Reporting Act ("DFCRA").[1]French claims that together Defendant CVS Health Corporation ("CVS Health"); Vacation Properties United, Ltd. ("VPU"); The Factoring Company ("TFC"); and Defendants Card Compliant LLC; Card Compliance Holding Company, LLC; Card Compliance LLC; CardFact, Ltd.; CardFact Acquisition Co., LLC; and CardFact 25, Inc. (all Defendants that are not CVS entities will most-often be referred herein collectively as the "Card Services Defendants") devised a contractual scheme to defraud the State of Delaware out of money from unredeemed gift cards issued by CVS Health to which the State was lawfully entitled under Delaware's Unclaimed Property Law ("DUPL").[2]

         Defendant CVS Health, the Card Services Defendants, and Defendants VPU and TFC each filed Motions to Dismiss the Original Complaint on August 31, 2018. However, those motions were mooted after French filed his first amended complaint on October 18, 2018 (the "Amended Complaint").[3] Currently before the Court are the corresponding Motions to Dismiss the Amended Complaint filed by the three groups of Defendants.[4] For the reasons set forth herein, the Defendants' Motions to Dismiss are GRANTED.


         Defendant CardFact Ltd. was incorporated in 2003 in the State of Ohio.[5]CardFact operated out of French's home from 2007 until Defendant Card Compliant, LLC purchased its card services business in September 2009. Card Compliant, LLC carried on CardFact's business while CardFact's original owners continued to conduct business under a new name, Vacation Properties United, Ltd.[6] The Factoring Company was formed by CardFact's original owners in the Cayman Islands.[7]

         CVS Health and its affiliates and subsidiaries have sold hundreds of millions of dollars per year in CVS gift cards to customers throughout the United States since at least 2003.[8] The beneficiaries of such gift cards are entitled to use the gift cards to purchase goods and services at CVS but often fail to use the full value of the gift cards, leaving unused money on the cards.[9] Under the DUPL, a holder[10] of the unredeemed value from gift cards that have not been used for five years is required to report and transfer that value to the Delaware State Escheator.[11]

         On or about October 2, 2008, CVS Pharmacy, Inc. ("CVS Pharmacy") entered into a Card Services Agreement ("CSA") with CardFact, Ltd.[12] CVS Pharmacy, a Rhode Island corporation, is a wholly-owned subsidiary of CVS Health, a Delaware corporation.[13] The CSA was signed by CVS Pharmacy, and negotiated and signed by a CVS Health employee and CardFact's Chief Executive Officer on behalf of the CVS entities and the Card Services Defendants, respectively.[14] The CSA binds all subsidiaries and affiliates of CVS Pharmacy, including its parent company CVS Health (collectively, "CVS"), to its terms.[15] CVS Health employees managed the gift card program and the relationship with the Card Services Defendants.[16]

         French alleges that since January 2008, CVS Health has intentionally failed to report and transfer the value of unclaimed CVS gift cards and instead has conspired with the Card Services Defendants to falsely portray the Card Services Defendants as the holders of the unredeemed gift cards in an effort to hide this unclaimed property from Delaware.[17] Under this arrangement, CVS issued and sold the gift cards, collected and retained the money from the gift cards, and never transferred any money to the Card Services Defendants other than a small annual fee.[18] As a result, CVS Health retained any money not redeemed by the beneficiary of the CVS gift cards.[19] According to French, this scheme demonstrates that the CSA is a sham created "for the express purpose of enabling CVS to retain the unused value of the gift cards" in violation of DUPL.[20]

         On September 19, 2013, CVS Health[21] received a Notice of Examination from the State informing the company that Kelmar Associates on behalf of the State would be conducting an examination to determine CVS Health's compliance with DUPL (the "examination" or "audit").[22] The notice stated that the "examination [would] relate to all property subject to escheat" under Delaware law and requested CVS Health "issue a litigation hold notice so that all records including . . . gift certificate issuances and redemptions, etc. [would] be retained."[23] During the course of the examination, Kelmar requested information concerning, inter alia, the following:

Identify all current and historical store value card programs [and] all current and historical stored value card programs that utilize a transaction processing third party or service provider.[24]
Explain whether CVS, CardFact 25 Inc. or any other entity has reported unredeemed gift certificates or gift cards as unclaimed property on behalf of CVS to any state ....
Provide any agreement(s) or contract(s) including all exhibits, addendums and amendments between CVS and CardFact 25, Inc.[25]

         In response to each request, CVS Health provided detailed information and copies of relevant documents, including a copy of the CSA at issue in the instant action.[26]

         On December 7, 2017, CVS entered into a Voluntary Disclosure Agreement ("VDA") with the State under 12 Del. C. § 1173.[27] That VDA was subsequently accepted by the State.[28] Section 1173 authorizes the Secretary of State to "resolve and compromise claims for property otherwise owing to the State Escheator" and provides the Secretary of State with "full and complete authority to determine and resolve all such claims."[29]


         Through a series of cases, the United States Supreme Court has established rules for determining which State is permitted to escheat abandoned property in the face of competing claims.[30] The primary rule provides that the right to escheat belongs to "the State of the last known address of the creditor, as shown by the debtor's books and records."[31] Where no address is recorded, or the creditor's state does not provide for escheat of the property, the secondary rule bestows the right to escheat upon "the debtor's State of corporate domicile."[32] These rules apply to disputes between States as well as disputes between private parties and States.[33]Because this case does not implicate the primary rule, the secondary controls.[34] As such, Delaware has the right to escheat money from unused gift cards so long as the debtor is a Delaware company.[35]

         The instant matter involves alleged violations of DFCRA's Sections 1201(a)(3), (4), and (7). Section 1201(a)(4) imposes liability on any person who "[h]as possession, custody or control of property or money used or to be used by the Government and knowingly delivers or causes to be delivered, less than all of that money or property."[36] Section 1201(a)(7) provides for liability for one who "[k]nowingly makes, uses, or causes to be made or used a false record or statement material to an obligation to pay or transmit money or property to the Government, or knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the Government."[37] Lastly, Section 1201(a)(3) imposes liability on any person who "[c]onspires to commit a violation" of Section 1201-this would include any violation of Sections 1201(a)(4) and (7).[38]


         CVS Health sets forth the following arguments for dismissal:

(1) French's claims are barred because the VDA involves the same "allegations or transactions" at issue in this case and indisputably constitutes an "administrative proceeding" within Section 1206(a) under Card Compliant II[39]
(2) CVS Pharmacy, a Rhode Island corporation, entered into the CSA rather than CVS Health.[40]
(3) French's claims are also barred under Section 1206(a) because this action is "based upon allegations or transactions" at issue in Card Compliant III, of which the government was a party.[41]
(4) Section 1203(b)(5) precludes French's claims because this action is "based on the facts underlying" Card Compliant III, which was pending at the time this action commenced.[42]
(5) The claim under Section 1201(a)(4) must fail because the Amended Complaint lacks allegations of conversion.[43]
(6) The Section 1201(a)(3) claim must be dismissed as time-barred or alternatively for failure to satisfy the heightened pleading standard required for such claims.[44]

         The Card Services Defendants join CVS Health's arguments and further submit that French's claims should be barred for lack of personal jurisdiction over the absent cardholders.[45] Defendants VPU and TFC also join the arguments by CVS Health and assert two additional arguments: (1) French's claims are time-barred under 6 Del. C. § 1209(a), [46] and (2) Delaware does not have personal jurisdiction over VPU or TFC.[47]


         Under 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.[48] "The burden of establishing the Court's subject matter jurisdiction rests with the party seeking the Court's intervention."[49]"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.'"[50]


         A. The Preclusive Effect of 6 Del. C. § 1206(a) as to CVS.

         Six Del. C. § 1201(c) provides the Superior Court jurisdiction over all violations of the DFCRA. Certain DFCRA actions, however, are barred under 6 Del. C. § 1206-including those "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."[51] The federal parallel of this section, referred to as the Government Action Bar, functions to prohibit qui tarn actions "that are parasitic in that they duplicate the State's civil suits or administrative proceedings without giving the government any useful return, other than the potential for additional monetary recovery."[52]

         Defendants argue that because CVS Health has been subject to an Unclaimed Property Examination by the State of Delaware since September 2013, French's claims are precluded by DFCRA's § 1206(a). These Defendants invoke Card Compliant IP[53] where-under Section 1206(b)[54] and nearly identical facts-this Court dismissed French's claims against Defendant Ralph Lauren Corporation.[55]

         In Card Compliant II, following a thorough analysis of the State's examination and VDA processes, this Court concluded that an "administrative proceeding" exists "if there is an undertaking of a compulsory nature engaged by Delaware state agency actors to inquire about, investigate, and resolve a particular state law compliance issue."[56] There the Court held:

The bases of the Delaware Audits and VDA are potential escheatable property stemming from dormant gift card balances that Defendants supposedly owe Delaware. The basis of the instant litigation is the same-that is, dormant gift card balances. ... As such, this suit and the Audits and VDA are "substantially ...

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