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The Green Sheet Online Edition

August 22, 2016 • Issue 16:08:02

Office Depot sues Delaware for audit overreach

The thorny matter of what to do with unredeemed gift cards has reared its ugly head in the State of Delaware. At issue are disagreements between state auditors and plaintiffs concerning the proper handling of unclaimed gift card balances, a topic various states have addressed under the broad area of escheatment, which governs the process of turning over unclaimed or abandoned property to a state authority. Most escheatment laws require unclaimed funds to be turned over to the state if the rightful owner cannot be located.

Various approaches to escheatment by legislative bodies in different states have added layers of complexity to the court action filed July 18, 2018, by office supply retailer Office Depot Inc. and gift card issuer North American Card and Coupon Services LLC against Delaware Secretary of Finance Thomas Cook, Delaware State Escheator David Gregor and Delaware State Audit Manager Michelle Whitaker.

The drama is playing out in Delaware, where Florida-based Office Depot established its articles of incorporation. Office Depot and affiliate NACCS are challenging an audit that they assert is in violation of an agreement between Office Depot and the state of Delaware. The voluntary disclosure agreement, executed in 2001, absolved Office Depot of liability for unclaimed property requests initiated before March 1, 2001, the plaintiffs stated.

Office Depot had issued its own gift certificates and gift cards before joining NACCS in 2002, reporting any unclaimed property to the State of Delaware, including unredeemed gift card balances. These balances were not connected to purchasers or recipients, because Office Depot was not collecting that information at the time.

The company entered into a formal agreement with NACCS in August 2002, agreeing to promote and sell NACCS's gift cards and gift certificates and issue merchandise credits in exchange for a commission. NACCS subsequently acquired Office Depot's gift card and gift certificate business in December 2002, according to sources familiar with the matter.

Overzealous audit

When Delaware appointed independent auditor Kelmar Associates LLC to review Office Depot's compliance with the Delaware Escheats Law in February 2013, Kelmar overreached by requesting records dating back to 1995, according to the plaintiffs. While the initial audit was focused on Office Depot and former gift card division, The Office Club, plaintiffs stated that Kelmar began to look into NACCS, which they claim is beyond the scope of the investigation. The evolving inquisition began to focus intently on NACCS's activities, despite the fact that NACCS was unrelated to the audit and operating outside of Delaware as a Virginia LLC.

These objections were backed up with extensive documentation, including copies of unclaimed property reports filed in states not participating in the audit, and referencing other precedent-setting cases such as New Jersey federal court litigation in the Third Circuit Court of Appeals that ruled in favor of a retailer. Plaintiffs continue to assert they have no outstanding liability to Delaware for unredeemed gift cards and certificates.

The plaintiffs further allege that the Delaware escheatment laws do not provide for pre-compliance review of a document request. If that had been part of the process, many of these proceedings would have been rendered irrelevant, relieving Office Depot and NACCS from what some payment analysts have called an essentially frivolous lawsuit.

Lessons learned

In 2009, Congress passed the Credit Card Accountability Responsibility and Disclosure Act, designed to protect consumers from ancillary fees associated with gift cards, including transaction, maintenance and inactivity fees. The guidelines stated that gift cards cannot expire within five years from their activation date, and they limit inactivity fees to specific circumstances, such as extended inactivity of 12 months or more.

A white paper published in 2009 by The Network Branded Prepaid Card Association attempted to clarify escheatment laws, which the authors described as "intangible personal property (such as funds underlying uncashed checks in a checking account)." Since regulations vary by state, the association recommends reviewing compliance guidelines of local legislative authorities . end of article

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