Does your business issue gift cards? Do you outsource management of your gift cards to a third party or subsidiary? If so, a recent whistleblower lawsuit filed in Delaware underscores the need to carefully re-examine your gift card program or risk significant fines – up to 125 percent of unredeemed gift card balances plus three times the amount otherwise due to the state in which your company operates.
The lawsuit was unsealed recently after having been filed in June 2013 against 33 large retailers, the National Restaurant Association, and Card Compliant, Inc. The lawsuit claims that Card Compliant (and its predecessor) conspired with the other defendants to circumvent Delaware’s law that unredeemed gift card balances are to be turned over to the state as unclaimed property. State of Delaware ex rel. French v. Card Compliant, LLC, et al., N13C-06-289 (Superior Court of Delaware, New Castle).
All states have laws which govern unclaimed property, and some, like Delaware, consider the unredeemed balance of gift cards to fall within the definition of unclaimed property after a specified period of inactivity. Delaware further requires the retailer to remit the value of that balance to the state once the specified period has expired. Other states do not consider unredeemed gift card balances to be unclaimed property or don’t require it to be remitted to the state. Thus, whether or not a business is obligated to turn over those balances to the state depends entirely on which state it calls home, generally the one in which it was formed.
To ensure your business doesn’t inadvertently fall within the sights of state law enforcement due to the failure of what may otherwise seem to be a perfectly legitimate gift card program, here are a few tips to mitigate your risk:
- Review all programs which provide for the issuance of gift cards, promotional certificates, and merchandise credits to ensure they comply with your state requirements, which would generally be those of the state of your corporate formation.
- If you use a subsidiary to manage these programs, analyze its form and substance. Ensure that it operates from an independent economic standpoint and isn’t merely a shell. Ensure proper intercompany agreements are in place and all formalities are followed.
- Check if your state has a voluntary disclosure program where you can report and remit unpaid amounts which you may find are subject to the state’s unclaimed property laws. Organizations formed in Delaware have until June 30, 2014 to do so.
- If you have a business relationship with a third party service provider, review your agreements and analyze whether they require amendments to minimize your exposure to potential fines and penalties.
Please contact our office with any questions.
According to this “New York Times” article, the best franchisee investors are hybrid entrepreneurs who mix risk & structure.
Franchisors spend a great deal of time trying to determine what kind of person will make the most successful franchisee for them. Once you get past the financial requirements, this piece in the “New York Times” suggests that frequently, the ideal franchisee investor is not a person who is an out and out entrepreneur. Rather, the more successful franchisees are those people who are entrepreneurial and yet they are comfortable working within the formula and structure of their franchisor. What do you think?
Here is a link to an informative article addressing the complexities of determining whether employees are full time or part time, and some of the implications of full time status under the Affordable Care Act.
The famous quote from the Terminator, California’s former Governor Arnold Schwarzenegger, might as well apply to “Level the Playing Field for the Small Businesses Act,” legislation that failed to pass in California in 2012. As predicted, legislation is now pending in California that picks up on the 2012 effort to expand California’s existing franchise laws.
2013’s version is called the “California Small Business Investment Protection Act.” The 2013 version is based upon the same underlying principle as its predecessor, that the franchise relationship is inherently unfair, pitting the naïve small business owner against the sophisticated corporate giant. This comparison is tired and dated. The reality is that in 2013, the franchisor is more likely to be a small business with a solid concept and lean infrastructure that is looking to partner with smart business owners to seize upon opportunity. While I want to assume the authors of the pending legislation have good intentions supported by valid business concerns, the following section gives me pause;
“As opposed to corporate entities that are franchisors and most often reside outside California, franchisees are the local small business owners who personally fund the franchise brand development, sales, use and income tax, and who invest in building, equipment, pay leases, and other spill over investments. Franchisees invest their substantial assets, take loans sometimes secured by their family homes, and enter into long-term commercial leases and other obligations while looking to their franchise businesses for their livelihoods.”
While this is sometimes a true statement, it implies that franchisors are not “small business owners” who “personally fund” the development of a franchise system. While many trial lawyers may be drooling at the prospect of this new legislation, I don’t believe the business community will benefit.
Yesterday, the Pennsylvania House of Representatives voted in favor of House Bill 790 by a vote of 105-90. The bill now heads to the Pennsylvania Senate where I expect to see additional changes to the legislation. It looks like Pennsylvania is about to get out of the business of selling alcohol to its citizens.