State of Delaware, ex. rel. French v. CVS Health Corporation ( 2019 )

IN THE SUPERIOR COURT OF THE STATE OF DELAWARE
STATE OF DELAWARE
Plaintiff,
ex rel.
)
)
)
)
)
WILLIAM SEAN FRENCH, )
) CA. No. N17C-07-313 PRW
Plaintiff-Relator, ) CCLD
)
)
)
)
)
)
Vv.
CVS HEALTH CORPORATION,
et al.
Defendants.
Submitted: July 2, 2019
Decided: September 24, 2019
Upon Defendant CVS Health Corporation’s Motion to Dismiss,
GRANTED.
Upon Defendants Card Compliant, LLC,
Card Compliance Holding Company, LLC, Card Compliance, LLC,
CardFact Acquisition Co., LLC, and CardFact 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.
WALLACE, J.
IL INTRODUCTION AND PROCEDURAL BACKGROUND
On August 7, 2017, Plaintiff-Relator William Sean French filed this gui tam
civil action under the Delaware False Claims and Reporting Act (“DFCRA”).'
French claims that together Defendant CVS Health Corporation (“CVS Health”);
Vacation Properties United, Ltd. (““WPU”); 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”).?
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
; DEL. CODE ANN. tit. 6, §§ 1201-1211 (2017). The State of Delaware filed its Notice of
Intent to Decline Intervention on December 8, 2017. (D.I. 6.) And so, French forges forward in
this matter on his own. See DEL. CODE ANN. tit. 6, § 1203(b)(4)(b) (when the Attorney General
declines to take over an initiated DFRCA the action, the private party bringing the action shall
have the right to conduct the action).
7 DEL. CODE ANN. tit. 12, §§ 1130-1190 (2017). Hereinafter, CVS Health and the Card
Services Defendants (including Vacation Properties and The Factoring Company) may, for
convenience sake, be collectively referred to as “Defendants.”
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on October 18, 2018 (the “Amended Complaint”).? Currently before the Court are
the corresponding Motions to Dismiss the Amended Complaint filed by the three
groups of Defendants.’ For the reasons set forth herein, the Defendants’ Motions to
Dismiss are GRANTED.
Il. FACTUAL BACKGROUND
Defendant CardFact Ltd. was incorporated in 2003 in the State of Ohio.°
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.° The
a DL. 1.
“ Def. CVS Health Corp.’s Mot. to Dismiss (Nov. 5, 2018) (D.I. 36) [hereinafter, “CVS
Health’s Op. Br.”]; Def. Card Services’ Mot. to Dismiss (Nov. 5, 2018) (D.I. 37) [hereinafter,
“Card Services Defs.’ Op. Br.”]; Def. Vacation Properties United Ltd. and The Factoring Co.’s
Mot. to Dismiss (Nov. 5, 2018) (D.I. 38) [hereinafter “VPU and TFC Op. Br.”].
° See Relator’s Am. Compl. § 32 (Oct. 8, 2018) (D.I. 29) [hereinafter, “Am. Compl.”]. The
underlying facts of the alleged conspiracy to defraud the State of Delaware advanced by French
are well-known to the Court. In State ex rel. French vy. Card Compliant, LLC, et. al., an action
initially filed in this Court in 2013, Relator pursued identical claims against the Card Services
Defendants and other retailers. Accordingly, the facts in the instant matter are derived from that
action with the differences noted. 2015 WL 11051006 (Del. Super. Ct. Nov. 23, 2015) [hereinafter,
“Card Compliant I]; 2017 WL 1483523 (Del. Super. Ct. Apr. 21, 2017) [hereinafter, “Card
Compliant IP’]; 2018 WL 4183714 (Del. Super. Ct. Apr. 30, 2018) [hereinafter, “Card Compliant
TIP’).
E Am. Compl. ff 44, 45, 56.
Factoring Company was formed by CardFact’s original owners in the Cayman
Islands.’
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.? Under the DUPL, a holder’? 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.'!
On or about October 2, 2008, CVS Pharmacy, Inc. (“CVS Pharmacy”) entered
into a Card Services Agreement (“CSA”) with CardFact, Ltd.'2 CVS Pharmacy, a
Rhode Island corporation, is a wholly-owned subsidiary of CVS Health, a Delaware
7 Am. Compl. 4 39.
8 Am. Compl. § 2.
9 Id
7 A “holder” means “any person having possession, custody or control of the property of
another person.” DEL. CODE ANN. tit. 12, § 1130(9) (2017). Because beneficiaries have ownership
of the cards’ value, retailers and financial services companies administering gift card programs are
“holders” within the meaning of the statute if they have possession. See Card Compliant I at *3.
(“The property at issue does not belong to the [issuer], much less [the servicer]. They do not even
have a residual claim to it.”).
: DEL. CODE ANN. tit. 12, §§ 1133, 1142-44, 1157 (2017).
2 Am. Compl. {ff 7.
corporation.!> 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.'* The CSA binds all
subsidiaries and affiliates of CVS Pharmacy, including its parent company CVS
Health (collectively, “CVS”), to its terms.'° CVS Health employees managed the
gift card program and the relationship with the Card Services Defendants.'°
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.'’ 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.'!® Asa result, CVS Health retained any money not redeemed by the beneficiary
B Id. 49.
z Id. Tf 7-8.
IS Id.47.
16 Td
7 Id. 99 4-5.
7 Id. JF 12, 118.
of the CVS gift cards.!? According to French, this scheme demonstrates that the
CSA isa sham created “for the express purpose of enabling CVS to retain the unused
value of the gift cards” in violation of DUPL.”°
On September 19, 2013, CVS Health?! 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”).”” 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.”*? During the course of the
examination, Kelmar requested information concerning, inter alia, the following:
2 Id. 411.
20 Am. Compl. ff 10, 14.
21 At the time the company was notified that the State wanted to examine its books and
records to determine compliance with DUPL, CVS Health was known as CVS Caremark
Corporation. Am. Compl. § 21.
= Ex. F of CVS Health’s Op. Br. At the time this audit commenced in September 2013, the
State Escheator’s examination powers and duties relating to unclaimed property were found at 12
Del. C. § 1155, et seg. Those provisions have since been amended and re-designated elsewhere in
Title 12. See 81 DEL. Laws c. 1, § 2 (effective Feb. 2, 2017) (Delaware’s State Escheator’s
unclaimed property examination powers and duties are now found at 12 Del. C. § 1171, et seq.).
2 Ex. F of CVS Health’s Op. Br.
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.”
* Ok Ok
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.”°
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.”°
On December 7, 2017, CVS entered into a Voluntary Disclosure Agreement
(“VDA”) with the State under 12 Del. C. § 1173.2” That VDA was subsequently
accepted by the State.?® Section 1173 authorizes the Secretary of State to “resolve
and compromise claims for property otherwise owing to the State Escheator” and
24 Ex. G of CVS Health’s Op. Br. (“For purposes of this request, the term ‘stored value card’
is generic and is intended to include any tangible device and/or equivalent intangible account
balance, including gift certificates, gift cards, merchandise credits, and any similar instruments
identified by any other term or description.”).
2s Ex. I of CVS Health’s Op. Br.
a Ex. H, J of CVS Health’s Op. Br.
27 Ex. K of CVS Health’s Op. Br.
28 See Ex. J. 4 1 of CVS Health’s Op. Br.
provides the Secretary of State with “full and complete authority to determine and
resolve all such claims.””?
Ill. STATUTORY PROVISIONS APPLICABLE TO
DFCRA VIOLATIONS
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.°° 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.”*! 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.”** These rules apply to
disputes between States as well as disputes between private parties and States.**
Because this case does not implicate the primary rule, the secondary controls.*4 As
29 DEL. CODE ANN. tit. 12, § 1173(a), (a)(2) (2017).
30 Delaware v. New York, 507 U.S. 490 (1993); Texas v. New Jersey, 379 U.S. 674 (1965);
Pennsylvania v. New York, 407 U.S. 206 (1972).
2 Texas v. New Jersey, 379 U.S. at 631.
7 Id.3 See Card Compliant I, at *2 n.14.
34 Id. at *3 (“Here, it is assumed that the unused gift card owners’ addresses were not
recorded, so the primary rule is not implicated.”).
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such, Delaware has the right to escheat money from unused gift cards so long as the
debtor is a Delaware company.°°
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.”°° Section 1201(a)(7) provides for liability for one who
“(k]Jnowingly 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
37 Lastly,
obligation to pay or transmit money or property to the Government.
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).°8
35 Id.
36 DEL. CODE ANN. tit. 6, § 1201(a)(4) (2017).
37 Id. at § 1201(a)(7).
2 Id. at § 1201(a)(3).
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IV. PARTIES’ CONTENTIONS
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.
(2) CVS Pharmacy, a Rhode Island corporation, entered into the CSA
rather than CVS Health.”
(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 LIT, of which the government was a party.*!
(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.”
(5) The claim under Section 1201(a)(4) must fail because the Amended
Complaint lacks allegations of conversion.”
(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.“
= CVS Health Op. Br., at 22-27. The DFCRA bars qui tam suits based upon allegations or
transactions which are the subject of a civil suit or administrative proceeding of which the
government is already a party. DEL. CODE ANN. tit. 6, § 1206(a) (2017).
a CVS Health Op. Br., at 8-15.
“1 Id. at 15-21,
” Id.
7 Id, at 28-31.
i Td. at 31-33.
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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.*5 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),*° and (2) Delaware does not have personal jurisdiction over
VPU or TFC.*”
Vv. STANDARD OF REVIEW
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.*® “The burden of establishing the Court’s
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subject matter jurisdiction rests with the party seeking the Court’s intervention.
“When reviewing a claim for lack of subject matter jurisdiction, the Court ‘need not
= Card Services Defs.’ Op. Br., at 2-13.
46 Def. VPU and TFC’s Mot. to Dismiss at 2-8 (Dec. 27, 2018) (D.I. 49) [hereinafter, “VPU
and TFC’s Op. Br.” ].
7 Id. at 9-13.
# Del. Super. Ct. Civ. R. 12(b)(1); Del. Super. Ct. Civ. R. 12(h)(3); Airbase Carpet Mart,
Inc. v. AYA Assocs., Inc., 2015 WL 9302894, at *2 (Del. Super. Ct. Dec. 15, 2015), aff'd 2016 WL
4938890 (Del. Sept. 16, 2016).
a Maloney-Refaie v. Bridge at School, Inc., 958 A.2d 871, 882 (Del. Ch. 2008) (citing Ropp
v. King, 2007 WL 2198771, at *2 (Del. Ch. July 25, 2007)).
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accept Plaintiffs factual allegations as true and is free to consider facts not alleged
in the complaint.’”*°
VI. DISCUSSION
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.”°'! The federal parallel of this section, referred to as the
Government Action Bar, functions to prohibit qui tam 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.”*?
7 Ramunno & Ramunno, P.A. v. Potter, 2016 WL 2982367, at *2 (Del. Super. Ct. May 11,
2016) (quoting Appriva Shareholder Litigation Co., LLC v.EV3, Inc., 937 A.2d 1275, 1285 n. 14
(Del. 2007)).
7 DEL. CODE ANN. tit. 6, § 1206(a) (2017).
°2 People ex rel. Lindblom v. Sears Brands, LLC, 105 N.E.3d 934, 937 (Ill. App. Ct. 2018).
Because the DFCRA is modeled after the federal False Claims Act (“FCA”), the Court looks to
federal case law for guidance in interpreting the DFCRA. See Card Compliant [, at *6 (“Delaware
authority interpreting the DFCRA is scant. Since the DFCRA is modeled after the federal False
Claims Act, the court will look to federal case law for guidance.”); State ex rel. Higgins v.
SourceGas, LLC, 2012 WL 1721783, at *4 (Del. Super. Ct. May 15, 2012) (“[T]here is a dearth
of Delaware authority interpreting the DFCRA. Because the DFCRA is modeled after the federal
False Claims Act (“FCA”), the Court will look to the FCA's legislative history, as well as federal
case law, for guidance in interpreting the DFCRA.”); State Dep 't of Labor- Div. of Unemployment
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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? where—under Section 1206(b)** and nearly identical facts—this
Court dismissed French’s claims against Defendant Ralph Lauren Corporation.>°
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.”°° There the Court held:
Ins. v. Pasquale, 2015 WL 5461540, at *3 (Del. Super. Ct. Sept. 17, 2015) (“Because the DFCRA
mirrors the FCA . . . this Court will look to authority interpreting and applying the FCA for
guidance in addition to Delaware authority.”’).
3 2017 WL 1483523 (Del. Super. Ct. Apr. 21, 2017).
“4 In the pre-2013 DFRCA at issue in Card Compliant IT, the applicable statutory bar was
found at 6 Del. C. § 1206(b). Card Compliant IT, at *1 n.3. It is now found at § 1206(a).
See 79 DEL. LAwS c. 141, § 1 (effective July 24, 2013).
7 CVS Health’s Op. Br., at 25.
7 Card Compliant IT, at *12. In Card Compliant II, the Court referred to the whole of 6 Del
C. § 1206(b) as the “Administrative Proceedings Bar” because the issue under those facts
concerned whether the State’s examinations and VDA processes constituted an “administrative
proceeding” for purposes of the statute. Here, however, CVS Health and French have submitted
arguments severing the text of Section 1206(a). They refer to § 1206(a)’s “civil suit” language as
the “government action bar;” they refer to § 1206(a)’s “administrative proceeding” language as
the “administrative proceedings bar.” Because the parties’ arguments for each involve
substantially the same reasoning, the Court has consolidated them for clarity and convenience.
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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 based upon” the same
“allegations or transactions.”>’
The Court found that Section 1206(b) applied to Ralph Lauren because in
Ralph Lauren’s examination “[t]he State demanded information on ‘all property
subject to escheat,’ including anything related to Ralph Lauren’s gift cards.”** The
Court also observed that the letter providing Ralph Lauren notice of the examination
“required Ralph Lauren to place a litigation hold on all books and records including
‘gift certificate issuances and redemptions.””*?
Defendants argue that, like Ralph Lauren in Card Compliant II, CVS Health’s
unclaimed property examination included all property subject to escheat under the
Abandoned Property Law, including gift cards, and contained a request to issue a
57 Card Compliant II, at *12-13 (“[A]n ‘administrative proceeding’ exists — for the purposes
of the 2012 version of § 1206’s Administrative Proceedings Bar — 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.”). The current version of that bar is virtually
identical to “the 2012 version of § 1206’s Administrative Proceedings Bar;” it has all but the single
word “substantially.” See DEL. CODE ANN. tit. 6, § 1206(b) (2012) (“In no event may a party bring
an action under this chapter which is substantially based upon allegations or transactions which
are the subject of . . . an administrative proceeding in which the Government is already a party.”)
(emphasis added).
= Card Compliant If, at *13.
~ Id.
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litigation hold which included gift cards. In fact, Defendants argue that their
position is even stronger than Ralph Lauren’s because Kelmar expressly inquired as
to CVS Health’s relationship with CardFact, and CVS Health provided Kelmar the
CSA that forms the basis of this lawsuit.°! Thus, the examination “plainly involved
allegations and transactions that are identical to those raised by this lawsuit.” And,
Defendants say, because the government was a party to that examination when
French filed his gui tam action, his claims against CVS Health are barred by Section
1206(a).%
French argues that Card Compliant II does not mandate dismissal because
“It]his is a separate case, and CVS was not a party in Card Compliant I, while the
other Defendants did not invoke and/or did not have a basis to invoke the
administrative proceedings bar in that matter.” French posits certain factual
differences® suggest the Court should find that neither the State Escheator’s prior
0 CVS Health’s Op. Br., at 26.
61 Id.
62 Id. See Card Services Defs.’ Op. Br., at 14.
7 CVS Health’s Op. Br., at 26; Card Services Defs.’ Op. Br., at 14.
a Relator’s Resp. to CVS Health’s Op. Br., at 8-10.
co French submits that notwithstanding the fact that the State Escheator’s examination of the
CVS entities commenced in 2013, CVS entered into its VDA only after this this action commenced
and when, in his view, the final judgment in Card Compliant was all but determined. This he says
CVS did in a vain effort to avoid DFCRA’s treble damages and penalties. Jd.
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examination of any CVS entity nor CVS’s 2017 VDA should be deemed an
administrative proceeding precluding suit.°°
CVS, not French, is correct here. The doctrine of collateral estoppel
“prohibits a party who has litigated one cause of action from relitigating in a second
cause of action matters of fact that were, or necessarily must have been, determined
in the first action.”®’ It applies in situations where “the same issue was presented in
both cases, the issue was litigated and decided in the first suit, and the determination
"68 “And, as noted by the Delaware Supreme
was essential to the prior judgment.
Court, “[t]he defendant in the second lawsuit may properly assert the defense of
collateral estoppel to prevent the plaintiff from litigating issues that the plaintiff
previously litigated and lost, even though the defendant himself was not a party to
the first proceeding.”®?
7 Id. at 10-16 (“The timing [that CVS elected to enter the VDA] strongly indicates that CVS
was motivated by investigations precipitated by the institution of this action and continued
escalation in Card Compliant I as that case proceeded to trial.”). It appears to be of little moment
to French when making these arguments that: (1) he filed this suit under seal and CVS wasn’t even
made aware of it until July 2018—about seven months after the VDA (D.I. 1, 10, and 15); or (2)
the only trial resulting in an adverse “final judgment” in the Card Compliant case occurred three
months later in October 2018.
67 Sanders v. Malik, 711 A.2d 32, 33 (Del. 1998).
68 Id. at 33-34.
° Id. at 34.
= | Fe
So may Defendants here properly assert collateral estoppel to prevent French
from litigating the issue of whether either a State Escheator’s examination ora VDA
constitute an “administrative proceeding” for DFCRA purposes because French
previously litigated the same issue and lost in Card Compliant IT, even though CVS
Health was not a party to that proceeding? They may. And, as a result, French’s
claims must be precluded.
Because Delaware’s State Escheator examination and VDA processes are
administrative proceedings under 6 Del. C. § 1206(a), this Court does not have
subject matter jurisdiction over the instant action. As a result, all counts against
CVS must be DISMISSED.”
B. THE EFFECT OF CVS’s § 1206(A) DISMISSAL ON
THE CARD SERVICES DEFENDANTS.
Card Services Defendants assert that the claims against them should be
dismissed because CVS is already subject to a State examination and VDA for the
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same property thus triggering “the due process restriction against double escheat.
Card Services Defendants contend that “the DFCRA itself, through Section 1206(a),
7 The Court need not address any of CVS’s other arguments because this action against it is
dismissed in whole by direct application of § 1206(a)’s statutory bar.
7 Card Services Defs.’ Op. Br., at 13-14 (citing Texas v. New Jersey, 379 U.S. 674, 676
(1965) (“[T]he Due Process Clause of the Fourteenth Amendment prevents more than one State
from escheating a given item of property.”)).
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elected to give precedence to the administrative proceeding, and the double escheat
rule simply tracks that statutory procedure.””
French argues that Card Services Defendants’ concern of double recovery is
not at issue under these facts because the Card Services Defendants are not subject
to a VDA and are therefore not subject to any prospect of payment for their
wrongdoing with CVS outside of this proceeding.” To invoke the Section § 1206(a)
bar, according to French, would allow Card Services Defendants to escape liability
for their role in the fraudulent scheme.”
The Court is mindful here that French’s is a “reverse false claims” action—
i.e., not one where the alleged violator (CVS) submitted false claims for payment,
but withheld payment due the State.” And, the Court understands well that French
alleges that the Card Services Defendants’ liability is premised on a Section
2 Id. at 15.
@ Relator’s Answ. Br. to Card Services Defs.’ Mot. to Dismiss, at 12-13.
™ Id. at 13.
8 See State ex. rel. Higgins y. SourceGas, LLC, 2012 WL 1721783, at *5 (Del. Super. Ct.
May 15, 2012) (Explaining that a violation of 6 Del. C.§ 1201(a)(7)—where one “knowingly
makes, uses, or causes to be made or used a false record or statement to conceal, avoid, or decrease
an obligation to pay or transmit money or property to the Government’—is termed a
“reverse false claim” because the “defendant’s action does not result in improper payment by the
government to the defendant, but instead results in no payment to the government when a payment
is obligated.”). See State ex. rel French v. Overstock, 2019 WL 2714835, at * 4 (Del. Super. Ct.
June 28, 2019) (observing that the allegations French has made against retailers relating to gift
card balance withholdings are “‘reverse’ false claims”).
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1201(a)(3) conspirator theory.’° But the Court must weigh those considerations, the
specifics of the alleged conduct, the applicable DUPL and DFCRA provisions, and
the purpose behind all of those DUPL and DFCRA provisions.
The purpose of the §1206(a) bar is to prevent double recovery by parasitic
suits.’”” “Parasitic” actions are those that “receiv[e] support, advantage, or the like
from the ‘host’ case (in which the government is a party) ‘without giving any useful
or proper return to the government.’””® A qui tam action has the potential for “useful
or proper return” to the government if “(1) it seeks recovery from the alleged
defrauders of the government for fraud that has not yet been the subject of a claim
by the government; and (2) it has the potential to restore money to the public fisc
that would not and could not have been restored [otherwise].””’
Like the examination and VDA processes, this suit seeks to recover
escheatable property that is believed to be owed to the State by the CVS entities.®°
be DEL. CODE ANN. tit. 6, § 1201(a)(3) (2017) (providing liability for one who “[c]onspires to
commit a violation of’ any other provision of § 1201(a)).
” See Card Compliant II, at *12; see also United States ex rel. Dorsey v. Dr. Warren E. Smith
Cmty. Mental Health/Mental Retardation & Substance Abuse Ctrs., 1997 WL 381761, at *3 (E.D.
Pa. June 25, 1997) (discussing the purpose behind 31 U.S.C. § 3730(e)(3)).
7 United States ex. rel. S. Prawer and Co. v. Fleet Bank of Maine, 24 F.3d 320, 327-28 (1st
Cir. 1994),
- Id. at 329. See also Card Compliant II, at *12.
> Card Compliant II, at *13.
- 20 -
So this suit “would not restore any money to Delaware that would not be restored
via the proper completion of the ongoing Audit[] and VDA.”8' And so, the Court
finds that this action where leveled against the Card Service Defendants provides no
useful or proper return to the State because it is inarguably based upon the precise
same allegations or transactions at issue in the State Escheator’s CVS examination
and CVS’s VDA.” Accordingly, the preclusive effect of 6 Del. C. § 1206(a)
prohibits the Court from exercising jurisdiction over the instant action against
Defendants Card Compliant LLC, Card Compliance Holding Company, LLC, Card
Compliance LLC, CardFact, Ltd., CardFact Acquisition Co., LLC, CardFact 25,
Inc., Vacation Properties United, Ltd. and The Factoring Company; so all counts
against those Card Services Defendants must be DISMISSED.”
81 Td.
82 This may well be why the Attorney General declined to intervene and proceed with this
action on behalf of the State. (D.I. 4-6). See DEL. CODE ANN. tit. 6, § 1203 (2017) (describing the
Delaware Department of Justice’s duties to investigate suspected DFCRA violations and discretion
to intervene or to decline to proceed ina DFCRA suit brought by a private party).
83 The Court need not address any of the Card Services Defendant’s other arguments because
this action against then is dismissed in whole by derivative application of § 1206(a)’s statutory
bar.
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VII. CONCLUSION
The Motions of Defendants CVS Health Corporation, Card Compliant LLC,
Card Compliance Holding Company, LLC, Card Compliance LLC, CardFact, Ltd.,
CardFact Acquisition Co., LLC, CardFact 25, Inc., Vacation Properties United, Ltd.
and The Factoring Company seeking dismissal of all of French’s qui tam claims are
GRANTED—because §1206(a) bars those claims either directly or derivatively.
IT IS SO ORDERED. 2.) _ >)
Paul R. Wallace, Judge
JOD =