The pitfalls of unclaimed property can be a large liability for luxury brands

An overlooked potential liability for most companies is unclaimed property law compliance. “Unclaimed property” is generally defined by state law as personal property owed to anyone (e.g., customers or vendors) for a period of generally three to five years when there has been no contact with the owner.  While all U.S. states have laws requiring companies to turn over “unclaimed” or “abandoned” property, these terms can be misleading. As defined in most states, property is deemed “unclaimed” even when a customer’s whereabouts are known and the customer has taken no action to “abandon” their property, but there has simply been no activity for a statutorily defined dormancy period. Thus, examples of unclaimed property include not only truly “abandoned” items, but also a variety of inactive, stale, or dormant property, such as uncashed checks, outstanding refunds, unused gift cards, and more.

The purpose of unclaimed property statutes is to reunite unclaimed property with its rightful owners. Therefore, states require holders to turn this property over to the custody of the state, where it is held on behalf of the owner until it is claimed. While these laws typically provide that the state acts as mere custodian (not owner) of the property until it is claimed by the rightful owner, the funds are often used as general revenue while in the state’s possession. In some states, unclaimed property can represent an important source of revenue. For example, in Fiscal Year 2024, Delaware collected over $500 million in unclaimed property, which it added to the state’s general fund.

Adding to this complexity, each state has its own set of unclaimed property statutes with its own standards, notice provisions, reporting obligations and recordkeeping requirements.  Navigating these varying requirements across 50 states for all property a company holds is an arduous task and can lead to significant liabilities if the company does not have a team focused on ensuring compliance. One concern for businesses is the prevalence of multi-state unclaimed property “audits” conducted by private firms (often with a financial stake in the outcome) on behalf of state governments. Another risk is the rise of qui tam lawsuits under state False Claims Acts (FCA). In such cases, a whistleblower brings a claim against a business for the commission or omission of a certain act relating to “state” money (in the unclaimed property context, the failure to turnover unclaimed property as required). These lawsuits are becoming more prevalent in the unclaimed property space, and states are receiving large windfall decisions or settlements. For example, in 2022, H&M faced a qui tam FCA case and was required to turn over $36 million in a settlement with New York for unused gift cards.

These developments reflect an increased aggressiveness by the States in taking custody of property; therefore, if a company is not tracking the ever-changing statutes and regulations across the states, it is at risk of facing an audit and/or FCA claim for noncompliance. 

Just last year, Delaware passed a statute that could greatly increase risk for companies with substantial foreign activity. Delaware, as a frequently used state of incorporation for US companies, has outsized importance in the field of unclaimed property because of the U.S. Supreme Court “priority” rules that determine which state has the right to claim unclaimed property.  The first priority goes to the state of the owner’s last known address. However, if the holder does not have an address for the owner or does not know the owner’s identity (so-called “address unknown” property), the property must be turned over to the holder’s state of incorporation. 

Delaware is now trying to expand its “address unknown” authority to property held by US companies for foreign owners.  Specifically, Delaware recently passed legislation allowing the state to take custody of property if (1) the company incorporated in Delaware is holding the property for an owner with a last-known address in a foreign jurisdiction; (2) the foreign jurisdiction does not have laws providing for the custodial taking of property; and (3) the foreign jurisdiction has no exemption for the property. This statute establishes a new requirement for companies to base their Delaware compliance on the custodial taking laws of an unlimited number of foreign jurisdictions. The variation of state and international laws contributing to compliance decisions means luxury brands face a high burden to maintain unclaimed property requirements and are at particularly high risk of noncompliance due to their broad, high-volume relationships with suppliers, customers, and employees around the globe. Many are not even aware of this risk.

Delaware’s statutory change, increased state audit activity, and H&M’s settlement are just a few of many examples that demonstrate how important it is for businesses to ensure compliance with unclaimed property laws. Once a company is subject to an audit or a lawsuit, the process can be extremely arduous, require a lot of business resources, and last 10 years or more.

The best way to avoid major issues in this area is to understand what property may be subject to unclaimed property laws and seek legal counsel to achieve compliance.