On December 4, 2017, the US Court of Appeals for the Third Circuit issued its much-anticipated precedential opinion in Marathon Petroleum Corp. et al., v. Secretary of Finance et al., No. 16-4011. The opinion affirms the Third Circuit’s existing view (described in its 2012 New Jersey Retailers Association decision) that US Supreme Court precedent permits a private cause of action to enforce the federal priority rules, overruling the federal district court’s conclusion (in this case and Temple-Inland) that the priority rules only apply to disputes between states.
The plaintiffs in this case ultimately lost (i.e., Delaware’s motion to dismiss was upheld) on ripeness grounds because the state had not yet taken formal steps to compel cooperation with the third-party auditor’s document request (i.e., Delaware had not yet issued a subpoena, but had only threatened it). The Third Circuit also rejected to the plaintiff’s argument that Delaware is barred from auditing the out-of-state gift card entities altogether—noting that Delaware plainly has the ability to audit both the plaintiffs and subsidiary gift card companies to determine who is the true holder and whether the formalities of corporate separateness have been observed. For these reasons, the Third Circuit vacated and remanded the case back to the federal district court to clarify that the plaintiffs preemption claim is dismissed without prejudice—i.e., the plaintiffs can still challenging the state’s audit authority under the federal priority rules if action is taken to enforce the disputed gift card related document request.
Looking beyond the plaintiffs’ procedural loss, this precedential opinion represents a substantial victory for the broader holder community and should provide much-needed certainty to companies with gift card entities that any positions taken on audit by Delaware (or other states within the Third Circuit, including New Jersey and Pennsylvania) that are inconsistent with the federal priority rules can be challenged in state or federal court. This is significant, given that Delaware is currently litigating a qui tam lawsuit against a number of retailers, their subsidiary gift card entities and Vacation Properties (f/k/a CardFact, Ltd.). See State ex rel. French v. Card Compliant LLC et al., No. N13C-06-289 PRW [CCLD]. Auditors for Delaware are now routinely issuing document requests to gift card issuers formed in other states. Many of the questions in the requests are unrelated to the issues of fraud and corporate separateness. Audit targets should consider whether to provide the information or withhold it and challenge any subsequent subpoena from the state based on the Marathon Petroleum decision.
Retailers with gift card entity structures in place are encouraged to contact the authors to discuss the potential impact of this opinion and the pending Delaware qui tam lawsuit in more detail in light of their unique facts.