On December 31, 2009, D.C. Attorney General ("AG") Peter Nickles filed suit in D.C. Superior Court against AT&T Corp. ("AT&T"), a subsidiary of AT&T, Inc.  The complaint sought to claim for the District the unused balance on prepaid calling cards sold to consumers with D.C. addresses.  According to the complaint, these sums, commonly known as  breakage, belong to the District under its escheat law, the Unclaimed Property Act.

The District argues that D.C. law treats the unused balance as abandoned property, which passes to the District if unclaimed for three years. The complaint seeks to deposit the balances in the city's general fund, rather than refunding it to consumers.  Notably, the complaint seeks recovery under the three-year period applicable to intangible personal property not otherwise enumerated and not the five-year period which applies specifically to gift cards and credit memos.

The complaint argues that AT&T has failed to report and deliver to the Mayor  unclaimed property.  AT&T has asserted that the balances do not qualify under D.C. law as  unclaimed property. The AG sought a declaratory ruling that such unused balances qualify as abandoned property under D.C. law and compelling AT&T to submit reports for each card with an unused balance over $50 and to pay said balances, with interest, to the District.

D.C.'s effort follows the lead of several other states and municipalities that have sought to claim unused gift card balances under applicable escheat laws.  Several states have recently amended or strengthened laws relating to unused gift card balances, including adopting escheat policies specifically applicable to gift cards and certificates.

Client Advisory

This case presents significant issues for prepaid calling card providers which typically derive considerable revenues from breakage.  Notably, unlike other recent actions intended to protect consumers, the lawsuit aims solely to extract contributions to the District's treasury.  That is, the complaint seeks to claim abandoned calling card balances rather than forcing AT&T to refund them to calling card holders.

Thus, while the AG's Office may disguise the complaint as a consumer protection measure, in fact, it aims to replenish depleted government funds.  This case is also significant as it may incite other states or municipalities to pursue similar strategies if D.C. is ultimately successful.  Clients with questions about this Advisory should contact the firm at 703-714-1300.