Issue No. 5: Top Five Developments in Gift Card Laws Since Last Holiday Season
It's been another busy year for gift cards. This Update describes our "top five" list of significant legal developments impacting gift cards since the 2005 holiday season.
- New State Gift Certificate and Unclaimed Property Laws
A majority of all states now have "gift certificate laws" that restrict a retailer's ability to impose expiration dates or charge service fees on gift cards or that require key terms and conditions to be conspicuously disclosed to consumers. Additionally, many states have unclaimed property laws that require unused gift card balances to be turned over to the state after a certain number of years. Since December 1, 2005, at least eight states have adopted new gift certificate laws or unclaimed property laws affecting gift cards. Kansas, Kentucky, New Jersey and Tennessee have enacted laws that restrict expiration dates and fees and require conspicuous disclosure of certain terms and conditions. Ohio has adopted a law that restricts expiration dates and fees, and Oklahoma has amended its gift certificate law to exclude certain "prepaid service arrangements." Nebraska has amended the dollar exemption and dormancy periods that apply to gift cards under its unclaimed property laws and mandated conspicuous disclosure of certain terms and conditions. Vermont has completely replaced its unclaimed property statute, which does not expressly describe gift cards as property that must be turned over to the state but does extend to credit balances, customer overpayments and other types of property. Given the increasingly complex patchwork of state laws impacting gift card programs, now is a good time to confirm that your gift card program complies with state restrictions and requirements.
- FTC Challenges Darden Restaurants' Online Gift Card Fee Disclosures
It is important to note that federal consumer protection laws may apply to a gift card program. As a result, failure to maintain conspicuous, complete and accurate disclosures regarding key terms and conditions of a gift card can lead to penalties and unwanted attention. For example, in July 2006, the Federal Trade Commission ("FTC") accused Darden Restaurants, Inc. - operator of Red Lobster, Olive Garden, Bahama Breeze and Smokey Bones restaurants - ("Darden") of unfair or deceptive practices related to Red Lobster gift cards sold through the Red Lobster Web site. The FTC concluded that Red Lobster's Web site disclosures regarding "dormancy fees" applicable to the gift cards were misleading under federal law because even the fine print failed to provide any detailed information regarding the amount of the dormancy fee or when it would be applied to the gift cards. The FTC has proposed that Darden pay $31 million to settle and has threatened to sue if talks failed. It appears the FTC and Darden are still negotiating this matter.
- State Restrictions May Not Apply to Certain Cards Issued by Federal Savings Associations
State gift certificate laws don't necessarily apply to all gift card programs. In June 2006, the U.S. Treasury Department's Office of Thrift Supervision ("OTS") issued a legal opinion holding that federal law preempts certain state gift certificate restrictions and requirements (including the expiration dates, fees and disclosures described above) in the case of gift cards issued by federal savings associations. These gift cards typically are "open loop" cards (which can be redeemed by multiple unaffiliated merchants, as opposed to "closed loop" cards, where the issuing and redeeming merchant are the same) that are branded with a Visa or MasterCard network logo. Although supporters of bank-issued, open loop, network-branded prepaid cards viewed the OTS legal opinion as a significant step toward preemption, it is important to note that the OTS opinion is limited to gift cards issued by federal savings associations and the specific facts upon which the opinion was based (e.g., not sold through third parties, non-reloadable, no cash access at ATMs, etc.).
- Federal Court Finds That New Hampshire Consumer Protection Laws Do Not Apply to Bank-Issued Gift Cards Sold by a Shopping Mall Operator
In August 2006, a federal district court held that certain New Hampshire consumer protection laws do not apply to gift cards issued by national banks and federal savings associations, even where the cards are marketed and sold by nonbank third parties. New Hampshire had sued shopping mall operator Simon Property Group ("Simon"), alleging that its bank-issued open loop gift cards violated state restrictions on fees and expiration dates. The court held that since Simon's open loop gift cards were issued by federally regulated institutions, federal laws regulating those institutions preempted New Hampshire state law. Notably, however, this opinion only applies to bank-issued gift cards in New Hampshire for which the bank (not the third party reseller) charged and retained the fees and imposed the expiration dates. If you are considering any business arrangement related to bank-issued open loop gift cards, you should determine how the preemption issue may affect you.
- Payroll Cards Are Now Subject to Federal Electronic Fund Transfer Regulations
Regulation E ("Reg E") is a federal law that establishes certain rights and obligations regarding electronic fund transfers, such as debit card transactions. In August 2006, the Federal Reserve Board ("FRB") issued a final rule (effective July 1, 2007) that subjects payroll card accounts to Reg E. Payroll cards can be used to withdraw funds at ATMs and to make purchases at various merchant locations. The FRB's rule applies Reg E to payroll card accounts established directly or indirectly through an employer and to which transfers of the consumer's salary, wages or other employee compensation are made on a recurring basis. Of particular interest to many employers are Reg E's requirements to provide periodic statements to consumers. Under the new rule, employers are not required to provide paper periodic statements as long as they make certain account and transaction information available to consumers. Employers holding payroll card accounts or issuing payroll cards should review their policies, procedures and practices to ensure that they comply with Reg E requirements.