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Navigating Gift Card Regulations
April 17, 2008
As Gift Card Sales Increase, So Do the Legal Hurdles
By Gonzalo E. Mon
The market for gift cards continues to grow at an impressive rate with sales estimated to reach $100 billion in 2008. The number of companies that issue gift cards is also growing, as is the number of stores in which gift cards are sold. Now, it's not uncommon to see racks of gift cards from various issuers in checkout lines of supermarkets, drug stores and other locations.
The increased interest in gift cards has been accompanied by an increased interest on the part of regulators. Over the past five years, many states have amended their statutes to impose new restrictions on how gift cards can be sold and what companies must do with unredeemed cards. And within the past year, there have been various legal challenges related to how gift card terms are disclosed.
Restrictions on Expiration Dates and Dormancy Fees
Most states restrict expiration dates on gift cards in some way. For example, some states prohibit expiration dates, others allow expiration dates as long as the gift cards are valid for a minimum amount of time and a third category of states simply require that expiration dates be disclosed in a specific manner. State laws related to dormancy fees generally break down into similar groups: some states prohibit dormancy fees, other states restrict the amount of fees that can be imposed and when they can be imposed and the last category of states simply requires that dormancy fees be disclosed in a specific manner. This growing patchwork of regulations makes it impossible for companies to sell gift cards with any restrictions on a nationwide basis. A restriction that is lawful in one state may not be lawful in another. Although some retailers may find it beneficial to create geographically-targeted gift cards that are only valid only in one state or group of states with similar laws, this approach may not be practical for nationwide organizations. The trend among these companies is to do without expiration dates and dormancy fees in all states.
Focus on Gift Card Disclosures
Legislatures, courts and regulators have all been paying more attention to how gift card terms are disclosed. Over the past few years, a growing number of states have passed laws requiring gift card issuers to disclose material terms prior to purchase. And in March 2008, a federal court in Chicago held that American Express could not enforce gift card terms that were only made available to consumers after purchase. The court held that because the consumer did not have adequate notice of the additional terms and did not have an opportunity to reject the terms, the terms were not enforceable.
In 2007, the FTC announced settlements with K-Mart and Darden Restaurants—the owner of such restaurant chains as Red Lobster and Olive Garden—over how the companies marketed their gift cards. In each case, the FTC alleged that the companies failed to clearly and conspicuously disclose the terms of their gift cards, including the existence of dormancy fees. As part of the settlements, both companies agreed to clearly and prominently disclose material gift card terms and to refund fees to affected cardholders.
Other federal agencies have also encouraged prominent disclosures. For example, in 2006, the Office of the Comptroller of the Currency issued disclosure guidelines for banks and in 2007, the Currency and Office of Thrift Supervision issued disclosure guidelines for thrift institutions. Therefore, regardless of which laws may apply, issuers must always ensure that they prominently disclose all material terms.
Escheat Laws Add Additional Complications
Complying with the laws noted above is a complicated task, but an issuer's job doesn't end there. It is important to note that many state statutes governing abandoned property provide that unredeemed gift cards will escheat to the state after a specified period of time. Under these statutes, if a gift card is subject to escheat and a consumer does not redeem the card within the amount of time prescribed by the statute, the gift card is presumed to be “abandoned” and the issuer may be required to turn the funds over to the state.
Finding out which state's escheat laws apply can be tricky. At the risk of oversimplifying a complicated issue, the "first priority rule" generally dictates that if a gift card issuer knows where the holder of a gift card lives, the laws in the holder's state of residence will apply. And the "second priority rule" dictates that if the issuer does not know where the holder lives, the laws in the issuer's state of incorporation will apply.
Many companies do not know where the holder resides (because the purchaser and the holder are usually not the same person) and therefore incorporate in a state where gift cards are not subject to escheat. That strategy can be complicated, however, by some states which subscribe to a "third priority rule." This rule generally holds that if gift cards aren’t subject to escheat in the state of incorporation, the laws in the state of sale should apply. There is some controversy among issuers about how to handle the third priority rule and about whether it is even constitutional.
Remain Vigilant
Despite all of the legal hurdles, gift cards can still offer significant benefits. But in the long term, organizations will only be able to reap these benefits if they spend the time to lay the proper legal groundwork for their gift card programs. As states continue to pass new laws and regulators begin to pay closer attention to how gift cards are marketed, the risk of not complying with relevant laws becomes greater. Issuers must remain vigilant so that they can identify changes to the legal landscape and quickly adapt their gift card programs accordingly.
Gonzalo E. Mon is an attorney in Kelley Drye & Warren's Advertising and Marketing Law practice. You can reach him at gmon@kelleydrye.com.
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