New Jersey Attacks Gift Card Fees
By Leonard A. Bernstein
Many of us have received or given gift cards or gift certificates. However, some donors and recipients have been shocked to learn that “dormancy” fees have piled up over time and have erased the value of the card or certificate. Or, the recipient lets the card or certificate lay unused and when it is finally presented, the recipient is unhappy to learn that it has expired. The surprise reduction in value or unexpected expiration of the card or certificate can trigger angry complaints.
Such scenarios encouraged the New Jersey Legislature to enact the “Gift Card Act,” which was signed by former Gov. Richard Cody on Jan. 4. Assembly Bill 1079, now known as P.L. 2005, c. 254, became effective April 4. However, a Gift Card Act cause of action for failure to comply with its “font-size” disclosure requirement (explained below) cannot be brought on or before Jan. 4, 2007. Other states have enacted a variety of gift card/gift certificate laws. Here is a summary of New Jersey’s approach.
COVERED CARDS AND CERTIFICATES
The Gift Card Act is intended to cover “Gift Cards,” which means a “tangible device, whereon is embedded or encoded in an electronic or other format a value issued in exchange for payment, which promises to provide to the bearer merchandise of equal value to the remaining balance of the device.” The Gift Card Act not only covers gift cards but also covers gift certificates. A “gift card” does not include a prepaid telephone card, a prepaid bank card or a rewards card given pursuant to an award, loyalty or promotional program. Therefore, the Gift Card Act seems concentrated on retailers that issue their own gift card or gift certificate products, and the Gift Card Act does not apply to bank-issued cards that have a pre-denominated amount usable at a merchant or an ATM.
While the Gift Card Act does not apply to bank-issued gift cards, that does not mean banks that issue such cards have no compliance requirements. For example, the federal Office of the Comptroller of the Currency, which regulates national banks, issued a Bulletin on Aug. 14 applicable to national banks that issue gift cards. The Bulletin says that national banks are “expected” to provide disclosures of essential terms on or affixed to gift cards, and to make sure such information is provided to the ultimate users of the gift cards. Such essential terms include the expiration date, any maintenance or dormancy fee and how additional information can be obtained. National banks are also warned to avoid misleading marketing of gift cards.
However, two bills were introduced in the New Jersey Legislature on Jan. 30 to extend the Gift Card Act to cover prepaid bank gift cards, including mall gift cards issued by third-party banks. Neither bill has made any progress in New Jersey’s Legislature. Even if the Gift Card Act is extended to prepaid bank cards, one federal regulator has published its opinion that such state gift card laws are in large part pre-empted for federal savings associations.
A gift card or gift certificate given to a New Jersey recipient now must retain full, unused value until presented, subject to the exceptions stated below. If an exception is to apply, the exception must be disclosed at the time of purchase.
First, in no case may the gift certificate or gift card expire within 24 months following the date of sale. Retailers that currently impose a shorter expiration date need to change their policy. If an issuer wants to impose an expiration date after the initial two-year period, it is prudent to follow the disclosure process explained below.
Second, any dormancy fee imposed may not exceed $2 per month. The Gift Card Act defines a “dormancy fee” to be a charge imposed against the unused value of a gift card or gift certificate due to inactivity. To the extent a dormancy fee is charged, it cannot be imposed within the 24 months following the date of sale, or within the 24 months immediately following the most recent activity in which the gift card or gift certificate was used. These fee limitations will make imposition of a dormancy fee difficult to manage. Again, imposing a dormancy fee triggers the disclosure process explained below.
To impose an expiration date and/or a dormancy fee, the retailer must disclose the terms of such expiration date or dormancy fee by written notice in “at least 10-point font.” This written notice may appear on either the gift certificate or gift card itself, on the sales receipt or on the package for the gift card or gift certificate. This disclosure must be made “at the time of purchase,” and there is no discussion of what that means if the purchase is done in any manner other than face to face.
In addition, such retailer must disclose in writing the “telephone number which the consumer may call for information concerning any expiration date or dormancy fee.” The same “at least 10-point font” format is required. The same disclosure location options apply: The telephone number may appear on either the gift certificate or gift card itself, on the sales receipt or on the package for the gift card or gift certificate. There is no direction as to whether such telephone number must be an “800” number. There is also no direction about what hours the telephone line must be staffed, and most important, there is no direction about what information the issuer must provide. For example, must the telephone response be capable of determining the precise issue date of the caller’s gift card or gift certificate, based perhaps on an identification number? Or, may the telephone response merely offer a generic summary of the issuer’s policy regarding dormancy and expiration?
PENALTIES AND ENFORCEMENT
The Gift Card Act says virtually nothing about penalties or enforcement, except for its statement that no action for violation of the New Jersey Consumer Fraud Act (CFA) based upon the font-size requirement may ensue for a year after enactment. The implication is that font violations and any other violations of the Gift Card Act may be enforced under the CFA. The CFA permits private actions and class actions, and contains a treble-damage remedy as well. The Attorney General also has enforcement powers under the CFA, and can seek to impose penalties of not more than $10,000 for the first offense and not more than $20,000 for the second and each subsequent offense.
Indeed, there is already a Gift Card Act class action complaint filed in May 2006 against a major drug store chain. Plaintiffs, on behalf of a purported class, allege that the gift card issuer violated the Gift Card Act and therefore the CFA. In particular, the complaint alleges that packaging of the cards obscured the required disclosures, and the complaint also alleges that the defendant had a policy of imposing a dormancy fee within 12 months of the most recent activity, thus violating the Gift Card Act’s 24-month limitation. Retailers can incur significant cost defending class action complaints and other lawsuits for alleged non-compliance with the Gift Card Act.
WHAT MUST RETAILERS DO?
First, many retailers operate gift card or gift certificate programs on a multistate basis. Such retailers need to decide whether or not New Jersey’s Gift Card Act or any combination of other state gift card or gift certificate law applies to their product. For some, a multistate research project may be overdue. If a gift card or gift certificate program is issued by a bank, although the Gift Card Act does not apply, there may be some state laws that apply to banks (if not pre-empted).
A retailer striving to comply with the Gift Card Act should immediately assess whether or not it wants to retain or impose an expiration date, and if so, the retailer should develop the requisite disclosures. In the event a retailer wants to develop or retain a dormancy fee, disclosures are also necessary. Retailers need to assess treatment of cards or certificates that may have been issued without compliance with the Gift Card Act. Thus, to many retailers, the new law is no gift.
Leonard A. Bernstein chairs the national Financial Services Regulatory Group of Reed Smith LLP and is resident in the firm’s Princeton office. He is a former chair of the New Jersey State Bar Association Banking Law Section and is a member of the American College of Consumer Financial Services Law Attorneys. He can be reached at firstname.lastname@example.org or (609) 520-6005.