Kmart Agrees to Disclose Gift Card Fees and Provide Refunds

This posting was written by William Zale, editor of CCH Advertising Law Guide.

In the Federal Trade Commission’s first enforcement action involving gift cards, Kmart Corporation has agreed to settle charges that it engaged in deceptive practices in advertising and selling its Kmart gift card, the FTC announced March 12, 2007. As part of the settlement, Kmart agreed to implement a refund program and publicize it on its website.

“Consumers have a right to know when gift cards come with strings attached,” FTC Chairman Deborah Platt Majoras said. “If fees or restrictions apply, gift card issuers must fully and clearly disclose them.”

According to the FTC’s complaint, Kmart promoted the card as equivalent to cash but failed to disclose that fees are assessed after two years of non-use, and misrepresented that the card would never expire. Kmart has agreed to disclose the fees prominently in future advertising and on the front of the gift card.

The FTC’s complaint alleges that since 2003, Kmart did not disclose adequately that after 24 months of non-use, a $2.10 “dormancy fee” would be deducted from the card’s balance for each month of inactivity, resulting in a $50.40 reduction from the card’s value if the card was not used for 24 months. In many instances, the Commission alleges, consumers did not learn of the fee until they attempted to use their cards.

According to the complaint, the Kmart gift card was sold bearing inadequate disclosures that appeared in fine print on the back side and that were phrased in legalese. In some instances the disclosures on the card were wholly concealed before sale, and there were no pre-sale disclosures in online sales.

As of May 1, 2006, Kmart stopped charging a dormancy fee on all Kmart gift cards, according to the FTC.

Under the proposed settlement, which is subject to public comment, Kmart Corporation, Kmart Services Corporation, and Kmart Promotions LLC, will not advertise or sell Kmart gift cards without disclosing, clearly and prominently, any expiration date or fees in all advertising and on the front of the gift card.

The proposed settlement further requires Kmart to disclose, clearly and prominently, all material terms and conditions of any expiration date or fee at the point of sale and before purchase. It bars Kmart from misrepresenting any material term or condition of the gift cards, and prohibits Kmart from collecting dormancy fees on any gift card sold before the proposed order is issued.

The proposed settlement requires Kmart to reimburse the dormancy fees for consumers who provide an affected gift card’s number, a mailing address, and a telephone number. Kmart will publicize the refund program on its website, including a toll-free number, e-mail address, and a postal address for eligible consumers to contact Kmart to seek a refund.

The FTC has established a Consumer Hotline at (202) 326-3569 for consumers who have questions about the refund program.

The Commission vote to accept the proposed consent agreement was 5-0. Commissioners Pamela Jones Harbour and Jon Leibowitz said they concur in the decision to bring an action against Kmart, but dissent in part from the proposed consent agreement because they believe the remedy should include disgorgement of ill-gotten profits

More than 25 states have laws that regulate gift certificates, gift cards, and stored value cards. The laws, which limit expiration or fees and require disclosures, are reported in CCH Advertising Law Guide.