FTC Challenge to Gift Card Dormancy Fees Settled

This posting was written by Jeffrey May, editor of CCH Trade Regulation Reporter.

The national restaurant company that owns the Olive Garden and Red Lobster chains, among others, has agreed to settle FTC charges that it engaged in deceptive practices in advertising and selling its gift cards.

As part of the settlement, the company will restore fees that were deducted from consumers’gift cards and disclose fees or expiration dates in future gift card sales.

This is the agency’s second law enforcement action involving allegedly deceptive gift card sales. Last month, Kmart Corporation agreed to resolve similar FTC charges (see March 13, 2007 blog posting).

At that time, Commissioners Pamela Jones Harbour and Jon Leibowitz criticized the agency's settlement with Kmart because “the order does not require Kmart automatically to restore previously deducted dormancy fees (absent consumer inquiries) or disgorge the windfall profits it made from these fees.”

In the current action, the FTC charged that the restaurant company did not disclose adequately the “dormancy fees” that would be deducted after a certain period of time. For cards sold before February 2004, after 15 months of non-use, a $1.50 dormancy fee was deducted from the card’s balance for each month of inactivity; for cards sold after February 2004, the monthly fee was deducted after 24 months of non-use.

As of October 2006, the restaurant company stopped charging a dormancy fee on its gift cards. It has already completed the process of restoring all fees on cards, according to the agency.

“The FTC works to make sure consumers have the facts they need to make smart decisions, no matter what they’re buying,” said FTC Bureau of Consumer Protection Director Lydia Parnes. “When it comes to gift cards, issuers can’t gloss over key information. They must clearly and prominently disclose fees and restrictions that affect the use of their gift cards.”

The FTC action is In the Matter of Darden Restaurants Inc., FTC File No. 062-3112, April 3, 2007 (CCH Trade Regulation Reports ¶15,996). The complaint, an agreement containing the consent order, and a news release appear at the FTC web site.