State Law Barring Gift Card Inactivity Fees Not Federally Preempted

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

A Connecticut law barring a gift card seller from charging inactivity fees was not federally preempted, the U.S. Court of Appeals in New York City has held, but the court gave the seller a further opportunity to show that the state's ban on gift card expiration dates was preempted. The state law did not violate the Commerce Clause of the U.S. Constitution, the court ruled.

The seller sued to prevent the Connecticut Attorney General from enforcing the statute. After the state’s enforcement action was filed in state court, the cases were consolidated in federal court.

The cards (“Simon Giftcards”) were sold in shopping malls by a subsidiary of a company that operated malls in 30 states. The cards were issued by Bank of America (BoA) and carried a Visa logo.

The cards were subject to a $2.50 monthly service fee, to be deducted from any balance remaining after six months from the date of purchase. In addition, to comply with Visa regulations, the cards carried a one-year expiration date.

Federal Banking Law, Regulations

The seller contended that applying the state statute would frustrate the purposes of the National Bank Act (NBA) and regulations of the Office of the Comptroller of the Currency (OCC), which authorized national banks to offer “electronic stored value systems.” Although BoA was the issuer of the Simon Giftcard, the seller bore the costs of administering the program and also collected and retained fees associated with the cards, the court noted. BoA, by contrast, was compensated exclusively through Visa interchange fees generated on a per-transaction basis.

The enforcement of the state law barring imposition of inactivity and other fees on consumers of the Simon Giftcard did not interfere with BoA’s ability to exercise its powers under the NBA and OCC regulations, the court determined. Rather, the enforcement of the state law affected only the conduct of card seller, which was neither protected under federal law nor subject to the OCC’s exclusive oversight.

Expiration Dates

The seller, however, did state a claim for preemption insofar as the Connecticut statute prohibited expiration dates. Unlike the various fees associated with Simon Giftcards, the seller alleged that an expiration date was necessary “to implement Visa fraud prevention and card maintenance requirements applicable to all prepaid cards bearing the VISA logo.”

Taking this allegation as true, an outright prohibition on expiration dates could have prevented a Visa member bank (such as BoA) from acting as the issuer of the Simon Giftcard, the court said.

BoA was legally entitled to use the Visa payment network, and, contrary to the Connecticut Attorney General’s suggestion, a Visa issuer benefited directly from having the cards operate on the Visa network due to the interchange fees received each time a gift card transaction was executed.

As a result, Connecticut’s attempt to prohibit expiration dates had to be analyzed separately from the ban on inactivity fees for purposes of federal preemption. The federal district court's dismissal of the seller's complaint was vacated in part and remanded for reconsideration of the preemption claim as to the state's ban on expiration dates.

Constitutionality

In upholding the statute against the seller’s challenge under the Commerce Clause, the court found that gift card seller failed to allege any facts tending to show that the law regulated commerce occurring outside of the state. The Connecticut Attorney General stipulated that the law applied only to sales of gift cards in Connecticut.

Even if the law's expiration date provisions were not federally preempted as applied to Simon Giftcards, the law would not prohibit all Visa products from being sold (or used) in Connecticut, according to the court. The law would prohibit only the sale of gift cards subject to expiration dates, and even then would apply only to sellers who were not national banks.

The fact that the cards were sold over the Internet did not present a risk that the Connecticut law would control sales of the card to anyone other than consumers with Connecticut billing addresses, the court said. That the seller might not be able to sell its gift cards on the same terms to consumers in all states did not, in itself, demonstrate a regulatory conflict sufficient to hold the law unconstitutional.

The October 19 opinion in SPGGC, LLC v. Blumenthal will be reported at CCH Advertising Law Guide ¶62,720.