Monday, March 17, 2008

Gift Card Purchaser Not Bound by “Agreement” Terms Inside Package

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

A gift card issuer (American Express) could not compel arbitration of a card purchaser’s class action claims for breach of contract, unjust enrichment, and statutory fraud, the federal district court in Chicago has ruled.

The true contract between the parties was formed at the point-of-sale and did not include an arbitration clause and a choice-of-law provision in a “cardholder agreement” included inside the gift card package, the court determined.

Cardholder Agreement

After buying a $50 gift card, the purchaser used it for two transactions totaling $36.70, but allegedly was unable to use the card again to spend down the remaining $13.30 because of restrictions on “split tender” transactions in which a retailer accepts cash for a balance on a purchase when the gift card available balance is insufficient. Those and other restrictions on card use were contained in a “cardholder agreement” printed on a six-page leaflet inside the gift card package.

The cardholder agreement, which was five-pages of approximately six-point narrow typeface, included disclosures that (1) value could not be added to the gift card; (2) American Express charged $5.95 for a replacement card, $10.00 to issue a check refunding available funds on the card after its expiration date, and $2 per month in “service fees” from any balance remaining twelve months from issuance (where allowed by law); and (3) retailers had discretion to accept a “split tender.”

Class Action—$5 Million-Plus in Controversy

The purchaser’s class claims were subject to federal jurisdiction under the Class Action Fairness Act (CAFA), the court found. American Express filed a notice for removal to federal court within 30 days of the purchaser's initial complaint in state court.

American Express asserted that the amount in controversy exceeded $5 million. CAFA authorized the aggregation of class members' claims to satisfy the jurisdictional minimum amount-in-controversy requirement. An American Express vice president of finance stated that the company's national revenue from gift card purchase fees totaled more than $5 million, as did the monthly service fees collected.

Choice of Law

American Express unsuccessfully contended that New York law applied to questions of whether and under what terms a contract was formed. The choice-of-law rules of Illinois, the forum state, were applied to determine which state's law applied in deciding the contract formation issues.

Packaging Notice

In order for the terms of the cardholder agreement to be considered part of the contract between the parties, American Express had to provide the purchaser with clear notice on the outside of the packaging that additional terms were included inside, the court said.

The outside of the package informed the purchaser of additional “information for the recipient.” Inside the package was a one-page insert, which instructed readers to “see Terms and Conditions,” a term likely to be afforded more weight than “information” by the average consumer. The package contained no document actually entitled “Terms and Conditions.”

The cardholder agreement, referred to on the outside of the package, was not easy to find either, the court noted. The six-page leaflet containing the agreement was called “Using the American Express® Gift Card.” The cardholder agreement began half-way down page two, after a page and a half of “information” about how to use the card.

Although the problems identified might be mere editorial and design oversights on American Express’s part, they were crucial to the issue of notice, according to the court. In light of the inconsistency of terms and relative obfuscation of documentation, the court questioned the effectiveness of the notice to the purchaser.

Use of Card

Contrary to American Express's contention, the purchaser did not accept the cardholder agreement by using the gift card, the court held. His use did not constitute acceptance because he did not have a meaningful opportunity to reject the agreement.

The purchaser contended that he could not return the card without paying a $10.00 fee to refund the available balance and without forfeiting the $4.95 fee he paid to the store that sold the card. American Express provided no information on how to obtain a refund (or that a cardholder was allowed to do so without cost), provided no suggestion that returns were allowed if a consumer rejected the agreement, enclosed documentation that suggested a charge for returning a gift card, and admitted to numerous discretionary hurdles to obtaining a refund.

The burden was not on the consumer to figure out whether he was allowed to return the card and obtain a refund in the absence of a single sentence in the agreement informing him that this was even an option. The contract between the parties was formed at the point-of-sale and did not include the arbitration agreement or the choice-of-law provision, the court concluded.

The March 7, 2008 decision in Kaufman v. American Express Travel Related Services Co., Inc. will be reported at CCH Advertising Law Guide ¶62,861.

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