Thursday, October 30, 2008





Small-Print Disclosure of Gift Card Fees Could Violate New York Law

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

Small-print disclosures of “dormancy fees” on Simon Gift Cards could violate New York law, a New York appellate court has ruled.

Simon Property Group’s alleged imposition of the improperly disclosed fees constituted a breach of contract, a violation of the implied covenant of good faith and fair dealing, and a violation of the New York deceptive practices statute, according to a consumer class action complaint.

The Simon Gift Card is a prepaid, stored-value card, programmed to hold a recorded balance from which the amount of transactions are deducted. Below a magnetic strip on the back of the card appeared the following:
“An administrative fee of $2.50 per month will be deducted from your balance beginning with the seventh month from the month of card purchase.”

Once activated, the card was placed in a cardboard sleeve along with five additional folding double-sided pages, which contained the card’s terms and conditions—including dormancy fees—in small print.

The court noted that virtually all gift cards are subject to a variety of fees. The court cited a report stating that consumers lose nearly $8 billion annually due to unredeemed value, expiration, or loss of gift cards—more than double the loss from debit and credit card fraud.

Federal Preemption

In earlier rulings in this case and a related case, Goldman v. Simon Property Management Group, Inc., the court overturned lower court decisions that the claims were federally preempted. The lower court had held that the National Bank Act and federal regulations of the Office of the Comptroller of the Currency preempted the application of New York law to Simon Gift Cards, which were issued by Bank of America, N.A., pursuant to a license from Visa U.S.A., Inc.

The appellate court rejected the lower court’s determination that the national bank was the real party in interest, in Goldman v. Simon Property Management Group, Inc., 31 A.D.3d 382, 383 (N.Y. App. Div., 2d Dept. 2006). Simon Property Group, not the bank, marketed and sold the card, and charged and collected the fees, according to the court.

Clear and Conspicuous Disclosure Requirements

The New York gift certificate statute (General Business Law Sec. 396-i), enacted in 1997, requires that the “terms and conditions of a gift certificate store credit shall be clearly and conspicuously stated thereon.” The law was amended effective October 18, 2004 to prohibit, among other things, the assessment of monthly fees prior to the 13th month of dormancy, although it is unclear whether this prohibition could be applied in this case, which was commenced February 18, 2004.

A New York civil practice rule, N.Y. CPLR Sec. 4544, provides that a consumer contract in which the print is not clear and legible or is less than 8 points in size (5 points for upper case) may not be received into evidence on behalf of the party who printed or prepared the contract.

The gift card at issue set forth imposition of the fee in font sizes materially less than required by CPLR 4544, the court found. In addition, the fee language was concealed, under case law precedents applicable to provisions buried in fine print agreements, according to the court.

The allegedly improper disclosure of the gift card dormancy fees would support a recovery of damages for breach of contract, the court held. In addition, the allegations were sufficient to maintain the claim for breach of the implied covenant of good faith and fair dealing. Even were Simon Property Group entitled to charge dormancy fees, it would still be barred, as a matter of good faith and fair dealing, from setting fees at grossly excessive amounts, the court added.

Finally, the alleged failure to conspicuously disclose the gift card dormancy fees could constitute deceptive and misleading practices under New York General Business Law Sec. 349, the court held. An action for damages under the deceptive practices statute could be based on the allegations of injury caused by the practices at issue, the court concluded.

The October 14, 2008 opinion in Lonner v. Simon Property Group, Inc. will be reported in the CCH Advertising Law Guide.

More About Gift Certificate and Gift Card Laws

Subscribers to the Advertising Law Guide on CCH Internet Research NetWork have access to more detailed coverage of gift certificate and gift card laws in New York and more than 35 other states.

A newly added Smart Chart™ gives users quick access to the types of certificates and cards that are subject to—and exempt from—the laws. Coverage of fee restrictions, expiration date restrictions, and disclosure requirements is provided, along with links to the law texts.

Information on 500 advertising-related state laws in ten categories with links to the texts is available in the Advertising Law Guide State Laws Quick Reference Smart Charts™.

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