National Banks’ “No Fee” Gift Card Ads Could Violate State Consumer Laws

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

In two suits against that TD Bank, N.A. and Commerce Bank, N.A., consumer claims that the banks deceptively advertised “no fee” gift cards in violation of state consumer protection laws were not preempted by the National Bank Act or federal regulations, the federal district courts in Philadelphia and Camden, New Jersey have ruled.

On the front of the cards appeared a “Good Thru” date in large, raised letters. Very small print on the back of the cards stated that use was subject to terms and conditions accompanying the card. Each card came prepackaged in a decorative box, tied shut. Inside was a hidden pouch with a cardboard folding envelope containing a piece of paper stating terms and conditions of the card.

Dormancy Fees

In class action complaints, the consumers alleged that the cards were subject to “dormancy fees.” If the cards were not used for a specified number of months after issuance, the banks would deduct $2.50 monthly, silently reducing the value of the cards prior to the “Good Thru” date.

No issue date appeared anywhere on the cards. There allegedly was no mechanism, such as an 800 number or website, that a cardholder could use to ascertain the issue date or fees deducted.

The banks’ advertising campaigns allegedly claimed that, unlike other bank cards, their gift cards had “no fees.”

Banks’ Power to Assess Fees

To the extent that the New Jersey Consumer Fraud Act claims in Mann v. T.D. Bank, N.A. were based on the banks’ assessment of dormancy fees, the claims were federally preempted, the federal district court in Camden ruled.

The court relied on SPGGC, LLC v. Ayotte (1st Cir. 2007) CCH Advertising Law Guide ¶62,824. In that case the First Cicuirt held that enforcement of a New Hampshire Consumer Protection Act prohibition against sale of gift certificates containing dormancy fees would “significantly interfere” with the issuing bank’s powers under the National Banking Act and regulations of the Office of the Comptroller of the Currency (OCC).

State Laws Barring Deceptive Advertising

Not all state laws affecting a national bank’s practice of issuing gift cards are preempted, however.

In Mann, the court went on to hold that the New Jersey Consumer Fraud Act, as applied to the banks’ allegedly deceptive marketing and advertising, did not “significantly interfere” with their federally created powers.

Similarly, in Mwantembe v. TD Bank, N.A., the federal district court in Philadelphia held that enforcing the Pennsylvania Unfair Trade Practices and Consumer Protection Law would not interfere with the banks’ operations or unduly impair their ability to sell gift cards. There are no federal regulations directing what disclosures a national bank must provide in connection with the issuance of a gift card, according to the court.

State laws of general application, which merely require all businesses, including banks, to abide by contracts and refrain from making misrepresentations to customers, do not impair a bank’s ability to exercise its gift-card issuing powers, the court concluded.

U.S. Supreme Court

Both courts cited the U.S. Supreme Court’s 2009 decision in Cuomo v. Clearing House Ass’n, LLC (CCH Federal Banking Law Reporter ¶101-126). Cuomo reversed a trend of expanding the scope of federal preemption for national banks and dispelled the notion that all state laws affecting national banks are preempted, the court said in Mwantembe.

OCC Guidance

In addition, both courts found that the banks’ argument of conflict preemption was not supported by an OCC guidance document on gift card disclosures (OCC Bulletin 2006-34).

The OCC advised national banks that it “expects national bank gift card issuers to take appropriate actions to ensure that critical information is provided in a form that is likely to be readily available to recipients, as well as purchasers, of gift cards.”

The November 12, 2009 opinion in Mann v. T.D. Bank, N.A. will be reported at CCH Advertising Law Guide ¶63,679.

The November 17, 2009 opinion in Mwantembe v. T.D. Bank, N.A. will be reported at CCH Advertising Law Guide ¶63,678.

Federal Law Regulates Gift Certificates and Cards

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

A new federal law regulates gift certificates, store gift cards, and general-use prepaid cards by putting limits on fees and expiration and imposing disclosure requirements. The measure is included in the Credit Card Accountability Responsibility and Disclosure Act (Credit CARD Act of 2009), Public Law 111-24, signed by President Obama May 22, 2009.

Title IV of the Act—relating to gift certificates, gift cards, and prepaid cards—becomes effective August 22, 2010.

Fees, Disclosures

Dormancy fees, inactivity fees, and service fees are prohibited unless (1) there has been no activity with respect to a certificate or card for the preceding 12 months, (2) disclosure requirements are met, (3) not more than one fee per month is charged, and (4) any additional requirements imposed by Federal Reserve Board regulations are met.

The law requires the Board to issue final regulations by February 22, 2010, after consulting with the Federal Trade Commission. The prohibition of fees does not apply to any gift certificate distributed pursuant to an award, loyalty, or promotional program, as defined by the Board, and for which no money or other value is exchanged.

Issuers or vendors of certificates or cards must inform purchasers of fees before purchase. Certificates and cards must clearly and conspicuously state (a) that a dormancy, inactivity, or service fee may be charged, (b) the amount, (c) how often the fee may be assessed, and (d) that the fee may be assessed for inactivity.

Expiration

The law prohibits sale of certificates or cards subject to an expiration date earlier than five years after the date a gift certificate was issued or the date on which card funds were last loaded to a store gift card or general-use prepaid card. Expiration dates must be clearly and conspicuously stated.

Effect on State Laws

State laws regulating gift certificates and cards are not affected if they afford consumers greater protections than those afforded by the new federal law.

Further details will appear in CCH Advertising Law Guide.