Gift Card Fees, Expiration Dates Limited by Federal Reserve Rules

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

The Federal Reserve Board has announced final rules that restrict the application of fees and expiration dates to store gift cards, gift certificates, and general-use prepaid cards. The rules become effective August 22, 2010. The rules become effective August 22, 2010.

The Board developed the rules as required by Title IV of the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CCH Advertising Law Guide ¶11,900)

Covered products include retail gift cards, which can be used to buy goods or services at a single merchant or affiliated group of merchants, and network-branded gift cards, which are redeemable at any merchant that accepts the card brand.

Exclusions, Marketing Compliance

The rules do not apply to reloadable prepaid cards that are not marketed or labeled as a gift card or gift certificate and prepaid cards received through a loyalty, award, or promotional program, according to the Board. The exclusion will not apply if a reloadable prepaid card is advertised or offered by suggesting the potential use of the card as a gift, according to the Official Staff Interpretations accompanying the rules.

For example, if a card issuer selling a variety of cards sets up at a retailer a promotional display topped by a sign prominently stating “Gift Cards,” the exclusion might not apply to general-purpose reloadable cards.

Similarly, if a banner ad for “Gift Cards” is prominently displayed on the home page of a website, general-purpose reloadable cards sold on the site might not be excluded from the rules’ restrictions on fees and expiration.

Fees

The rules prohibit imposition of dormancy, inactivity, or service fees unless: (1) there has been at least one year of inactivity on the certificate or card; (2) no more than one such fee is charged per month; and (3) the consumer is given clear and conspicuous disclosures about the fees.

Fees subject to the restrictions include monthly maintenance or service fees, balance inquiry fees, and transaction-based fees, such as reload fees, ATM fees, and point-of-sale fees.

Expiration

The rules prohibit the sale or issuance of a gift certificate, store gift card, or general-use prepaid card that has an expiration date of less than five years after the date a certificate or card is issued or the date funds are last loaded.

The expiration date restrictions apply to a consumer’s funds, and not to the certificate or card itself. The rule includes provisions intended to give consumers a reasonable opportunity to purchase a certificate or card with at least five years before the certificate or card expiration date. The rules prohibit any fees for replacing an expired certificate or card, or for refunding the remaining balance, if the underlying funds remain valid.

State Laws, Limited Preemption

The rules prescribe standards for determining whether state laws that govern dormancy, inactivity, or service fees, or expiration dates, are preempted. A state law is not preempted due to inconsistency with federal law if the state law is more protective of consumers.

A state law that is inconsistent may be preempted even if the Board has not issued a determination. However, a financial institution might not be immune from violations of state law if the institution chooses not to comply with the state law and the Board later determines that the state law is not preempted.

Access to State Laws, Smart Chart

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

A 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.

Gift Card and Certificate Fees, Expiration Dates Would Be Limited by Proposed Rules

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

The Federal Reserve Board has announced proposed rules that would restrict the application of fees and expiration dates to store gift cards, gift certificates, and general-use prepaid cards.

The proposal would implement the gift card provisions of the Credit Card Accountability Responsibility and Disclosure 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 (CCH Advertising Law Guide ¶11,900)—becomes effective August 22, 2010.

(Further information on the Credit Card Accountability Responsibility and Disclosure Act of 2009 appears in a May 27, 2009 posting on Trade Regulation Talk.)

Covered products include retail gift cards, which can be used to buy goods or services at a single merchant or affiliated group of merchants, and network-branded gift cards, which are redeemable at any merchant that accepts the card brand.

Consistent with the statute, the proposed rule would not apply to other types of prepaid cards, including reloadable prepaid cards that are not marketed or labeled as a gift card or gift certificate, and prepaid cards received through a loyalty, award, or promotional program, according to the Board.

Dormancy, Inactivity, or Service Fees

The proposed rules would limit imposition a dormancy, inactivity, or service fee. Dormancy, inactivity, and service fees may be assessed only for a certificate or card if: (1) there has been at least one year of inactivity on the certificate or card; (2) no more than one such fee is charged per month; and (3) the consumer is given clear and conspicuous disclosures about the fees.

Fees subject to the proposed restrictions would include monthly maintenance or service fees, balance inquiry fees, and transaction-based fees, such as reload fees and point-of-sale fees.

Expiration Dates

The proposed rules would prohibit the sale or issuance of a gift certificate, store gift card, or general-use prepaid card that has an expiration date of less than five years after the date of issuance or the date funds are last loaded.

The expiration date restrictions would apply to a consumer’s funds, and not to the certificate or card itself. The proposal includes provisions intended to help ensure consumers have at least five years to use a certificate or card from the date of purchase. The proposed rule would prohibit the imposition of any fees for replacement of an expired card or certificate if the underlying funds remain valid

State Laws, Preemption

The Board would determine—upon its own motion or upon the request of a state, financial institution, or other interested party—whether the Act and rules preempt state law relating to electronic fund transfers, to dormancy, inactivity, or service fees, or to expiration dates of gift certificates, store gift cards, or general-use prepaid cards.

A state law that is inconsistent may be preempted even if the Board has not issued a determination. However, a financial institution would not be shielded by immunity for violations of state law if the institution chooses not to make state disclosures and the Board later determines that the state law is not preempted.

Comments

Comments on the proposal must be submitted within 30 days after publication in the Federal Register, which is expected shortly.

Subscribers to the CCH Advertising Law Guide on the Internet have access to more detailed coverage gift certificate and gift card laws in more than 35 states. A 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.

McDonald’s Faces Class Action After Refusing to Redeem $5 Gift Card for Cash

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

The holder of a $5 McDonald’s gift card has standing to sue fast food giant McDonald’s under California law based on McDonald’s alleged failure to redeem the card for cash, the federal district court in San Diego has ruled.

The California gift certificate statute (CCH Advertising Law Guide ¶30,515) provides that any gift certificate with a cash value of less than $10 is redeemable in cash. The statute defines “gift certificate” to include gift cards.

In a class action complaint, the gift card holder asserted claims under the California Unfair Competition Law (UCL) and the common law of unjust enrichment based on violation of the gift certificate statute.

Standing

McDonald’s argued that the gift card holder lacked standing to assert a UCL claim because he could still redeem his gift card for McDonald’s products and therefore did not lose money or property as a result of the unlawful conduct.

The holder responded that he did not want McDonald’s products and that McDonald’s unlawful conduct had caused him to keep the gift card that could only be used for products he did not wish to consume.

The court held that the holder had standing to pursue the UCL claim based on his allegation that he was denied money to which he had a right under the gift card statute. Likewise, the holder had standing to sue on the ground that McDonald’s was unjustly enriched by its practice of refusing cash redemptions on unused card balances of less than $10.

False Advertising

The holder also brought a UCL claim based on the California False Advertising Law, but the court rejected this theory.

The holder alleged that a statement on the back of the card—“[t]he value on this card may not be redeemed for cash . . . unless required by law”—was deceptive and misleading. The holder maintained that the statement led average consumers to believe that they could not redeem gift cards for cash and failed to disclose the right to redeem cards with balances of less than ten dollars for cash.

The holder’s false advertising theory failed, in the court’s view, because he did not allege that he relied on the language on the back of the gift card and, as a result of that reliance, lost money or property.

The September 21, 2009 opinion in Marilao v. McDonald’s Corp. will be reported at CCH Advertising Law Guide ¶63,615 and CCH State Unfair Trade Practices Law ¶31,917.

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.

Gift Card Suit Brought Under State Laws Not Federally Preempted

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

A national bank failed to establish that federal law and regulations preempted a gift card holder's class action complaint, asserting state law claims against the bank for imposing inactivity fees on the card, the federal district court in Chicago has ruled.

When the holder first used his $30 card 11 months after receiving it as a gift, he discovered that the bank already had deducted $12.50 to pay five months of inactivity fees. This prompted him to file suit against the bank in Illinois state court, alleging breach of fiduciary duty; unjust enrichment; and violation of various state consumer fraud and deceptive trade practices acts. The bank removed the case to federal court based on the Class Action Fairness Act of 2005.

National Bank Act, Federal Regulations

The bank argued that the state law claims were barred by the National Bank Act, which preempts unduly burdensome and duplicative state regulations. The bank further cited a regulation of the federal Office of the Comptroller of the Currency that authorized the charging of fees to "customers." A customer was defined as a party who obtained a product or service from a bank.

The gift card holder alleged that he obtained a product or service from the bank only after inactivity fees had been deducted from his card balance. At an early stage of the litigation, there did not appear to be an irreconcilable conflict between the state law claims and the federal law and regulations.

Fraud Pleading

The holder failed to plead with particularity the statutory consumer fraud claims but could pursue a common law unjust enrichment claim, the court determined. The consumer protection claims failed to meet the heightened standards for pleading fraud under Rule 9(b) of the Federal Rules of Civil Procedure.

Unjust Enrichment

The bank contended that the unjust enrichment claim failed because the parties had entered into a contract. While this was a correct statement of the law, the argument could not succeed at an early stage of the case when the holder's theory was that no contract was formed when the inactivity fees were charged.

The bank's reliance on the law of Ohio as governing under the card holder agreement was misplaced when the claim was quasi-contractual and could not by its very nature be governed by the terms of the agreement. The law of Illinois explicitly recognized that an unjust enrichment claim may be brought by a plaintiff seeking recovery of a benefit transferred to the defendant by a third party, according to the court.

The opinion in Green v. Charter One Bank, N.A. appears at CCH Advertising Law Guide ¶63,221.