In the wake of the COVID-19 pandemic, many small businesses and restaurants have been forced to close or to provide only limited services to customers. To ensure a sustained income stream, some businesses have been emphasizing the sale of gift cards or gift certificates—and the media have been encouraging consumers to support their favorites by pitching gift cards as the “war bonds” of the coronavirus pandemic. But while buying and selling gift cards can be a win-win for both consumers and the businesses issuing them, gift card issuers must remember to comply with federal and state gift card laws that impose restrictions on expiration dates and fees, require specific disclosures, and impose other regulatory requirements. With the upsurge in gift card activity, it’s a good time to review these laws and restrictions to ensure one does not end up as the target of a Federal Trade Commission or state attorney general inquiry or an expensive class action lawsuit.
Federal Regulation of Gift Cards
The Credit Card Accountability Responsibility and Disclosure Act (“CARD Act”) was signed into law on May 22, 2009. Although the name suggests this law pertains only to credit cards, it also applies to gift cards, stored value cards, and general-use prepaid cards that are sold or issued primarily for personal, family, or household use. Section 401 of the CARD Act requires specific disclosures regarding expiration dates and fees, limits dormancy, inactivity, and service fees, and establishes a minimum expiration date for these cards.
Under the CARD Act, a gift card or certificate may not expire earlier than five years after the date on which it was issued. The expiration date must be clearly and conspicuously stated on the gift card. Additionally, the CARD Act states the business cannot impose a dormancy, inactivity, or service fee on a gift certificate or gift card unless the following four conditions are met: (1) there has been no activity within the one-year period prior to imposing the fee; (2) only one fee may be assessed in a calendar month; (3) disclosures are clearly and conspicuously stated on the certificate or card regarding these fees and this disclosure must be made before purchase; and (4) additional requirements are met, as determined by the Board of the Federal Reserve System. The fee disclosures must clearly and conspicuously state: (1) that a fee may be charged; (2) the fee amount; (3) the frequency of the fee; and (4) that the fee may be assessed for inactivity.
State Regulation of Gift Cards
While the federal CARD Act provides a floor for expiration dates and fees, states have enacted their own laws regulating gift cards, and these laws are not pre-empted unless they directly violate the federal regulations. Businesses that are not operating nationally should review the law of the state(s) in which they operate to determine the rules they must comply with, while businesses operating nationwide must comply with the strictest state’s rules or else take a “patchwork” approach and exclude or carve out those states where they are noncompliant.
Regarding expiration dates, the states typically take one of several different approaches to the question of whether gift cards should have an expiration date. In some states, for example, Maine, expiration dates are prohibited altogether, while the majority of states take the CARD Act approach and allow an expiration date after some period of time but require clear disclosure of that date. Arizona and New York, for example, follow the CARD Act standard of 5 years. Some states (like Massachusetts) allow expiration dates but require that the gift card be valid for some minimum number of years that is longer than the CARD Act requirement—7 years in Massachusetts.
Additionally, states also regulate the fees that may be imposed upon gift cards or gift certificates. Some states, like Connecticut and Florida, prohibit fees associated with gift cards altogether. Some states, including Massachusetts and Virginia, allow fees but require clear disclosures to the consumer, while some only allow fees under very particular circumstances or after a specified time period has elapsed. For example, in New York, one of the states that is hardest hit by the COVID-19 outbreak, the gift card law provides that fees can be charged to unused gift card or gift certificate balances only after 25 months of inactivity, and any monthly service fees that are applied after this time must be waived if the consumer then returns and uses the gift card or gift certificate within three years of the issue date. Retailers are required to give clear instructions in the gift card’s or gift certificate’s terms and conditions for replacing a missing card.
Many states also have a requirement that any remaining balance on a gift card below a specified amount must be refunded to the consumer upon request. In California, for example, the holder of a card can request a refund of any balance under $10. This requirement has been the focus of significant class action litigation in the recent past and should not be ignored.
Regulation of Promotional Gift Cards
While traditional gift cards and gift certificates are subject to the regulations in the CARD Act, a common exception to these regulations relates to promotional gift cards, i.e., gift cards issued in conjunction with a promotional, loyalty or rewards program such as “Spend $50 and get a $25 gift card to use for your next delivery”). Under the CARD Act, a promotional gift card is one that: (1) is issued on a prepaid basis primarily for personal, family, or household purposes to a consumer in connection with a loyalty, award, or promotional program; (2) is redeemable at one or more merchants for goods or services, or can be used at an automated teller machine; and (3) includes certain disclosures.
Promotional and loyalty cards are actually exempt from the CARD Act’s restrictions on fees and expiration dates—provided the required disclosures are included on the card(s). First, the front of the card must disclose the expiration date and state that it is issued for loyalty, award, or promotional purposes only. If the card states “Reward,” “Promotional,” or “Loyalty” on its front, it satisfies the requirement. Second, issuers must disclose a toll-free telephone number on the card or a website address that consumers can use to obtain any fee information. Third, if there are fees, they must be disclosed, along with the conditions under which they will be imposed, on the card, with the code, or on the device.
Some states have also enacted laws providing specific laws or regulations for “promotional, loyalty or rewards” gift cards. Some states that do not have laws addressing promotional cards simply limit the definition of a gift card to include only cards for which money or some other thing of value has been given by the consumer in exchange for the gift card—thus arguably excluding promotional cards outside of their scope. Each one of these states, with the exception of Maine, permits an expiration date for promotional gift cards, but many states impose specific rules regarding the placement or format of the disclosure of expiration dates or fees (for example, format or font size).
Additionally, states take a variety of approaches in addressing abandoned gift cards and escheat. Abandoned property law provides that property may be presumed abandoned under state law if there is no activity with respect to the property for a specified abandonment period. Regarding gift cards, the majority of states deem gift certificates that have not been used for a period of time, typically three to five years, abandoned property. Other states, including Illinois and Virginia, expressly exclude gift certificates from abandoned property laws. Considering how varied the approaches can be, it is a good idea to consult the state statutes to see how each jurisdiction handles the issue of abandoned property before issuing gift cards, and to plan accordingly for unclaimed property avoidance and accounting purposes.
Businesses trying to supplement their income by selling gift cards during this trying time must understand the web of laws and regulations that govern this part of the business to avoid compliance issues. Federal and state regulators, as well as plaintiffs’ class action attorneys, are always on the lookout for violations of these often very specific and technical laws. Business owners should consult with an attorney regarding these laws to make sure their practices are consistent with the applicable federal and state regulations.