On March 23, 2010, the Federal Reserve Board issued a final rule amending Regulation E, its implementing regulation for the Electronic Funds Transfer Act, 15 U.S.C. § 1693, et seq. (“EFTA”). The EFTA regulates transactions made electronically, such as through ATM’s, point of sale terminals and remote banking services. With this amendment, the EFTA, in conjunction with the Credit Card Accountability and Responsibility Disclosure Act of 2009, will provide federal regulation of plastic cards, electronic promises or other devices which retailers typically sell to consumers for store credit. The new rules take effect on August 22, 2010.
Regulation E distinguishes between two types of gift cards: (i) retail cards sold by a merchant for store credit and (ii) retail cards issued through loyalty, award or promotional programs. The new rules apply to both types of gift cards; however, as described below, the former type of card will be regulated more stringently than the latter. Traditional gift certificates issued in purely paper form are not regulated under the new federal rules.
For retail cards sold for store credit, the new rules prohibit a retailer from imposing a dormancy, inactivity or service fee with respect to a gift card unless (i) the consumer is provided clear and conspicuous disclosures about the fees in advance and (ii) no more than one such fee is charged per month. Service fees subject to the restrictions include monthly maintenance fees, service fees, balance inquiry fees, and “reload” fees, which are fees assessed if a consumer adds additional money to a card after the initial purchase. A retailer is also prohibited from charging a dormancy or inactivity fee unless there has been at least one year of inactivity on the card prior to the imposition of the fee. Notably, the new rules prohibit the sale of a gift card that has an expiration date of less than five years after the date the card is purchased or when value was last added to the card.
For cards issued through loyalty, award or promotional programs, the new rules require advance disclosure of any fees or expiration terms. The card must state (on its front) that it is issued for loyalty, award or promotional purposes, as well as the card’s expiration date and any potentially applicable fees.
Issuers of gift cards should also determine whether any state laws govern the issuance and maintenance of their gift cards. For instance, the State of Illinois regulates gift cards (which are included in the definition of “gift certificates”) through a provision in its Consumer Fraud and Deceptive Business Practices Act, 815 ILCS § 505/2SS. Unlike the amended federal rules, the Illinois statute covers both plastic gift cards and traditional gift certificates issued in paper form. The same categories of cards as with Regulation E apply; namely, gift cards that are sold for store credit and gift cards that are issued for loyalty, awards or promotional programs. Only the first type of gift card is covered by the Illinois statute. A gift card sold for store credit after January 1, 2008 cannot (i) have an expiration date earlier than five years after the date of issuance, (ii) be subject to any post-purchase fee or (iii) be reduced in value from its face value. The holder of a gift card issued after January 1, 2008 may not be penalized in any way for non-use or untimely redemption. Because every gift card issued after January 1, 2008 must meet these requirements, Illinois does not require disclosure of any of these terms on the face of the card.
Any gift card issued prior to January 1, 2008 that is subject to a fee must contain a statement clearly and conspicuously printed on the card stating whether there is a fee, the amount of the fee, how often the fee will occur, that the fee is triggered by the inactivity of the gift card, and at what point the fee will be charged. The statement may appear on the front or back of the gift card in a location where it is visible to the customer prior to purchase. However, the restrictions for gift cards issued before January 1, 2008 will not apply to any gift card that contains a toll free phone number and a statement stating that the holders can call the toll free number to find out the balance on the gift card, if applicable, and the expiration date. Also exempted from regulation in Illinois are gift cards that are (i) distributed by the issuer to a consumer pursuant to an awards, loyalty or promotional program without any money or item of value given in direct exchange, (ii) sold below face value at a volume discount to employers or to nonprofit and charitable organizations for fundraising purposes if the expiration date is not more than thirty days after the date of sale and (iii) issued for a food product.
Although the Federal Reserve Board’s Final Rule changes to Regulation E do not go into effect until August 22, 2010, several lawsuits have recently been filed against retailers for alleged violations of state laws regulating gift cards. For instance, two putative class action lawsuits were filed in the Circuit Court for Cook County, Illinois, alleging noncompliance with section 505/2SS of the Illinois Consumer Fraud Act. See Keeler v. Groupon, Inc., Case No. 10 CH 08666 (filed on March 2, 2010); Cohen v. Restaurant.com, Inc., Case No. 10 CH 12045 (filed on March 23, 2010). In both cases, defendants are alleged to have violated Illinois law by selling gift cards that expire prior to five years from the date of issuance. These cases assert claims—on behalf of nationwide and Illinois-only classes—for declaratory relief that defendants’ practices violate Illinois law, as well for damages resulting from violations of the Illinois Consumer Fraud Act, as well as for breach of contract and unjust enrichment.
In order to avoid such claims (not to mention the attendant public relations fallout), it is imperative for retailers to examine their gift card practices thoroughly to ensure compliance with all potentially applicably regulations, including the recently promulgated Regulation E.