Gift Cards Under Attack
Heed the Warning. In February 2006, in a written response to a request from U.S. Congressman Charles Bass (R-NH), FTC Chairman Deborah Platt Majoras expressed concern that companies using gift cards are not clearly disclosing all material terms and conditions, including expiration dates and applicable fees. Chairman Majoras has asked her staff to look into the issue, which translates roughly into, “FTC enforcement action coming soon against those companies that aren’t complying.” Bass has indicated that he would request a hearing to see if uniform guidelines for disclosures may be necessary.
In conjunction with the FTC’s response, it also released a consumer advisory informing consumers of the pitfalls in buying gift cards and asks consumers to call the FTC if they have any problems.
While the FTC’s response has raised a note of concern within the industry, the fact is that companies that issue gift cards, or use them for promotional purposes, have always had an obligation to disclose the material restrictions or limitations on those cards. As chairman Majoras points out, “Section 5 of the FTC Act prohibits deceptive and unfair acts or practices. An advertisement is deceptive if it contains a statement — or omits information — that is likely to mislead consumers acting reasonable under the circumstances and is material to a consumer’s decision to buy or use the product.” Certainly, anything that reduces the value or effective use period of a gift card (think expiration date or dormancy fee) could affect a consumer’s decision to purchase the gift card. The same rationale could also apply to gift cards given away as premium items or prizes, since the perceived value of the gift card premium could impact a consumer’s choice to purchase one product over another.
The lesson here is that no matter how you are using a gift card, the material limitations, including any expiration date, dormancy fee, transaction fee, or restrictions on when, where and how the card can be used, must all be disclosed to the consumer in a clear and conspicuous manner prior to the purchase.
While the FTC is just now weighing in on the legal issues, the states have been dealing with them for years, by either prohibiting or restricting the use of expiration dates or dormancy fees. Currently, at least 15 states either prohibit or restrict expiration dates, and at least 22 prohibit or restrict dormancy or other fees. Many more states have similar types of legislation pending.
Under the abandoned property statutes, certain property, if not claimed within a specific time frame, reverts to the state, and the holder of such property is required to turn it over. Gift cards can be among the types of property covered by the escheat statutes, and so the amounts represented by the cards may need to be paid to the applicable state if not used by the holder within the statutorily defined period.
The good news is that the state laws that prohibit or restrict expiration dates or fees typically do not apply in situations where the gift card is distributed to a consumer pursuant to an awards, loyalty or promotional program, so long as no money or other consideration is given by the consumer in exchange for the card. Be careful, though, because in some states, a technical reading of the statute may indicate that such exemption is not available.
According to some reports, the sale of gift cards exceeded $110 billion last year. Their popularity, coupled with increased scrutiny coming from both the FTC and the states, make them an attractive enforcement target. Keep yourself out of the bull’s eye by ensuring your campaign complies with the law.
— Joseph Lewczak is a partner at Davis & Gilbert LLP, New York. He can be reached at 212-468-4909.
