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Will your gift card program comply with new federal laws?

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					DLA Piper | Publications | Will your gift card program comply with new federal laws?

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News & Insights > Publications

Publications
27 OCT 2009

Will your gift card program comply with new federal laws?
FRANCAST

Scott W. Pink

Gift cards and gift certificates have long been regulated by the states. States have generally focused on two issues: whether gift cards can expire after a certain period of time; and whether gift card issuers can impose service fees on use of the cards and dormancy charges for non-use of the cards. The states have varied widely in their approach to these issues. Some states, such as Minnesota, prohibit any expiration date or any form of service fee or dormancy charge. Other states, such as Missouri, have no such restrictions on gift cards. Many states are somewhere in between, allowing expiration dates after a certain number of years (generally ranging from two to five years) and the imposition of dormancy fees after a certain period of activity (generally ranging from one to two years). The federal government has now stepped into the gift card arena by enacting a national standard for gift card expiration dates and service fees and dormancy charges. This new law is part of the Credit Card Act of 2009 that was signed into law by President Obama on May 22, 2009. Section 401 of the Act adds a new Section 915 to the Electronic Funds Transfer Act (15 U.S.C. §1693 et seq.) making unlawful the imposition of expiration dates or service fees or dormancy charges unless certain conditions are met. Each of these is discussed in further detail below. 1. What kind of cards are covered by the new law? The new federal law applies to three types of prepaid instruments. The first is a “general-use prepaid card” that is redeemable at multiple, unaffiliated merchants, or service providers or automated teller machines, issued in a requested amount, but that can be increased or reloaded at the request of the consumer, purchased or loaded on a prepaid basis, and honored by the merchants for goods and services or at ATMs. An example would be a card that is issued by a mall owner for use at multiple merchants in the mall or “open loop” cards such as those commonly issued by banks and usable over

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10/27/2009

DLA Piper | Publications | Will your gift card program comply with new federal laws?

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payment networks such as Visa or MasterCard. The second is a “gift certificate,” which is defined as an electronic promise that is redeemable at a single merchant or an affiliated group of merchants that share the same name, issued in a specific amount that cannot be increased or reloaded, purchased on a prepaid basis and honored by the merchant for goods and services. An example would be an electronic gift certificate issued by a particular clothing retailer in a fixed amount to purchase clothing at that retailer. The third is a “store gift card,” which is an electronic promise, plastic card or other payment code or device that is the same as a gift certificate, except that the amount on the card may be increased in value or reloaded at the request of the holder. 2. What kind of cards are excluded from the law? The new federal gift card law specifically excludes certain kinds of cards from its ambit. It does not apply to electronic promises, plastic cards or payment codes or devices that are: used solely for telephone services reloadable and not marketed or labeled as a gift card or gift certificate a loyalty, award or promotional gift card not marketed to the general public issued in paper form only or redeemable solely for admission to events or venues at a particular location or group of affiliated locations. Gift card issuers will need to determine whether their gift card program or portions of their gift card program fall within any of these exceptions. 3. What are the restrictions on expiration dates? The new law makes it unlawful to sell or issue a gift certificate, store gift card, or general-use prepaid card that is subject to an expiration date, except that a gift card may contain an expiration date that is not earlier than five years from the date a gift certificate was issued or the date on which funds were last loaded to a store gift card or general-use prepaid card, if the expiration date is clearly and conspicuously disclosed. The law does not specifically define the disclosure requirements, but current practice is to disclose the expiration date on the gift card itself. It is uncertain whether those practices would meet the clear and conspicuous standard, and implementing regulations by the Federal Reserve Board may provide additional guidance. Gift card issuers that wish to impose expiration dates should consult with their counsel to develop an approach that satisfies this disclosure requirement. 4. What are the restrictions on service fees and dormancy charges? The new law also generally makes it unlawful for any person to impose a dormancy fee, inactivity charge or fee or service fee on a gift certificate, store gift card or general-use prepaid card. There is an exception to this prohibition, in which such a fee or charge can be imposed if the following conditions are met:

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10/27/2009

DLA Piper | Publications | Will your gift card program comply with new federal laws?

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there has been no activity with respect to the certificate or card in the 12-month period ending on the date on which the charge or fee is imposed certain disclosure requirements are met and not more than one fee is charged in a given month. The law also provides that the Federal Reserve Board may implement additional regulations relating to the imposition of such fees. Those regulations are expected to be published in February 2010. The restrictions on dormancy charges and service fees do not apply to gift certificates that are distributed pursuant to an award, loyalty or promotional program (to be defined by the Federal Reserve Board) and with respect to which there no money or other value exchanged. The disclosure provisions for imposing these fees or charges require the issuer or seller to conspicuously disclose that a fee may be charged, the amount of the fee or charge, how often such fee or charge may be assessed and that such fee or charge may be assessed for inactivity. In addition, the issuer or seller must inform the customer of the charge or fee before the certificate or card is purchased, whether it is purchased in person, over the Internet or by phone. This will require both issuers and sellers of such cards to implement processes to ensure the disclosure is made prior to purchase. 5. To whom does the new law apply? The new law applies to any person who “sells” or “issues” a gift certificate, store gift card or general-use prepaid card. Often the issuer and seller are one and the same. For example, a retailer that sells gift cards for use at its stores would be considered both an issuer and a seller. However, it is possible to be just the seller of a gift card, but not the issuer. For example, a supermarket that sells gift cards for various third-party retailers or restaurants would be considered a “seller” and would be in violation of the law if the third-party gift cards they sold violated the expiration date or service fee or dormancy charge provisions of this law, even though they are not the issuer of the cards and did not prepare the terms. Therefore, these retailers will need to review the gift cards they are selling to ensure they are in compliance. 6. What is the effect of the federal law on existing state gift card laws? The new federal law does not preempt any state law that affords a consumer greater protection. That is, it appears that a state law that prohibits expiration dates entirely or requires a longer expiration period than the federal law would remain in effect for that state. The Federal Reserve is also granted the power to exempt the requirements concerning dormancy fees, inactivity charges, service fees and expiration dates within any state if the Board determines that under that state’s law, the requirements are substantially similar and there is adequate provision for enforcement. 7. What are the penalties for non-compliance? A violation of these new gift card obligations will be considered a violation of the Electronic Fund Transfer Act (15 U.S.C. § 1693 et seq.). Under that act, a violator is subject to enforcement actions by the Federal Trade Commission, private lawsuits and criminal prosecution, depending on the circumstances. Violators could also be subject to civil penalties of up to $1,000 per violation in individual civil suits, and $500,000 or 1 percent of net worth in class action suits. Criminal penalties can be imposed if there is a knowing and willful violation of the new gift card provisions.

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10/27/2009

DLA Piper | Publications | Will your gift card program comply with new federal laws?

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8. What should gift card issuers and retailers do next? Gift card issuers and retailers should immediately start a review of their programs to make sure they are in compliance when the new law takes effect. As part of that review, they should review the implementing regulations that are expected to be issued by the Federal Reserve Board in February 2010.

http://www.dlapiper.com/will-your-gift-card-program-comply-with-new-federal-laws/

10/27/2009


				
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