Gift Card Summary (12 09)
Gift cards are now regulated under the CARD Act, which will limit gift card fees and expiration dates. Federal law currently preempts state attempts to regulate the terms of national bank issued gift cards. However, the Federal Circuit Courts of Appeal are divided on whether states may regulate non-bank retailers that sell gift cards as agents of national banks.
A. Federal Regulation
The Credit CARD Act of 2009 provides regulations for gift cards which go into effect on August 22, 1010. Credit CARD Act of 2009, 123 Stat. 1734 § 401 (2009). The Act regulates two major gift card practices: inactivity and other fees, and expiration dates. The Act applies to gift cards in general, but does not apply to phone cards, reloadable cards that are not marketed as gift cards, or rewards-type cards. Id. § 401(a)(2). It also does not apply to gift certificates issued in paper form only. Id.
The Act’s fee regulations provide that fees cannot be charged on gift cards unless those fees comply with the Act. Id. §§ 401(b)(1), (2). In order to comply with the Act, fees may not be charged unless the card has been inactive for a full 12 months. Id. § 401(b)(2). Companies may also charge no more than one fee per month. Id. Companies must further comply with the Act’s disclosure requirements in order to charge fees on gift cards. Id. § 401(b)(3). Under these requirements, cards must state that a termination fee may be charged, the amount of the fee, how often it is assessed, and the reasons for which it may be assessed. Id. Gift card sellers are further required to notify purchasers of the fees at the point of sale, whether the cards are purchased in person, online, or by telephone. Id.
The Act also forbids the sale of gift cards with expiration dates, unless the expiration date is at least five years from the card’s purchase or the last time it was loaded with funds. Id. § 401(c). The expiration date must also be clearly stated on the card. Id
Pursuant to the CARD Act § 401(d), the Federal Reserve Board has promulgated proposed rules to implement the Act’s gift card requirements. 12 CFR 205 (2009). The Board’s regulations must go into effect no later than 9 months after the gift card regulations become effective. 123 Stat. 1734 § 401(d)(3). These regulations will fill in the details of how exactly gift card sellers may comply with the Act.
B. State Regulation
State regulation of gift cards has not been universally successful. In SPGGC, LLC v. Ayotte, 488 F.3d 525 (1st Cir. 2007), cert. denied, Ayotte v. SPGGC, LLC, 552 U.S. 1185 (U.S. 2008), the court decided that New Hampshire could not forbid banks from selling gift cards that carried expiration dates or fees. Id. at 536. At issue in the case was N.H. Rev. Stat. § 358-A:2 (2009). Ayotte at 528. This statute contained a flat prohibition on gift cards with expiration dates or fees. Id. The plaintiffs sued the state, arguing that the National Bank Act, 12 U.S.C. § 24, gave banks the power to issue gift cards with expiration dates and fees. Ayotte at 528, 530. Because the New Hampshire law interfered with this power, the plaintiffs argued that the state law was preempted. Id. at 528. The First Circuit agreed, holding the New Hampshire law to be preempted and unenforceable, not only against banks, but also against the third party retailers who sell gift cards as agents of the banks. Id. at 536.
Several courts have agreed with the Ayotte rule, that the National Bank Act preempts state prohibitions on gift card fees and expiration dates. Green v. Charter One Bank, N.A., 640 F. Supp. 2d 998, 1002 (N.D. Ill. 2009); Mann v. Td Bank, N.A., 2009 U.S. Dist. LEXIS 106015 at *22 (D.N.J. 2009). The Second Circuit, however, has disagreed with Ayotte on a key point. SPGGC, LLC v. Blumenthal, 505 F.3d 183 (2d Cir. 2007). While conceding that the National Bank Act protects national banks from state gift card regulations, that court has held that non-bank retailers who sell gift cards as agents of national banks may still be subject to state gift card laws. Id. at 190-91.
According to Consumers Union, 32 states have laws that regulate or prohibit expiration dates and fees. Consumers Union, Fact Sheet on State Gift Card Protection Laws, http://www.consumersunion.org/pdf/State-Gift-Card-Laws.pdf, (Sep. 15, 2009). Another five states have laws requiring that expiration dates and fees be disclosed to the consumer. Id. As reported by Stateline.org, as of 2007 many companies had already moved away from gift card expiration dates and fees as a result of this widespread regulation. Stateline.org, States Make Gift Cards Friendlier to Consumer, http://www.stateline.org/live/details/story?contentId=265257, (Dec. 26, 2007). As such, though Ayotte ostensibly makes state gift card regulations unenforceable, many gift card distributors have elected to drop their fees and expiration dates rather than pursue an aggressive 50-state litigation campaign.