Beware of Regulators Bearing Gift Cards

Although many people think the Trojan Horse story comes from Homer, the Iliad ends before Odysseus comes up with the famous deception and the Odyssey occurs after Troy has fallen. It is Virgil, the most famous poet of Ancient Rome, who wrote the Aeneid that actually fills the gap. In Book II, the priest Laocoon warns the Trojans not to accept a giant wooden horse placed outside the walls and gates of Troy: “Quidquid id est, timeo Danaos et dona ferentes”—which translates into “Whatever it is, I fear Dardanians [Greeks] even when they bring gifts.” While we have come to think of a “Trojan” Horse as a form of malicious code—a computer virus wrapped in a friendly cocoon—the “Trojan” Horse wasn’t really Trojan at all: it was a Greek horse figure filled with Greek fighters who deceived and overpowered the drunken Trojans who thought it was a gift. The English expression “beware of Greeks bearing gifts” is derived from Virgil’s Aeneid.

Deception is also at the heart of legislation regulating gift cards, gift certificates, e-cards, gift codes and similar instruments—we’ll call them all gift cards in this article. Essentially plastic or electronic prepaid or stored value cards, they can be purchased or obtained by one person, freely transferred or gifted to another, used in promotions, or used by the original purchaser. Years ago, prepaid phone cards adorned the walls of gas stations and retail outlets. Today, newsstands, retail stores, the Internet are filled with them—adorning walls, displays, check-out counters, e-greeting card websites and online digital music services.

Gift cards owe their origins to pieces of paper issued by merchants allowing one person to pre-purchase value that can be given to someone else as a gift and which they can then use at an establishment to purchase goods or services available from that merchant. When you engage in a transaction with a merchant at the point of sale, you are presumed to know (or you should be able to know) the terms and conditions that apply. While there are legal exceptions, a posted sign that says “no refunds, no exchanges—store credit only” is part of the bargain you make when buying from that retailer. But what about a gift? If I hand you a gift card, how will you know what restrictions or limitations apply…the Trojan Horse!

Not limited by geography, gift cards can be used virtually (pardon the pun) anywhere. Chain store near you? Buy a gift card for your nephew across the street or across the country. Know a teenager who loves rock and roll, but prefer not sending a check for $100 and hope they head for the CD rack? Send a gift card that enables downloads, CD or subscription purchases online.

So you try to use a gift card. The merchant says, “I’m sorry, this card has expired.” WHAT? You present your unused $50 gift card in payment for a $45 item. The merchant says, “I’m sorry, your card only has $42 left on it.” WHAT? Moving, you find that old gift card you forgot about six years ago and head straight for the retailer. Sorry, no money? WHAT?

The increased proliferation of gift cards—fostered by the ease of shopping on the Web, anywhere, any time—has stimulated a flurry of legislation. Some statutes, like “escheat” laws, have been around for some time and legislatures are shoring up loopholes which have allowed them to escape the “abandoned property” net.

Without an expiration date on the card or disclosures that make the expiration clear to the recipient, how would they know? Many states have begun to pass consumer protection legislation prohibiting expiration dates or requiring their disclosure, or both. That’s good news for us lawyers—states are neither uniform nor consistent, there are exceptions to the requirements, and new and amended laws are coming up all the time at both the state and federal level (think FTC, disclosure, misleading advertising practices, Trojan Horses)—so you’ll have to ask us to help. By the way, federally chartered banks are not regulated by state law or the FTC directly. Gee, this really is a legal nightmare, isn’t it?

Now back to escheat laws which appoint the state as custodian for unclaimed property of their citizens. Sometimes referred to as “abandoned” or “unclaimed” property laws, they all have one purpose: To protect the consumer if the entity that promises to pay is no longer around. If it’s your money, fill out a form proving it’s yours and the state sends it back to you—even years later. While they are complex, laws typically require the holder of the funds to escheat to the state, all monies left unused in inactive accounts after some period of time. When? Time periods vary, not all states have such laws, and not all laws cover gift cards. Getting the hint yet?

Getting dizzy? What if you buy a gift card in Texas, for your aunt in Illinois? Or you are sitting at your computer in New York, arranging an e-gift card (code) to be emailed to your sons in California? Which “consumer” is to be protected? Which state’s escheat laws apply? What if you don’t know who I gave it to? Where the recipient chooses to use it? What if you move?

To avoid these abandoned property laws, some gift card issuers have attempted to impose “dormancy,” “inactivity” or “administrative” fees which are deducted from the unused gift card balance after some period of inactivity (e.g., after X months, a fee of Y will be deducted each month). It is easy to see how dormancy fees can reduce or eliminate the amount available on the gift card and the amount to escheat. An unused gift card could wind up not being much of a “gift” at all. So states are passing laws prohibiting (or limiting) the imposition of dormancy fees and requiring disclosures.

The bottom line: Gift cards, like Trojan Horses, are not always what they seem to be and are more complex than a simple gift. Rimon has helped numerous companies untangle the web of laws and regulations. We routinely follow developments in this area, whether state or federal legislation or regulation. How can we help you?