In a decision of potentially far-reaching consequences, on Aug. 1, 2006, a U.S. District Court in New Hampshire ruled the sale of Simon Giftcards—prepaid electronic stored value cards—sold by the company that owns and operates shopping malls, are not subject to certain provisions of the New Hampshire consumer protection laws and are preempted by federal law. Simon cards look like ordinary plastic credit cards and operate on the Visa network. Simon became subject to action by the Attorney General in New Hampshire because each card had an expiration date and fees were imposed that reduced their value, violating provisions in New Hampshire’s Consumer Protection Act.
Simon cards are issued by U.S. Bank (formed under the National Bank Act) and MetaBank (a federal savings association under the Home Owners’ Loan Act). Simon had agreements under which each bank owns and issues the cards, manages the “account” relationship with the consumer, and sets the fees and terms that apply. Simon is responsible for advertising, marketing, promoting and selling the cards. Simon has no right to define or change the terms of the contract between the bank and consumer. Simon sells a Giftcard to a consumer and collects payment. The amount of purchase, minus an initial fee, is loaded onto the card, and Simon gives the consumer a copy of the card agreement along with the card. Simon deposits the funds into the bank’s account and the bank pays Simon a sales commission. When the consumer uses the Giftcard, the bank sends the money to the merchant through the Visa network, and all further deductions or fees charged are bank charges.
New Hampshire sought to stop the sale of these cards—asserting that Simon sells these Giftcards as an agent for the banks; and since Simon is not a bank, New Hampshire laws can be applied against Simon. Because the Giftcard is sold by Simon—a non-bank—the state claimed federal laws don’t preempt any limitations New Hampshire law impose to protect its citizens.
In deciding the case, the court notes that state regulations are preempted whenever they conflict with federal regulations, or when state law impedes the accomplishment of federal law objectives. Clearly, state regulation cannot limit fees charged or impose restrictions on the contract between these banks and the purchaser—thus state regulation is preempted. But what about Simon?
Well, the court notes the OCC has already ruled that if federal law authorizes a national bank to exercise a power, a state may not infringe that authorization. So New Hampshire may not enforce its consumer protection regulations against Simon either. Why, you ask? Because banks and savings’ associations have the right to use agents to conduct their business and routinely co-brand and co-market products to promote sales—for example, issuing private label department store cards and co-branded credit cards, auto dealers soliciting loans to finance vehicles, or tax preparers soliciting tax refund anticipation loans. Just because a third party is involved does not transform the card into a non-bank product, nor does it subject that product to state regulation.
Simon doesn’t control the contract between the bank and the consumer, and Simon is not compensated by fees imposed on Giftcard holders—the banks get those. Simon is paid a sales commission and the court notes: “If the State were able to enforce provisions of its CPA against Simon, one of two consequences would necessarily follow: either the banks would be required to stop all sales in New Hampshire…or the banks would have to alter the terms and conditions of the contractual relationship between themselves and purchasers of those Giftcards to comply with local law. Given that the Giftcards are banking products issued by federally chartered and federally regulated banks, the State cannot force those banks to elect between those options…. If there are to be any restrictions on fees associated with the Giftcards, or limitations imposed on expiration dates, they must come either from Congress or the federal agencies empowered by Congress to oversee national banks and federal savings associations.”
The ruling doesn’t mean all state consumer protection (or other laws) are preempted, but it does mean those particular regulations at issue in this case—the expiration date and imposition of fees that diminish the value of the card—are the domain of federal banking laws and regulations when the instrument is issued by them. New Hampshire’s Consumer Protection Act cannot restrict those aspects of the Giftcard, even against Simon, a non-bank sales agent. The state cannot do indirectly what it cannot do directly.
We have lots of experience with gift cards, stored value cards, prepaid cards and financial services. Our own Len Bernstein, one day before the ruling above, captured some important news about New Jersey regulation of gift cards in the New Jersey Law Journal, and we have professionals throughout the firm who follow and are knowledgeable in this area. Contact me, Len Bernstein, Russ Frandsen, Kaveri Subbarao or Catherine Wu—we can help you.