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Guide To Selling Gift Cards Under the Federal Gift Card Law

 

Contents

Gift Card Rules
How to determine when or if your gift cards or certificates can expire
Overview of the CARD Act and Regulation E
Are your Gift Cards covered in the CARD Act's Definitions?
Six Exclusions from the CARD Act
    *Loyalty, Award or Promotional Exclusion
    *Disclosure Requirements to qualify for the Loyalty, Reward or Promotional Program Exclusion
    *Issued in Paper Form Only Exclusion

Reality Check
Expiration of Card vs. Underlying Funds
What is state law?
Lost and stolen not required for replacement
Prior to Purchase and On the Card Disclosures
Non-compliant cards in inventory
What to do next
Possible Approaches
Closing Thoughts

Introduction

If you are like many small or independent retailers across the US, you are probably wondering how the new federal gift certificate laws affect you and your business. This guide is meant to help you understand the new law and determine how to adjust your gift card or gift certificate program. It is NOT LEGAL ADVICE, and should not be a substitute for legal counsel. With that out of the way, lets get started!

Gift Card Rules

The "CARD Act," explained more fully below, sets a federal minimum redeemable term for gift certificates, store gift cards and general-use prepaid "cards, codes and other devices" of five years from the date of issuance or the date funds are last loaded on the card (if it is a store gift card or general use prepaid card), whichever is later. The products covered by the CARD Act will be referred to in this guide as "Cards." The CARD Act also requires disclosure of any expiration term for funds underlying a Card prior to purchase and on the Card. The new law also limits dormancy, inactivity, or service fees that can be charged to a Card; one-time fees (e.g., purchase and activation of a Card, purchase of a good/service or reloading of funds) are treated differently. Specifically, it does not permit such fees unless there has been 12 months of inactivity and then only permits one such fee per month. Furthermore, monthly fees may not be accumulated into a single periodic fee. Such fees must be disclosed clearly and conspicuously prior to purchase and on the Card; one-time fees need to be disclosed prior to purchase and on or with the Card. Also note that no fee may be imposed for replacing a Card or providing the cardholder with the remaining balance on a Card prior to the funds expiration date unless the Card is issued to replace a lost or stolen Card. In the interest of brevity, since few small and independent retailers are charging the types of "inactivity" or "dormancy fees" covered by the new law, this guide will focus on expiration dates as they might commonly affect small and mid-sized retail businesses.

How to determine when or if you gift cards or certificates can expire

It's actually simple. Step one; determine if your gift card or gift certificate (referred here as "Gift Card") is subject to the federal law. If the answer is no, mazal tov! But don't forget that even if the new federal law does not impose an expiration term or disclosure requirements for your Gift Card, your state gift card law still applies. So you have to understand what your state law says. If the new law does apply to you, step two is to see if your state law is more or less restrictive than the new law. The federal gift card law does not trump the states' gift card laws if they provide consumers with more protection than the federal law and are otherwise consistent with the federal law. So if your state's gift card law is more protective than the CARD Act and it is consistent with federal law, your Gift Cards need to comply with your state's law. If it is not, the new federal law applies to your Gift Cards. Simple right? Our government rocks!

Overview of the CARD Act and Regulation E

The good news (for everyone) is that the new federal law does not apply to all Gift Cards. To figure out if your gift program is affected, you have to know what the law says. It's harder to find than you might think. The legislative history is slightly different than what we learned from the campy schoolhouse rock. A short history of the federal gift card law: Credit card companies did all kinds of nasty things to their customers like make "oppressive" changes in their services agreements and increasing annual interest rates for almost any reason. Congress came to the rescue by passing the Credit Card Accountability Responsibility and Disclosure Act of 2009 (the "CARD Act"), which amends Section 915 of the Electronic Funds Transfer Card Act ("EFTA"). The CARD Act is mainly concerned with credit cards but while they were at it, Congress decided to regulate Cards. Specifically, the CARD Act requires that the consumer will have a reasonable opportunity to purchase a Card with at least five years remaining until the Card expiration date, and restricts certain fees.

The CARD Act was signed into law by President Obama on May 22nd, 2009. You can read the gift card provisions here, but that won't really give you the whole story. It is important to understand that Section 2 of the CARD Act gives the Board of Governors of the Federal Reserve System (the "Board") authority to make additional rules it thinks are necessary to implement the CARD Act by amending Regulation E, which is the implementing regulation for the EFTA. Implementing a law by amending an implementing regulation for the law will have to be on schoolhouse rock 2.0. The Board decides how individual definitions and provisions of the EFTA and Regulation E apply to Cards. On March 23, 2010, the Board issued its much-anticipated (to those of us who follow this stuff) "Final Rule," that amended Regulation E to implement the CARD Act. Therefore it is the Final Rule that really explains how the CARD Act should and will likely be interpreted. It is important to remember that one of the core purposes of the EFTA is to protect "individual consumer rights." At its core, the CARD Act is designed to protect consumer.

Are your Gift Cards covered in the CARD Act's Definitions?

Who cares about the legal mumbo jumbo! What is my expiration date? We're getting there. The good news is that the Final Rule (and the amendment that was passed on August 11th, just eleven days before the provisions became effective) is very helpful in explaining how the CARD Act is to be applied. It includes over 100 pages of rule, explanation and official staff comments, which are more or less the law. Lets jump into step one and analyze if your Gift Cards are subject to the new law. The Final Rule slightly modifies the CARD Act's definitions of "gift certificates and "store gift cards;" although the CARD Act covers general-use prepaid cards as well, i.e., cards redeemable at multiple, unaffiliated merchants (e.g., Visa-branded gift cards). General-use cards will not be discussed in detail in this guide, but you can read all about them in the Final Rule. The Final Rule's definitions state.

The Final Rule and comments explain that the CARD Act should not be applied differently just because someone is holding a piece of plastic as opposed to a piece of biodegradable material, memory chip, paper or code. Regardless of the form (the Final Rule likes favors "card, code or other device"), the substantive requirements of the CARD Act will apply. So lets cut to the chase in these definitions. The comments clarify two points specifically: that Cards (1) NOT issued primarily for "personal, family, or household purposes" to a consumer, and (2) cards NOT issued in a "specified amount" are not subject to the CARD Act. The "personal, family or household" is meant as a narrow exception. Essentially, if the card is in the hands of a consumer to use for themselves, it's subject to the CARD Act. The example given by the Final Rule of an exempted card is one given by a business to its employee to reimburse for travel expenses or to purchase office supplies.

The second exemption may be significant for a variety of industries, including importantly small service businesses. The Final Rule interprets "specified amount" to mean a specific dollar amount that can be applied toward any purchase. Therefore Cards issued for a specific good, service or experience WITHOUT A SPECIFIC OR DENOMINATED AMOUNT are not covered by the CARD Act. For example, if a spa sells a certificate for a massage, a restaurant sells a card for a free meal, or a merchant provides a customer with a coupon for 20% off of a purchase, so long as the "card, code or other device" does not state a specific monetary value (like "a $50 value!"), it is NOT subject to the CARD Act. This is very good news. The Board's reasoning here is that if a business were liable to redeem an "experience" card or certificate for five years they would charge more for such card to adjust for anticipated price increases over the following 60 months. It is a very intuitive and well-reasoned approach. Consequently, if you issue certificate for a Blended Massage, or a fixed price meal you need only abide by your state gift card laws, which may or may not cover these sorts of products. You can find a handy guide here.

Six Exclusions from the CARD Act

If your Gift Card is covered by the Final Rule's definitions and therefore subject to the CARD Act, it may still qualify for an exclusion. There are six "statutory exclusions" set forth in the CARD Act. The exclusions are:

1. Useable solely for telephone services;
2. Reloadable and not marketed or labeled as a gift card or gift certificate;
3. A loyalty, award, or promotional gift card (if required disclosures are made);
4. Not marketed to the general public;
5. Issued in paper form only; or
6. Redeemable solely for admission to events or venues.

Out of this list, only two of these are likely to impact a small or independent retailer selling Gift Cards. Exclusion three for Cards issued as part of a loyalty, award or promotional program, and exclusion five for cards issued in paper form only. For more information regarding the other four exclusions, grab yourself a venti caffeinated beverage, read the Final Rule and then consult your legal counsel. Otherwise, read on and then consult your legal counsel. The CARD Act is good for lawyers.

Loyalty, Award or Promotional Exclusion

This is a potentially important exclusion for most businesses. The Board provides seven examples of programs excluded as loyalty, awards or promotional in the Final Rule. The summary of the Final Rule, explaining the history of the comments regarding this exclusion (yes, it really is that complicated) states that the commenters liked the proposed examples because they apply even if consumers have paid for or otherwise exchanged value for the certificates or cards. Of the seven examples (Paragraph 20(a)(4) to the official staff comment if you are hungry for details) exclusions number (i), (ii) and (vii) are the most likely to apply to small and independent retailers. They are:

1. Consumer retention programs operated or administered by a merchant or other person that provide to consumers cards or coupons redeemable for or towards goods or services or other monetary value as a reward for purchases made or for visits to the participating merchant;
2. Sales promotions operated or administered by a merchant or product manufacturer that provide coupons or discounts redeemable for or towards goods or services or other monetary value.
7. Charitable or community relations programs through which a company provides cards redeemable for or towards goods or services or other monetary value to a charity or community group for their fundraising purposes, for example, as a reward for a donation or as a prize in a charitable event.

Most small businesses participate in customer rewards programs and sales promotions. If you run promotions that fit these descriptions, your Gift Cards issued under such programs may qualify for this exclusion and exempt from the substantive expiration requirements of the CARD Act if the required disclosures are made.

Disclosure Requirements to qualify for the Loyalty, Reward or Promotional Program Exclusion

In order to qualify for this exclusion, the Final Rule requires certain disclosures. This discussion assumes that you do not charge fees on your Gift Cards but that you do expire them. (If you charge fees on your Gift Cards, additional disclosures are required, e.g., a toll-free number and, if one is maintained, a website address; for more information, review the Final Rule) If you expire your Gift Cards, to qualify for this exclusion, you are required to disclose on the front of the Card (1) that the Card is issued for loyalty, award or promotional reason (e.g., "AWARD" or "PROMOTION"); and (2) the date the underlying funds expires. The next question is: What do the disclosures need to look like? The Final Rule states that all disclosures must be "clear and conspicuous" meaning "readily understandable" and "the location and type size are readily noticeable to consumers." The Board did not adopt a rigid size or prominence standard for these disclosures required by the loyalty, award and promotion exception. However, the required disclosures should be prominently placed on the Card, not hidden. Also, state gift card laws may dictate how the disclosure is to be made. For example, California requires the date to be in all capital letters and in 10 point font.

If your Gift Card qualifies for this exclusion, the it may expire in less than five years, unless the governing state gift card law dictates otherwise.

Issued in Paper Form Only Exclusion

This is a narrow exception. The Final Rule's official comments explain, "the sole means of issuing the card, code or other device must be in paper form" (emphasis added). The fact that a card or certificate is printable or even generally issued or tendered in printed form does not mean that your Gift Card qualifies for this exclusion. In fact, one of the comments seems to speak directly to users of the BoomTime services. Our SpaBoom and CoverBoom platform creates a private labeled gift certificate that end users can purchase online or at a retailer's physical location in paper form. It generates an image and secure barcode that can be printed or emailed to a purchaser or gift recipient. The official comments state that this exclusion will not apply if the Card is "issued to the consumer in electronic form even though it can be reproduced or otherwise printed on paper by the consumer." So the Instant Gift Certificates or Gift Cards that are emailed to a customer who is able to print it at home do not qualify. The sole means of obtaining the Card must be in paper form. The examples given by the Rule of Cards or Certificates that meet this exclusion are cases where the Card is not available in any form other than paper, e.g., a prepaid parking code or ticket from a fuel pump good for a car wash.

Reality Check

If your Gift Card does not fit within the Final Rule's definition of Card, check out your state's gift card law. If it does fit within the Final Rule's definition of Card, next ask does it fit within one of the six exclusions? If it does, make sure you are complying with any other requirements (like the required disclosures for excluded Gift Cards). Also, check out your state's gift card law.

If your Gift Cards do fit within the Final Rule's definition of Card and they do not qualify for an exclusion, now what? Again, remember, we are assuming for this discussion that you do not charge fees on your Gift Cards. If we determine that our Gift Card or certificate is subject to the new law, what is the permitted expiration? Now we have to understand the relationship between the CARD Act and the governing state gift card laws. Whether the CARD Act preempts state law is subject to the fun doctrine of federal preemption. The Supremacy Clause of the United States Constitution generally allows federal law to preempt state law where there is a conflict. However, the CARD Act's core purpose is to provide consumer protection. The Card Act expressly states that it preempts state gift card laws only if they are inconsistent with its protections and only to the extent of the inconsistency. Therefore, if you sell a Gift Card that has a dollar value and is not subject to one of the seven statutory exceptions, it is subject to the CARD Act's five-year minimum expiration date. If your state law says there is a three-year minimum, it is preempted by the CARD Act and subject to the five-year expiration requirement. However, if your state law has a seven-year minimum expiration period, your Gift Card remains subject to the seven-year expiration period under the state law. If you are in one of the states, like California and Florida that do not allow gift certificates to expire at all, your Gift Cards may not expire. It is worth noting that states like California makes it unlawful to sell one with an expiration date on it at all. Thus, the new federal law is a floor, not a ceiling on consumer protection.

Expiration of Card vs. Underlying Funds

The Final Rule prohibits the issuance of a Card unless the underlying funds do not expire for at least five years. What does that mean? Certain Cards are reloadable. Instead of requiring retailers to issue a new Card each time a person loads funds onto the Card, the Board requires the issuer to disclose the date the Card expires and that the underlying funds do not expire for five years from the date loaded onto the Card. The Final Rule gives the examples, "Funds expire after card. Call for replacement card." or "Funds do not expire. Call for new card after 09/2016." The Final Rule says its cool for disclosures to use commonly accepted or readily understandable abbrevia­tions or symbols (e.g., "mo." for month or "/" to indicate "per") since space on a Card can be limited.

It is also important to understand that, because lots or retailers are still using old-fashioned plastic Cards, which are often printed (with unchangeable expiration dates) in large batches and warehoused before being stocked on retailers' shelves, the Board wanted to make sure that consumers get at least 60 months to use their Cards and underlying funds. To ensure that this happens, the Final Rule states that issuers or sellers of Cards are required to adopt policies and procedures to ensure that a consumer will have a reasonable opportunity to purchase a Gift Card with at least five years remaining until the Card expiration date. This means, to avoid confusing consumers, issuers must make Cards available that do not have expiration dates of less than five years, even if the underlying funds are good for five years. It's hard to imaging wanting to sell cards subject to such complicated rules, but if you do, make sure you understand them and know how to comply.

What is state law?

That should be easy, but you may not feel that way. There are fifty states (plus territories like Guam and Puerto Rico). Some of them are wackier than others in terms of their gift card laws. There are at least 10 states that do not permit gift cards or certificates to expire. There are several more that require valid terms of greater than 60 months. How do they feel about underlying funds? Good question. There may not be 50 different answers but its likely more than two. The big question is; how will your state handle underlying funds. Some states (like Arkansas for example) use a definition that generally tracks that of the CARD Act. Therefore an "experience" or service gift certificate sold without a dollar or specific amount on its face may not subject to the Arkansas gift card law. Surveys like this are a good place to start, but you should consult with your legal counsel regarding the state gift card laws that apply to your Gift Cards.

States	Expiration
California, Connecticut, Florida, Maine, Minnesota, Montana, New Hampshire, Oregon, Rhode Island, Washington	No expiration allowed
Massachusetts	7 years
Louisiana	Greater than 5 years
Illinois, Kansas, Michigan, New Mexico, Ohio	5 years
Maryland	Greater than 4 years
North Dakota	Greater than 6 years
Vermont	3 years
Arkansas, Hawaii, New Jersey, Oklahoma, Tennesee	2 years
South Carolina, Kentucky	1 year
Alabama, Alaska, Arizona, Colorado, Delaware, Georgia, Idaho, Indiana, Iowa, Mississippi, Missouri, Nevada, New York, North Carolina, Pennsylvania, South Dakota, Texas, Virginia, West Virginia, Wisconsin, Wyoming, Washington D.C.	No requirement

 

Lost and stolen not required for replacement

The CARD Act states clearly that there is no requirement to replace gift cards or certificates that are lost or stolen. Also consult your state gift card laws.

Prior to Purchase and On the Card Disclosures

One of the simple but important requirements of the CARD Act is that if a Card or its underlying funds expire, that fact must be disclosed on the Card "prior to purchase" of such Card with equal prominence and in close proximity to the Card expiration date. If the Card expires before the underlying funds or the underlying funds do not expire the consumer must be informed that they can contact the issuer for a replacement Card. Those disclosures must be "clear and conspicuous" to the customer before they consummate the transaction.

Of particular interest to those of us involved in selling instant gift certificates and Gift Cards online is the fact that for certificates, cards, codes or other devices purchased via the web, disclosures can be made after a consumer has started an on-line purchase of a certificate or card, but before the purchase is consummated. However, simply posting such disclosures on an issuer's website that need not be accessed during the purchase process will not satisfy the prior-to-purchase requirement. The disclosures should be prominent on the page, printable and the customer should be required to scroll through the disclosures before purchasing the Gift Card and the disclosures. This is consistent with the general rule that all disclosures must be "clear and conspicuous" standard discussed above.

If you are selling gift cards at retail, its also worth noting that a disclosure made in an accompanying terms and conditions document, on packaging surrounding a Card or on a sticker or other label affixed to the Card does not constitute a disclosure on the Card.

Non-compliant cards in inventory

On August 11th 2010, (yeah, a couple of weeks ago) the Board issued an amendment to the Final Rule that permits Card issuers to sell existing Card stock if certain disclosures are made. In a nutshell, the extension of the CARD Act addresses Cards produced before April 1, 2010 that are not compliant with the new law's disclosure requirements and restrictions on fees and expiration dates. The amendment permits issuers continue to sell those non-compliant cards through January 31, 2011 if they otherwise comply with the CARD Act, i.e., they do not expire the underlying funds (ever), don't charge any restricted fees, and provide signage, oral and electronic notice regarding the accessibility to those funds for up to two years after the January 31, 2011 date. Yikes! You would have to have a lot invested in your card stock to take that deal!

What to do next

Anyone selling Gift Cards should take a good, hard look at their entire gift card and loyalty, award and promotional program ("Card Program"). A great start is to get a basic handle on the federal gift card law. Next, make sure you understand the state gift card laws that govern your Card Program. It is probably worth engaging legal counsel unless you have the time and background for finding and reviewing statutes and researching how they have been interpreted. Specifically, you need to determine if your state law is more or less restrictive than the new federal law and if it imposes other substantive requirements. For example, some states require Gift Cards to be redeemable in cash if the balance on the Gift Card reaches some threshold amount and the holder of the Gift Card requests cash back. Some state gift card laws set minimum terms for Gift Cards given away as part of a loyalty, award or promotional program. So it is important to understand the boundaries of the CARD Act as well as the state gift card laws. As discussed above, if your state law is more restrictive (requires a term longer than five years before a Gift Card may expire) than the CARD Act, is not likely to affect your Card Program.

After evaluating your Card Program and creating a new strategic plan you may need to implement new policies, procedures and controls, including training your employees. Your vendors should be able to accommodate strategies like experience-based Gift Cards and dual expiration dates so that a promotional value or an experience Gift Card can expire while the underlying funds remain available for a longer term.

Possible Approaches

• Utilize Gift Cards that offer a service, e.g., a massage, facial, four-course meal, etc., without a fixed value identified on the Gift Card (assuming it complies with the governing state gift card laws)
• Implement a loyalty, award or promotional program that complies with the CARD Act and the governing state gift card laws
• Utilize Gift Cards that offer your customers a percentage off of their next purchase/visit/service (if it complies with the governing state gift card laws)
• Modify your existing policies and procedures so that your Cards expire at least five years from the date of service (if expiring Gift Cards is permitted by state law) and comply with the CARD Act/state law disclosure requirements.

Closing Thoughts

Do your homework: Review your Card Program, review the law, and seek guidance from the right advisors ASAP! The CARD Act was effective August 22, 2010 and the holidays will be here before you know it, get your compliant Card Program in place to limit your exposure and make your it a wonderful customer service and marketing tool for your business.