New Federal and State Laws Restrict the Sale of Gift Cards by Franchisors, Franchisees, and other Merchants

This is the 36th in a series of brief articles that Moye White is sending to its clients and friends to provide practical insights into opportunities and challenges in today's business and financial world.

Beginning in August 2010, new federal and Colorado state laws will limit how franchisors, franchisees, and other merchants sell store gift cards to the public.

New Federal Regulations

Effective August 22, 2010, new federal regulations under the Credit Card Accountability and Disclosure Act of 2009 will restrict the use of expiration dates and service charges by franchisors, franchisees, and merchants in connection with the sale of gift cards. The regulations also require additional disclosure of information about gift cards to consumers. The new regulations define “gift card” as any card, code, or other device issued to a consumer in a specified amount that can be redeemed for goods or services provided by a single merchant or affiliated merchants, and that can be reloaded or increased in amount by the consumer. Gift certificates are likely included in this definition. Franchisors and franchisees are included in the term “affiliated merchants,” as they are subject to a common set of corporate policies and practices pursuant to their franchise agreements.

Under the regulations, gift cards must not expire for at least five years after they were last loaded with funds (unless, of course, the full value has been used). Because virtually all gift cards have an expiration date printed on the card, the regulations require merchants to adopt policies and procedures to minimize customer confusion regarding the difference between a gift card’s expiration date and the expiration date for use of the underlying funds. These policies are to be adopted to give the consumers a reasonable opportunity to use a gift card within five years of its purchase, or within five years of last reloading the card with new funds.

After August 22, 2010, it also will be unlawful to impose dormancy, inactivity, or service charges on a gift card unless three conditions are met. First, there must have been no activity on the gift card for at least one year. Second, the merchant may charge only one dormancy, inactivity, or service charge on a card in any calendar month. Finally, dormancy, inactivity, and service charges must be conspicuously disclosed on the gift card, and notice thereof provided to the consumer prior to the card’s purchase. Other new disclosure requirements include the duty to maintain a toll-free telephone number or web site address where consumers can obtain information about such charges.

New Colorado Statute

Virtually all states have adopted their own laws affecting the sale or use of gift cards, because the federal regulations are considered to set relatively minimal standards that should not supplant stricter state law requirements. On April 29, 2010, the Colorado legislature passed Colorado Senate Bill 155, which has been signed by Governor Ritter and will go into effect in August 2010. This statute requires any seller of a gift card to redeem the gift card for cash, upon request of the holder, if the amount remaining on the card is less than $5. The new state statute also makes it unlawful for a person to sell a gift card that contains a service, dormancy, inactivity, or maintenance charge. Disregard of this rule will be deemed a violation of the Colorado Deceptive Trade Practices Act. Accordingly, compliance with the new federal regulations concerning service and other similar charges may not protect the seller of gift cards from being in violation of Colorado law. Finally, gift cards redeemable in cash (as opposed to food, goods, or services), must be turned over to the State of Colorado if unclaimed by their owners for more than five years.

Franchisors, franchisees, and other merchants should carefully evaluate whether their gift card programs comply with the new federal and Colorado state laws, as well as the laws of all other states in which they sell gift cards.

Moye White LLP has prepared this bulletin to provide general information; however this bulletin does not provide legal advice and does not create an attorney-client relationship between the reader and Moye White. No legal or business decision should be based solely on the content of this bulletin.