Online, retail and other businesses that issue or sell prepaid products such as gift certificates or gift cards should be aware of recent proposed rules intended to provide greater consumer protection. The Board of Governors of the Federal Reserve System (the Board) recently proposed rules that would implement the gift card provisions of the Credit Card Accountability Responsibility and Disclosure Act of 2009 (the CARD Act), which goes into effect on August 22, 2010. Generally, the proposed rules would restrict the fees and expiration dates that may apply to certain prepaid products, including gift certificates and gift cards, and require that the terms and conditions of such products be clearly stated. The Board solicits comments on the proposed rules, which can be made via the Internet, email, fax or mail, and must be received by December 21, 2009. The proposed rules, and information for submitting comments thereto, are set forth in the November 20 issue of the Federal Register, at page 60986.
Applicable Prepaid Products
The proposed rules apply to gift certificates, store gift cards and general-use prepaid cards. Gift certificates and gift cards are generally defined as cards, codes or other devices that are issued to consumers in a specified amount, and are redeemable at a single merchant or an affiliated group of merchants for goods or services. "Affiliated groups of merchants" include two or more merchants or other persons that (i) are related by common ownership or common corporate control and share the same name, mark or logo, or (ii) agree among each other to redeem such products that bear the same name, mark or logo at their establishments (e.g., stores in a shopping mall). On the other hand, general-use prepaid cards can be redeemed at multiple, unaffiliated merchants for goods or services, or are usable at ATMs.
However, the proposed rules do not apply to certificates and cards that fall into one of six specified categories. Specifically, the proposed rules do not apply to prepaid products that are (i) usable solely for telephone services; (ii) reloadable and not marketed or labeled as a gift card or gift certificate; (iii) loyalty, award or promotional gift cards; (iv) not marketed to the general public; (v) issued in paper form only; or (vi) redeemable solely for admission to events or venues at specific locations affiliated with and in geographic proximity to the event or venue. Because some of these categories may be difficult to interpret, the Board specifically solicits comments as to whether further guidance beyond the proposed rules and commentary is necessary to provide clarity with respect to products that are covered under the proposed rules.
Restrictions on Fees and Expiration Dates
The proposed rules would prohibit dormancy, inactivity and service fees on certificates and cards prior to the first 12 months of inactivity. Any action taken by the consumer to increase, decrease or otherwise make use of the funds underlying the certificate or card constitutes "activity." After the first 12 months of inactivity, such fees can only be imposed at a frequency of no more than once per month.
The proposed rules also provide that certificates and cards may not be sold or issued unless the expiration date of the underlying funds is no less than five years after the date the product is issued or the date the funds are last loaded onto the product. The Board recognizes that under the proposed rules, a physical gift card may expire before the underlying funds, particularly if funds are reloaded close to the expiration date pre-printed on the gift card. To prevent consumer confusion in such cases, the proposed rules require that a statement that the consumer may contact the issuer for a replacement card be disclosed on the product.
Finally, the proposed rules require certain disclosures be clearly and conspicuously stated on the gift certificates, store gift cards or general-use prepaid cards. Items that are required to be disclosed include dormancy, inactivity, service fees and all other fees, expiration dates, and a toll-free telephone number and, if one is maintained, an Internet website that a consumer may use to obtain information about fees and replacement certificates or cards. However, neither a toll-free number nor a website must be maintained or disclosed if no fees are imposed in connection with a certificate or card, and the certificate or card and underlying funds do not expire.
Conflict With State Law
More than 40 states have already enacted laws applicable to gift certificates and gift cards, some of which prohibit expiration dates and fees on certificates and cards altogether. Such state laws that provide greater protection for consumers than the CARD Act are not preempted. In other words, the proposed rules are intended to serve as the effective "federal floor" for specific consumer protections, but do not prohibit states from imposing stricter consumer protections. Therefore, retailers should carefully review applicable state law to ensure that gift certificates and gift cards comply not only with the CARD Act, but also with the laws of the states in which the certificates or cards are issued.
For more information about the CARD Act, proposed rules or state gift certificate and gift card law, or assistance in reviewing applicable policies, please contact your principal Squire Sanders lawyer or one of the individuals listed in this Alert.