Guide to Computer Law—Number 277
Practitioner’s Perspective
by Holly K. Towle, J.D.
Gift Cards and Gift Certificates
With the holiday season coming, it seems appropriate to focus on gift
certificates and their modern equivalent, electronic gift cards. To spur
holiday sales, assume your company decides to offer a gift certificate (or
card) for its goods or services. Are there any new legal issues to think about?
In some states the answer is yes, although there have long been plenty of
issues to consider. This column discusses a few of those issues.
Holly K. Towle is a
partner with Kirpatrick &
Lockhart Preston Gates
Ellis LLP (K&L Gates), an international law firm,
and chair of the firm’s E-merging Commerce
group. Holly is located in the firm’s Seattle
office and is the coauthor of The Law of
Electronic Commercial Transactions (2003,
A.S. Pratt & Sons). Holly.Towle@KLgates.com,
206-623-7580.
Characterization
Gift certificates can invoke a hodgepodge of commercial and consumer
protection laws. Depending upon how they are written, they can present
questions whether they are “instruments,” “checks,” or the like under the
Uniform Commercial Code. If the gift card is a “stored value” card, the
federal Bank Secrecy Act even can come into play, although there is an
exemption for issuers, sellers or redeemers of stored value of $1,000 or less.
What is a gift card or “stored value?” A gift card is a newer form of “gift
certificate.” Some of the cards are “loaded” with value stored on the card
itself and some simply “talk” to a remote computer that deals with the
value. An example of a “gift certificate” statute dealing with both types is
Washington’s new Gift Certificate Act which uses these definitions:
• “Gift certificate” means an instrument evidencing a promise by the
seller or issuer of the record that consumer goods or services will be
provided to the bearer of the record to the value or credit shown in the
record and includes gift cards.
• “Gift card” means a record as described in [the definition of gift
certificate] in the form of a card, a stored value card, or other physical
medium containing stored value primarily intended to be exchanged
for consumer goods and services.
What is stored value? Borrowing from the Bank Secrecy Act, it is “ Funds
or monetary value represented in digital electronics format (whether or not
specially encrypted) and stored or capable of storage on electronic media in
such a way as to be retrievable and transferable electronically.” In short, it
is electronic money-like value which, as noted, can be stored on a card or
somewhere else.
Practitioner’s Perspective appears periodically
in the monthly ReportLetter of the CCH Guide to
Computer Law. Various practitioners provideindepth analyses of significant issues and trends.
That “somewhere else” concept can get very complex and the FDIC is
currently considering when stored value (including “payroll cards”) should
be considered a “deposit” for FDIC insurance purposes and, I predict, other
more extensive regulatory purposes. Retailer gift cards in “closed systems”
(i.e., cards not cleared through a bank) will probably not be covered, but
coverage may be heavily fact-dependent. Not all states use the above
CCH GUIDE TO COMPUTER LAW
definition of stored value. Washington, for example, uses
a definition designed to exempt gift cards from regulation
under Washington’s “money services business” statute
(other states have similar statutes), as long as the stored
value is only redeemable for the issuer’s goods and services.
Confused? Well so in this area of law. It can be a long, factdependent trudge through statutory thickets, although one
can often get to the other side without fatal scars.
Regulation of Format
Many states regulate gift certificates or gift cards right
down to type size and text. Some states allow an expiration
date and some do not, and some states limit dormancy or
administrative fees.
To illustrate, consider the new Washington Gift Certificate
Act. In general, it prohibits expiration dates, so the gift
certificate (or card) remains valid until redeemed or replaced.
Exception is made for gift certificates issued under an awards
or loyalty program or where no consideration is given.
When the “no expiration” rule applies, long-term accounting
for gift certificates is required. The Washington statute also
prohibits dormancy or “inactivity” fees for gift certificates,
subject to a few exceptions. One allows a dormancy fee for
gift cards if certain details are printed on the card in six-point
font visible before purchase. A dormancy charge may only
be levied after 24 months of absolute inactivity (a balance
inquiry will restart the clock) and may not exceed $1 per
month; the balance at the time of the charge must be less
than $5. The bearer must be able to “reload” or add value
to the card and, once a charge is assessed, the remaining
balance must be refundable in cash. Cash redemption is also
NUMBER 277
required for gift certificates in other circumstances, such as
when a certificate is redeemed for less than the full amount.
Thus, if a $50 certificate is used to purchase a $30 toaster, the
issuer could deliver the toaster with another $20 certificate.
But once the remaining balance is less than $5, it must be
redeemable in cash on demand.
State Unclaimed Property Acts
Most states have an abandoned or “unclaimed property
act” requiring entities holding intangible property (such as
unused gift certificates, dividends, checks, deposits, and so
on) to “escheat” that property to the state if it is not claimed
within a stated number of years (usually from one to five).
The state then acts as custodian of the property in the event
its rightful owner claims it. These acts have significant
reporting obligations and even though many states have
adopted a version of the Uniform Unclaimed Property Act,
non-uniformity exists. Further, some states do not honor
expiration dates. In short, these acts can create significant
reporting and administrative obligations, including audits,
for gift certificate programs.
Some states recognize this burden. For example, under
Washington’s new Gift Certificates Act, issuers can, as of
January 1, 2005, essentially “opt-out” of the state’s unclaimed
property act as long as they comply with the Gift Certificates
Act. This election is made, however, by failing to report the gift
certificate to the state as abandoned property. This may have
surprising results (at least to the business that does not realize
that a non-report is an election). To avoid that kind of surprise,
taking a look at laws applicable to the exact gift card program
in question is advisable before launch of the program.