On March 23, 2010, the Federal Reserve Board (the Board) announced the final rule implementing the gift card provisions of last year's comprehensive credit card reform legislation, the Credit Card Accountability Responsibility and Disclosure Act. The final rule, which becomes effective on August 22, 2010, creates certain uniform minimum standards with which gift card issuers must comply, in addition to the varying regulations imposed by more than 40 states. Specifically, the final rule imposes limits on the dormancy, inactivity or service fees that can be assessed against, and expiration dates that can be placed on, gift certificates, store gift cards (those redeemable at a single merchant or affiliated group of merchants) and general-use prepaid cards (those redeemable at multiple, unaffiliated merchants, service providers or automated teller machines).
Citing a recent survey finding that 95% of Americans have received or purchased a gift card, the Board observed that electronic gift cards have largely replaced paper-based gift certificates as a more cost-effective and efficient means of facilitating gift-giving by consumers. While, in 2006, closed-loop gift cards (which, typically, are redeemable at a single merchant or group of affiliated merchants) constituted approximately 75% of the prepaid card market, or $36.6 billion, the Board observed that the use of open-loop gift cards (which, generally, are issued by a financial institution and carry a card network brand logo such as Visa, MasterCard, etc.) was steadily increasing. Accordingly, in contrast to many state gift card laws, which address only closed-loop gift cards, the Board's final rule includes open-loop gift cards within its scope. The final rule does not apply to other types of prepaid cards, including reloadable (a card is "reloadable" if the terms of the agreement permit funds to be added to the card after the initial purchase or issuance) prepaid cards that are not marked or labeled as a gift card or gift certificate and prepaid cards received through a loyalty, award or promotional program.
Highlights of the Gift Card Rule
Restrictions on dormancy, inactivity and service fees. Dormancy, inactivity and service fees may be imposed with respect to a gift certificate, store gift card or general-use prepaid card only if: (1) there has been at least one year of inactivity on the certificate or card; (2) no more than one such fee is charged per month; and (3) the consumer is given clear and conspicuous disclosures about the fees. Such fees include monthly maintenance or service fees, balance inquiry fees and transaction-based fees, such as reload fees, ATM fees and point-of-sale fees.
Restrictions on expiration dates. The final rule prohibits the sale or issuance of a gift certificate, store gift card or general-use prepaid card that has an expiration date of less than five years after the date a certificate or card is issued or the date funds are last loaded.
- Although the five-year expiration date restriction applies only to the consumer's underlying funds (not the certificate or card itself), the issuer must nonetheless establish policies and procedures to provide consumers with a reasonable opportunity to purchase a certificate or card with at least five years remaining until the expiration date of the certificate or card.
- The final rule prohibits any fees for replacing an expired certificate or card, or for refunding the remaining balance, if the underlying funds remain valid.
In light of the wide variety of state gift card laws and the floor established by the new federal regulations, the Board devoted a good deal of attention to the doctrine of preemption, which generally provides that federal law supersedes state law when federal law is in conflict with a state law on a subject or when there is congressional intent to regulate a subject to the exclusion of the states. In its comments on the new regulations, the Board specified that it "may determine whether a state law relating to, among other things, expiration dates of gift certificates, store gift cards, or general-use prepaid cards is preempted by a provision of the [new] regulation." Employing the same preemption standard as the Federal Trade Commission's Franchise Rule, the Board stated that "a provision can only preempt a state law that is inconsistent with the provision and only to the extent of its inconsistency. Moreover, the regulation provides that a state law is not inconsistent with any provision if it is more protective of consumers."
State Escheat Laws
Finally, the Board focused on the applicability of state escheat laws, which govern when the ownership of unclaimed property transfers to the state, to gift cards—specifically, whether or when gift card issuers must remit unused funds to the state. Some commenters urged the Board to clarify whether the new protections regarding the fund expiration dates supersede state laws mandating the transfer of unused gift card/certificate funds to the state. The Board declined to do so, stating that "it is not feasible or prudent to make a preemption determination that applies generally to all states. Upon request for a determination with respect to a particular state's escheat law, the Board would apply the standards set forth" in the regulations to determine whether such a law is inconsistent and therefore preempted.
On its face, the Board's action, unfortunately, does little to ease the confusion created by the varying requirements imposed by over 40 state laws. As a result, companies will need to continue to monitor closely the ongoing efforts to regulate gift cards at both the federal and state levels.