Several lawsuits have been filed against Groupon and LivingSocial, two companies well known for providing special offers online that allow consumers to sign up for a deal-of-the-day and purchase products and services at special rates for limited windows of time. The suits claim that the companies are violating the federal Credit Card Accountability Responsibility and Disclosure Act (CARD Act) and similar state laws that restrict the period in which gift cards can expire to a minimum of five years.

Groupon, an Illinois-based company, offers a “Deal of the Day” to subscribers. Each day, the website provides a list of specials to all those that register to take advantage of the deal. The deal only becomes available if a set number of subscribers sign up for it. It is often a discount at a local restaurant or retailer. After a subscriber and the requisite number of people register for the special, they can pay the set amount for the product or service and print out a voucher to be used to purchase the advertised product or service. Under the company’s terms, the vouchers expire within a period set forth in print on the voucher, which is often within months of the offer. The amount paid for the voucher, however, does not expire for five years or longer, depending on state law. Therefore, the paid portion of the voucher is available beyond the printed expiration date and for the amount of time required by law.

LivingSocial, a Washington, DC-based business, works somewhat similarly, except the deal is available regardless of whether a set number of people sign up for it. For example, on a particular day, LivingSocial may offer a painting class that is normally priced at $105 for only $50. Recipients of the email may then purchase a certificate – or voucher – referencing the deal. Unlike Groupon, there is no requirement that a set number of individuals join in order for the deal to be activated. Like Groupon, however, the voucher’s expiration date is governed by state law. At the bottom of each voucher is the following provision: “If the state or province where the merchant is located prohibits earlier termination, then the amount you paid for the voucher will expire five (5) years from the date the voucher is issued. The prepaid portion will not expire in states and provinces where it is prohibited by law.”

Businesses offer their products and services at these special rates through these websites and, in return, receive an influx of business from local residents that learned of them through the websites. For example, on LivingSocial, a spa may offer a facial that is normally priced at $150 for only $75 to those who purchase the deal within the 24- hour period. The consumer then has a period of time – usually only a couple of months – to redeem the certificate for the facial at the discounted price.

President Obama passed the CARD Act in 2009 as an overhaul to the way that credit card and gift cards are handled and as a way to help protect consumers from overage charges, undisclosed fees, and forfeited funds. Among the provisions of the CARD Act is a restriction that forbids companies from issuing gift cards that expire in less than five years. The regulations accompanying the CARD Act, however, exclude “loyalty, award, or promotional gift cards” from the expiration restriction. Cards falling under the restriction include, among others, those that are issued on a prepaid basis for personal use and are part of a promotional program. Cards not marketed as gift cards, those not marketed to the general public, and those issued in paper form only are also excluded from the rule.

The pending lawsuits – many awaiting class action certification – allege that Groupon and LivingSocial violate the CARD Act by issuing gift certificates that expire in less than five years. State gift card laws, also cited in the lawsuits, have similar restrictions and are not preempted by the federal law where the state laws have more stringent requirements. Although the companies have yet to respond, they likely have an argument that their certificates are promotional gift cards thus excluded from the CARD Act. Alternatively, the companies may choose to settle as Groupon did in a recent suit brought against it in Illinois under an Illinois state gift card law that prohibited gift certificates with an expiration date within five years of issuance. Even a settlement option may be extremely expensive given the growing number of plaintiffs. However, if the companies lose at trial, damages for an individual suit may be actual damages or statutory damages ranging from $100 to $1,000. If the suits are granted class action status, the damages may be no more than the lesser of $500,000 or 1 percent of the defendant’s net worth.

The outcome of this case may define the nature of these and other similar businesses. For now, they appear to be what some have called a “mash-up” of gift cards and promotional cards due to the two-tiered expiration dates. Companies that offer promotions through Groupon and LivingSocial as well as those companies that involve a similar business model should keep abreast of the issues involved in this case and ensure compliance with the CARD Act, accompanying regulations, and state laws.