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Gift Card Regulations: What Your Business Needs to Know

Posted by Attorney David J. Espin in Gift Cards / Comments

Gift cards are a recent trend many businesses are turning to in order to increase lagging sales, especially around the holidays when shoppers are looking for gifts that are versatile enough for those hard-to-please recipients. However, before you decide to use gift cards to give your company's sales a boost, you should familiarize yourself with the rules and regulations surrounding their sale in order to avoid litigation or a costly fine.

Congress passed the Credit CARD Act in 2010, and with it came regulations on the sale and use of gift cards. These regulations apply to issuers and sellers of prepaid gift cards, and to franchisors and franchisees alike. However, the regulations specifically exclude loyalty, award, or promotional cards, so punch cards and similar loyalty driven programs would not be included. Below is a summary of the rules and regulations that were imposed by the CARD Act.

Fees Associated with Gift Cards. In order to charge dormancy, inactivity, or service fees, there needs to be at least one year of no activity on the card prior to the fee being charged. This one year period gets re-set each time the card is used. In addition, only one fee can be charged in any given calendar month. The regulations also state that these fees must be disclosed “clearly and conspicuously" on the actual card, and not somewhere in the fine print of a contract that accompanies the card. Contact information where customers can call or email to get their questions on these fees answered must also be disclosed.

Expiration Dates. Expiration dates for gift cards must be at least five years after the date of their issuance or the last date that the card was funded. States can pass their own laws with longer time limits if they so choose. Many have done so, including some states that have passed laws that prevent gift cards from ever expiring. However, in no case can the expiration date be less than the five-year federally mandated time limit.

Failure to Comply with CARD Act Provisions. Failure to comply with these CARD Act regulations can open the offending merchant up to both civil and criminal liability. The Federal Trade Commission has authority to commence civil actions to recover penalties for CARD Act violations. Additionally, the Act imposes liability to consumers for not only their actual damages arising from the violation, but also statutorily set liability of up to $1,000 per violation for individual lawsuits, and up to $500,000 for class actions. Offenders must also foot the bill for the costs and attorney fees accrued by the consumers filing suit against them. As one might imagine, because of these provisions, CARD Act violations have been an attractive area for plaintiff's class action attorneys to pursue. Finally, on top of the civil liability, criminal actions may also be brought against offenders. Knowing and willful violations of the CARD Act's disclosure provisions can result in a $5,000 fine and prison for up to a year.

In addition to these federal regulations that apply to businesses of all sizes, larger companies also have to consider the state laws in each state that they do business in. Over forty states have gift card regulations that can be even more onerous that the federal regulations summarized above. While it may seem like a simple solution to boost stagnating sales, a gift card program should be carefully structured and implemented in order to avoid the extensive and sometimes punitive penalties if a rule or regulation is broken.

Attorney David J. Espin

Dave focuses his practice on business law, with an emphasis on business formation, corporate transactions, business bankruptcy, and work-outs. Dave has acted as general counsel for businesses of all sizes, and understands the various legal and practical issues that companies face every day.

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