Retailers Beware of the new New Jersey Gift Card Law

In the wake of the 2011 decision of the Third Circuit Court of Appeals in New Jersey Retail Merchants Association v. Sidamon-Eristoff, 669 F.3d 374 (3rd Cir. 2012),  condemning a large portion of the New Jersey statute adopted in 2010 regarding gift cards, gift certificates, and other stored value cards, the New Jersey legislature amended the statute.  S.B. (1928), Laws 2012, effective June 29, 2012.  The statute removes some of the more objectionable provisions of the old law regarding stored value cards, which are defined broadly to include gift certificates, gift cards, and any other record (tangible or electronic) that reflects a promise, for money, by the issuer or seller that the owner of the record may obtain merchandise, services, and/or cash in the amount of the face value of the record.  The statute, however, does add some strict prohibitions regarding stored value cards, and gift cards and certificates in particular.  These prohibitions are such that a retailer that issues gift cards could be exposed to significant penalties unless it makes sure its practices conform to the requirements of this statute.  At the same time, the law reduces the potential escheat of unredeemed gift cards. It also protects small issuers of stored value cards.  A company that issues stored value cards of less than $250,000 per year is not subject to the escheat and consumer protection provisions of the New Jersey statute.  Now for the details:

The features of the new law that are beneficial to retailers are that:  (1) it repeals the provision of the old law that if the issuer does not maintain the address of the owner or purchaser of the stored value card, the value of the card must be escheated to New Jersey if the card was issued there; (2) it eliminates the requirement of the old law that the issuer obtain information about the gift card purchaser or owner, but instead requires that by July 1, 2016, the issuer maintain a record of the zip code of the owner or purchaser; (3) it extends the period of abandonment (i.e. an unredeemed gift card not claimed) from two years after issuance to five years; and (4) it requires escheat of only 60% (as opposed to 100%) of the proceeds of all stored value cards other than general purpose reloadable cards, which are cards issued by a bank or other financial institution.

Retailers are faced with three new provisions in the nature of “gotcha” clauses.  The first requires that, for a valid expiration period or dormancy fee for a gift certificate or gift card, the issuer must disclose in 10 point font on the gift certificate or gift card, or the sales receipt or package for the certificate or card:  (1) the expiration period or dormancy fee; and (2) a telephone number that the consumer may call for information regarding the expiration date or dormancy fee.   

The second new feature is even more onerous.  The issuer is required, for any stored value card that has a remaining balance of less than $5, to refund in cash the balance due upon request of the owner.  Although there is no requirement for the retailer to advertise the consumer’s right to refund, or to disclose the same on the gift card, if the issuer fails to honor a gift card owner’s request to redeem, the penalties are severe.  For each such instance, the retailer is liable for a penalty of $500 plus the remaining value on the certificate or card.  If there are 100 or more violations during any 12-month period, the penalty is trebled to $1,500 per violation.   The statute provides that the sole enforcement means for a violation of this section is a hearing before the Director of the Division of Consumer Affairs.

Finally, the new law prohibits the imposition of a fee in connection with stored value cards, except (1) activation or issuance fees of a card; (2) a replacement card fee with respect to lost or stolen cards; or (3) a dormancy fee of not more than $2.00 per month, but only for gift certificates or gift cards and only if the disclosure conditions described previously are satisfied.

In short, while the statute deletes some problematic features of the prior law and limits the escheat to 60% of the face value of the gift cards, it adds to the burden on direct marketers who issue gift cards, except for the small issuers of gift cards.  The potential penalties for the unwary direct marketer are significant, so a gift card program should include protocol to make sure that the company satisfies this new law.

Unclaimed Property Laws Often Go Overlooked by E-Marketers, But Many States Are Aggressively Enforcing Them

One set of legal obligations that are often overlooked by Internet sellers arise under states’ “unclaimed property” laws, sometimes referred to under the arcane label of “escheat.” Black’s Law Dictionary defines escheat as “the preferable right of the state to an estate left vacant, and without there being any one in existence able to make a claim thereto.” Although dense, the definition, once parsed, describes a relatively simple concept: under the laws of nearly every state, a business that is holding property on behalf of a third-party (called the “owner”) is obligated to report and turn over the unclaimed property to the state, after passage of a prescribed “dormancy” period.

Unclaimed property includes customers’ unredeemed gift certificates and gift cards, merchandise credits, and uncashed refund checks. It also includes accounts payable, payroll and benefits, shareholder dividends, and even workers’ compensation funds, among other things. Indeed, any third-party obligation that goes unredeemed may be subject to escheat. For Internet retailers, unredeemed gift obligations can be substantial (although fortunately some state laws include exemptions for gift certificates). Retailers should be aware that expiration dates on gift certificates and gift cards do not apply to states’ right of escheat and that there is no statute of limitations on escheat obligations under most states’ laws.

Essentially, as such property becomes “abandoned” under the applicable dormancy period, the holder of the property (i.e., the retailer) must pay such amounts to the state. As a general rule, the holder is obligated to remit the funds to the state of the last known address of the owner; if the retailer does not have address information for the holder, then the retailer typically must remit the funds to the retailer’s state of domicile (typically, where the retailer is incorporated).

Many states aggressively enforce their unclaimed property laws as a source of revenue. (Among the most active states for unclaimed property audits are Arizona, Delaware, Illinois, Massachusetts, Michigan, New Hampshire, New Jersey, Nevada, Rhode Island, and Tennessee.) Indeed, a number of states are increasing the number of unclaimed property audits they conduct on the belief that there are billions of dollars of unreported unclaimed property. State laws typically impose interest and penalties for failure to report, as well.

Note that there is no nexus rule that limits a state’s constitutional authority to seek to collect unclaimed property from a remote seller. Multi-state audits are common. In addition, many states are now using outside auditors, paid on a commission basis, to pursue collection. Not surprisingly, such “hired-gun” auditors have an incentive to think creatively and to conduct wide-ranging, time-consuming audits that examine records going back decades.

There are strategies for managing unclaimed property obligations and reporting. If you believe your company faces unclaimed property reporting requirements which have not yet been addressed, consult legal counsel for advice on the various solutions available.

Gift Cards: The Sleeping Dog

Many of you may have read about the federal Credit Card Accountability, Responsibility, And Disclosure Act of 2009 (the “CARD Act”). While the CARD Act largely regulates the terms and conditions for credit cards, it also provides certain protections for purchasers of gift cards that will go into effect on August 22, 2010. But many people may not be aware that the CARD Act does not preempt or otherwise supersede state laws on gift cards, either before August 22 or afterwards.

There are many states that have gift card laws that bar the use of expiration dates on purchased gift cards, prohibit or set restrictions on imposing inactivity fees or other charges with regard to gift cards, and/or require disclosures regarding fees and expiration dates. Some of these laws are enforceable by the attorneys general of the states and/or through suits brought by consumers.

Moreover, most of these laws are enforceable against online retailers, even if the online retailer doesn’t have nexus or a physical presence in the state. Constitutional “Due Process” standards permit suits against a company that might nevertheless be insulated from tax obligation under the Commerce Clause. As long as the online retailer sells to a customer in the state, the online retailer will be subject to the provisions of the state’s gift card statute.

Finally, there are several states that require the “escheat,” or payment over to the state, of the value gift certificates and gift cards that have not been redeemed within a prescribed period of time set by statute. These so-called “unclaimed property” statutes are designed to preclude a retailer from obtaining an advantage through such “breakage” and require the payment of all or a portion of the face value of the gift cards to the state.

The point is not to throw your hands up in defeat and either ignore the applicable statutes or take measures that do not make sense from a business standpoint. Rather, a prudent online retailer should review its gift card program in light of the various state statutes. This will be particularly important prior to the effective date of the CARD Act on August 22, 2010, so that the retailer can understand its obligations with respect to gift cards issued before and after the new requirements of the CARD Act take effect.