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Issuer Beware: The Varied Landscape of State "Baby-CARD" Laws

Issuer Beware: The Varied Landscape of State "Baby-CARD" Laws


Franchise Law Journal
(September 27, 2016)

Gift cards are ubiquitous. Stores offer numerous options with many cards now themed to various holidays and other special occasions. Almost every business offers some form of gift card or gift certificate—totaling more than $130 billion sold in 2015.1 With gift card use continuing to grow, franchisors and franchisees must be cautious and ensure they are complying with federal and state regulations.

In 2009, Congress passed the federal Credit Card Accountability Responsibility and Disclosure Act (the Credit CARD Act), which amended existing law and provided additional regulations and requirements for businesses operating gift card programs. Businesses with multiple locations, including franchised businesses, are more likely to offer either gift certificates or store gift cards,2 and most state regulations defining these terms are similar to those provided by the federal statute.3 State statutes typically parallel the federal Credit CARD Act but often provide additional regulations or protections for consumers. These so-called "baby-CARD" acts often have very different requirements, and it is incumbent upon a business to be aware of state requirements or risk facing stiff penalties.4

As franchise systems expand into new states, they must ensure they are complying with that state's baby-CARD act regarding cash value refunds, inactivity or dormancy fees, and expiration dates. Although few reported cases have directly involved franchised businesses, it is likely that franchisors and franchisees will continue to face consumer questions and requests regarding their gift cards. Because franchised businesses operate in multiple states, they must comply with federal law and each state's respective statutory scheme.

This article focuses on the application of state baby-CARD laws to franchised businesses and how a franchised business may best protect itself from violating these statutes. It discusses gift card regulations involving the relationship between the issuer and the holder rather than any rights or role the state government may have in the unused value of gift cards actions against franchised businesses under state baby-CARD laws.5 The first section will focus on the federal Credit CARD Act's provisions governing gift cards, the Act's protections, and its limitations. The second section will focus on state baby-CARD laws and their relationship with federal law. It will discuss typical areas covered by these laws, including refund requirements, inactivity or dormancy fees, and expiration dates. Finally, this article provides some suggestions about how a franchise system can best approach widely varying state regulations.

I. Congress Takes Action: Credit CARD Act

On May 22, 2009, President Obama signed the Credit Card Accountability Responsibility and Disclosure Act of 2009 into law. This act amended the Electronic Fund Transfer Act (EFT) and included other broad consumer protections, including provisions applying to credit cards, gift certificates, store gift cards, and general use prepaid cards.6

The Credit CARD Act addresses certain disclosures regarding fees and expiration dates; limits dormancy, inactivity, and service fees for gift cards; and establishes a five-year minimum period before the funds on these gift cards may expire.7 The Credit CARD Act applies to a variety of payment methods, including general use prepaid cards, gift certificates, and store gift cards, that businesses may offer as forms of payment for their goods and services.

A general use prepaid card is defined as a card or other payment device issued by a person that is (1) redeemable at multiple, unaffiliated merchants or other service providers; (2) issued in a requested amount, whether or not that amount may, at the option of the issuer, be increased or reloaded by the holder; (3) pre-purchased or pre-loaded; and (4) honored by merchants for goods or services upon presentation.8

A gift certificate is an electronic promise that is (1) redeemable at a single merchant or affiliated merchants that share the same name, mark, or logo; (2) issued in a specified amount that may not be increased or reloaded; (3) purchased on a prepaid basis in exchange for payment; and (4) honored by the single merchant or affiliated merchants for goods or services.9

Finally, the Credit CARD Act defines a store gift card as an electronic promise, plastic card, or other payment device that is (1) redeemable at a single merchant or affiliated group of merchants sharing the same name, mark, or logo; (2) issued in a specific amount, whether this amount may be increased or reloaded by the holder; (3) purchased on a prepaid basis in exchange for payment; and (4) honored by the single merchant or group of merchants for goods or services.10

This same section of the Credit CARD Act exempts a variety of gift cards from these requirements,11 including cards that are (1) used solely for telephone services, (2) reloadable and not marketed or labeled as a gift card, (3) loyalty or promotional cards, (4) cards not marketed to the general public, (5) gift certificates issued in paper form only, or (6) those redeemable solely for admission to events that may also include services or goods obtainable at or in conjunction with the event.12 These exclusions, especially the loyalty or promotional exclusion, are broad and often utilized by businesses to avoid the Credit CARD Act's requirements.

The Credit CARD Act does, however, restrict the imposition of inactivity or dormancy fees. An inactivity or dormancy fee "mean[s] a fee, charge, or penalty for non-use or inactivity of a gift certificate, store gift card, or general use prepaid card."13 Generally, the Credit CARD Act makes it "unlawful for any person to impose a dormancy fee, an inactivity charge or fee, or a service fee with respect to a gift certificate, store gift card, or general use prepaid card."14 The federal law provides, however, that such a fee may be imposed if (1) the card has not been used during the twelve months ending on the date when the fee is imposed, (2) certain disclosures have been made, (3) no more than one fee can be charged in any one month, and (4) satisfaction of any additional requirements promulgated by the Consumer Financial Protection Bureau.15 To satisfy the disclosure requirements under the Credit CARD Act, the gift card must clearly and conspicuously state (1) that it has a dormancy, inactivity, or service fee; (2) the amount of this fee; (3) how often the fee can be imposed; and (4) that the fee can be imposed for inactivity.16 Additionally, the issuer or vendor of the gift card must inform the purchaser of the inactivity, dormancy, or service fee prior to the purchase of the gift card, regardless of how the purchase is made.17

Finally, the federal Credit CARD Act regulates the imposition of an expiration date on gift cards. In general, the Act makes it unlawful for a gift card to have an expiration date.18 A gift card may, however, contain an expiration date if it is no earlier than five years after the date on which the card was issued or the date on which funds were last loaded, and the terms of expiration are clearly and conspicuously stated.19 Gift cards that can be categorized as "promotional" are not subject to the five-year expiration date minimum or the prohibition against expiration dates.

Courts have found that the provisions of the Credit CARD Act regarding expiration dates for gift cards do not apply retroactively.20 Although this case did not involve a franchised business, the prohibition on retroactivity would apply to franchisors. Further, at least one court has held that, despite a lack of actual damages suffered by a plaintiff, the plaintiff still would have standing to bring a lawsuit alleging an unlawful expiration date.21

Although no reported cases have specifically involved a franchised business under the Credit CARD Act, the Act's provisions, which set minimum standards that a business selling gift cards must meet, apply with equal force to a franchised business. Although the federal Credit CARD Act is extensive and touches on numerous areas of consumer protection, courts have found that it does not preempt state laws that provide greater protection to consumers.22 The federal law provides a floor, but states may provide consumers with additional protections.

II. State Baby-CARD Laws
Despite the breadth of the federal Credit CARD law, numerous states also regulate aspects of gift cards. State gift card laws focus on many of the same areas as the federal statute, but some address other areas as well. This section will focus on three major areas relevant to a franchise system: cash refunds for unused funds, inactivity or dormancy fees, and expiration dates.

A California case illustrates how a franchisor that operates a gift card or certificate program may be liable, even if employees of the franchisee performed the actions that violated the state statute.23 In Hahn v. Massage Envy Franchising, LLC, the plaintiff filed a consumer class action case alleging violations of California law.24 Massage Envy markets massage memberships through which it offers massages and other additional services through a nationwide network of franchisees.25 One plaintiff, Gail Hahn, alleged she purchased a membership at a Massage Envy franchise. As part of her $59 per month membership package, Hahn was entitled to one massage per month. Despite making twenty- three monthly payments, Hahn redeemed only two massages, and her request to redeem her prepaid massages was denied.26 A second plaintiff, Chaille Duncan, signed a membership agreement at another California franchise, but canceled her membership. At the time of cancelation, Duncan had three unused prepaid massages, which she sought to redeem, but her request was denied because of the cancelation of her membership.27 Finally, plaintiff Alexis Hernandez had eight unused prepaid massages when she canceled her membership, but her request to redeem them was similarly denied.28

The plaintiffs' case was predicated on the membership agreements as well as the cancelation form, which stated that members had thirty days from their last payment to use any remaining membership massages. If they failed to do so, the former members forfeited any unused membership massages.29 The franchisor defendant, Massage Envy Franchising, LLC, argued it could not be held liable for any practices in which the franchisees engaged because the franchisees were parties to the membership agreement, not the franchisor.30 The court found, however, that based on the franchise disclosure document and the franchise agreements all franchisees were required to sign, Massage Envy Franchising, LLC required its franchises to use the prescribed membership agreement and cancelation forms.31 The defendant also argued that it was not a party to the membership agreement, did not administer the agreement, and did not interact with the plaintiffs.32 The court found, however, that Massage Envy Franchising, LLC had "retained control over the content of the membership agreement as reflected in the documents governing the franchisor-franchisee relationship."33 This case demonstrates how a franchisor may face liability even when the franchisee violates the state baby-CARD acts.

A. Refunds on Unused Balances

1. Statutes

Currently, ten states allow a consumer to redeem for cash the remaining balance on a gift card if the gift card's value drops below a particular threshold. The philosophy behind this requirement is to  allow  consumers  to  receive cash when a gift card would no longer be able to pay for any item at the named establishment. The idea is that consumers  could  receive  any value remaining on the card without being forced to purchase items whose prices are more than the remaining gift card balance.34

Ten states have statutes addressing redemption for cash value: California,35 Colorado,36 Maine,37 Massachusetts,38 Montana,39 New Jersey,40 Oregon,41 Rhode Island,42 Vermont,43 and Washington.44 Each of these states provides that a customer may request a refund for the unused balance on a gift card if the remaining balance falls below a particular threshold. Each statute has varying requirements and amounts  for  which  the  consumer may receive the cash refund. In California, any gift card sold after January 1, 1997, with a cash value of less than $10 is redeemable in cash for the value remaining on the card.45 If the gift card has a cash value of $10 or more, the issuer has the option of providing the cash value or a replacement gift card.46 Colorado47 and Maine48 require cash redemption if the value remaining on the card is $5 or less. New Jersey,49 Oregon,50 and Washington51 require the cash value of the gift card to be refunded to the customer if the balance is less than $5. In Massachusetts, the requirements for the business depend on whether the card can be reloaded with additional funds. If the card is reloadable, the issuer must redeem the cash balance when the remaining funds on the card are $5 or less.52 If the card cannot be reloaded, however, the consumer may elect to receive the remaining balance in cash once the value drops below 90 percent of its face value.53 In Montana,54 if the original face value of the card was more than $5, but the remaining balance is less than $5, the issuer must provide a requesting customer with a cash refund. Finally, in Rhode Island55 and Vermont,56 if the remaining value of a gift card is less than $1, it is redeemable in cash at the request of the gift cardholder. These requirements apply to all businesses that provide and accept gift cards in the state, even if the gift card was actually purchased in a state with no statutory scheme addressing redemption for cash value. For franchised businesses operating nationally, especially if there are franchisees in these ten states, it is critical that they are aware of the redemption provisions and permit customers to redeem their gift cards for their cash value as required by the applicable statute.

Although a provision requiring cash redemption is a minority position, only one state explicitly forbids requiring a business to redeem the cash value of the unused amount on a gift card: in Kansas, a business is not required to redeem a gift card for cash.57
The remaining thirty-nine states do not have statutes addressing the issue of redeeming the cash value of the remaining balance on a gift card. Many of these states have statutes addressing other issues regarding gift cards, but they do not require a business to refund cash in any amount.

2. Decided Cases

The only reported state law refund case involving a franchisor or franchisee is Marilao v. McDonald's Corp., a 2009 decision from the U.S. District Court for the Southern District of California.58 The plaintiff filed a class action complaint against McDonald's,59 seeking to bring an action on behalf of all customers who received a McDonald's gift card that was not redeemable for cash.60 When the plaintiff attempted to redeem the card, he was told he could not receive cash.61 The cards did not state that they were redeemable for cash, just that "[t]he value on this card may not be redeemed for cash . . . unless required by law."62 The plaintiff brought claims against McDonald's for violation of California's Unfair Competition Law and unjust enrichment.63 McDonald's moved to dismiss.64

The plaintiff alleged, on behalf of the class, a violation of the section of the Unfair Competition Law requiring that "[a]ny gift certificate sold after January 1, 1997, is redeemable in cash for its cash value, or subject to replacement with a new gift certificate at no cost to the purchaser or holder."65 The court found this to be a right of selection, which, pursuant to California law, belonged to the issuer of the card, in this instance, McDonald's.66 "Therefore, it is the vendor that holds the right to select whether to redeem a gift card in cash for its cash value or to provide a replacement card at no cost to the purchaser or holder."67 The court reasoned that McDonald's had no obligation to give the plaintiff cash for the gift card; whether to do so or provide a replacement card was at McDonald's option.68 The court also looked at the legislative history of this provision and found no intent that this provision mandated buyback or a remedy at the election of the holder of the gift card.69 The court dismissed the cause of action under the unfair competition laws.70 In a subsequent decision on the plaintiff 's amended complaint, however, the court permitted  the  unfair  competition  law  allegation to move past the motion to dismiss stage.71

The complaint was not explicitly brought under the 2007 refund provision contained in California law, but the Marilaocourt analyzed that provision, which adds that "[n]otwithstanding paragraph (1), any gift certificate with a cash value of less than ten dollars ($10) is redeemable in cash for its cash value."72 The court noted that this provision did not apply, not only because plaintiff had not alleged a violation, but also because he had not alleged that the gift card value was less than $10.73 The court went on to note that the rationale for this provision: because consumers could not buy anything with low-value gift cards, there was a need to amend the statute to allow a refund—directly contrary to the plaintiff 's argument that Section 1749.5(b)(1) allowed such a refund.74 Section (b)(2), the court held, was explicitly adopted to allow the kind of refund the plaintiff sought, which was not available under the prior section.75  Therefore, the plaintiff could not use Section (b)(2).

Finally, as to the unjust enrichment claim, the court held that this claim was based on the failure to give a refund; since there was no right to a refund, this claim was similarly dismissed.76 Unfortunately, Marilao stands only for the proposition that a refund claim must be brought under Section (b)(2) of the unfair competition law; it does not shed any light on the franchisee/franchisor relationship and how that relationship might impact the analysis of a refund claim.

Following this decision, the plaintiff amended his complaint, asserting that he was entitled to a redemption of the cash value of his $5 gift card and McDonald's denied him this right.77 The district court allowed this claim to survive the defendant's motion to dismiss because the plaintiff properly alleged a violation of subsection (b)(2) and that the gift card had a balance of less than $10.78 This subsequent decision demonstrates the importance of both the franchisor and franchisee being aware of any cash redemption requirements of the state in which franchisees operate.

An unreported case also arising from the U.S. District Court for the Southern District of California confirms the court's reasoning in Marilao. In Rudd v. Borders, Inc.,79 the plaintiff filed a complaint against Borders, alleging that a gift card she received had language on the card stating that the card was not returnable or redeemable for cash, but the plaintiff wanted to redeem the gift card.80 The plaintiff filed the complaint as a class action on behalf of herself and others who received Borders' gift cards not redeemable for cash, bringing her cause of action under California's unfair competition laws.81 Relying upon the reasoning of Marilao as well as the legislative history of the California statute, the court held that an issuer has the option of redeeming the customer's card in cash or replacing the gift card with a new one when the amount of the gift card exceeds $10.82 The legislative history of the bill demonstrates the law gives the issuer the option of providing a refund or a replacement card. "Thus, the legislature clearly understood Section 1749.5 to provide consumers the right to the cash value of their gift card, its value in goods, or a replacement card, at the option of the retailer."83 Although this case does not involve a franchise, it supports the reasoning and discussion of the court in Marilao.

Although no other reported cases have involved a franchisor or franchisee, some pleadings may provide guidance for a franchise system wishing to avoid a lawsuit for failing to provide the cash value of a gift card. The analysis for franchise systems is complicated, depending on which entity manages the gift card program. Typically,  the  franchisor  maintains  the  responsibility for administering a gift card program, but it is likely to be a franchisee's business that a customer enters seeking a cash value refund. In 2012, Darren Smith filed a class action complaint in the Superior Court of California against Panera Bread Company.84 The plaintiff alleged Panera Bread Company violated California's unfair competition laws by failing to comply with the California statute requiring businesses to  redeem  any  gift  card  with  a cash value of less than $10 for cash.85  At that time, Panera gift cards included a statement that the card could not be redeemed or exchanged for cash, except as required by law, and that no cash would be given as change from a gift card purchase, except as required  by  law.86  The  plaintiff  alleged  that, after using a Panera gift card, he requested that the cashier refund the remaining balance in cash, but the cashier told the plaintiff he could not do that.87 The plaintiff hired a private investigator  to  visit  several  Panera Bread locations and purchase items with a gift card that would  bring  the card's balance to less than $10. At each of these stores, either the cashier or store manager denied the investigator's request.88 Unlike in Marilao or Rudd, the plaintiff alleged that the value of these gift cards was under $10 and he had been denied the legally obligated refund. This complaint demonstrates how a plaintiff can assert a cause of action under the California Baby- CARD Act. Although this case has not been tried, it demonstrates the risk a franchisor faces if it or its franchisees do not comply with a state act.

Also in California, a plaintiff brought an action alleging that a business refused to redeem the cash balance on her gift cards and engaged in deceptive advertising.89 The defendant marketed certain gasoline gift cards in various denominations; advertisements stated that the cards could be reused until the balance was zero.90 The plaintiff alleged that, on two separate occasions, she used a gift card, bringing its balance to less than $1 each time. On her next visit, she attempted to use the amount remaining on the gift card, but the card was rejected and the store clerk told her that the amount remaining on the gift card could not be used toward her current purchase. The clerk also claimed he could not give the plaintiff a refund for the remaining balance.91 The defendant had a formal request process by which customers filled out a form for a refund and mailed it to the defendant at the customer's expense. Assuming the balance was verified, only then would the customer be issued a refund check.92 Although the defendant did have a process by which an individual could receive a refund, the plaintiff claimed the refusal to redeem in the store as well as the failure to inform the plaintiff of her rights violated California law. While this case was not reported or tried, it serves as a caution to franchises to ensure the franchisees are aware of the applicable state laws. The question of whether redemption may be made by mail or in person is still unanswered.

3. Recommended Approach to Ensure Compliance

To ensure compliance with the disparate state regulations, franchise systems have taken a variety of tactics. Many gift cards contain language stating that the gift card is "not redeemable for cash except as required by applicable law and then only to the extent required by applicable law."93 This type of disclosure is becoming more common on gift cards, and it  is  likely  the  best  manner  by which a franchisor can ensure its compliance with all states' regulations. It is critical, however, that a franchisee operating in a state that requires the refund of the cash value of the gift card be aware of the law as well as how much must be refunded. It is important that, in the franchise agreement  or  during  the training of the franchisee, the franchisor inform franchisees of the applicable state laws. Because most gift card programs  are  operated  by  the  franchisor rather than the franchisee, the franchisor may be at risk for liability if a franchisee refuses to redeem a gift card as required by a state's applicable law.

B. Inactivity Fees

1. Statutes

A vast majority of state baby-CARD acts also regulate the imposition of inactivity or dormancy fees, and individual plaintiffs are permitted to pursue a private cause of action using these statutes. In order to do so, plaintiffs generally bring some type of unfair or deceptive trade practices claim against the issuer of the gift card. Fifteen states prohibit the imposition of inactivity or dormancy fees: Colorado,94 Connecticut,95 Florida,96 Hawaii,97 Kentucky,98 Louisiana,99 Michigan,100 Minnesota,101 Montana,102 New Hampshire,103 New Mexico,104  North Dakota,105  Oregon,106  Rhode Island,107  and Vermont.108 Other states require the same disclosures as  under  the  federal Credit CARD Act, but do not  permit  the  imposition  of  fees  until  more time has passed since there was activity on the card. Maryland law states that a gift card cannot be subject to any type of dormancy or inactivity fee within four years  after  the  date  of  purchase.109  Nevada  does  not  permit the imposition of a fee due to inactivity unless the card has not been used for three years.110 Arkansas,111 New Jersey,112 Oklahoma,113 Ohio,114 Tennessee,115 and  Washington116  all  prohibit  the  imposition  of  dormancy  fees or inactivity fees for a minimum of two years. Additionally, Oklahoma and Washington permit dormancy fees only when the cash value of the gift card is $5 or less; the maximum amount of this fee is capped at $1 per month.117 Nevada also caps the amount of the dormancy fee at $1 per month, but allows its imposition after there has been no activity for twelve months.118 New Jersey caps its permitted dormancy fee at $2 per month.119  Virginia requires that a gift card include a telephone number or Internet address where the holder can obtain information if the card's value diminishes over time.120 The majority of state regulations require that certain disclosures, including the amount of the fee,121 its frequency,122 and whether the fee is triggered due to inactivity,123 be conspicuously stated on the card. Both Arkansas and Nevada mandate that these disclosures cannot be smaller than a ten-point font.124

2. Decided Cases

At least one state government has brought an action against a business alleging violations of the law regarding inactivity and dormancy fees. In Commonwealth of Massachusetts v. Simon Property Group,125 the commonwealth's attorney general brought an action against the Simon Property Group for violations,  particularly  the  imposition  of  a  monthly  dormancy  fee,  of  the state's gift card laws. Simon owned and operated shopping malls and sold Visa gift cards, which could be used  at  any  location  that  accepted  Visa debit cards,  including  retailers not affiliated  with Simon.126 Simon charged certain fees when there had been no activity on the card for six months following activation; Massachusetts contended these fees violated the state statute regarding dormancy fees. Based on the state's definition of a gift card, however, the court found the gift card law  inapplicable  because  the  card could not be used to purchase goods or services supplied by the defendant because it was not in the  business  of  retail  sales.127  Although  this  case does not directly involve a franchise, it established how a court must be satisfied the card at issue qualifies as a gift card before the court will subject it to any state laws regarding gift cards.

3. Recommended Approach to Ensure Compliance

As evidenced by the wide variety of state statutes, it is difficult for a franchisor to operate a gift card program that satisfies all state laws. Given that several states prohibit the imposition of a dormancy fee, a franchisor may be best served by refraining from imposing this type of fee. Many major franchisors have made this decision and do not impose an inactivity or dormancy fee to their gift cards.128 Since fifteen states, including several large states, prohibit the imposition of dormancy or inactivity fees, franchisors offering franchises in multiple states would likely be best served by not imposing such fees.

C. Expiration Dates

1. Statutes

The third area this article will address is expiration dates, which are heavily regulated under state baby-CARD acts. Similar to complaints alleging unlawful inactivity fees, a plaintiff may assert an unfair or deceptive trade practice because of the imposition of an impermissible expiration date. The following states generally prohibit expiration dates on gift cards: California,129 Connecticut,130 Florida,131 Maine,132 Minnesota,133 Montana,134 New Hampshire,135  New Jersey,136 Oregon,137 Rhode Island,138 and Washington.139 Several other states mirror the federal law  in allowing an expiration date  after five years: Hawaii,140 Illinois,141 Kansas,142 Louisiana,143 Michigan,144 and Vermont.145 Other states, including Massachusetts146 and North Dakota,147 require a  longer  period  of  time.  Additionally, states that do not reference a specific minimum period of time prior to expiration still require the expiration date to be conspicuously displayed on the gift card.148 Furthermore, many states provide that, if a gift card is sold without an expiration  date,  it  is  valid  until  it  is  redeemed  or  replaced.149  Although the federal Credit CARD Act and many states' respective baby-CARD acts appear to require a minimum of five years prior to expiration, this minimum usually does not apply to loyalty or promotional gift cards.

2. Reported Cases

Much of the case law on expiration dates has focused on class actions regarding expiration dates on gift cards and whether the card is better classified as a promotional gift card. If a card is a loyalty or promotional card, restrictions on expiration dates typically do not apply. In one Illinois case, the plaintiffs filed a class action alleging breach of contract when the retail store Abercrombie & Fitch voided the value of a number of promotional gift cards.150 In November and December 2009, Abercrombie held a holiday promotion under which customers were eligible to receive a $25 gift card for every $100 spent in the store. In their print and online advertising, Abercrombie published  the  applicable  terms  for  the  $25  promotional  gift  cards,  which included the exclusion of gift card purchases and an expiration date of January 30, 2010.151 Abercrombie distributed the gift cards to the customers in a sleeve stating that the $25 gift card expired on January 30, 2010, but the cards themselves contained the phrase "no expiration date."152 In April 2010, the plaintiff attempted to use these promotional gift cards, but the store clerk told her that the value of the gift cards had been voided on January 30.153 When the plaintiff subsequently moved for summary judgment on  her breach of contract claim, the court denied the summary judgment motion, stating that the plaintiff 's breach of contract legal theory was fatally flawed.154 Although Illinois requires that gift cards may not expire less than five years from their issuance, this statute does not apply to a promotional gift card because of the statutory definition of a gift card. Both the plaintiff and defendant agreed that the terms of the promotion clearly stated the $25 gift cards were to expire on January 30, 2010.155 Based on the terms of the promotion and the fact that this was a promotional gift card, the court denied the plaintiff 's summary judgment motion.156

In another expiration date case, the court held that a receipt containing a code for a free car wash did not have a cash value and therefore could not be considered a gift card under the statute.157 In Wells v. Holiday Companies, the plaintiff purchased gas and a car wash at a fuel-and-convenience store that was either operated or franchised by Holiday Companies. On January 30, 2012, the plaintiff paid $7.99 for a car wash and received a receipt that stated "Car Wash: $7.99," "Car Wash Code: 832370," and "Car Wash Good for 30 Days," but the plaintiff never attempted to use the car wash code.158 In February, the plaintiff filed a complaint against Holiday Companies alleging that the practice of selling car wash codes with thirty-day expiration dates violated Minnesota law. When the parties engaged in discovery, it was revealed that Holiday Companies had a policy of either providing a customer with a new code after the original unused code expired or refunding the amount that the customer paid for the car wash.159 Although this policy was not published to customers, Holiday Companies required its employees to give customers a new code if they entered with an expired, unused car wash code.160 The franchisor required a thirty-day expiration to prevent customers from randomly punching numbers into the code box near the car wash in an attempt to obtain a free car wash.161 Following discovery, Holiday Companies moved for summary judgment. The district court granted the motion, concluding that because the car wash code was not a gift certificate under Minnesota law, the rule regarding expiration dates did not apply.162

Under Minnesota law, a gift certificate is defined as follows:

[A] tangible record evidencing a promise, made for consideration, by the seller or issuer of the record that goods or services will be provided to the owner of the record to the value shown in the record and includes, but is not limited to, a gift card, stored-value card, store card, or a similar record or card that contains a microprocessor chip, magnetic stripe, or other means for the storage of information, and for which the value is decreased upon each use.163

In reviewing Holiday Companies' motion for summary judgment, the trial court found that the receipt did not satisfy  the  requirement  of  "value shown in the record" because it interpreted value to mean "cash value."164 The plaintiff contended that the word "value" in the statutory definition of gift card "is not  limited  to  cash  value,  but  instead  includes  monetary and non-monetary value."165 The  court  stated  that  the  receipt  containing the car wash code was redeemable only for the particular type of car wash the customer purchased, and the code itself does not have any cash value because the customer could not redeem the code to purchase another product at  Holiday  Companies  using  the  amount  paid  for  the  car  wash.166  "The $7.99 that [the plaintiff] paid to Holiday [Companies] for the basic car wash was consideration for the car wash, not $7.99 in value that he could use to purchase a car wash or another good or service from Holiday."167 Because the receipt containing the car wash code was not a gift certificate as defined by the Minnesota statute, the expiration date was permissible.168

3. Recommended Approach to Ensure Compliance

As demonstrated by these cases, whether a gift card meets the definition of "gift card" is critical to the determination of whether it is subject to state statutes regarding expiration dates. These cases do not involve a dispute between a franchisor and franchisee, but they do involve programs that would be likely managed nationally by a franchisor. Given that numerous states either prohibit the imposition of expiration dates or require a longer period of time than does the federal law, a franchise system may be best served to have no expiration dates on its gift cards. If the business offers a promotion or loyalty rewards, however, these cards can continue to be subject to expiration dates—after careful study of applicable state laws.

Conclusion
Redemption for the cash value of the card, inactivity or dormancy fees, and expiration dates are three areas in which state baby-CARD acts regulate all businesses operating gift card programs. While few reported cases directly involved a franchise, the cases applying to other businesses apply with equal force, especially if the franchisor operates the gift card program.

In short, to protect against liability for failure to redeem the cash value of a gift card, a disclosure on the gift card stating that it cannot be redeemed for cash except as required by law will most likely provide protection from liability under the varying state regulatory schemes. Many states prohibit inactivity or dormancy fees or require detailed disclosures so we recommend that a franchisor operating a gift card program not impose these fees. Finally, several states prohibit expiration dates on gift cards, not including promotional or loyalty cards, or require a period longer than that required by the federal act. A franchisor operating a national gift card program ought to refrain from imposing expiration dates on its gift cards. This would ensure compliance with all laws and may have the added benefit of increased customer satisfaction. Because of the variety of state regulations, despite the small number of cases brought against franchise systems, a franchised business should adopt a policy with broad compliance rather than attempt to implement separate schemes for separate states. It is critical, however, that franchisees operating in states with more stringent regulations be aware of these requirements. Otherwise, the franchisor may be liable for violations committed by its franchisees, particularly if the franchisor operates the gift card program.

As the above cases and statutes demonstrate, it is critical for franchisors to educate their franchisees on applicable rules regarding gift cards. With the wide variation in standards for state baby-CARD acts, many franchises are opting to conduct their national gift card programs, especially with regard to inactivity or dormancy fees and expiration dates, in compliance with the most restrictive laws. Many franchises are simply refraining from imposing inactivity fees and providing that the gift cards do not expire.169 Regarding the cash value of the gift cards, however, franchisors are taking a slightly different stance. Because only ten states currently require that the cash value of a gift card be redeemable when the value drops below a certain level, franchise systems typically do not permit cash refunds unless mandated by state law. By including clear, conspicuous language on the gift card that it is not redeemable for cash, except as required by law, businesses will satisfy any state baby-CARD acts. However, franchisors must be very cautious to instruct their franchisees in those ten states where the holders of gift cards are entitled to receive the cash value of the gift card if the value drops below a certain amount.

One option to ensure that the franchisor is not liable for any mistakes by franchisees regarding gift cards is for the franchisor itself to not manage the gift card program. But this may not be a feasible solution. It is impossible for each individual franchisee to maintain its own program; moreover,  this would frustrate customers because the gift cards might be redeemable only at one specific location rather than at franchisees across the country, eliminating the core consistency of a franchise system. If the franchisor maintains control of either the gift card program or program policies, a court would likely place liability for any violations of the state's baby-CARD act on the franchisor.170

A system could consider whether it is a better business decision to have dissimilar gift card programs  rather  than  simply  ensuring  compliance  with the most restrictive state regulatory scheme. If a franchisor does not anticipate opening franchises in states in which gift cards may be redeemed for their cash value or which mandate  longer  expiration  dates,  the  franchise may have greater flexibility in its approach. For example, if a regional franchise that is primarily based in the southeastern United States does not anticipate expanding to any of the ten states that require the gift card issuer to provide the cash value of the card should its value fall below a particular value, it may  not  need  to  include  language  regarding  refunds  as  required by applicable laws. At the time  a  franchisor  is  setting  up  a  national  gift card program, however, it should maintain the maximum amount of flexibility for growth of the business. Further, other states may adopt a statute requiring a refund for the card's remaining cash value, forcing franchisors to move quickly in altering the language of their cards.

Although little case law has directly involved a franchised business's gift card program, the variations in state baby-CARD acts mean that additional litigation on this issue is to be expected. Franchisors must know the requirements of the states in which they offer franchises in order to ensure they are not in violation of the state's baby-CARD act. Furthermore, it is likely best for a franchisor to meet the most restrictive state statutes regarding inactivity or dormancy fees and expiration dates. Regarding the refund of the nominal cash value of the gift card, however, a franchised business is best served by prohibiting refunds unless required by applicable law. Because of the variety of state baby-CARD acts, a franchisor operating a national gift card program would be well served to carefully research the requirements of the states in which they offer or hope to offer franchisees.

  1. 2015 Gift Card Sales to Reach New Peak of $130Billion, PR NEWSWIRE (Dec. 8, 2015, 8:30 AM), http://www.prnewswire.com/news-releases/2015-gift-card-sales-to-reach-new-peak-of-130- billion-300189615.html.
  2. Unless otherwise noted, these will collectively be referred to as "gift cards."
  3. See, e.g., ARK. STAT. ANN. § 4-88-702; CONN. GEN. STAT. §§ 3-56(a) & 42-460(a); GA.
    CODE § 10-1-393(b)(33)(B); N.M. STAT. ANN. § 57-12-26(A); PA. STAT. tit. 72, § 1301.1.
  4. For example, under New Jersey law, a business that fails to comply with the cash redemption provision of New Jersey law is liable for a penalty of $500 for each violation plus restitution of the amount of cash value remaining on the card. Further, if a business has 100 violations or more during any twelve-month period, the damages can be trebled. See N.J. REV. STAT. § 56:8-110(c).
  5. Discussion of abandoned property—or escheat—laws is beyond the scope of this article. For a thorough discussion of these laws, see Phillip W. Bohl, Kathryn J. Bergstrom & Kevin J. Moran, Prepaid Cards and State Unclaimed Property Laws, 27 FRANCHISE L.J. 23 (2007); Diane Green-Kelly, UnclaimedProperty: An Ancient Concept Creating Modern Liabilities, 32 FRANCHISE L.J. 41 (2012).
  6. For a full discussion of the Credit CARD Act, see Craig J. Knobbe, Nathan J. Cook & Lynne M. Hanson, The New Federal Gift Card Regulations, 30 FRANCHISE L.J. 181 (2011).
  7. 15 U.S.C. § 1693l-1(b), (c).
  8. 15 U.S.C. § 1693l-1(a)(2)(A).
  9. 15 U.S.C. § 1693l-1(a)(2)(B).
  10. 15 U.S.C. § 1693l-1(a)(2)(C).
  11. 15 U.S.C. § 1693l-1(a).
  12. 15 U.S.C. § 1693l-1(a)(1)(D).
  13. 15 U.S.C. § 1693l-1(a)(1).
  14. 15 U.S.C. § 1693l-1(b)(1).
  15. 15 U.S.C. § 1693l-1(b)(2).
  16. 15 U.S.C. § 1693l-1(b)(3)(A).
  17. 15 U.S.C. § 1693l-1(b)(3)(B).
  18. 15 U.S.C. § 1693l-1(c)(1).
  19. 15 U.S.C. § 1693l-1(c)(2).
  20. See Carlini v. United Airlines, Case No. 10 C 6343, 2011 WL 1543212 (N.D. Ill. Apr. 19, 2011).
  21. Sucec v. Greenbrier, Case No. 5:11-0968, 2012 WL 3079233 (S.D. W.Va. July 10, 2012).
  22. See 12 C.F.R. § 205.12(b); see also N.J. Retail Merchs. Ass'n v. Sidamon-Eristoff, 669 F.3d 374 (3d Cir. 2012) (holding that the state's escheat laws are not preempted by the federal Credit CARD  Act).
  23. Hahn v. Massage Envy Franchising, LLC, Case No. 12cv153 DMS (BGS), 2014 WL 5100220 (S.D. Cal. Sept. 25, 2014).
  24. Id. at *1.
  25. Id.
  26. Id. at *2.
  27. Id.
  28. Id.
  29. Id. at *5.
  30. Id. at *13.
  31. Id.
  32. Id. at *14.
  33. Id. at *13 (emphasis in original).
  34. See Marilao v. McDonald's Corp., 632 F. Supp. 2d 1008, 1012 (S.D. Cal. 2009).
  35. CAL. CIV. CODE § 1749.5(b).
  36. COLO. REV. STAT. § 6-1-722(b)(2).
  37. ME. REV. STAT. ANN. tit. 33, § 1953.
  38. MASS. GEN LAWS ANN. ch. 200A, § 5D.
  39. MONT. CODE ANN. § 30-14-108(4).
  40. N.J. REV. STAT. § 56:8-110(c).
  41. OR. REV. STAT. § 646A.276(1)(d).
  42. R.I. GEN. LAWS § 6-13-12.
  43. VT. STAT. ANN. tit. 8, § 2704.
  44. WASH. REV. CODE § 19.240.020(3).
  45. CAL. CIV. CODE § 1749.5(b).
  46. CAL. CIV. CODE  § 1749.5(b); see Marilao v. McDonald's Corp., 632 F. Supp. 2d 1008 (S.D. Cal. 2009).
  47. COLO. REV. STAT. § 6-1-722(b)(2).
  48. ME. REV. STAT. ANN. tit. 33, §1953.
  49. N.J. REV. STAT. § 56:8-110(c).
  50. OR. REV. STAT. § 646A.276(1)(d).
  51. WASH. REV. CODE § 19.240.020(3).
  52. MASS. GEN. LAWS ANN. ch. 200A, § 5D.
  53. MASS. GEN LAWS ANN. ch. 200A, § 5D.
  54. MONT. CODE ANN. § 30-14-108(4).
  55. R.I. GEN. LAWS § 6-13-12.
  56. VT. STAT. ANN. tit. 8, § 2704.
  57. KAN. STAT. ANN. § 50-6,108(b).
  58. 632 F. Supp. 2d 1008 (S.D. Cal. 2009).
  59. Id. at 1010.
  60. Id.
  61. Id.
  62. Id.
  63. Id.
  64. Id.
  65. Id. at 1011; CAL. CIV. CODE § 1749.5(b)(1).
  66. Marilao, 632 F. Supp. 2d at 1011; CAL. CIV. CODE § 1448.
  67. Marilao, 632 F. Supp. 2d at 1011.
  68. Id.
  69. Id. at 1012.
  70. Id.
  71. See Marilao v. McDonald's Corp., Case No. 09-CV-01014-H (AJB), 2009 WL 3007368 (S.D. Cal. Sept. 21, 2009).
  72. Id.; CAL. CIV. CODE § 1749.5(b)(2).
  73. Marilao v. McDonald's Corp., 632 F. Supp. 2d 1008, 1011 (S.D. Cal. 2009).
  74. Id.
  75. Id.
  76. Id.
  77. Marilao, 2009 WL 3007368, at *3.
  78. Id.
  79. Case No. 09cv832 BTM (NLS), 2009 WL 282013 (S.D. Cal. Nov. 25, 2009).
  80. Id. at *1.
  81. Id. at *2.
  82. Id. at *5.
  83. Id. at *3 (emphasis in original).
  84. Complaint for Damages and Demand for Jury Trial, Smith v. Panera Bread Co., Case No. 37-2012-00084077-CU-BT-CTL (Cal. Super. Ct. Oct. 24, 2012).
  85. Compl. ¶¶ 2, 3.
  86. Compl. ¶ 21.
  87. Compl. ¶ 23.
  88. Compl. ¶¶ 29–32.
  89. Complaint for Damages, Isaac v. GEO Mijilem & Co., Inc., Case No. CV 12-2174 (C.D. Cal. Jan. 18, 2012).
  90. Compl. ¶ 24.
  91. Compl. ¶¶ 27, 29.
  92. Compl. ¶ 31.
  93. See Chick-fil-A Cards FAQs, CHICK-FIL-A, http://www.chick-fil-a.com/Food/Cards-FAQ (last visited May 6, 2016); Arch Card Terms and Conditions, MCDONALD'S, http://www.mcdonalds. com/content/dam/McDonalds/Documents/McDonald_s_Arch_Card_Terms_and_ Conditions_.pdf (last visited May 6, 2016); Academy Gift Cards, ACADEMY SPORTS + OUTDOORS, http://www.academy.com/shop/en/store/Gift-Cards (last visited May 6, 2016).
  94. COLO. REV. STAT. § 6-1-722(b)(3).
  95. CONN. GEN. STAT. § 3-65c.
  96. FLA. STAT. ANN. § 501.95.
  97. HAW. REV. STAT. § 481B-13(a).
  98. KY. REV. STAT. § 367.890(3).
  99. LA. REV. STAT. ANN. § 51:1423(B)(2).
  100. MICH. COMP. LAWS § 445.903f.
  101. MINN. STAT. ANN. § 325G.53.
  102. MONT. CODE ANN. § 30-14-108(4).
  103. N.H. REV. ANN. § 358A:2.
  104. N.M. STAT. ANN. § 57-12-26(C).
  105. N.D. CENT. CODE § 51-29-02.
  106. OR. REV. STAT. § 646A.276.
  107. R.I. GEN. LAWS § 6-13-12.
  108. VT. STAT. ANN. tit. 8, § 2703.
  109. MD. COM. CODE ANN. § 14-1319.
  110. NEV. REV. STAT. § 598.0921(1)(b).
  111. ARK. STAT. ANN. § 4-88-703(c).
  112. N.J. REV. STAT. § 56:8-110(a).
  113. OKLA. STAT. tit. 15, § 797.
  114. OHIO REV. CODE ANN. § 1349.61.
  115. TENN. CODE ANN. § 47-18-127.
  116. WASH. REV. CODE § 19.240.040.
  117. OKLA. STAT. tit. 15, § 797; WASH. REV. CODE § 19.240.040.
  118. NEV. REV. STAT. § 598.0921(1)(c).
  119. N.J. REV. STAT. § 56:8-110.
  120. VA. CODE § 59.1-531.
  121. See, e.g., ARIZ. REV. STAT. ANN. § 44-7402; ARK. STAT. ANN. § 4-88-702(c); GA. CODE
    § 10-1-393(b)(33)(A)(ii); NEB. REV. STAT. § 69-1305.03; NEV. REV. STAT. §598.0921(1)(b).
  122. See, e.g., ARK. STAT. ANN. § 4-88-702(c); NEB. REV. STAT. § 69-1305.03.
  123. See, e.g., ARIZ. REV. STAT. ANN. § 44-7402; ARK. STAT. ANN. § 4-88-702(c); NEV. REV. STAT. § 598.0921(1)(b).
  124. ARK. STAT. ANN. § 4-88-702(c); NEV. REV. STAT. § 598.0921(1)(b).
  125. Case No. 04-4993-BLS2, 2008 WL 4965853 (Mass. Super. Ct. Oct. 27, 2008).
  126. Id. at *1.
  127. Id. at *4.
  128. See Chick-fil-A Cards FAQs, supra note 93 (no mention of dormancy fee in FAQs); Arch Card Terms and Conditions, supra note 93 (explicitly says "no inactivity fee").
  129. CAL. CIV. CODE § 1749.5.
  130. CONN. GEN. STAT. § 42-460.
  131. FLA. STAT. § 501.95 (excepting those provided as charitable contributions and those issued as part of an incentive, loyalty, or promotional program).
  132. ME. REV. STAT. ANN. tit. 33, § 1953(G).
  133. MINN. STAT. § 325G.53.
  134. MONT. CODE ANN. § 30-14-108(1).
  135. N.H. REV. STAT. ANN. § 3580A:2 (if the gift card is valued at less than $100).
  136. N.J. REV. STAT. § 46:30B-42.1(i) (underlying funds of a gift card cannot expire).
  137. OR. REV. STAT. § 646A.278 (can expire only if the card bears, in at least ten point font, the words "EXPIRES ON" or "EXPIRATION DATE" followed by the date; the gift card was sold at a cost below the card's face value; and the card does not expire until at least thirty days after the date of sale).
  138. R.I. GEN. LAWS § 6-13-12 (however, R.I. GEN. LAWS § 6-13-12.1 exempts gift cards donated for charitable purposes which may not expire less than one year from the issuance of the gift card to the recipient).
  139. WASH. REV. CODE §§ 19.240.020(1)(a), 19.240.030 (expiration date is not allowed unless no money is paid for the gift card or when the gift card is valid for artistic or cultural organizations and disclosed to the recipient).
  140. HAW. REV. STAT. § 481B-13.
  141. 815 ILL. REV. STAT. § 505/2SS(b).
  142. KAN. STAT. ANN. § 50-6,108.
  143. LA. REV. STAT. ANN. § 51:1423(B)(1).
  144. MICH. COMP. LAWS § 445.903f.
  145. VT. STAT. ANN. tit. 8, § 2702.
  146. MASS. GEN. LAWS ANN. ch. 200A, § 5D (seven years).
  147. N.D. CENT. CODE § 51-29-02 (six years).
  148. See, e.g., Georgia (GA. CODE § 10-1-393(b)(33)(A)(ii); Nebraska (NEB. REV. STAT. § 691305.03); Nevada (NEV. REV. STAT. § 598.0921(1)(a)); New York (N.Y. GEN. BUS. LAW § 396-i); Texas (TEX. BUS. & COM. CODE § 604.101).
  149. See,e.g., Hawaii (HAW. REV. STAT. § 481B-13); Kansas (KAN. STAT. ANN. § 50-6,108); Kentucky (KY. REV. STAT. § 367.890); Louisiana (LA. REV. STAT. ANN. § 51:1423(B)(1)); Massachusetts (MASS. GEN. LAWS ANN. ch. 200A, § 5D); New Mexico (N.M. STAT. ANN. § 57-12-26(B)); Ohio (OHIO REV. CODE ANN. § 1349.61); Oklahoma (OKLA. STAT. tit. 15, § 797); Utah (UTAH CODE ANN. § 13-11-4(4)(a)); Vermont (VT. STAT. ANN. tit. 8, § 2702).
  150. Boundas v. Abercrombie & Fitch Stores, Inc., Case No. C 04866, 2015 WL 5116821 (N.D. Ill. Aug. 28, 2015).
  151. Id. at *1.
  152. Id.
  153. Id. at *2.
  154. Id. at *5.
  155. Id.
  156. Id. at *6.
  157. Wells v. Holiday Cos., Inc., 862 N.W.2d 492 (Minn. Ct. App. 2015).
  158. Id. at 493.
  159. Id. at 495.
  160. Id.
  161. Id.
  162. Id.
  163. MINN. STAT. § 325G.53, subd. 1(a).
  164. Wells v. Holiday Cos., Inc., 862 N.W.2d 492, 495 (Minn. Ct. App. 2015).
  165. Id. at 496.
  166. Id. at 497.
  167. Id.
  168. Id. at 498.
  169. See Marilao v. McDonald's Corp., Case No. 09-CV-01014-H (AJB), 2009 WL 3007368, at *3 (S.D. Cal. Sept. 21, 2009); N.J. REV. STAT. § 56:8-110(a).
  170. See Hahn v. Massage Envy Franchising, LLC, Case No. 12cv153 DMS (BGS), 2014 WL 5100220, at *13 (S.D. Cal. Sept. 25, 2014) (stating that because the franchisor retained control over the content of the membership agreement at issue, it could be liable for any violations arising from this agreement).

Copyright 2016, Franchise Law Journal, Volume 36-1 (Summer 2016). Reprint permission granted.

Authors
Emily I. Bridges
T (864) 751-7618
F (864) 751-7800
Evan M. Sauda
T (704) 384-2647
F (704) 384-2923
Associated Attorneys
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