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Gift Cards (The Gift That May Stop Giving) *

Attention holiday shoppers. Not sure what to buy Aunt Matilda or cousin George? A gift card allows them to buy whatever they like? Maybe. Large retailers such as Sharper Image, Bombay Company and Linens ‘N Things have filed for bankruptcy or gone out of business, leaving behind millions of dollars in unused gift cards. In bankruptcy, money left on a gift card is treated as a debt, which the bankruptcy court can decide if it is to be repaid, and how. If the retailer stays in business, the court may allow it to continue to honor its cards, but even then consumers may not get the full value. Sharper Image, for example, was allowed to continue accepting gift cards, but only if the cardholder spent twice the value of the card in a single transaction. Bombay Company was allowed to pay its gift-card holders 25 cents on the dollar. If the retailer closes its doors, it is possible the consumer’s only recourse would be to file a claim and stand in line with the other unsecured creditors.

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What Do DSS, GLB and SOX Have in Common?

If you carry, accept, use, issue or have anything to do with the world of credit cards, debit cards, gift cards, smart cards, stored value cards, pre-paid cards—need I go on?—you need to pay attention to DSS. That is the Payment Card Industry’s Data Security Standards that apply to all types of payment cards issued by the major card-issuing companies. The PCI DSS, in case you hadn’t heard, requires, as an example, that personally identifiable card data be rendered unreadable (truncated, encrypted, firewalled, decapitated—is anyone reading) whenever it is potentially exposed to a third party, when it’s stored, transmitted, used or processed. If you are a merchant with significant card-transaction volumes. encryption can be expensive or time-consuming or both—and no one wants to slow down transactions at the point of sale or at the point of billing. The DSS also requires audit records be kept so breaches can be detected, compromises traced and data integrity monitored. Yes, there are DSS Audit Guidelines from the PCI as well. Not to mention the fact that more than 30 U.S. states already have some form of data breach legislation that requires disclosure, notice and, in some cases, that some remedies be made available to consumers who are or potentially might be the victims of lapses in data protection.

Acquiring institutions—those financial institutions and card processors that have the relationships with merchants that accept and process cards—have until year-end to bring their systems and relationships into compliance, and some card associations are offering rewards for early compliance, but stiff penalties for delays and failure to comply.

How complex does it get? Well, imagine that a merchant opts to mask all credit card numbers, even though address information is unencrypted—but the numbers aren’t visible within any systems and therefore can’t be cross-referenced. PCI compliant? Probably? BUT, that won’t comply with Gramm-Leach-Bliley, the privacy statute applicable to banks and financial institutions that requires otherwise. What about SEC regulations regarding customer data and, of course, Sarbanes-Oxley, which says, “You must control access to your information.”

It’s enough to give anyone a headache. That’s why Rimon has a Financial Services, Corporate & Securities, Intellectual Property and, of course, an Advertising Technology & Media Law practice—so you get one seamless solution to your problems, no matter how complex the world gets.

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Gift Cards in the Legal Limelight

In a decision of potentially far-reaching consequences, on Aug. 1, 2006, a U.S. District Court in New Hampshire ruled the sale of Simon Giftcards—prepaid electronic stored value cards—sold by the company that owns and operates shopping malls, are not subject to certain provisions of the New Hampshire consumer protection laws and are preempted by federal law. Simon cards look like ordinary plastic credit cards and operate on the Visa network. Simon became subject to action by the Attorney General in New Hampshire because each card had an expiration date and fees were imposed that reduced their value, violating provisions in New Hampshire’s Consumer Protection Act.

Simon cards are issued by U.S. Bank (formed under the National Bank Act) and MetaBank (a federal savings association under the Home Owners’ Loan Act). Simon had agreements under which each bank owns and issues the cards, manages the “account” relationship with the consumer, and sets the fees and terms that apply. Simon is responsible for advertising, marketing, promoting and selling the cards. Simon has no right to define or change the terms of the contract between the bank and consumer. Simon sells a Giftcard to a consumer and collects payment. The amount of purchase, minus an initial fee, is loaded onto the card, and Simon gives the consumer a copy of the card agreement along with the card. Simon deposits the funds into the bank’s account and the bank pays Simon a sales commission. When the consumer uses the Giftcard, the bank sends the money to the merchant through the Visa network, and all further deductions or fees charged are bank charges.

New Hampshire sought to stop the sale of these cards—asserting that Simon sells these Giftcards as an agent for the banks; and since Simon is not a bank, New Hampshire laws can be applied against Simon. Because the Giftcard is sold by Simon—a non-bank—the state claimed federal laws don’t preempt any limitations New Hampshire law impose to protect its citizens.

In deciding the case, the court notes that state regulations are preempted whenever they conflict with federal regulations, or when state law impedes the accomplishment of federal law objectives. Clearly, state regulation cannot limit fees charged or impose restrictions on the contract between these banks and the purchaser—thus state regulation is preempted. But what about Simon?

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Beware of Regulators Bearing Gift Cards

Although many people think the Trojan Horse story comes from Homer, the Iliad ends before Odysseus comes up with the famous deception and the Odyssey occurs after Troy has fallen. It is Virgil, the most famous poet of Ancient Rome, who wrote the Aeneid that actually fills the gap. In Book II, the priest Laocoon warns the Trojans not to accept a giant wooden horse placed outside the walls and gates of Troy: “Quidquid id est, timeo Danaos et dona ferentes”—which translates into “Whatever it is, I fear Dardanians [Greeks] even when they bring gifts.” While we have come to think of a “Trojan” Horse as a form of malicious code—a computer virus wrapped in a friendly cocoon—the “Trojan” Horse wasn’t really Trojan at all: it was a Greek horse figure filled with Greek fighters who deceived and overpowered the drunken Trojans who thought it was a gift. The English expression “beware of Greeks bearing gifts” is derived from Virgil’s Aeneid.

Deception is also at the heart of legislation regulating gift cards, gift certificates, e-cards, gift codes and similar instruments—we’ll call them all gift cards in this article. Essentially plastic or electronic prepaid or stored value cards, they can be purchased or obtained by one person, freely transferred or gifted to another, used in promotions, or used by the original purchaser. Years ago, prepaid phone cards adorned the walls of gas stations and retail outlets. Today, newsstands, retail stores, the Internet are filled with them—adorning walls, displays, check-out counters, e-greeting card websites and online digital music services.

Gift cards owe their origins to pieces of paper issued by merchants allowing one person to pre-purchase value that can be given to someone else as a gift and which they can then use at an establishment to purchase goods or services available from that merchant. When you engage in a transaction with a merchant at the point of sale, you are presumed to know (or you should be able to know) the terms and conditions that apply. While there are legal exceptions, a posted sign that says “no refunds, no exchanges—store credit only” is part of the bargain you make when buying from that retailer. But what about a gift? If I hand you a gift card, how will you know what restrictions or limitations apply…the Trojan Horse!

Not limited by geography, gift cards can be used virtually (pardon the pun) anywhere. Chain store near you? Buy a gift card for your nephew across the street or across the country. Know a teenager who loves rock and roll, but prefer not sending a check for $100 and hope they head for the CD rack? Send a gift card that enables downloads, CD or subscription purchases online.

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