New federal regulation of retail gift cards

By David S. Almeida and David M. Caves,,

Prompted by Congress’s recent passage of the Credit Card Accountability and Responsibility Disclosure Act of 2009, the Federal Reserve Bank recently issued new federal regulations governing retail gift cards. Broadly speaking, the new regulations -- which take effect on Aug. 22 -- will require greater transparency for retailers seeking to impose fees or expiration dates on users of gift cards. The new regulation applies to two types of gift cards: Retail cards sold for store credit, and retail cards issued through loyalty, award or promotional programs. As described below, the former type of card will be regulated more stringently than the latter. Notably, gift certificates issued in purely paper form are not regulated under the new federal regulation (although they may be regulated under certain states’ laws).

For retail cards sold for store credit, a retailer’s ability to impose a fee associated with a gift card will be greatly restricted. Specifically, the new regulation prohibits a retailer from imposing a dormancy, inactivity or service fee unless (i) the consumer is provided clear and conspicuous disclosures about the fees in advance and (ii) no more than one such fee is charged per month. Service fees subject to the restrictions include monthly maintenance fees, service fees, balance inquiry fees and “reload” fees, which are fees assessed if a consumer adds additional money to a card after the initial purchase. A retailer is also prohibited from charging a dormancy or inactivity fee unless there has been at least one year of inactivity on the card prior to the imposition of the fee. The new regulation mandates that all gift cards must not expire sooner than five years after the date the card is purchased or when value was last added to the card.

For cards issued through loyalty, award or promotional programs, the new regulation simply requires advance disclosure of any fees or expiration terms. The card must state (on its front) that it is issued for loyalty, award or promotional purposes, as well as the card’s expiration date and any potentially applicable fees.

Although the new federal rules are relatively straightforward, retailers may still need to navigate around various state laws. For instance, the State of Illinois regulates gift cards (which are included in the definition of “gift certificates”) through a provision in its Consumer Fraud and Deceptive Business Practices Act. Unlike the new federal regulation, the Illinois law covers both plastic gift cards and traditional gift certificates issued in paper form.

Gift cards sold for store credit after January 1, 2008, cannot have an expiration date earlier than five years after the date of issuance, be subject to any post-purchase fee or be reduced in value from its face value. The holder of a gift card issued after January 1, 2008 may not be penalized in any way for non-use or untimely redemption. The new federal regulation will not preempt most state laws governing gift cards, so retailers must comply with both federal and state regulations.

Although the new federal regulation will not take effect until this August, several lawsuits have recently been filed against retailers for alleged violations of state laws regulating gift cards. For instance, two putative class-action lawsuits were filed in Cook County, Ill., asserting claims for violation of the Illinois Consumer Fraud Act based on allegations that defendants sold gift cards that expire prior to five years from the date of issuance. These cases assert claims -- on behalf of nationwide and Illinois-only classes -- for declaratory relief that defendants’ practices violate Illinois law, as well for damages resulting from violations of the Illinois Consumer Fraud Act and for breach of contract and unjust enrichment.

In order to avoid the costs and uncertainties attendant with class-action litigation (not to mention the attendant public relations fallout), it is imperative for retailers to examine their gift-card practices thoroughly to ensure compliance with all potentially applicably regulations, both federal and state.

David S. Almeida, is a partner in the Litigation Practice Group and a member the Class Action/Multi-District Litigation Team at Michael Best & Friedrich LLP, Chicago. He can be reached at

David M. Caves is an attorney in the Chicago office and a member of the Litigation Practice Group He can be reached at

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