Gift certificates, gift cards and stored value cards (Gift Devices)—all of which require the consumer's advance deposit of money with a business for future access to goods and services—are an integral part of retail business in the United States. Unfortunately, it is this same deposit feature and corresponding risk of loss/misappropriation on the part of the consumer that brings the bulk of federal and state regulation to the Gift Device arena.
Despite the risks, studies estimate that nearly three-fourths of shoppers purchased at least one Gift Device last year, thus making them a top selling item during the 2005 holiday season. The popularity of Gift Devices is driven by the many benefits they provide to businesses and consumers alike. For the purchaser, a Gift Device affords convenience whether it is purchased for personal use or as a gift. For businesses, advance Gift Device purchases equate to instant cash and offer the opportunity for another point of sale (and impulse purchase) at the time of redemption. Not surprisingly, they are available for everything from movies, restaurants and music downloads, to everyday items such as coffee, gasoline and groceries. If executed properly, a Gift Device program can drive sales, revenue and brand recognition in a variety of businesses and industries, including franchising.
In designing and implementing Gift Device programs, businesses must observe a complex series of federal and state laws, many of which are inconsistent in scope and mandate. Particularly for franchisors and others who undertake these programs on a system wide basis, proper design through advance legal and business analysis can avoid a series of subsequent legal, regulatory, financial and public relations problems. Below we explore the legal issues incident to the proper development and implementation of a Gift Device program, and summarize key considerations in our first ever "Can't Miss Tip."
Gift certificate, escheat and other applicable state law
State gift certificate laws (some of which also apply to gift cards and stored value cards) may impose two key limitations on any Gift Device program. First, these laws may restrict your ability to impose time limitations on the Gift Device (i.e., a date certain after which the device is void and customer forfeits the deposited funds.) For example, except only in limited situations, California law imposes a blanket prohibition on expiration dates. Moreover, Rhode Island permits expiration dates except on restaurant gift certificates, while New York permits expiration dates so long as expressly stated. Second, these state laws may regulate "dormancy fees," which are fees imposed or value deducted after a specified period of inactivity (e.g., a Gift Device loses one percent of its value for each month of inactivity after an initial twelve month period). Once again, California has an extensive set of regulations regarding the amount, timing and type of dormancy fees that can be applied to Gift Devices. Likewise, Louisiana does not permit any dormancy or service fees other than a one-time processing fee of $1.00 or less.
Assuming that applicable state law permits the expiration of Gift Devices, one must keep in mind that state escheat laws regulate the ownership and control of abandoned funds following the expiration of the device. Escheat laws typically require that the business (a) report the amount of funds on deposit, the funds that have become abandoned, and whether the abandoned funds can be identified to a specific purchaser, and (b) pay a portion of the abandoned funds to the state rather than retain those funds for its own use. Additionally, some states have escheat laws but specifically exclude Gift Device amounts from the definition of "abandoned property." Many states with older escheat statutes do not even address Gift Devices.
Other state laws also apply to the purchase and sale of these devices, such as sales and use taxes, advertising laws and deceptive trade practice/consumer protection laws. Each of these laws should be explored before implementing any Gift Device program.
Banking and other federal laws
Businesses often are surprised to learn that, thanks to the deposit-based nature of Gift Devices, the businesses are deemed to be "banks" or "financial institutions" under some state and federal laws. State-based "money transmitter" laws, which govern entities that issue checks, travelers checks, money orders and electronic equivalents, may apply to a Gift Device program. These laws usually require licensure, payment of fees, surety bond or capitalization requirements, reporting obligations and periodic state audits. And, where the money transmitter laws apply to a depository program, the potential application of a federal criminal law counterpart also looms. Whether such a law applies depends the statutory definition of a "money transmitter" and the exemptions from that definition (e.g., the Minnesota money transmitter law applies to issuers of prepaid cards). One prevalent state law exemption from money transmitter laws is for single entities that issue and redeem the device; in a typical franchise system, however, the franchisor issuer and franchisee redeemers generally are not deemed a "single" entity.
Many contractual, practical and legal considerations inherent in the franchisor-franchisee relationship dictate fundamental program and Gift Device design, implementation and maintenance considerations. For example, can a franchisor require a franchisee to offer and participate in the program? Can franchisees offer their own programs or are permitted programs only those that are franchisor-sponsored? Where is program information collected and maintained? The answers to these questions are reached only after a franchisor fully explores the wide range of legal and business issues applicable to its system.
Can't Miss Tip
Our fundamental practice tip for Gift Device programs—as well as for any other promotional programs undertaken by a business, including loyalty programs and sweepstakes and contests (which will be subjects of future CAN'T MISS TIPS)—is that timely, up-front, and coordinated team design of these programs is an absolute requirement. Too often we see financial, legal, advertising and marketing teams working separately and creating problems for each other. Those teams need to work together (and begin working together early) to avoid sunk programs, inefficiencies, last minute disasters, and noncompliance with legal and financial requirements.