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Congress Considers New Gift Card Rules

By James R. Hood
ConsumerAffairs.com

February 20, 2006

Rosalind of College Park, Georgia, was on the receiving end of a $50 American Express gift card. She took it to the Red Lobster for dinner but afterwards the waitress would not accept it as payment.

"American Express told me that if they refunded a $50.00 gift card, I would have to pay a $10.00 fee," Rosalind said. "They sold a card that is not valid where American Express is accepted and now they want to keep 20% of the value because I can't use the card."

Rosalind isn't alone. Many cards saddle the recipient with expiration dates, fees, restrictions on what can be purchased and little or no protection in case of loss, fraud or a dispute over the merchandise or service purchased with the card.

A few states have challenged some of the more blatant abuses but there has so far been little in the way of federal protection, although the Federal Trade Commission warned last week that gift card issuers who don't clearly disclose all of the restrictions and terms could be engaged in deceptive marketing.

In a letter to Rep. Charles F. Bass (R-N.H.), FTC Chair Deborah Platt Majoras said consumers are "entitled to know all material terms."

Bass, who is considering legislation to protect consumers, had called on the agency in December to undertake an investigation into the marketing, sale and usage of consumer gift cards.

"I will continue to work toward ensuring that consumers are protected from the uncertainties and deceptive practices that have been associated with certain gift cards," Bass said. He and Rep. Joe Barton (R-Tex.), chairman of the House Energy and Commerce Committee, are reportedly planning to schedule a hearing on the problem.

Bass became interested when the state of New Hampshire filed a lawsuit against a gift card issuer who claimed their cards were not subject to state consumer protection laws.

The FTC has been largely silent on the issue, although after Barton and Bass asked it to investigate, it issued a brief list of consumer tips.

States Carry the Ball

New York and other Northeastern states have been the most aggressive in tracking down and prosecuting abuse by retailers who issue gift cards.

New York Attorney General Eliot Spitzer last February filed a lawsuit against Simon Property Group Inc., the nation�s largest shopping mall chain, alleging that fees on its gift cards violated state law.

"The gift card law was enacted to protect consumers against hidden and unwarranted fees that diminish the balance of gift cards," Spitzer said.

At the time, Simon charged a fee of $1.50 for each card if purchased at its malls or $5.95 for "shipping and handling" if purchased on the Internet. In addition, Simon charged a $2.50 monthly "administrative" fee commencing in the seventh month after purchase; a 50 cent fee for each telephone balance inquiry; a $5 fee to reissue a lost or stolen gift card; and a $7.50 fee to reissue an expired card.

In settling the suit, Simon has agreed not to assess a service fee on any card unless it has been unused for twelve consecutive months.

Simon also agreed to comply with New York�s law that requires it to disclose on its gift card the five dollar fee it charges to replace a lost or stolen card, and the $7.50 fee it charges to reissue an expired card. These fees are not prohibited by law, but must be conspicuously disclosed on the card itself.

Massachusetts and Connecticut had sued Simon Malls earlier and won similar settlements.

"These 'gift cards' are riddled with additional charges that Massachusetts consumers should not have to pay," Massachusetts Attorney General Tom Reilly said. "Despite the name, these gift cards are not what they seem."

Legal Picture Murky

But commendable as the state efforts may be, gift cards present some interesting legal challenges that may need to be addressed by Congress and banking regulators, especially as banks and financial services companies join retailers in the gift card game.

The FTC, for example, does not have the authority to regulate banks, which are taking a bigger share of the gift card market with Visa, MasterCard, American Express and Discover gift cards. State authorities may also have only limited authorities over these companies.

American Express was an early entrant in the gift card business and has also produced some of the most vehement consumer criticism from gift-givers like David of Plano, Texas, who was surprised to learn the cards can't be used for airline travel, hotels, gas or rental cars.

"So now I'm out $600.00 and have these gift cards that are useless for the purpose I purchased them for," said David, who bought the cards as presents for his children to use during their holiday travel.

The store where David bought the cards would not take them back and neither would American Express. "They were not able to redeem my money, turn into Gift Checks or help in any way," he said in his complaint to ConsumerAffairs.com. "What a racket."

Ownership Questions

Bass said part of the problem is that the person who buys the card is not the person who ends up using it, raising questions about who "owns" the card and has legal standing to challenge the issuers' regulations.

Credit card companies who issue gift cards are regulated by banking authorities and generally follow the rules that govern electronic funds transfer, but it's not clear whether those rules can properly be applied to the gift cards, officials said.

"I believe we can do more," Bass said. "The FTC shares my concerns and has issued an advisory stating many of the inconsistencies that remain present in this largely unregulated market."

"This is a vital first step in ensuring that consumers are aware of the prospective problems with these cards, but this issue is not over," he said.

In her report to Reps. Bass and Barton, Majoras quoted a survey of 30 retail gift cards conducted by the Montgomery County, Md., Division of Consumer Affairs. It found nine with expiration dates and potential fees, while six failed to disclose that information in stores and Web sites.

Many retailers are getting rid of fees and expiration dates, the National Retail Federation told the Washington Post, which did not cite any examples.

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