For franchise systems, the recent action by the FTC against Darden Gardens regarding their gift cards is instructive. The FTC complaint can be read here.
"According to the FTC's complaint, Darden advertised its gift cards on television and radio, and in its restaurants and Web sites. Darden represented that consumers could redeem the cards to buy goods or services at its restaurants equal to the card's monetary value. But Darden did not disclose adequately the "dormancy fees" that would be deducted after a certain period of time. For cards sold before February 2004, after 15 months of non-use, a $1.50 dormancy fee was deducted from the card's balance for each month of inactivity; for cards sold after February 2004, the monthly fee was deducted after 24 months of non-use."
"Darden Restaurants Inc., which owns restaurant chains Olive Garden, Red Lobster, Smokey Bones, and Bahama Breeze, agreed to settle Federal Trade Commission charges that it engaged in deceptive practices in advertising and selling its gift cards. As part of the settlement, Darden will restore fees that were deducted from consumers' gift cards and disclose fees or expiration dates in future gift card sales. This is the agency's second law enforcement action involving allegedly deceptive gift card sales."
The other FTC Action was against K-Mart, which was similar.
"The FTC's complaint alleges that since 2003, Kmart did not disclose adequately that after 24 months of non-use, a $2.10 "dormancy fee" would be deducted from the card's balance for each month of inactivity, resulting in a $50.40 reduction from the card's value if the card was not used for 24 months. In many instances, the Commission alleges, consumers did not learn of the fee until they attempted to use their cards."
There have been similar lawsuits. The Attorney General of New Hampshire filed the suit in November of 2004, charging that Simon was in violation of a provision of the Consumer Protection Act that forbids the selling of gift certificates that bear expiration dates or fees that reduce the value of the gift certificate. In its lawsuit, the State noted that the Simon Gift Card, a prepaid debit card sold at shopping malls owned or operated by Simon, has both an expiration date and fees that are charged against the value of the card."
Tivo settled a class action regarding its gift cards. "Every state has a different set of rules, but in the Golden State, you're not allowed to put an expiration date on a gift certificate, except in very rare instances. This is largely because gift certificates are typically purchased with cash and it's not fair for a consumer to lose out on a service just because they didn't move quickly enough or because they received the gift on a later date. When it comes to rebates, coupons and other discounts anything goes, but once a consumer has purchased a gift certificate, it's good for life as far as California is concerned."
The FTC has published their own gift card buying brochure, but the best summary and comparisons of gift cards comes from the Montgomery County Office of Consumer Protection.
The Montgomery County of Consumer Protection organized their review of gift cards into these five categories: a) Is a Replacement Cards Available, b) Can the Gift Card be used to buy from the Website, c) Is there an Expiration date, d) Are there fees, and e) Are the expiration and the fees clearly disclosed on the card and the company's website.
The Montgomery County of Consumer Protection annual assessment provides a franchise system with a useful checklist.
Should franchise systems adopt the California rule, and have no expiration dates on their gift cards? This seems like a fairly consumer friendly move. But there is a problem here.
"Did you get a gift card for Christmas? Since it was given to you, you probably think the money should be spent by you. However, if you wait too long to spend that gift card, it could end up in the state's unclaimed-property account.
Why? Well, even though you might not think you've abandoned your gift card, if you don't use it after a certain amount of years it might be subject to laws that allow the money left on that card to revert, or escheat, to your state's piggy bank.", from an article at Bankrate.com
Escheat laws are different in every state, abandoned property and escheatment laws can generally be separated into two categories: laws that either specifically include or generally exclude gift certificates from escheat laws.
The National Restaurant Association published in 2003 a complete list of the state escheat laws and how they applied to gift cards.
As Kristen Arnold explained: There are basically three models of escheat laws.
1. No expiration or escheat model. This is a very consumer-friendly model used in several states including California, Washington and Massachusetts. This model never gives up the money to the state. The gift card is good from now until eternity. In this model, there is a reserve fund specifically for redemptions set up by the retailer. By setting up this reserve fund, the retailer recognizes that the consumer can eventually redeem the gift card for merchandise. Retailers in these states are not required to have the money escheat to the state.
2. 60/40 model. This is a more traditional model stating that gift certificates can come with expiration dates and when they do expire (usually between three and five years) retailers are responsible for having 60 percent of the value of the card escheat to the state. The retailers are allowed to keep the other 40 percent. The state acknowledges that retailers have costs that come with gift cards and allows them to keep a portion of the leftover money. Indiana and Iowa use this law.
3. No gift-card expiration dates, escheat laws apply. This model is somewhat confusing since the states involved, such as Connecticut, have eliminated expiration dates on gift card and certificates. However, even though consumers will not find expiration dates on their gift cards, they are expected to use their gift cards within three years. Otherwise the state views the gift card as abandoned and the money escheats to the state. However, if a customer comes in after three years and obtains merchandise from the store using their unexpired gift card, the retailers can apply to get the money back from the state. (my emphasis)
A franchise system should prefer Model 1 and lobby their respective states to achieve this goal.
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