12/ 11/ 2006
by Beth Gaudio, NFIB Legal Foundation
One of the hottest trends this holiday season is the sale of gift cards and gift certificates. Gift cards are prepaid cards containing a specific amount of future purchasing value, designed to be bought and presented as a gift. Gift certificates are, similarly, prepaid certificates that entitle the owner to a specific amount of purchasing value. Rather than making an agonizing selection, consumers enjoy the convenience of buying an item someone else can use to obtain exactly what he or she wants. Generally, the laws regarding gift cards and gift certificates are essentially the same. However, there are a few things small businesses need to consider before offering these choice items to their holiday shoppers.
Disclosures
The central problem associated with gift cards and gift certificates is what information must be given to the consumer concerning the use of the card or the certificate. The problem lies with the fact that information disclosed to the purchaser of the card or the certificate may not reach the actual recipient, leading to misunderstandings about the terms and conditions of use. Disclosures that simply accompany the card or the certificate are the most convenient way to communicate with the buyer; these are usually contained in the promotional packaging of the card, such as a sleeve insertion. Disclosures that appear on the face of the card or the certificate are the most convenient way to communicate with the recipient; these may be permanently printed on the card or the certificate envelope or affixed to the card by a sticker or tape. No matter which form of disclosure is used, a failure to disclose all the material terms could be characterized as misleading and could land a business into legal troubles.
Bankruptcy/New Management
Sometimes the business selling gift cards or certificates ceases to exist for some reason. Then a consumer is left holding a gift card or certificate with seemingly no value. Small businesses should be forewarned that this does not let them off the hook, since the holder of the gift item may still have grounds to raise a claim against the business.
Small businesses that file Chapter 11 (reorganization) bankruptcy intend to stay in business, so ask the bankruptcy court for permission to honor previously issued gift certificates in an effort to maintain good customer relations. If the bankruptcy court does not allow gift cards to be honored, or if the small business files Chapter 7 (liquidation) bankruptcy, holders of gift cards and gift certificates become creditors in the bankruptcy case. They have relatively high priority among unsecured creditors in a Chapter 7 case and may be entitled to receive some percentage of the card’s value.
If a business is sold or acquired by another company and reopens under a new owner, the new owner may or may not be obligated to honor gift cards and gift certificates issued under the prior business. The matter will be determined by the terms of the purchasing contract, whether or not any existing obligations were bought along with the business. However, from a public relations standpoint, new owners should honor such certificates in the interest of goodwill. Taken one step further, when another business in the area closes without reopening, a way to attract those last-minute holiday shoppers is to make an offer to honor the certificates of the closed business.
State and Federal Regulation
Be sure to double-check any state laws and regulations that may apply to the sale of gift cards and gift certificates. Some of the most common state requirements include:
- The expiration dates may need to be set anywhere from three to seven years after the purchase date.
- If fees will be charged against the balance for non-use, then both the amount of the fee and the time intervals for which the fee will be incurred must be disclosed.
- A business may need to establish a policy concerning the replacement of lost or damaged cards, and whether there will be any cash redemption options to the consumer.
Though no laws exist now, small businesses should also be aware that federal regulation may not be far behind the state laws. A bill was introduced during the last Congress to eliminate completely gift card expiration dates and fees. Though the measure wasn't passed, both the Federal Trade Commission and the House Energy and Commerce Committee may soon choose to issue their own uniform guidelines. In addition, the Federal Trade Commission warned that failure to disclose dormancy fees and expiration dates may be considered an unfair or deceptive trade practice. Impending federal rules are just another reason for businesses to ensure that gift card and gift certificate policies are not hidden in the fine print. Remember that an informed customer is more likely to be a happy customer.
