LEGAL ISSUES OF PREPAID CARDS

SAN DIEGO -- For a supermarket considering a gift-card program, several major issues arise in connection with the design and implementation of a workable, yet legal, gift-card program, said attorney Richard Segal in the office here of Pillsbury Winthrop Shaw Pittman.R - Expiration dates: Traditionally, paper gift certificates, and later electronic gift cards, often contained expiration dates. Many

SAN DIEGO -- For a supermarket considering a gift-card program, several major issues arise in connection with the design and implementation of a workable, yet legal, gift-card program, said attorney Richard Segal in the office here of Pillsbury Winthrop Shaw Pittman.

R> - Expiration dates: Traditionally, paper gift certificates, and later electronic gift cards, often contained expiration dates. Many states now regulate under what conditions (and even whether at all) a gift card may contain an expiration date.

- Dormancy/maintenance fees: With traditional paper gift certificates, there was usually no administrative cost involved in having a paper certificate outstanding and unused once it has been issued. However, with the advent of electronic gift cards, which often link to an electronic value database maintained by the retailer, there is a certain cost to the retailer of maintaining the value of an outstanding and unused gift card, which cost is often sought to be recovered through the application of a fee, usually on a monthly basis, when a gift card goes unused. For example, a retailer might decide to charge $1 for every month a gift card goes unused after a particular period of time (for example, after one year). Many states see this type of fee as a slow, progressive application of an expiration date and either regulate or ban the application of such fees to gift cards.

- Cash-redemption option: There has been significant litigation, particularly in California, regarding whether a retailer must have a policy of permitting a card holder to redeem an outstanding gift card for its remaining cash value upon demand by the card holder. Regardless of the legal requirements in place in any particular state, a supermarket should consider whether, as a matter of policy and customer relations, it wants to offer its card holders the option to redeem gift cards for cash upon demand.

- Lost, stolen or damaged gift cards: There has also been significant litigation in several states regarding the obligation of retailers to replace lost, stolen or damaged gift cards. The recent trend in the retailing industry has been toward retailers', either voluntarily or pursuant to a legal settlement with private or government litigants, implementing programs whereby they will replace lost, stolen or damaged gift cards upon presentation of proof sufficient to demonstrate that the claimant is a legitimate holder of the gift card and under circumstances when the retailer has the ability determine the outstanding value of the lost/stolen/damaged card, cancel it and issue a new card for the same value. When establishing a policy on this issue, a supermarket should consider the nature of the law in the states where the supermarket operates and the technical capacity of its own gift-card system to track the value of outstanding gift cards.

- Contractual language on the card: Supermarkets should not forget that gift cards are essentially contracts with the purchaser. Thus, the terms and conditions printed on the cards and on advertisements relating to the cards will be considered contract terms, which will be considered binding on the supermarket. As such, the supermarket needs to be prepared to honor the cards based on what is printed on the cards and the related advertisements. On a related point, if the supermarket wants any limitations on the card to be enforceable against a card holder, it should make sure the limiting language is visible to the purchaser before the card is purchased.