At Prepaid Day held during the Electronic Transactions Association's 2009 Meeting & Expo, Daveed A. Schwartz, Attorney at Pillsbury, Winthrop, Shaw, Pittman LLP, ad-vised gift card program managers of what areas in gift card laws should be given special attention to avoid getting into legal trouble.
Trouble may come in the form of a knock on the door from a representative of the Federal Trade Commission, the U.S. Department of Justice, state attorneys general, or city or county district attorneys, he said.
Factors pertaining to prepaid cards that attract the attention of such entities include:
The issue of having expiration dates in jurisdictions that don't allow this is "a big problem," Schwartz said. "Most companies and ISOs are hip to that, but not everyone, believe it or not."
Program providers can even run afoul of the law when expiration dates are valid.
As an example, Schwartz offered the following scenario: An ISO registered with a national bank sets up a merchant with a gift card mall in April 2009.
In accordance with state law, the cards that populate that mall come with legal expiration dates. But the expiration date on one batch of cards is June 2009, only two months after the mall was implemented.
When a customer purchases one of those cards, he or she fails to notice the card's expiration date, which is not prominently displayed.
Four months later, when the gift card's recipient finally uses the card, the expiration date has passed and the recipient must pay a reactivation fee to access the funds on the card.
"That's a problem," Schwartz said. "That's where you could get [in trouble], even though you have a legitimate expiration date on the card, because it's too close to when the sale of the card occurred.
"I would recommend that ISOs pay close attention to open-loop gift cards with expiration dates. What are the expiration dates? Are you stocking [cards with] expiration dates that are coming up too quickly in the future?"
Another area of emerging litigation is in discrepancies in terms and conditions, Schwartz said.
For instance, the terms and conditions outlined on a card may differ from what is posted on a Web site. Or the language on the outside packaging may differ from the language on the card. Even if it's a simple typo, lawyers have exploited that lack of coordination, he said.
"If you're an ISO, are you going to rely on the card issuer to craft the terms and conditions and then let the issuer put your name on the card?" Schwartz said.
"If you're going to do that, you should do some due diligence. Because if it comes time for a lawsuit, the people that get named are going to be the card issuer, the ISO and the major stores in which the card is sold.
"So there are all sorts of ways in which you can get sued. And you've got to think about these things up front. You can't just default to or rely on the card issuer [or] you're really putting yourself at risk."
When entities are found liable of misrepresenting or defrauding consumers, the penalties can be "fairly draconian," Schwartz said. Civil judgments can range from $5,000 to $25,000 per violation, he added.
According to Schwartz, the way to deal with such potentially devastating civil actions is to avoid them in the first place. "You want to do your due diligence, adhere to best practices and engage in risk management so that you don't have to talk to a guy like me," he said.
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