On July 17, 2020, a class action lawsuit was filed against Apple, Inc. and their Virginia special purpose legal entity, Apple Value Services, LLC, their gift card entity, for allegedly knowingly or recklessly enabling scammers to use the iTunes gift card platform.
Plaintiffs alleged that Apple failed to stop the “formulaic” gift card scam on their platform, nor did they return its 30% commission to victims. Plaintiffs alleged that Apple had complete control over the gift card “ecosystem” and could have done more to stop or to prevent these scams.
On March 4, 2021, the Northern District of California granted Apple’s motion to dismiss.
The Gift Card Scam
The scam isn’t new and the scam isn’t isolated to just Apple’s iTunes store. But the iTunes gift cards have become a favorite vehicle for many scammers in recent years.
First, the scammer will call or message the intended victim with an urgent or panic inducing message. Some common messages include:
- “Your (teenage or adult) child or grandchild has been arrested and needs bail money right now!”
- “You will be arrested if you don’t pay this parking ticket.”
- “You owe the IRS money, pay with gift cards.”
- and recently, “Pay now and you can get the COVID vaccine right now!”
There’s also the sympathy ploy: someone down on their luck, needs some help getting back on their feet, may want a donation or may want to sell something quick.
Once the scammer has the victim hooked, then they will direct the victim to purchase a significant amount of gift cards from local retailers or online. The scammer will then have the victim give them the serial number and pin number on the back of the physical gift card or from the emails. Once the scammer has this information, they are able to quickly transfer the value to themselves – often by purchasing their own “apps” from the iTunes store. (I use the term “app” in quotes because these are often not anything more than a dummy application for use in these transactions and don’t serve much a real purpose other than that)
Within 45 days of the end of the fiscal month, Apple will pay out proceeds, minus the 30% commission that Apple earns on transactions, earned by apps in its ecosystem. Including these scam apps. Once the payment is made, the scam is complete.
The Federal Trade Commission (FTC) estimates that scammers stole $30 million through this gift card scam in just 2020.
Some recent press and resources on this scam:
FTC: Paying Scammers with Gift Cards
AARP: Fraudsters Rip Off Retiree for $35,000 in Gift Cards
NBC Washington: Gift Card Scams: What Are Retailers Doing to Protect You?
Rental Car Companies Hit With Gift Card Scam
Federal Court Dismisses Class Action Lawsuit
The Court found that the complaint does not satisfy the standard to make Apple liable for third-party conduct on their platform.
In the Complaint, the plaintiffs did not adequately allege that Apple reach a conscious decision to participate nor that the company provided substantial assistance or encouragement to the scammers. The Complaint failed to allege that Apple gave specific authorization beyond what is given to any app developer or user with an Apple ID. It was not enough to create third-party liability that Apple didn’t “revoke the previously granted authorizations.”
While not specifically mentioned, it appears that the automated nature of the “ecosystem” gave Apple some leeway here. It also helped that the company had posted notices on its website regarding the gift card scam and to not participate in it. Further, they also leaned heavily on their terms and conditions that lost or stolen cards (and their value) cannot be recovered.
The Court dismissed the case without prejudice, stating that it is possible that additional facts exist to cure these deficiencies.
What Gift Card Issuers Need to Do Next
Gift card issuers need to be aware of the potential for their gift cards to be used for fraudulent purposes.
To this extent, gift card issuers should be aware of the patterns of purchase – perhaps limiting the denominations or the daily total for gift card purchases.
Review Gift Card Warnings
The Court noted that Apple iTunes gift cards had bold red lettering, warning customers “Do not share your code with anyone you do not know.”
This, along with a website detailing the gift card scam, was an important warning to consumers that they should be aware of the scam and to act in accordance to avoid the scam.
Review Gift Card Terms and Conditions
Gift card issuers should regularly review all terms and conditions in respect to their gift card program.
Thus far, Apple has successfully defended this potential class action lawsuit because of a strong terms and conditions contract. Their gift card packing contained a partial version of the Terms and Conditions, including “Neither Apple nor Issuer is responsible for any loss or damage resulting from lost or stolen cards or for use without permission.”
This, along with the full terms and conditions that are available online, gave Apple broad protections against several fraud and unconscionable contract claims.
When the gift card issuer is also a retailer, there are additional steps that can be taken to protect the consumer.
What Retailers Can Do to Prevent Gift Card Fraud
Gift card fraud will happen. But retailers can do much to help to stop and prevent this type of scam.
Post Warnings in Gift Card Displays
Many retailers have begun placing warning signs and notices in their gift card displays.
This is a visual reminder to customers to help them de-escalate from the panic induced message that they received from the scammer.
Lower Purchase Limits
Many retailers have lowered the maximum value of any individual gift card that a customer can buy.
As scammers took notice of retailers putting limits on individual gift cards, the scammers began instructing victims to buy multiple gift cards. Thus, some retailers have also lowered the maximum value of all gift cards a customer can buy in one day.
Training Front-Line Staff to Identify the Scam in Action
In hindsight, it is often easy to spot the scam in action and it may be hard to understand why the victims are caught. That’s the purpose of the initial message. But retail’s front line staff can help here!
Retailers can train clerks to talk to the customers about what they are using the gift cards for – and if there are any signs of the scam, to report it to their management right away before completing the sale.
Other times, high dollar gift card transactions can only be completed by a manager or other senior associate that has been trained to spot the scams in action.
In any case, the retail employee should remind the customer of the scam and that they shouldn’t give out the card number and pin to anyone on the phone, that the government will not require you to pay a bill via gift card,
Need Help With Your Gift Card Program?
If you are an issuer or retailer looking to start a gift card program, setting up your program correctly from the beginning can result in multiple savings. It can protect you from whistleblower lawsuits and treble damages, shareholder lawsuits, and even class action lawsuits like this one. Contact Kimberly DeCarrera to discuss how she can help you establish a best practice gift card program.
If you already have a gift card program, Kimberly DeCarrera recommends an annual review, to ensure that the terms and conditions are still applicable, that the financial structure is still appropriate, and that the issuer is properly recognizing breakage income.
More on Gift Card Programs from DeCarrera Law
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