On May 3, 2019, plaintiffs filed a class action lawsuit against retailer Recreational Equipment, Inc., more commonly known as REI, for violating state and federal laws pertaining to the issuance of gift cards.
REI has a unique business model within the retail structure. Consumers are allowed to purchase a membership in the company which allows them to receive a “dividend” based on the company’s profits and how much the individual consumer purchased in a given year.
Like many other payments, including rebates and refunds, many of these dividends are paid via a stored-value card.
At issue is whether the dividends paid in these stored-value cards are subject to federal and state laws prohibiting fees and expiration dates.
Applicable Federal Law: 2009 CARD Act
In 2009, Congress passed the Credit Card Accountability, Responsibility, and Disclosure Act, amending the 1978 Electronic Funds Transfer Act. In addition to other topics, the CARD Act applies to gift cards and certain other prepaid cards.
Specifically, the CARD Act prohibits expiration dates within 5 years of the gift card’s issuance or when funds were last loaded on the gift card.
Potential damages for violation of the CARD Act include actual damages for the lost value of the card, statutory damages, and attorneys’ fees and costs.
Applicable State Law: Unclaimed Property
Washington, like other states, has laws that restrict how companies manage their gift card programs. Some of these laws are found within the unclaimed property statutes.
Washington has determined that corporate holders do not need to report unused gift cards as unclaimed property. However, to protect the consumers, the state has also prohibited expiration dates and fees on inactive Washington gift cards. There are certain exceptions, including for loyalty programs, charitable giving, and when issued by certain organizations.
The unclaimed property statutes do not contain provisions for damages for violation of the Washington gift card provisions. It does say that the contracts are void and unenforceable.
However, the unfair business practice statute permits damages up to three times actual damages of the lost value of the gift card and reasonable attorneys’ fees and costs.
REI Dividends Issued as Prepaid Cards
In the Newell v. REI class action complaint, the Plaintiffs allege that REI issued member dividends as closed-loop prepaid gift cards. According to the complaint, the cards expire approximately two years from when they were issued.
Furthermore, the cards, allegedly, do not contain statements that they cards are for loyalty, reward, or promotional purposes. This is important as these cards, issued with a lack of consideration, are exempt from the prohibitions on expiration dates and inactivity fees for gift cards and prepaid cards under Washington law.
Current Status of Case
This case was filed on May 3, 2019, in the Western District of Washington. The case number is 19-CV-00662.
On September 26, 2019, the Court granted REI’s motion to dismiss, determining that the dividends are not gift cards under the CARD Act.
“REI’s patronage dividends are not “purchased on a prepaid basis in exchange for payment” because a member cannot purchase a patronage dividend.
Further, whether REI decides to issue a dividend is purely at the discretion of REI’s board, and thus the dividends are not “electronic promises” “purchased on a prepaid basis in exchange for payment” as required by the EFTA.
The Court concludes that REI’s patronage dividends are not gift cards under the EFTA because they are not “electronic promises” “purchased on a prepaid basis in exchange for payment.”.
The case was dismissed with prejudice.
Gift Card Planning
As in this case and many others, gift cards are an area of concern for retailers, with active class action plaintiff counsel looking for cases.
In addition to the federal CARD Act, prohibiting expiration dates of less than 5 years, state unclaimed property laws may prohibit expiration dates and fees. In states where expiration dates or fees are permitted, retailers may have a requirement to remit unused balances as unclaimed property.
Additional state laws may require retailers to give cash back for the unused portion of gift cards upon request. DeCarrera Law is aware of cases in California where plaintiff counsel were actively seeking non-compliant retailers to bring putative class action lawsuits on this specific issue.
Contact Kimberly DeCarrera if you would like to establish a compliant gift card program or to review existing gift card issues. Proactively managing these issues can help reduce risk of class action lawsuits, as well as unclaimed property audits and assessments.
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