Topic:
ABANDONMENT OF PROPERTY; CONSTITUTIONAL LAW; COURTS; RETAIL TRADE;
Location:
RETAIL TRADE;

OLR Research Report


October 29, 2008

 

2008-R-0598

FEDERAL COURT DECISION ON PRE-PAID GIFT CARDS

By: Kevin E. McCarthy, Principal Analyst

You asked how the decision in SPGGC, LLC v. Blumenthal D. Conn. (2006), 408 F. Supp. 2d 87, affirmed in part, vacated in part, and remanded 505 F. 3d 183, affects Connecticut's law on pre-paid gift cards. You also wanted to know the status of that part of the case that was remanded to the federal district court.

SUMMARY

Connecticut's gift card law (CGS 3-65b, 3-65c, 3-73a, and 42-460) prohibits issuers of gift cards from imposing expiration dates on the cards or charging dormancy or similar fees for periods when there is no activity on a card.

SPGGC, an issuer of gift cards, challenged the law in federal and state courts (the cases were subsequently combined in federal court). It argued that the provisions of Connecticut's law barring an expiration date and prohibiting dormancy fees were preempted by federal law. SPGGC also argued that Connecticut's law violated the Commerce Clause of the U.S. Constitution, which gives the federal government jurisdiction over interstate commerce. Specifically, SPGGC argued that Connecticut's law violated this clause by (1) regulating commerce occurring outside of the state and (2) conflicting with gift card regulations in other states. Attorney General Richard Blumenthal moved to have the case dismissed, and the U.S. district court granted this motion.

SPGGC appealed the decision to the court of appeals, which affirmed most of the district court's decision. It held that (1) federal law does not preempt Connecticut's law with regard to the prohibition of dormancy fees and (2) Connecticut's law does not violate the Commerce Clause. But the court of appeals held that SPGGC had raised a potentially valid claim with regard to federal preemption of the state's ban on expiration dates. The court of appeals remanded this part of the case to the district court. Ultimately, the district court could rule that federal law preempts the state's law barring expiration dates. The parties are currently engaged in settlement talks, and a status meeting is scheduled for November 21, 2008. At present, all of the law's provisions are being enforced.

CONNECTICUT'S GIFT CARD LAW

The escheats law deems most types of property held or owed in this state to be abandoned if the owner fails to claim it after three years. The law (1) exempts the value of gift cards from the law; (2) repeals the law that specified that the value of an unredeemed gift card is presumed abandoned three years after the purchase date or its last use, whichever is later; (3) eliminates the requirement that gift card sellers obtain and keep the purchaser's address; and (4) specifically prohibits imposing dormancy charges on gift cards.

DISTRICT COURT DECISION

Facts

SPGGC is a subsidiary of Simon Property Group, Inc., which operates shopping malls in Connecticut and 38 other states. The malls and Simon's website sell the Simon Giftcard, a prepaid card with a stored value. When the case went to trial, these gift cards were issued by Bank of America and used the Visa debit card system. SPGGC was selling several thousand gift cards in Connecticut per year at that time.

Bank of America had the authority to review and approve the terms and conditions of the cards, and these terms and conditions were uniform across the country. They included a $2.50 per month service fee that went into effect six months from the date the card was purchased. In addition, to comply with Visa regulations, the gift cards had a one-year expiration date.

Decision

In November 2004, attorney general Richard Blumenthal informed SPGGC that he intended to bring an enforcement action against the company for violating the gift card law. In response, SPGGC filed an action in federal court seeking a declaratory judgment that the National Bank Act (12 U.S.C. 21 et seq.) preempted the proposed enforcement action. Blumenthal then sued SPGGC in state court. This case was consolidated with the federal case, where SPGGC additionally claimed that Blumenthal's proposed action would violate the Commerce Clause of the U.S. Constitution. SPGGC also sought an injunction to prevent Blumenthal from pursuing any further enforcement action against the company.

Blumenthal moved to dismiss SPGGC's complaint for failure to state a claim and district court hearing the case granted his motion. Among other things, the court noted that SPGGC did not plead any facts to indicate that it was a subsidiary of a national bank, which would bring it under federal rather than state jurisdiction.

SPGGC moved for reconsideration for three reasons: (1) the district court did not consider the appellate court's decision in Wachovia Bank, N.A. v. Burke, 414 F.3d 305 (2d Cir. 2005), which had been issued shortly before the district court' ruling; (2) the district court erred in its analysis of the Commerce Clause argument; and (3) the gift cards were issued jointly by a national bank and a federal savings bank under an agreement that went into effect in September 2005, and this subjected the cards to oversight by the federal Office of Thrift Supervision as well as the federal Office of the Comptroller of the Currency (OCC). The district court reconsidered the case, but upheld its decision dismissing SPGGC's complaint.

COURT OF APPEALS

SPGGC then appealed to the court of appeals, arguing that the district court erred. The company's arguments focused solely on its relationship with Bank of America, which was not a party to the case. (Although SPGGC ended its relationship with Bank of America in September 2005, the attorney general was continuing to seek to impose civil penalties on SPGGC related to its issuance of gift cards in conjunction with Bank of America.) The court of appeals issued its decision on October 19, 2007.

Preemption

On appeal, SPGGC argued that applying Connecticut's law to its gift cards would frustrate the purposes of the National Bank Act and the OCC regulations that implement it, and thus the federal law preempted Connecticut's gift card law. Under the act, OCC has authorized national banks (such as Bank of America) to offer “electronic stored value systems” such as gift cards. The court stated that (1) OCC regulations appear to permit imposing expiration dates and dormancy fees in connection with such cards and (2) federal law would preempt Connecticut's gift card law if it were applied to national banks or there subsidiaries. SPGGC argued that while it was not a national bank or subsidiary, its gift cards were a product of a national bank and thus fell under OCC's exclusive jurisdiction. SPGGC argued that Connecticut's law not only limited its ability to offer gift cards but also Bank of America's ability to use the Visa system.

Although OCC submitted a brief arguing that the district court had read the federal law too narrowly, the court of appeals agreed with district court that SPGGC had failed to failed to state a valid claim for preemption with regard to that part of the Connecticut law that prohibits dormancy fees. It held that the attorney general's enforcement of the law's provisions regarding dormancy fees does not interfere with Bank of America's ability to exercise its powers under the National Bank Act and the OCC regulations. Instead, this enforcement only affects SPGGC, which is not covered by the National Bank Act and is not subject to OCC's exclusive jurisdiction.

On the other hand, the court of appeals held that SPGGC had stated a valid claim for preemption with regard to the provision of the Connecticut law that prohibits expiration dates. It held that an outright prohibition on expiration dates could have prevented Bank of America from acting as an issuer for the Simon Giftcards. While the court of appeals expressed no views on the merits of SPGGC's claims, it remanded the issue to the district court. Ultimately, the district court could rule that federal law preempts the state's law barring expiration dates.

Commerce Clause

The Commerce Clause of the U.S. Constitution gives the federal government jurisdiction over interstate commerce. SPGGC argued that Connecticut's law violated this clause by (1) in effect regulating commerce occurring outside of the state and (2) conflicting with gift card regulations in other states. The court of appeals rejected these arguments. It found that the law does not directly regulate sales of gift cards in other states or prevent other states from regulating gift card sales differently in their own territories. It found that while SPGGC had cited several examples of states that regulate gift cards differently than Connecticut, it had not identified any actual conflict among the law.

REMAND

As noted above, the court of appeals remanded the part of the case dealing with federal preemption of the ban on expiration dates to the district court. The district court has stayed proceedings in the case while the parties engage in settlement negotiations. The negotiations are also addressing Connecticut's state court suit against SPGGC.  The district court has ordered a status conference for November 21st, but staff from the attorney general's hope that the parties will have settled the case before then.  

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