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Gift Card Lawsuits Can Be Avoided — Here’s How

Many brands launch gift card programs for all the right reasons: incremental sales, new customer acquisition, brand recognition and to build customer loyalty. Not to mention consumers love them, with 80% saying they plan to purchase more gift cards in 2022. Responsibility for your gift card program typically lives in the marketing department. For newer gift card programs, the program is just one responsibility among many others, while larger, more established programs may have a dedicated gift card manager with a small team.

The goal of a gift card program may seem simple: to establish sales within your own brand’s retail locations and online store. But there can be many additional benefits, including seizing additional sales by selling to corporate buyers via programs such as employee incentives, rewards and loyalty, or taking advantage of third-party sales channels such as grocery, drugstores and online marketplaces.

Once you’ve established a gift card program and take advantage of the many benefits it can bring, it’s possible for the program to represent as much as 5% to 10% of your brand’s revenue and it may even become a line item in your company’s financials.  

If your company is like most, one very important aspect of managing your gift card program may be overlooked, or at least not be given the attention required — state regulatory and legal compliance. As a growing number of brands have learned firsthand, this oversight can cost your company millions or even tens of millions of dollars.

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Keeping Up with State Compliance

One of the most difficult aspects of managing a gift card program is keeping up with the constant evolution of 50 state laws and regulations that may impact your gift card. The chore of staying aware, interpreting and then adjusting the operational procedures of your gift card program is an enormous burden, especially when internal legal and compliance resources are, and should be, focused on your core business.

In the past year, the industry has seen multiple multi-million-dollar lawsuits filed and settled against well-established brands such as Dunkin’ and H&M. So how do you protect yourself from the nightmare of state audits, litigation and judgements? 

The first question to ask is what state laws and regulations apply to your gift card program. Unfortunately, for brands selling across all 50 states, the answer is that all 50 states should be analyzed and considered by your legal team. If you’re not selling nationwide, you should start with the state that your parent company is domiciled in, and then shift your focus to states where your brand has retail locations or sells online.

Areas of analysis should include state unclaimed property laws, also known as escheatment. Escheatment laws vary widely by state and dictate how and when the unused funds from your gift cards should be treated. What complicates this matter further is priority rules, which have been set by the federal government and outline which state’s escheatment laws apply to individual cards based on where your company is based, where your gift card was sold and where the actual cardholder resides.

In addition to escheatment laws, several states have created consumer protection laws that govern aspects of your program, ranging from when and how cash refunds should be provided to cardholders to the information required in your program’s terms and conditions. All these laws must be considered in your customer service, operations and fulfillment procedures or your program runs the risk of a costly lawsuit or state action.

As states look to protect residents and find sources of revenue, it is critical to understand and apply these laws in order to protect your program from potential large fines. A lack of understanding of these laws or an incorrect interpretation has led to dozens of audits and legal cases brought by states in the past several years. 

Don’t Forget Federal Regulations

Finally, although less overlooked, there are federal laws and regulations, such as The Credit Card Accountability Responsibility and Disclosure (Credit CARD) Act, that will impact the expiration date and fees that can be charged on your gift cards. There are also federal anti-money laundering (AML) and Know Your Customer (KYC) regulations that must be considered. 

These considerations can be overwhelming and daunting — it’s enough for any brand to decide not to move forward with a gift program. The good news is there are solutions to help mitigate these challenges and ensure the success of your gift card program. Here are a few recommended next steps:

  1. Consult with your internal legal and compliance departments. However, it is also recommended to consult with outside legal experts to get the full picture. There are many law firms that specialize specifically in closed-loop gift card laws that can offer expertise and guidance.
  2. Join the Retail Gift Card Association, also known as the RGCA, which provides a long list of resources, including periodic legal and regulatory updates. 
  3. Outsource your program to a gift card management and issuance partner to avoid shouldering the burden on your own. Gift card management partners can take on the responsibility for escheatment and have the expertise needed to navigate and comply with state consumer protection laws, as well as federal laws.

Gift card programs are an important marketing strategy for brands and can make a meaningful impact on your bottom line. However, do not rush into a program without ensuring it is in compliance with federal and state laws and regulations, or the benefits may be outweighed by legal and financial consequences. 

NOTE: The information contained in this article is provided for informational purposes only and should not be construed as legal advice on any subject matter. You should not act or refrain from acting on the basis of any content included in this article without seeking legal or other professional advice.


Dave Jones is the CEO and Co-founder of TOTUS. His background has been primarily in the payments and electronic commerce industries in which he has over 20 years of experience and three successful entrepreneurial exits. Jones’ most recent role was as the General Manager of the Digital and Incentives Divisions of Blackhawk Network, a leading global gift card provider acquired by Silverlake Private Equity in 2018.

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