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NY Attorney General Targets Gift Card Fees and Fake Sale Prices in Two Recent Enforcement Actions

New York’s Attorney General announced that it has filed a complaint against the owner of a national chain of shopping malls for alleged violations of New York’s recently amended gift card law.  The complaint states that Simon Property Group sells pre-paid gift cards that are subject to a monthly $2.50 administrative charge that begins in the seventh month after purchase, a fee of $.50 every time a consumer calls to ask about the remaining balance on the card, a $5.00 fee to reissue a lost or stolen card (which is not disclosed on the card), and a $7.50 fee to reissue an expired card.  New York law prohibits applying service or dormancy fees prior to the thirteenth month of dormancy, and requires the terms and conditions to be clearly and conspicuously disclosed on the card.  Simon Property Group may argue, as it has in similar actions in other states, that since the card is bank-issued, it is subject only to federal banking law and not to state law restrictions on gift cards.

New York’s Attorney General also recently announced a settlement with a major department store chain over the store’s alleged practice of advertising “fake” sale prices.  State and federal law and industry guidelines prohibit the practice of falsely describing a price as a sale price.  A sale is a temporary and meaningful reduction of the regular price of an item.  A reduction of at least 5% typically qualifies as a “sale” under state regulations.  A retailer can establish the regular price by demonstrating substantial sales at the regular price or demonstrating that the item was offered at the regular price for a reasonably substantial period of time.  (The Federal Trade Commission’s Guides Against Deceptive Pricing are online at .)

The New York Attorney General’s Office investigated the Kaufmann’s chain of department stores over a 15 month period and determined that prices advertised as sale prices were the regular prices of many items.  For example, a kitchen appliance was advertised at a sale price of $169.99 for a 28-week period.  The store’s records also showed that many products were never sold at the regular price.  Kaufmann’s did not admit any wrongdoing, but agreed to change its practices and pay $400,000 in penalties and costs.  This is the third announced settlement with stores regarding “fake” sale prices, which suggests the New York Attorney General’s Office is cracking down on this practice.

Federal Bill Regulating Gift Cards Is Introduced

Representative Rodney Frelinghuysen, Republican from New Jersey, has introduced the federal Gift Card Protection Act (H.R. 85).  If enacted, the bill would instruct the FTC to issue a rule that would prohibit expiration dates and service and dormancy fees on gift cards and gift certificates.

The bill would apply to gift cards, gift certificates, stored value cards, and merchandise credits sold after the effective date of the FTC rule.  The term “gift certificate” is defined somewhat ambiguously in the statute as “a writing identified as a gift certificate purchased by a buyer for use by a person other than the buyer, or at a later date, not redeemable for cash and usable in its face amount for goods or services provided by the seller.  Such term shall include an electronic card with a stored dollar value, a merchandise credit, or any other medium that evidences that the issuer has received payment for the full face value for the future purchase or delivery of goods or services.”  The bill says that it does not prevent a state official from
enforcing state statutes, but it does not say how the federal law would affect state laws that specifically permit expiration dates and service and/or dormancy fees.

California Court Rules that Prop 64 Is Not Retroactive

A California appeals court has ruled, in Californians for Disability Rights v. Mervyn’s LLC, that Proposition 64 does not apply retroactively to state unfair competition claims.  Prop 64 was approved by voters in November and took effect the day after the election.  The measure amended California’s unfair competition and false advertising law, Business and Professions Code A7 17200, by prohibiting anyone, other than the state Attorney General or local prosecutors, from filing a lawsuit unless the person has suffered an actual injury and lost money or property as a result of a violation of the law.  Prop 64 also requires that a plaintiff who files suit on behalf of the general public satisfy all of the requirements for bringing a class action lawsuit.

Prop 64 will likely reduce the number of A7 17200 cases that are filed each year.  One important question is whether the measure will apply to A7 17200 claims that were filed before the amendment took effect.  The recent appeals court ruling indicates that Prop 64 will not apply retroactively to A7 17200 cases that were pending at the time the measure passed, allowing those cases to go forward.  However, some trial courts have found that Proposition 64 is retroactive, and we expect that the issue will have to be resolved by the California Supreme Court.

This client alert is a publication of Loeb & Loeb and is intended to provide information on recent legal developments. This client alert does not create or continue an attorney client relationship nor should it be construed as legal advice or an opinion on specific situations.

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