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The U.S. District Court in New Hampshire recently ruled (1) that a bank-issued stored value card is a bank product governed by national banking laws, and (2) that national banking laws, which allow fees and expiration dates on stored value cards, pre-empt New Hampshire's consumer protection law which restricts fees and expiration dates on gift cards.
The lawsuit was brought by Simon Property Group which owns and operates shopping malls across the country and markets and sells Simon Visa Giftcards. The Giftcards contain expiration dates, and certain fees are deducted from the balance of the card, such as a monthly $2.50 administrative fee after a specified period of dormancy, a $5.00 replacement fee for lost or stolen cards, and a $15.00 fee to replace or cash-out an expired card. New Hampshire law prohibits expiration dates on gift certificates that are $100 or less, and prohibits fees on most gift certificates sold in New Hampshire.
When Simon learned that the New Hampshire Attorney General was going to initiate an enforcement action against it, Simon filed a declaratory action asking the court to rule that New Hampshire's gift certificate law is pre-empted by national banking laws and therefore does not apply to the Simon Visa Giftcards. Simon argued that the Simon Visa Giftcards that are currently marketed are owned and issued by a national bank and national savings association and that Simon merely acts as an agent for the bank and savings association by selling, marketing, and servicing the cards, for which it earns a commission. To support this argument, Simon showed that the money paid to purchase a Simon Visa Giftcard is deposited with the bank or savings association and when the card is used the transaction is routed through the Visa settlement network. In addition, the bank and savings association set the terms of the Giftcards, including the fee schedule, and collect the fees imposed on the cardholders (other than a $2.00 or $5.95 "handling fee" for purchasing the card), and the cards can be used wherever Visa debit cards are accepted, not just at shopping malls owned by Simon.
The state argued that Simon is not a bank and the Simon Visa Giftcard is not a bank product, and that, therefore, the state's gift card law is not pre-empted by federal banking law.
On August 1st, the court granted Simon's motion, in part, holding that even though Simon is not a bank, the Simon Visa Giftcards, as currently marketed and sold, are bank products issued by federally chartered and federally regulated banks. As such, the federal banking laws governing national banks and national savings associations, which allow expiration dates and fees, pre-empt New Hampshire's state gift card law that restricts expiration dates and fees. The court noted that banks are authorized to use third parties to carry on the business of banking and that banks routinely establish relationships with non-banking entities to market and/or distribute a bank product. The court explained that the mere involvement of a third party does not render the product being sold something other than a national bank product.
The court also distinguished this case from a similar case in Connecticut in which a federal court dismissed Simon's complaint. The court in New Hampshire noted that, in the gift card program at issue in the Connecticut case, Simon charged and retained the monthly maintenance fees rather than the bank. The New Hampshire court explained that in the instant case, Simon's role is much more circumscribed: it markets and sells the Giftcards on the banks' behalf as a sales agent, but it does not have the authority to alter the terms of the Giftcards or set the fees associated with the card. Also, rather than receive compensation through fees imposed on Giftcard holders, Simon receives a sales-based commission from the banks, consistent with its limited role as a sales agent.
The court explicitly stated that if claims of fraudulent conduct or unfair business practices were at issue, such claims would not be pre-empted. Also, the court declined to rule on Simon's previous gift card programs which were structured differently than the current programs. Simon's previous gift card programs are the subject of an ongoing case in New Hampshire state court.
It remains to be seen how courts in other jurisdictions address this issue. Also, the New Hampshire Attorney General may appeal this ruling, so the question of federal pre-emption of state gift card laws is not completely resolved at this time.
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