Gift Card Sellers Take Note: Groupon Settlement and New Developments in New Jersey May Affect Your Business Strategy

7 min

During the past couple of weeks, there have been several important new developments in the gift card industry that may inform the next steps of sellers of gift cards and similar instruments in New Jersey and other states. At the end of March and the beginning of April, several of the biggest gift card sellers announced that they would stop selling gift card products in New Jersey, on the basis that they could not ensure that third parties would comply with the data collection provisions of the New Jersey stored value card law. On the other side of the country, in California, Groupon reached an $8.5 million settlement in multidistrict litigation alleging that the promotions company sold vouchers with unlawful expiration dates, in violation of the law of several states. Sellers that offer gift cards in New Jersey, or that offer “daily deal” vouchers in partnership with Groupon (or run similar promotions), should take note of these developments, summarized in more detail below.

New Jersey Gift Card Update

As we have previously reported, in January of this year the U.S. Court of Appeals for the Third Circuit (“Third Circuit”) issued a decision in New Jersey Retail Merchants Association (NJRMA) v. Sidamon-Eristoff requiring issuers or sellers of stored value and other gift cards to collect address information (or, at a minimum, ZIP codes) from purchasers of those cards. This decision lifted a stay of the data collection provision of New Jersey’s new stored value card law, which became law in the summer of 2010 and amended the state’s escheat law. Following the Third Circuit’s decision, the NJRMA sought to engage the New Jersey Department of the Treasury on behalf of retailers to discuss, among other matters, implementation of the ZIP code collection provision, which is intended to facilitate the escheatment of cards to the state after they have expired. The Treasury Department had indicated that it would not begin enforcing the law until after it had met with the NJRMA and issued new guidance for complying with the law, but has yet to issue new guidance on how to implement the data collection requirements.

During the last week of March, American Express became the first company to pull its gift cards from New Jersey. By the first week of April, at least two more companies – InComm and Blackhawk Network, both third-party providers of gift cards – had announced that they too would stop selling gift cards in New Jersey.

This past Wednesday, April 4, 2012, the New Jersey Department of the Treasury issued a press release titled “The Real Story on Gift Cards,” intended to “set the record straight” on the enforcement of the statute and how the escheat laws work. The release stated that the requirement to collect ZIP code information was “not an unreasonable requirement” and that some retailers are already collecting the information. At about the same time, the Associated Press reported that the state is not currently requiring retailers to collect ZIP codes from gift card purchasers, and is working to develop a policy for collecting the information that is uniform and is not onerous. When asked about this statement and the status of the ZIP code collection provision, our contact at the NJ Unclaimed Property Department stated that the Treasury Department would be setting a compliance date soon and still plans to issue new guidance on data collection. Our contact was aware that while some entities have data collection systems in place and are already in compliance with the law, others are still developing systems. We also understand that more gift card sellers are expected to discontinue selling gift cards in that state. Meanwhile, entities such as the NJRMA continue to challenge the law in court.

The immediate effect of these announcements, however, is that many retailers (including groceries, drugstores, and the like) will be left without a source for the popular “gift card malls” that they maintain at the point of purchase. The long-term effect is less clear--will the New Jersey legislature bow to economic pressure by finally repealing the controversial stored value card law? Will the Treasury Department find a way to reconcile the apparent contradictions between the stored value card law and the privacy law in New Jersey, which appears on its face to prohibit collection of address and ZIP code information at the point of purchase? As the situation evolves, retailers should remain vigilant in tracking these developments as they seek to implement their New Jersey business plans.

Groupon Settlement

At the end of March 2012, Groupon announced that it had agreed to settle the multi-district class-action litigation In re Groupon Marketing and Sales Practices Litigation, for $8.5 million. That case consolidated 17 lawsuits before Judge Dana Sabraw in the U.S. District Court of the Southern District of California. In that litigation, the plaintiffs had alleged that the expiration dates on Groupon’s vouchers violated the Electronic Funds Transfer Act, as amended by the Credit Card Accountability Responsibility and Disclosure Act, which prohibits the sale of gift certificates that expire in less than five years. The complaint further alleged violations of state consumer protection laws for failure to sufficiently disclose the terms of use of Groupon’s vouchers (including, for example, the limitation that the vouchers could be used only once, and that vouchers were not valid for cash).

Under the terms of the $8.5 million settlement, Groupon admitted no wrongdoing; however, Groupon customers who purchased vouchers prior to December 1, 2011 are permitted to redeem them past their expiration date or seek a refund plus 20% of the promotional value of the voucher from the settlement fund if they are unable to exercise the redemption. The settlement also sets aside $75,000 for distribution between two advocacy groups. Additionally, the settlement provides that for three years, with limited exceptions (e.g., ticketed events, time-limited events), no more than 10% of Groupon’s deals may have expiration dates of 30 days or less. Groupon has also agreed to clearly and conspicuously disclose the difference between the promotional value expiration and the purchase price expiration. The vouchers must disclose the expiration date after which customers may not redeem the portion of the voucher that is only the promotional value. The plaintiffs’ lawyers may also seek up to 25% of the fund.

Those entities partnering with Groupon should take note of the restrictions under which Groupon will be operating as a result of the settlement (if it is approved by the court) and consider how, if at all, such conditions may affect the expected redemption rates of vouchers. Businesses that offer their own deals similar to those provided by Groupon, partner with other companies seeking to offer similar deals, or seek to offer other types of coupons, vouchers or gift cards with limited time horizons should also be aware that the plaintiffs’ bar may take the Groupon case as a model for targeting similar practices by other entities.

Even with the Groupon litigation resolved, the advisability under state gift card laws of imposing an expiration date on daily deal or gift card offers remains in question. It is notable that Groupon agreed in the settlement to limit future offers with expiration dates to no more than 10% of its total mix of “daily deals”. To the extent that other sellers wish to offer daily deals with expiration dates, they should similarly limit the number of offers with an expiration date and disclose the following, clearly and conspicuously prior to purchase: (1) the promotional value of the voucher; (2) the purchase price of the voucher; (3) the difference between the two values; and (4) the expiration date of the promotional value. What is very clear is that, like most settlements, the resolution of the Groupon litigation has not conclusively resolved all of the issues it raised, and sellers should think very carefully – and consult with counsel – before imposing an expiration date on a “daily deal” voucher or any other type of gift card.

Please contact Melissa Landau Steinman or Tara Sugiyama Potashnik with any questions regarding promotions and gift card marketing law.