June 18, 2020

Loyalty Programs

Venable Advertising Law Webinar

4 min

Loyalty programs have been around for decades, but their widespread popularity and the migration to digital marketing have led to increased complexity, with programs now involving multiple areas of law, ranging from labor and employment to privacy and data security. In a recent webinar, Venable partner Melissa Steinman discussed the relevant laws that regulate loyalty programs, the inherent risks in designing such programs, and practical ways to address those issues.

  1. Terms and Conditions. When drafting terms and conditions, care should be taken to ensure they are as comprehensive as possible and that the merchant retains the right to modify and/or terminate said terms as needed. Consumers should be given adequate notice of any changes to the terms, and, ideally, program terms should have a provision defining how and how much notice of changes will be provided. Merchants should also take care not to promote loyalty programs in a misleading manner, fail to disclose material terms, or fail to meet reasonable consumer expectations.
  2. Fraud. Consumer, internal, and external fraud can potentially be a big problem with loyalty programs. In order to limit risk from fraud, merchants should craft rules that are robust and clear and preserve the right to fully enforce those rules. Merchants should also educate program members on keeping their accounts secure, implement industry standard cyber security protocols, and monitor access to internal controls.
  3. Money Transmission. In cases where points can be purchased or redeemed for cash and/or where members can transfer credits to one another, money transmission laws, including the Bank Secrecy Act, may apply.
  4. Unclaimed property. In recent years states have been increasingly aggressive in seeking to collect abandoned property, defined as property that is presumed abandoned because of inactivity over a specified period. For instance, in 2018, an online retailer was found guilty of concealing nearly $3 million in unpaid escheat claims. Laws vary significantly by state, however, with some specifically exempting "merchandise points," so the extent to which loyalty programs will be treated as property subject to unclaimed property laws is unclear.
  5. Sweepstakes and Contests. With loyalty programs increasingly linked to prize promotions to win or redeem points, merchants need to be aware that this might trigger a gambling/lottery issue. As requiring rewards points to "buy" entry into a promotion could be deemed consideration, merchants should offer a free Alternative Method of Entry (AMOE) to ensure there is no consideration issue.
  6. Experiences and Buzz Activations. Merchants entering into cross-platform activations that may have an on-the-ground/social component, such as a festival, should vet any co-sponsors and make sure clear agreements are in place, and be sure to address crowd control and safety, local licensing considerations, and staff training. As poorly orchestrated activations may result in litigation, careful planning is important.
  7. Social Media Considerations. When using influencers or members to promote loyalty programs on social media, merchants need to be aware that the FTC's Endorsements and Testimonials Rule may apply. Material connections that might affect the credibility of the endorsement (e.g., payment or other compensation, such as gift cards or even additional points, or even an employment or agency relationship) should be disclosed.
  8. Privacy and Data Collection. Loyalty programs are one of the key ways that companies can collect personal information from participants. However, the collection of personal data may trigger privacy issues, and merchants should disclose the personal information they collect and how they use it in their privacy terms. Different regions also have different privacy rules. For instance, the EU has strict requirements for the processing of personal data, which can affect information collected as part of loyalty programs in the global marketplace. Similarly, the newly adopted California Consumer Privacy Act grants consumers new rights with respect to personal information collected by the merchant, including the right to request that their information be deleted, and prohibits discrimination against consumers who make that request (subject to certain exceptions). This might have a material effect on the ability to offer loyalty programs.

Want to learn more? View the full webinar or find additional AdLaw alerts, news, and resources at allaboutadvertisinglaw.com/