Gift cards are a mainstay of retail sales, especially during the holidays when frantic shoppers are looking for easy, last-minute gift solutions.

Retailers often benefit from regulating gift certificates and gift cards by adding expiration dates and dormancy fees. But in many states, these practices can run afoul of consumer protection statutes.

Restrictions on gift card policies

The federal CARD Act establishes restrictions on gift cards, including prohibiting card expiration earlier than five years after purchase. The regulation also prohibits dormancy fees, unless the gift card has not been used for at least one year, and the fees are not charged more than once a month. If retailers violate these provisions, the CARD Act authorizes criminal and civil liability.

The CARD Act permits states to establish laws offering consumers greater protection. As a result, several states have their own statutes adding additional consumer safeguards, while other states are subject to the CARD Act’s minimum restrictions.

For example, and perhaps unsurprisingly, California has particularly onerous gift card regulations. Expiration dates are prohibited entirely and dormancy fees are allowed only after 2 years. Retailers must redeem gift cards for cash when the value dips below $10.

In less restrictive states, such as Texas, retailers may use expiration dates, charge reasonable fees after one year, and need not give cash back. Similarly, New York allows expiration dates, permits dormancy fee charges after 13 months without activity, and requires retailers only to provide store credit for gift cards.

Beware of consumer class actions and state proceedings

While several states’ restrictions authorize government enforcement actions, the plaintiffs’ bar  appears to present the most substantial risk. Plaintiffs’ lawyers are increasingly enforcing gift card requirements through consumer class actions. Unwitting policy errors can quickly add up to multi-million dollar class settlements or other penalties.

Just last month, plaintiffs sued an outdoor retailer in California with a putative class action alleging employees failed to provide cash back to consumers when their gift card balances fell below $10. The California District Attorney’s Office filed a similar complaint against a coffee retailer in 2009, resulting in a $225,000 fine, an injunction, and required policy changes.

The regulations can also present challenges for companies selling hybrid products, such as short-lived deals or discounts. Last year, a DC court approved a consumer class settlement of almost $6 million against a seller of online daily deals, resolving alleged violations of the CARD Act and state gift certificate laws. Even though few actual claims materialized, the defendant agreed to pay $4.1 million in cy pres awards to consumer advocate groups plus costly class counsel fees.

In 2012, a California court approved a similar settlement, in which another daily deals seller agreed to pay about $8.5 million and extend its expiration dates (third party objectors are currently appealing the settlement approval).

These examples do not even mention state escheatment laws. For example, Delaware law requires that companies remit unclaimed property, i.e., gift card balances, to the state.

Approaching compliance

With the holiday shopping season in full swing, retailers should review whether their gift card policies could create liability.

Retailers providing gift cards on a national basis should consider either clearly distinguishing the terms applicable in each state and establishing state-by-state internal polices to effectuate those terms, or adopting a policy that complies with the most restrictive state in which it does business.

Once retailers have established policies, it is crucial to implement procedures to train personnel on the handling of gift cards, regularly review compliance and enforce policies, and address specific problems quickly and effectively. Options include placing easy-to-read instructions where employees will see them and making redeeming gift cards for cash simple for cashiers where required.

This approach has been tacitly approved by at least one California District Attorney. As part of a 2009 settlement, a retailer agreed to put-up signs and install a button in its check-out system to make cash redemption easier.