Nearly every company that sells a gift card or provides promotional benefits to consumers will – as of August 22, 2010 – need to comply with the CARD Act. But what is the CARD Act and how will it affect your loyalty programs and your gift cards?

Broader Scope Than You May Realize. The Credit Card Accountability, Responsibility and Disclosure Act of 2009 (CARD Act) sounds like one more consumer credit regulation, but almost any business that uses modern technology to interface with consumers needs to pay attention. In fact, the CARD Act covers gift cards, gift certificates and, to the surprise of many, offers and rewards from promotional programs (e.g., certain online coupons and sweepstakes prizes) and/or loyalty programs (e.g., programs awarding customers "$10 off" coupons or cards after spending a certain amount of money at a particular store). The CARD Act imposes disclosure requirements on offers and rewards from promotional and loyalty programs, and implements both substantive requirements and disclosure requirements for gift cards, gift certificates and the like.

Among the CARD Act's other changes to common industry practice, all gift cards and other covered items sold on or after August 22, 2010, must:

  1. have an expiration date of the underlying funds of no earlier than five years after purchase or re-load (or no expiration date at all), with that expiration date (or the fact that there is none) clearly and conspicuously displayed on the card; and
  2. not impose dormancy, inactivity or service fees against the consumer unless there has been no activity on the gift card within the prior year and, even then, only one fee (of any type) can be charged per month and only as long as the fees are clearly and conspicuously disclosed to the consumer before the consumer purchases the card.

The CARD Act also requires covered offers or rewards from promotional programs and/ or loyalty programs to:

  1. be labeled on the front of the offer or reward with "Reward," "Promotional" or a similar statement;
  2. be labeled on the front of the offer or reward with the expiration date for the underlying funds, if there is an expiration date;
  3. disclose on or with the offer or reward the amount and conditions of fees, if there are any fees associated with the offer; and
  4. disclose on the offer or reward a toll-free telephone number and website if there are any fees associated with the offer.

Compliance Required By August 22, 2010; Lawsuits May Ensue. Even those who knew that this was coming may be surprised by the looming deadline for compliance. An "extension" related to the CARD Act that Congress passed this past spring has lulled many into believing that they need not comply with the CARD Act until January 31, 2011. This "extension," however, does not apply to all of the provisions of the CARD Act. In fact, the extension is very limited in scope, applying only to gift cards and covered items produced before April 1, 2010. As a result, the vast majority of gift card products and programs must still comply by August 22, 2010, and even those that qualify for the extension require some amount of compliance by August 22, 2010 (i.e., certain disclosure requirements must be met). Consequently, now is the time to put products and programs into compliance. Failure to act could subject the non-complying party to lawsuits from individual consumers or even class action suits. Penalties for non-compliance may include actual damages, statutory damages of $100 to $1,000 per consumer (subject to a cap in class actions of the lesser of $500,000 or 1 percent of the defendant's net worth) and the costs of the suit, including attorneys' fees. A prompt investment in compliance now may avoid the greater expense of litigation later.

Compliance Required By Both Issuers And Vendors. What's more, the CARD Act unambiguously states that all parties involved in the sale of gift cards are responsible for compliance. The Final Rule promulgated by the Federal Reserve Board encourages all parties in the distribution chain (e.g., the issuer, program manager and the retailer) to contract among themselves to allocate responsibility for compliance and to impose liability for non-compliance. As a result, products and programs should be reviewed for compliance with the CARD Act, and existing agreements with other parties in the distribution chain must now be re-evaluated.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.