Article by L. Richard Fischer & James R. McGuire

In a major victory for the banking industry, a federal district court in New Hampshire has rejected the state’s efforts to regulate the terms of stored value gift cards issued by a national bank and federal savings association, but marketed and sold by a non-bank third party. SPGCC, LLC; MetaBank; and U.S. Bank, N.A. v. Ayotte, No. 04-CV-420-M (Dist. N.H.). According to the Court, a state’s attempt to impose restrictions upon a national banking product "stand[s] as an obstacle to the fulfillment of Congressional policies and goals embodied in federal banking laws and the associated regulations implemented by both OTS and OCC" and is therefore preempted.

Simon, a major operator of shopping malls nationwide, markets and sells stored value gift cards issued by U.S. Bank National Association, a national bank, and MetaBank, a federal savings association. In November 2004, the State of New Hampshire notified Simon that its sale of the gift cards violated provisions of New Hampshire’s Consumer Protection Act relating to "gift certificates," including the prohibitions on expiration dates and the imposition of certain administrative fees. When the state threatened enforcement action, Simon filed suit in federal court seeking declaratory and injunctive relief. The state thereafter filed suit in state court. Simon moved for summary judgment in the federal action, and U.S. Bank and MetaBank subsequently sought, and were granted leave, to intervene as plaintiffs.

On August 1, 2006, the district court granted the plaintiffs’ motion for summary judgment, finding that the state could not permissibly regulate the gift card products at issue. The Court first determined that U.S. Bank and MetaBank acted well within their federally authorized power to issue stored value cards, and held that, as an incident to such power, each bank necessarily had the ability to establish the terms and conditions—including fee schedules and expiration dates—under which the cards were issued. The Court concluded that any state statutory or regulatory provisions that would purport to limit the fees assessed "or otherwise impose restrictions on the contractual relationship between the cardholder and the issuing national bank or federal savings association are preempted."

The Court next turned to what it deemed the "central issue presented" in the case—whether the use of a third party to sell and market the gift cards "exposes those cards to state regulations which would otherwise be preempted by federal banking laws"—and soundly rejected the state’s argument that such involvement subjects the product to state law. The Court noted that both banks are expressly authorized to use third parties to carry on the business of banking and cited numerous examples of such business relationships proffered by U.S. Bank. Expressly rejecting the state’s reliance on the so-called "payday lending" cases, the Court noted that those cases involved allegations of "fraudulent or deceptive conduct" by the third party, issues the Court found not to be present in this case. Finally, the Court held that the arrangement between Simon and the issuing banks also involved a substantial relationship between the banks and consumers, and only a limited role for Simon, such that application of federal banking law, and only federal banking law, was appropriate. The Court concluded by describing, as "plainly unrealistic," the state’s contention that permitting it to regulate Simon’s sale of the gift cards would have no impact on the banks: "If the [s]tate were able to enforce provisions of its [Consumer Protection Act] against Simon, one of two consequences would necessarily follow: either the banks would be required to stop all sales in New Hampshire of the Simon Visa stored value Giftcard, or the banks would have to alter the terms and conditions of the contractual relationship between themselves and the purchasers of the Giftcards to comply with local law. Given that the Giftcards are banking products issued by federally chartered and federally regulated banks, the [s]tate cannot force those banks to elect between those options." Instead, the Court continued, "[i]f there are to be any restrictions on fees associated with the Giftcards, or limitations imposed on expiration dates, they must come either from Congress or the federal agencies empowered by Congress to oversee national banks and federal savings associations."

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved