United States: New Case Sheds Light on Reward Program Pitfalls

Last Updated: September 6 2016
Article by Terri J. Seligman and Kelly O'Donnell

Doing a reward program? Be very clear about the rules. And don't change them unless you provide plenty of notice. To do otherwise is to risk antagonizing customers ---  and exciting plaintiffs' lawyers ---  as a major marketer just learned. Here's what you need to know about a rewards program class action lawsuit recently filed in California.

Background

According to the complaint, the retailer, a seller of automotive parts and accessories, promoted a reward program allowing customers to earn a $20 reward when they made five purchases of $20 or more from the retailer. Plaintiffs allege that when the retailer initially marketed the program, there was no time limit for completing the five purchases and there was no expiration date for redemption of the $20 reward. Later, plaintiffs allege, the retailer changed the program, without notice, and began imposing deadlines for both. Plaintiffs say that they discovered the change in the program terms when they attempted to redeem credits that they had earned for past purchases and learned that those credits were missing from their accounts. When they asked an employee about their missing credits, the plaintiffs were allegedly told those credits had expired because the purchases attached to those credits had occurred more than 12 months earlier. They also allege that they learned that any $20 reward credits that they had earned or would now earn would expire after 90 days. The complaint charges that the retailer not only failed to adequately notify its members, but that the changes effectively eliminated the chance to earn the $20 reward (since few customers would make the requisite number of qualifying purchases within a 12 month period). The complaint charges the retailer with breach of contract, false advertising and fraud. The retailer has not yet responded to the complaint.

The Take-away

Although the case is at the complaint stage, it does shine light on several of the major issues companies should keep in mind when structuring and implementing a reward program, especially if that reward program requires purchases by customers. First, the program terms must adequately disclose the material terms and conditions of the program, which will typically include (i) how someone earns rewards, (ii) what the rewards are, (iii) whether there is a deadline to complete the requisite actions to earn a reward, and (iv) if and when the rewards expire. To be prudent, companies should also include a provision in their reward program terms allowing them to modify the terms during the course of the program. In addition to ensuring that the program terms are clear, companies should also review their advertising materials that tout the program to ensure that they clearly describe the program requirements and are not misleading. A company should also be confident that its reward program allows most consumers to actually obtain the rewards offered and to redeem them within the expiration window, if any. In addition, if a company wants to make material changes to an existing program, it should develop a plan for notifying customers of the changes and consider whether those changes should only be made prospectively to avoid potential consumer complaints. Finally, though not an issue addressed in the new complaint, any company considering a reward program should ensure there are mechanisms in place on the back-end to guard against fraud.

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This alert provides general coverage of its subject area. We provide it with the understanding that Frankfurt Kurnit Klein & Selz is not engaged herein in rendering legal advice, and shall not be liable for any damages resulting from any error, inaccuracy, or omission. Our attorneys practice law only in jurisdictions in which they are properly authorized to do so. We do not seek to represent clients in other jurisdictions.

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