Article by David A. Stuckey and Eugene D. Weaver
Retailers’ desire to increase convenience to the consumer (and, at the same time, generate increased profits for their businesses) can lead to a "trap" for the unwary seller. In this season of giving, California merchants should remember that, except in certain limited circumstances, they are not allowed to sell gift certificates that contain an expiration date.
Although California Civil Code § 1749.5 ("Section 1749.5"), the statute that prohibits retailers from selling such gift certificates, has been around for over five years, retailers who are apparently unfamiliar with the law or confused by its terms continue to violate it and are regularly sued. Especially at this time of year, when gift certificates are frequently bought and redeemed, California retailers should examine their gift certificate policies and procedures and act to ensure that they are not needlessly exposing themselves to litigation.
Section 1749.5 codified settlement terms in a 1994 lawsuit that was brought against eighteen national retailers who failed to honor gift certificates which had expired. Section 1749.5 makes it unlawful for any person or business to sell a gift certificate containing an expiration date. However, non-open-ended gift certificates distributed on or after January 1, 1998 may be: (1) provided pursuant to an awards, loyalty, or promotional program without any money or other thing of value being given in exchange for the gift certificate by the consumer; (2) sold below face value at a volume discount to employers or to non profit and charitable organizations for fundraising purposes if the expiration date on those gift certificates is not more than 30 days after the date of sale; or (3) issued for a food product if they contain an expiration date printed in capital letters in at least 10-point font on the front of the certificate.
Any gift certificate sold after January 1, 1998 that contains an expiration date, and does not fall within the enumerated exceptions, violates the statute and must be replaced with a new certificate at no cost to the consumer, or be redeemed for cash or cash value upon presentation. Gift certificates sold without expiration dates are valid until redeemed or replaced.
Plaintiffs continue to file cases under section 1749.5 – in part because the statute does not clearly define the universe of merchants’ rights. For example, the statute does not explicitly address circumstances under which merchants may recoup their costs of maintaining the gift certificate program. The text of the law also fails to specify when a customer can demand cash in return for the gift certificate (or any unused portion) or when a merchant may consider the gift certificate abandoned and book the amount paid for the gift certificate as its profit.
In 2000, the California Attorney General issued CAG Opinion No. 00-701 expressing its conclusion that a gift certificate for a meal, sold by a restaurant, does not fall within the exception for "food product" and consequently cannot contain an expiration date. Although the Attorney General Opinion sets some boundaries for the enforcement regime, case law in this area is driven by the ingenuity of claims asserted by plaintiffs’ attorneys in their persistent challenges to merchants’ gift certificate programs. Erring in favor of the plain reading of the statute would appear to be a prudent course for businesses that issue gift certificates.
If retailers pay attention to the fairly straightforward requirements of § 1749.5, sales of gift certificates should provide convenience to the purchaser and profit (with few headaches) to the retailer.
For further information about the issues discussed in this client alert, please contact the authors.
Client Alert is published solely for informational purposes and should in no way be relied upon or construed as legal advice. For specific information on recent developments or particular factual situations, the opinion of legal counsel should be sought. Paul, Hastings, Janofsky & Walker LLP is a limited liability partnership.
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