UPdateIssue 1 | June 2007
Welcome to the Inaugural Issue of UPdateUPdate is a publication from KPMG LLP’s National Unclaimed Property practice. It is designed to provide you with current developments in the unclaimed property arena and will be published periodically throughout the year as developments warrant. Gift Cards Continue to be a Hot TopicBenson v. Simon Property Group Inc. (March 2007)The Supreme Court of Georgia (Georgia Supreme Court) has affirmed the decision of the Georgia Court of Appeals in a case brought against Simon Property Group regarding the terms of its gift cards. Benson v. Simon Property Group Inc., 642 S.E.2d 687 (Ga. March 19, 2007). Simon Property Group, Inc. and Simon Property Group, LLC (Simon) sells gift certificates and electronic gift cards for use at Simon’s shopping malls. During the period in question, a $2.50 monthly dormancy fee was assessed by Simon, beginning the seventh month after purchase. The certificates and cards also expired approximately one year after issuance. The gift cards and certificates at issue were sold from 2001 through 2004. The owners (purchasers and recipients of the gift certificates and cards) filed suit against Simon on December 8, 2004, alleging damages resulting from the imposed dormancy fees and expiration dates, which they claimed were in violation of Georgia’s Disposition of Unclaimed Property Act (the DUPA). The trial court denied Simon’s motion and granted a review. On appeal, the Georgia Court of Appeals reversed the trial court, concluding that the complaint failed to state any DUPA violations. That is, because none of the cards or certificates had remained unclaimed for more than five years (as required by the DUPA) when the complaint was filed, the conditions leading to the presumption of abandonment had not been satisfied. The Georgia Supreme Court ruled that the DUPA only applies as to rights between the holder and the state. Specifically, the Georgia Supreme Court concluded that the DUPA does not affect the substantive rights of any party until the conditions leading to a presumption of abandonment are satisfied, and then the DUPA only affects the rights as between the holder and the state, not as between the holder and the owner. The court noted that rights between the holder and the owner are determined by the contractual terms. The court also stated that the expiration of statutory or contractual periods of limitation does not preclude the presumption of abandonment or affect the holder’s duties under the DUPA. Under the DUPA, a holder is not relieved of its obligation to deliver abandoned property to the state, even though the owner’s claim for possession against the holder may be barred by the statute of limitations. The court further stated that it is inconsistent with both the purpose and the express language of the DUPA to construe the law as either repealing statutes of limitations or as invalidating contractual expiration dates which are applicable as between the owner and the holder. Although this case involved gift certificates and gift cards, the Georgia Supreme Court’s analysis also provides insights into statutory construction and other issues, such as private escheat. Connecticut Attorney General Opinion (June 2006)The Connecticut Attorney General added his thoughts to the gift card discussion in Opinion No. 2006-013. The opinion addresses the following issues: (1) whether a gift card that contains an expiration date violates section #42-460(a) of Connecticut’s unclaimed property statute (prohibiting the issuance of gift cards with expiration dates) if the possessor can obtain a refund of the unredeemed balance after the card expires; and (2) whether Connecticut’s unclaimed property law is preempted by federal law as it relates to gift cards issued by national banks. The ruling involves gift cards issued by a local bank that were required by VISA to contain an expiration date for security reasons. However, the local bank would provide the purchasers of the gift cards with literature informing the purchasers that a refund of the remaining balance on the cards could be obtained upon request, after the cards expired. The Attorney General concluded that because the cards contained an expiration date, the cards violated §42-460(a). It was irrelevant, in the Attorney General’s opinion, that the local bank would provide a mechanism for the possessors of the cards to obtain a refund of the unredeemed balances after the cards expired. The Attorney General stated that allowing an expiration date on the gift card and requiring the possessor of the card to affirmatively request a refund would result in the “very windfall to the issuer” that the law was enacted to prevent. With regard to whether Connecticut’s unclaimed property laws are preempted by federal law as it relates to gift cards issued by national banks, the Attorney General’s conclusion was a resounding yes. The Attorney General noted that federal preemption is applicable under three scenarios: (1) when there is a specific intent to preempt state law; (2) when the area is prescribed for federal regulation only; and (3) when there is a conflict or physical impossibility to comply with both the federal and state law. The last point is the one at issue. Specifically, the gift cards issued by the national bank in question contained not only an expiration date but also inactivity fees. Inactivity fees are prohibited by §§ 42-460 and 3-65c of Connecticut’s unclaimed property code. The Attorney General noted that because a national bank has the “power under federal law to sell gift cards” and “charge its customers fees,” the application of §§ 42-460 and 3-65c “is an obstacle to the full exercise of a national bank’s powers under federal law.” As such, the Attorney General concluded that Connecticut’s unclaimed property law as it applies to gift cards issued by national banks is preempted. For the preemption to apply, the Attorney General noted that not only must the gift cards be issued by the national bank or its operating subsidiary, the cards must also be sold by the national bank. When the seller of the gift card is someone other than a national bank or its operating subsidiary – even though the card has been issued by a national bank – the federal preemption does not apply. From an unclaimed property perspective, this is a reminder that a federal preemption argument could be a potential argument with the right fact pattern. This is an issue that holders will have to address with legal counsel. FTC Addresses Gift Card “Deceptive Practices”The Federal Trade Commission (FTC) has recently issued settlement agreements and proposed consent orders in its first gift card cases involving deceptive trade practices in the advertising and selling of gift cards. The FTC charged Kmart Corporation, Kmart Services Corporation, and Kmart Promotions, LLC (Kmart) and Darden Restaurants, Inc., GMRI, Inc., and Darden GC Corp. (Darden) with deceptive trade practices regarding disclosures and gift card dormancy fees associated with the Kmart Gift Card and the Kmart Cash Card (Kmart Gift Cards), and with various Darden restaurant gift cards, respectively. In its complaint against Kmart, the FTC noted that Kmart represented that consumers could redeem Kmart Gift Cards for goods or services equal in value to the amount on the cards and the cards were equivalent to cash. However, if a Kmart Gift Card was not used for 24 consecutive months, a $2.10 dormancy fee was deducted from the card balance for each of the past 24 months, thereby reducing the value on a card with a value of less than $50.40 to zero. The FTC also charged that Kmart did not properly disclose the dormancy fees, noting that (1) the disclosure was in small print, imbedded in the cards’ terms and conditions; (2) the cards were affixed to card stock that completely obscured the disclosure on the back of the card; (3) the disclosure was not presented in understandable language or syntax; and (4) when the cards were sold on Kmart.com, the dormancy fee was not disclosed and Kmart’s website stated that its cards “never expire.” As with the Kmart complaint, the FTC’s complaint against Darden noted that Darden represented that consumers could redeem the cards for goods or services equal in value to the amount on the cards and the cards were equivalent to cash. The FTC charged that Darden failed to disclose (or adequately disclose) the dormancy fees by: (1) printing the dormancy fee in small print on the back of the card, obscured by miscellaneous other information; (2) marketing a transparent Red Lobster gift card with a red lobster on the front that obscured the dormancy disclosure on the back; (3) marketing the gift cards in the restaurants without disclosing the dormancy fee (i.e., by not providing the disclosure on drink coasters and table tents that served as gift card order forms); and (4) marketing the gift cards on the restaurant Web sites without disclosing the dormancy fees. In some instances, when contacted by consumers, both companies provided some amount or form of reimbursement. The terms of both settlement agreements and proposed consent orders are very similar. The orders provide that the existence of any expiration date or Covered Fee (any automatic fee that decrease the value of a gift card – e.g., dormancy, maintenance, inactivity, monthly, balance inquiry fees) must be clearly and prominently disclosed on the front of the card, and all material terms and conditions related to Covered Fees should be clearly and prominently disclosed. For a period of five years from the date of the final order, both companies (and their successors and assigns) are required to maintain specific records, including representative copies of all gift cards issued. The companies are also required to educate select employees and the third-party vendors involved with their gift cards about the applicable sections of the order. Kmart is specifically ordered to develop a written reimbursement policy that describes the methods by which eligible consumers may contact Kmart to request reimbursement of any Covered Fees that were deducted from their gift cards, and the means by which Kmart will reimburse those fees. The reimbursement policy is required to provide a toll-free phone number, valid email address and postal address for consumers to use to obtain reimbursement. These written policies must be prominently disclosed in various forums. The comment period for Kmart’s proposed order ended on April 10, 2007, and Darden’s ended on May 2, 2007. Once comments are received, the commissioners will vote on finalizing the orders. The consent agreements and proposed orders provide insight into the direction the FTC is taking in its first actions related to the terms and conditions associated with gift cards and how they are marketed to consumers. In addition to tracking the ongoing legislative and regulatory changes occurring at the state level, retailers may want to review their current gift card policies and procedures in light of the FTC’s interest in how gift cards’ terms and conditions are presented to consumers. Fitzgerald v. Young America Corp.The Treasurer of Iowa has brought suit against Young America Corp. (YAC), seeking to examine YAC’s records to determine if the company has complied with the state’s Uniform Disposition of Property Act (the Act). Twenty-seven states and the District of Columbia have joined Iowa in the suit. BackgroundYAC administers promotional programs, including rebate programs, for its clients. The rebate program services, also known as “fulfillment” services, include receiving and processing rebate forms and issuing rebate payments according to the programs’ rules, as established by YAC’s clients. In its filing, the state alleges that YAC’s clients have two options for paying rebate claims and compensating YAC for its services. Under the first option, the client remits funds to YAC to pay the rebate claims as they are submitted by the consumers. Also, under this option, the client pays a service fee to YAC for the fulfillment services provided. Additionally, the client retains the funds associated with any uncashed rebate checks. The state alleges in its filing that YAC’s clients are required to report these amounts as abandoned property to the state of the last known address of the payees. Under the second option, YAC has a contractual agreement with its clients which provides that: (1) YAC will receive a lower service fee; (2) YAC is responsible for funding the rebate program; (3) the client will pay YAC the full face value of the rebate checks issued; and (4) YAC will retain the slippage (value of uncashed checks) associated with the rebate checks. According to the complaint, YAC took into income approximately $43 million in slippage from January 1995 through June 30, 2002, including funds owed to payees with Iowa addresses. The complaint alleges that the slippage is intangible property subject to the unclaimed property act. The state alleges that YAC has “willfully and deliberately refused to permit” the state to examine its books and records by filing an action in the United States District Court for the District of Minnesota (YAC’s state of incorporation) against Iowa’s agents, seeking a permanent injunction restraining the agents, the state, and others from demanding that YAC submit to an examination of its records. That case was dismissed in 2004, with the court finding it did not have subject matter jurisdiction. YAC appealed to the United States Court of Appeals for the Eighth Circuit, which affirmed the dismissal of the case. The case is proceeding, and a trial date has been set for April 28, 2008. Massachusetts Superior Court Addresses Retroactive Application of “Credit Balance” Exemption Limitation to Business-to-Business TransactionsIn Biogen Idec MA Inc. v. Cahill, 22 Mass.L.Rptr. 181 (February 27, 2007), the Superior Court of Massachusetts at Suffolk ruled that the definition of the term “credit balance,” and the regulations in place at the time the state’s unclaimed property audit of Biogen began should be controlling, not subsequent regulations which the state adopted and applied retroactively. BackgroundMassachusetts revised its unclaimed property statute in 2000 and developed related regulations in 2001 (the 2001 regulations). The 2001 regulations included a broad definition of credit balances and included a commercial customer reporting exemption that provided that credit balances shall not be considered as abandoned property. In response to a state outreach program to encourage compliance with the regulations, Biogen filed abandoned property reports. Biogen did not report commercial accounts payable credit balances (that were converted to checks) that it believed were exempt under the credit balance exemption provisions of the statute. The state initiated an audit in 2003. In 2004, the new treasurer filed “emergency” amendments to the abandoned property regulations (the 2004 regulations). The purpose of the amendments was to “offer a different interpretation” of the credit balance exemption. Specifically, the regulations narrowed the definition of exempt credit balances. The state argued that the 2001 regulations were not consistent with the legislative intent of the statute, and therefore, the 2004 regulations were applicable to the Biogen audit. The state applied the 2004 regulations retroactively back to 1981, Biogen’s year of incorporation in Massachusetts (despite the prior practice of using only a 10-year look-back period on audits). Because the applicable statute did not define credit balances, the court examined the definitions provided by the 2001 and 2004 regulations. The court determined that the public could read and rely on the 2001 regulations for an interpretation of whether the credit balance exemption extended to vendor checks when the holder could show that the underlying source of the check was a vendor credit balance. The court ruled that the 2001 regulations were in accordance with the statute’s apparent intent and purpose. The court also found that there was no express direction for retroactive application of the 2004 regulations, and noted that the Biogen audit was already underway when the emergency regulations were promulgated. Thus, the court determined that the 2001 regulations, and not the 2004 regulations, are applicable to the Biogen audit. This ruling seems to indicate that for a change in law to apply retroactively, it must be clearly stated that this is the intent of the legislators. Otherwise, the change should apply prospectively only. Holders in Massachusetts need to be aware of this fact as they try to determine how to apply changes in the unclaimed property compliance rules to their business. Current Legislation TrendsNot a lot of substantial legislation has been passed so far this year (as of April 30) but don’t take this as a sign that the states are not interested in the area. Recently Enacted Laws Relating to Unclaimed Property
Proposed Legislation
Contact UsOur area leaders in the National Unclaimed Property Practice are interested in your feedback, including any topics you might like to see addressed in future issues.
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