October 25, 2007

Simon Loses Appeal on State Gift Card Law

On October 19, 2007, the U.S. Court of Appeals for the Second Circuit issued an opinion that affirms the State of Connecticut’s right to ban fees on gift card. SPGGC is a subsidiary of Simon Property Group, Inc., which operates shopping malls in thirty states, including Connecticut, and sells pre-paid gift cards. SPGGC’s gift cards are issued through banks and operated on Visa debit card infrastructure. SPGGC challenged Connecticut’s authority to ban fees because their gift cards are a form of debit card and are governed by federal banking laws, which supersedes state laws.

Granted we are no legal experts and this is just our and other’s interpretation of the opinion, 05-4711-CV, issued by the U.S. Court of Appeals for the 2nd Circuit. The ruling only upheld the State of Connecticut’s ban on fees levied against gift cards. However, the action only affects Simon gift cards sold under its former program through Bank of America and does not affect their current gift card program that partners with US Bank and Metabank. Furthermore, the ruling only pertains to gift cards sold in Connecticut and not those bought outside the state and given as present to Connecticut residents. Lastly, the ruling provides no decision on whether Connecticut can prohibit expiration dates on gift cards.

On the surface, this seems like a small victory for consumers. However, what is resounding about the ruling is that merchants’ legal standing in using federal banking laws to circumvent state gift card laws are starting to crack. If subsequent rulings continues to go in favor of state regulation on gift cards, there will be a fundamental shift in gift card laws throughout the country. So fundamental that banks and merchants will fight aggressively to keep a such valuable revenue source. There are still many years and numerous legal challenges ahead before there is a clear decision on whether bank issued gift cards are truly subject state laws.

Simons can still appeal the decision to the Supreme Court. Furthermore, financial institutions and merchants may mount a lobbying campaign to convince Washington lawmakers to either expand federal banking laws that will protect bank issued gift cards from state gift laws or pass a federal gift card law that exempts bank gift cards.

05-4711-CV, SPGGC v. Blumenthal [U.S. Court of Appeals for the Second Circuit]
Court Upholds Gift Card Rules [consumeraffairs.com]

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