Litigation: Retail Gift Card Updates

Several recent class action decisions involving closed-loop gift cards warrant attention.

Abercrombie & Fitch

The Abercrombie & Fitch case illustrates how disputes surrounding expiration dates on promotional gift card products typically were handled as breach of contract claims prior to the passage of the CARD Act.

In the Abercrombie and Fitch case, the U.S. District Court for the Northern District of Illinois denied a consumer’s request for summary judgment in a breach of contract class action against the retailer for failure to honor promotional gift cards. The promotional gift cards were part of a holiday promotion from late November through late December 2009 in which customers were eligible to receive a $25 gift card for every $100 spent in a single transaction. The promotional gift cards stated “no expiration date” on their reverse side, but all marketing materials, including in-store banners and the card packaging, indicated the cards expired on January 30, 2010.

According to the lawsuit, an Abercrombie & Fitch customer received two of these promotional gift cards worth $75, then gifted them to the plaintiff. When the plaintiff attempted to use the gift cards in April 2010, she was informed that the cards had expired on January 30, 2010. The plaintiff then sued the retailer under a breach of contract theory. In rejecting the plaintiff’s class action motion for summary judgment, the District Court judge determined that no breach of contract took place under Illinois law. An offer was provided by Abercrombie & Fitch and accepted by the plaintiff in the form of a sales transaction in which she purchased the required amount of goods to be rewarded with the appropriate number of gift cards.

The promotional gift cards involved in this case were issued before the August 22, 2010, effective date of the CARD Act regulations.

RadioShack

According to a press release from New York Attorney General Eric T. Schneiderman, RadioShack has reached a settlement in principle with his office that will pay holders of unredeemed gift cards purchased by consumers 100 percent of the value of the cards. The agreement applies to gift cards purchased from RadioShack and from other merchants that sold RadioShack gift cards and applies to consumers nationwide. The settlement doesn’t impose a minimum dollar threshold for consumer claims and is supported by the attorneys general of Texas, Pennsylvania, Oregon, Tennessee and New Hampshire.

The Associated Press reports that about $46 million worth of gift cards will be repaid, but cardholders who are holding promotional cards (cards given for merchandise credits or returns and cards given for customer service complaints) will not be included in the settlement. These cardholders, however, will be included in the pool of general unsecured creditors.

The settlement agreement still has to be approved by the bankruptcy court managing the RadioShack bankruptcy. In similar cases, bankruptcy courts often have allowed retailers to honor outstanding gift cards but haven’t permitted them to pay out the value of the cards in cash to avoid depleting the bankrupt estate. By contrast, honoring gift cards without allowing cash back will promote further purchases of goods and services from the bankrupt estate.

The RadioShack case shines a light on whether a state attorney general has the ability to supersede applicable bankruptcy law through a voluntary settlement agreement with a bankrupt company. By requiring RadioShack to pay the unredeemed value of outstanding gift cards to cardholders, the attorney general is effectively elevating the priority of their claims in bankruptcy above what would otherwise be an unsecured creditor. It will be interesting to see the reaction of the bankruptcy court as well as the other creditors that previously had a superior claims to the holders of outstanding gift cards.