For gift-givers, the gift card is the perfect solution to the man-who-has-everything, the birthday-you-forgot-about and for walking the tightrope of generous-but-slightly-impersonal required for say, the office gift pool or a co-worker’s bridal shower.
For franchise systems, the gift card is a great revenue-creating tool. It can help capitalize on the holiday-shopping crowds, can increase traffic or word-of-mouth about a new location, and, the jackpot, can result in the sale of gift cards that are never redeemed – in essence “free money.”
In reality, gift cards can represent more of a conundrum to franchisees and franchisors than one might expect. In addition to the federal Credit Card Accountability Responsibility and Disclosure Act of 2009 (the “Credit CARD Act”), which contains limitations on expiration dates and fees associated with gift cards, a host of state-specific regulations can affect franchise systems, and both franchisees and franchisors should be mindful of the rules and potential pitfalls when incorporating gift cards into their business plans.
For example, some state laws require businesses to remit some or all of the money from gift cards that remains unspent to the state. These are commonly referred to as “escheat” laws and they vary widely from state to state. New York, for example, requires all unpaid gift card funds to be paid to the state. In California, on the other hand, unredeemed funds do not escheat except in very limited circumstances.
As for expiration dates, various states ban expiration dates altogether or otherwise limit their enforceability. In California, for example, gift cards are typically not permitted to contain an expiration date. This is subject to certain very limited exceptions. In New York, expiration dates are not prohibited and must be clearly and conspicuously stated on the card.
The relevant statutes may also prohibit service fees or other limitations on spending gift cards. In California, the state policy of protecting consumers from being prevented from redeeming their gift cards is so strong that a holder of gift card will have a claim in a Chapter 7 bankruptcy proceeding against a bankrupt seller of the card.
In franchise systems, other areas of conflict may arise; such as, when a gift card is sold at one franchisee’s location, but redeemed at a second franchisee’s location. It can be complicated to correctly distribute funds to each franchisee, and to calculate royalties.
In light of these nuanced regulations and their potential complications to franchises, franchisors should consider creating a separate legal entity to fund and manage its gift card program at the outset. Additionally, it may be helpful to purchase software specifically tailored to managing gift card programs, to consult with existing franchisees as to their concerns and/or problems with the program and even to hire “gift card counsel” to advise the franchisor as to its obligations with respect to franchisees, consumers and the state.