May 1, 2013
Authored by: Bryan Cave
CFPB Finds Limited Preemption; Gift Card Issuers Must Honor Cards
Even After Funds Have Escheated to the State
The Consumer Financial Protection Bureau (“CFPB”) recently published a final determination regarding whether the unclaimed property laws of Maine and Tennessee relating to unredeemed gift cards (“Applicable State Law”) are inconsistent with and preempted by the gift card provisions of the Electronic Fund Transfer Act and Regulation E (“Federal Law”). The applicable laws of Maine and Tennessee are quite similar for the issues at hand. In its ruling, the CFPB determined that Maine’s unclaimed property law as applied to gift cards is not inconsistent with Federal Law, and therefore no preemption was found. However, with respect to Tennessee’s unclaimed property law, the CFPB ruled in favor of preemption but only with respect to the provision permitting issuers to choose whether to honor an unclaimed gift card after the underlying funds have been escheated to the state. (A Print Version of this Alert is available.)
The specific issue involves Federal Law vis à vis the abandoned property laws of Maine and Tennessee. Federal Law prohibits a gift card from containing an expiration date that is less than five years from the date of issuance or date of last load, whichever is later; Applicable State Law, however, generally requires escheatment of unused balances on certain types of gift cards after two years of card inactivity.
A potential conflict arises when a bank or retail gift card issuer remits the unclaimed funds from a gift card to a state as required by the applicable abandoned property law, but then is subsequently faced with having to honor the card because it has not expired. Issuers have to decide whether to honor the card and seek reimbursement directly from the state or whether to instruct the consumer to seek reimbursement directly from the state.
In August 2012, the CFPB published a notice of intent to make a preemption determination, seeking public comment regarding whether Federal Law relating to gift card expiration dates preempts the unclaimed property laws of Maine and Tennessee. The CFPB received 20 comments in response to the Notice, including two comments from consumer advocacy groups and 18 comments from gift card issuers and trade associations. All of the comments supported federal preemption.
However, one comment letter from the National Consumer Law Center (“NCLC”) stood out and provided a basis for the Bureau’s ultimate determination. In its letter, the NCLC specifically argued that the CFPB should preempt state escheat laws only to the extent that they permit gift card issuers to fail to honor cards before the cards may expire under Federal Law. The letter argued that it would be less burdensome for issuers to request reimbursement from the state after transferring the unused value than it would be for consumers to retrieve their unclaimed property directly from the state. The letter added that issuers could request reimbursement at regular intervals (e.g. annually) and that issuers would have “little difficulty” establishing their right to reimbursement.
The CFPB first considered Maine’s abandoned property law, ultimately ruling against federal preemption since there was no basis for concluding that Maine’s law as applied to gift cards is inconsistent with Federal Law. The CFPB’s determination relied heavily on the position by Maine’s Office of the State Treasurer (“Maine Treasurer”) that Maine’s unclaimed property law requires issuers to indefinitely honor a gift card even after it has been presumed abandoned pursuant to Maine’s Uniform Unclaimed Property Act. This finding was supported by the CFPB despite the fact that section 1961(2) of the Act provides that the state assumes custody of and responsibility for the property after escheatment, and a business that has transferred the unclaimed funds to the state is relieved of all liability arising thereafter with respect it. The Maine Treasurer added that it does not fulfill a consumer’s direct request to claim unclaimed funds. Rather the Maine Office re-directs the consumer to the gift card issuer, and informs the issuer that it is obligated to honor the card. For these reasons, the CFPB found that Maine’s law does not interfere with the ability of consumers to use their gift cards at the point-of-sale for at least as long as they are guaranteed by Federal Law, and thus, no preemption applies.
The CFPB’s determination with respect to Tennessee focused on section 66-29-116 of the Uniform Disposition of Unclaimed Property Act (“Tennessee Provision”), which provides that a gift card issuer is relieved of all liability with respect to a gift card after the unused value is transferred to the state and to the extent of the value transferred for any claim that may later arise with respect to the gift card. The CFPB treated Tennessee law differently than Maine’s law, finding that despite the extensive similarities in statutory language, Tennessee’s unclaimed property law does not require an issuer to honor an abandoned gift card after transferring the card’s unused value to the state. Rather, section 66-29-116 provides that a person that has transferred a gift card’s unused value to Tennessee has the option of (i) honoring the cards and then requesting reimbursement from the state or (ii) not honoring the cards because the funds have already escheated to the state.
In its analysis, the CFPB decided that the Tennessee Provision effectively acts as an expiration date to what should otherwise be easy point-of-sale access to a gift card’s underlying funds. The CFPB acknowledged that complying with both Federal Law and Applicable State Law imposes “possibly burdensome” obligations on gift card issuers. Yet above all else, the CFPB was concerned with consumers’ ability to use their gift cards. The fact that issuers “may face an increased burden or cost to comply with both Federal law and [Applicable State Law]” did not bear any weight in the CFPB’s decision. For these reasons, the CFPB determined that Applicable State Law permitting issuers to decline to honor gift cards as soon as two years after issuance and relieving them of liability conflicts with Federal Law.
The CFPB’s determination serves as an official staff interpretation of Federal Law with respect to the laws of Tennessee and Maine, and does not constitute a determination with respect to the laws of any other states. However, given the fact that many other states have provisions similar to the Tennessee Provision, the CFPB’s ruling likely has much broader implications for gift card issuers.