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SECOND CIRCUIT GIVES MIXED REVIEW ON GIFT CARD RESTRICTIONS

The Second Circuit remanded SPGG, LLC's preemption claim as to a state law prohibition on expiration dates for development of the facts, but found no preemption as to administrative fee restrictions. SPGGC, LLC v. Blumenthal, 2007 WL 3036812 (2nd Cir. Oct. 19, 2007).

Card Programs Facts

SPGGC was at the relevant time a seller of Simon Gift Cards, prepaid gift cards issued by Bank of America, N.A. ("BoA"), a national bank, and operated on the Visa debit card infrastructure. Pursuant to BoA's relationship with SPGGC, all Simon gift cards and cardholder agreements identified BoA as the issuer. BoA retained review and approval authority over all terms and conditions for the gift cards, as well as design of the cards and card carriers with which they were sold.

The court found that although BoA was the issuer of the Simon Gift Card, SPGGC bore the costs of administering the program and also collected and retained maintenance and other fees associated with the cards. According to the court, BoA was compensated exclusively through Visa interchange fees generated on a per-transaction basis. Additionally, the court found that while BoA had review and approval authority over any terms and conditions the gift cards carried, SPGGC had the authority to establish such terms or conditions in the first instance.

Connecticut Statute

The Connecticut Gift Card law prohibits the sale of any "gift certificate" subject to inactivity or dormancy fees or to an expiration date. Gift certificates are defined to include gift cards and other stored-value card. SPGGC sued to prevent enforcement of the Connecticut Gift Card Law passed on national bank preemption.

SPGGC is neither a national bank nor the operating subsidiary of a national bank; nonetheless, SPGGC contended that because of its association with BoA, the Simon gift card was a national bank product. Therefore, SPGGC argued that the gift card should be subject to the Office of the Comptroller of the Currency's exclusive supervision relying on Watters v. Wachovia Bank, N.A., 127 S.Ct. 1559 (2007).

Court Analysis

The court concluded that SPGGC failed to state a valid claim for preemption of the Connecticut Gift Card Law insofar as it prohibits SPGGC from imposing inactivity and certain other fees on consumers of the Simon Gift Card. The court found that the Attorney General's enforcement of the fee restrictions does not interfere with BoA's ability to exercise its powers under the National Bank Act and OCC regulations; rather, it affects only the conduct of SPGGC, which is neither protected under federal law nor subject to the OCC's exclusive oversight. The court stated it was not addressing whether a different conclusion would be reached were the fees in question established and collected by the issuing bank rather than SPGGC.

The court found that SPGGC did state a valid claim for preemption insofar as the Connecticut Gift Card Law prohibits expiration dates. Unlike the various administrative and maintenance fees associated with Simon Gift Cards, SPGGC alleged in its complaint that an expiration date is necessary "to implement Visa fraud prevention and card maintenance requirements applicable to all prepaid cards bearing the VISA logo." Taking this allegation as true, the court found that an outright prohibition on expiration dates could have prevented a Visa member bank (such as BoA) from acting as the issuer of the Simon Gift Card. The court stated that in the absence of further factual development concerning the precise nature of Visa's requirements, as well as BoA's involvement in setting the expiration date for the Simon Gift Card, the court could not conclude that SPGGC's preemption claim was entirely lacking in merit. Accordingly, the court vacated and remanded this aspect of the judgment below so that the district court could reconsider SPGGC's preemption claim as to the state's ban on expiration dates.

Conclusion

The decision illustrates the factual inquiry necessary for a preemption determination. The First Circuit in finding the New Hampshire gift card law preempted acknowledged the factual distinctions between this case and the New Hampshire case. See SPGGC, LLC v. Ayotte, 488 F.3d 525 (1st Cir. 2007). The Ayotte court noted that SPGGC's relationship with BoA differed from its subsequent relationship with U.S. Bank and MetaBank, the card issuers in the New Hampshire case. In the arrangement with BoA, Simon set and collected all of the fees from the sale of the gift cards and managed the gift card program. In the U.S. Bank and MetaBank programs, the banks established and collected the fees, compensating SPGGC as a servicer-vendor. See our Alert dated June 1, 2007 (First Circuit Affirms Preemption of State Gift Card Law in First Post-Watters Case).