FIRST CIRCUIT AFFIRMS PREEMPTION OF STATE GIFT CARD LAW IN FIRST POST-WATTERS CASE
The U.S. Court of Appeals for the First Circuit, citing Watters v. Wachovia Bank, N.A., 127 S.Ct. 1559 (2007), affirmed a grant of summary judgment in favor of SPGGC, LLC (Simon), a mall owner selling bank-issued gift cards, against Kelly A. Ayotte, Attorney General of New Hampshire. SPGGC, LLC v. Ayotte, --- F.3d ----, No. 06-2326, 2007 WL 1545840 (1st Cir. May 30, 2007). Other named plaintiffs include U.S. Bank (USB), a national bank that issues Simon-branded gift cards sold at Simon malls, and Metabank, a national thrift that issues Simon-branded gift cards sold over the Internet. The plaintiffs sought injunctive relief and a declaratory judgment that a New Hampshire law restricting the sale of stored value gift cards with expiration dates or administrative fees was preempted by the National Bank Act (NBA), the Home Owners Loan Act (HOLA) and the regulations promulgated thereunder. The New Hampshire federal district court granted summary judgment to Simon, concluding that the New Hampshire law was preempted as applied to products sold by national banks and thrifts.
In its discussion of NBA preemption, the court noted that Section 24 (Seventh) of the NBA grants to national banks the power to exercise by its board of directors or duly authorized officers or agents, subject to law, all such incidental powers as shall be necessary to carry on the business of banking, which grant of authority is not ordinarily limited by, but rather ordinarily preemptive of, contrary state law. 2007 WL 1545840 *3; see 12 U.S.C. § 85; Barnett Bank of Marion County, 517 U.S. 25, 32 (1996). The First Circuit also cited to the recent U.S. Supreme Court decision, Watters v. Wachovia Bank, which held that national bank preemption extends to operating subsidiaries of national banks. Following the Supreme Court’s bank powers-based analysis, the First Circuit’s opinion expands preemption protection to third party agents of national banks. The First Circuit focused not on whom the law regulates but on what activity it regulates. 2007 WL 1545840 *6. In the court’s analysis, the New Hampshire law is not concerned with Simon's activity, which is limited to how and where the gift cards are marketed, but rather with the sale of certain gift cards through a third party agent, which is the activity of USB, a national bank. Thus, the state law significantly interferes with USB’s statutory power and is preempted.
This is one of many cases involving Simon gift cards. Several other state and federal cases have been filed by and against Simon, some of them relating to the sale of gift cards issued by its former national bank partner, Bank of America (BoA). Although the First Circuit declined to decide whether the facts of the BoA program would support preemption under the NBA, the court distinguished the former Simon/BoA gift card program from the new Simon/USB program. A few of the purported distinctions are shown in the table below:
||BoA Gift Cards
||USB Gift Cards
|Recipient of proceeds from card sales
|Consideration to other party for card sales
||"Transaction fee" per card use paid by Simon to BoA
||Commission per card sold paid by USB to Simon
|Responsibility for servicing
|Responsibility for setting and collecting gift card fees
Other notable provisions of Simon's contract with USB (which the court described as substantially similar to the contract between Simon and Metabank) include:
- A statement that the gift cards are to be “national bank products within the meaning of the National Bank Act for all purposes, including the principles of federal preemption”;
- A provision specifying that USB provides the disclosures that Simon gives to card purchasers with purchased cards; and
- A provision specifying that Simon has no authority to alter the terms and conditions of the agreement between USB and the consumer.
In summary, the First Circuit agreed with the district court that (i) federal banking laws authorize nationally-chartered banks and thrifts to sell gift cards as a banking product, (ii) the New Hampshire law substantially frustrates the ability of Metabank and USB to sell gift cards in New Hampshire and (iii) the NBA and HOLA preempt New Hampshire law with respect to products issued by nationally chartered banks and thrifts to the extent that New Hampshire law prohibits Simon from gift cards issued by such institutions with expiration dates and administrative fees. The First Circuit thus affirmed that states do not have the power to regulate activities of national banks and national thrifts if these activities are carried out by third party agents.