In the Federal Trade Commission’s first law enforcement action involving gift cards, Kmart Corporation has agreed to settle charges that it engaged in deceptive practices in advertising and selling its Kmart Gift Card. The FTC’s complaint alleged that Kmart violated the Federal Trade Commission Act by misrepresenting that its gift cards were equivalent to cash and “never expire” when, in fact, dormancy fees could reduce the value of a card and cause a card to expire after an extended period of non-use. The FTC also claimed that Kmart did not adequately disclose the existence and conditions of the dormancy fees.

According to the FTC’s complaint, in numerous instances, the dormancy fee was disclosed within a paragraph of “Terms and Conditions” in small print (approximately five-point font) on the back of the card, which was affixed to cardstock that obscured the disclosures on the back of the card. The FTC also asserted that the language and syntax of the dormancy fee disclosure (“after 24 months of non-use, a $2.10 per month service fee will be deducted from your balance in arrears until the card is used or depleted”) was not understandable.

The proposed Settlement Agreement generally requires Kmart to disclose clearly and prominently the existence of any expiration date or “Covered Fee” (i.e., any fee or surcharge assessed automatically following activation of any Kmart Gift Card that decreases the value of the card, including dormancy, maintenance, inactivity, monthly, balance inquiry or other fees assessed automatically, but excluding replacement fees for lost or stolen cards). Kmart also must disclose clearly and prominently (i) at the point of sale, prior to purchase, all material terms and conditions of any expiration date or Covered Fee and (ii) on the front of each gift card, the existence of any expiration date or Covered Fee. The Settlement Agreement also (i) prohibits Kmart from misrepresenting in any manner any material term or condition of its gift card, (ii) prohibits Kmart from collecting Covered Fees on gift cards activated prior to the date of the FTC’s order and (iii) requires Kmart to reimburse consumers for Covered Fees already deducted.

The Settlement Agreement will be subject to public comment until April 10, 2007, after which the FTC will decide whether to make it final.

  • Mike Tomkies and