Avoid the Pitfalls of Offering Gift Cards Through Your Franchise System

Avoid the Pitfalls of Offering Gift Cards Through Your Franchise System
Do you have system-wide gift card program?  Have you talked to your attorney regarding the federal and state requirements related to gift cards?  What happens to the gift cards sold by a franchise location that subsequently closes?  If you offer gift cards through your franchise system and haven’t spoken to your attorney, it’s definitely time to have that conversation.

The Credit Card Accountability Responsibility and Disclosure Act (the “Act”) regulates gift cards on the federal level.  The Act applies to store gift cards, codes or other devices issued to consumers in a specified amount that can be redeemed for goods or services at a single merchant or a group of affiliated merchants.  The Act is specifically applicable to the franchising context and applies to both franchisors (who typically manage or control the gift card program) and franchisees (who sell the gift cards).

The Act contains a variety of disclosure requirements, prohibits the expiration of a gift card earlier than five years and prohibits dormancy, inactivity and service fees unless certain requirements are met.  The Act does not preempt state laws, which may provide greater protection to consumers.  For example, California, Connecticut, Florida, Maine, Minnesota, Montana, New Hampshire, Rhode Island and Washington all prohibits gift cards from having any expiration date.  Many states permit gift cards to contain an expiration date, however, Arizona, Georgia, Nebraska, Nevada, New York, North Carolina, Oregon, South Dakota, Texas, Utah and Virginia require that the expiration date be disclosed to the consumer.  Other states permit expiration dates but require the gift card to be valid for a certain minimum period of time.

Thus, in states without gift card regulations, the Act serves as the very least with which you must comply.  In states with gift card regulations, the regulations vary, so it is necessary, especially in the context of a national franchise brand, to consult an attorney regarding your gift card policies to ensure that you are complying with both federal and state law.

Additional considerations for franchisors include:

  • Review of corporate structure and tax issues
  • Whether to maintain a centralized gift card account
  • Previous experience with gift card programs
  • Whether to require system-wide participation and modification of documents
  • Training franchisees to comply with federal and state gift card regulations
  • Design of the gift card
  • Whether to hire a third party vendor to manage the funds paid for gift cards