NEW YORK (CNN/Money) -
Those who got a gift card this year instead of yet another pair of Oomphies slippers should keep this in mind: that $50 electronic gift certificate might not be worth $50 for long.
In fact, it might be worth nothing.
It's the dirty little secret of select gift cards: activation charges, monthly service fees, unreturned balances, and expiration dates that can render worthless Grandma's new and much-welcomed form of expressing love.
Not all gift cards carry these stealth costs, but enough of them do that they're capturing the attention of legislators, regulators and lawyers.
Last month the attorneys general of Massachusetts, New Hampshire and Connecticut sued Simon Property Group, the country's largest owner of shopping malls, over one of its gift cards.
Called the Simon Visa Giftcard, the prepaid electronic card levies a $2.50 monthly surcharge starting six months after it is issued and, according to one state lawsuit, deducts 50 cents for each balance check and $5 for replacing a lost or stolen card. The gift card, which can be used at any store that accepts Visa, also expires after a year.
Some Fortune 500 companies have been sued too. In lawsuits filed recently in Illinois, a consumer charged Wal-Mart Stores, Inc. (Research) and Kmart Holding Corporation (Research) of violating the law by refusing to refund gift card balances of $1.39 and 52 cents, respectively. The complaints also accuse the retailers of charging illegal expiration and non-usage fees.
While $2.50 here and 52 cents there doesn't sound worth quibbling about, the numbers add up to huge savings for gift card issuers, argues Dale McCormick who, as Maine's Treasurer, regulates gift cards on behalf of state consumers.
"We're talking big dollars," said McCormick. For consumers to buy a gift card and then watch the card's value diminish with or without actual purchases, "doesn't make sense."
McCormick said the Maine legislature will soon take up a bill that bans service fees not just on gift cards but also on all so-called stored-value cards.
Indianapolis-based Simon Property (Research) denies its gift card policies are illegal and argues in court that the states don't have grounds to sue because the card is issued by a national bank and, as a result, comes under federal law. A company spokeswoman noted too that the card has special features that cost the company money to administer.
A big business that's getting bigger
There's no question that gift card sales are booming. The National Retail Federation estimates that $55 billion worth of gift cards were sold in 2004. Gifts cards will be an $85 billion business in 2007, according to TowerGroup.
Retailers like gift cards because, unlike paper gift certificates, they can simply deduct the value of the purchase from the card without having to return a cash balance or create a new certificate for the leftover amount. What's more, plastic gift cards boost sales: studies have shown that gift card users often exceed the value of their cards when they do redeem them.
Traditional gift cards issued by retailers are regulated by state law. Therein lies one of the causes of the growing controversy over gift card policies.
Only six or seven states have laws on the books that address electronic gift card policies specifically, including expiration dates and the so-called non-usage fees that kick in if they aren't used, said Paul Griffin, a San Francisco lawyer and Thelen Reid & Priest partner who has defended retailers in gift card litigation. He said California, which banned expiration dates in 1997 and non-usage fees this year, is the most stringent.
Most states instead have longstanding provisions requiring gift certificate issuers to track balances and hand over to state coffers any unclaimed amounts within a few years. The states typically use the leftover money for miscellaneous expenses like highway maintenance or school programs.
But as gift cards have become more prevalent and more lawsuits crop up, more state legislatures are looking to update their laws.
Banning expiration dates and non-usage fees is a trend "that's catching on," said Griffin.
Consider, for example, the law in Maine. State regulations ban "unconscionable" gift card service fees. But what dollar amount is excessive? "I guess you know it when you see it," said Treasurer McCormick. She said she will push the Maine legislature to prohibit service fees. At the same time, she said, state merchants are lobbying for legislation that would let them pocket gift card balances unclaimed after three years.
McCormick predicts a "tug-of-war" between consumer rights advocates and retailers when state lawmakers take up gift card legislation early next year.
The fight over $1.39
Simply proscribing expiration dates or service charges, however, is unlikely to quell the controversy over gift card policies. In the six or seven states that have done so, the hot issue now are cash-back policies, according to Griffin.
To maximize their profits, most retailers require that the cards be redeemed for merchandise only and not cash.
"There are lawsuits in California that basically say that retailers should be like ATM machines and that if my grandmother gets a $50 card and doesn't like any of the store's products, she ought to be able to march into the retailer and say 'give me $50,'" said Griffin. Retailers, however, counter that they're not banks, that it costs them money to set up and administer a gift card program and that the cards are transferable, meaning anyone can sell or give their card to someone else.
So which side is winning the argument? "It's unresolved," said Griffin, noting that two California trial courts have sided with consumers and two have favored retailers.
"The issue is headed up to the appellate courts," he said.
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