Wednesday, October 6, 2010

NJRMA v. New Jersey - Overview of the New Jersey Gift Card Litigation

As promised, we now have some additional information relating to the NJ Retail Merchants Association's lawsuit against New Jersey in response to that state's new unclaimed property laws relating to gift cards.  As we covered earlier, the new legislation (the "Bill") requires gift card issuers to obtain at least the zip code of all gift card purchasers (the "Zip Code Requirement") and requires that issuers turn over the full face value of cards inactive for 2 years (the "Face Value Requirement").  In addition, the legislation was expressly deemed to be retroactive - meaning that the new laws applied to cards that were issued years before the bill was enacted.

The full complaint, filed last Thursday, is worth a read for gift card issuers (or those otherwise interested), but a few of the allegations jump out. 

In challenging the Zip Code Requirement, the NJRMA notes that "[b]ecause Gift Cards are given away by the purchaser, there is no way for the issuer to know, or keep a record of, who the bearer, or rightful owner of a Gift Card is."  (Compl. at 15 - footnote omitted).  In other words, the NJRMA is challenging the utility of requiring issuers to obtain the zip code of a purchaser (as a purported proxy for the owners last known address), where experience shows that the owner and the purchaser of a gift cards are not necessarily (or even usually) the same.

In setting up their challenge to the Face Value Requirement, the NJRMA notes that their members' gift cards "generally do not expire and there is no fee associated with purchasing a gift card."  (Compl. at 19).  Accordingly, the NJRMA alleges, most retailers do not recognize any profit until the time that the gift card is actually used, but that it has a property right to the profit it would eventually receive if the gift card is used.

Taking a page from the Hollenbach litigation (in which American Express successfully challenged Kentucky's shorening of the dormancy period for travelers' checks), the NJRMA also alleges that, despite the stated purposes of the legislation (to protect the funds of gift card owners) ,"there was a clear revenue objective" to the legislation.  (Compl. at 36).  Specifically, the NJRMA noted a report by the Office of Legislative Services stating that the "fiscal impact" of  the legislation to be nearly $80 million in FY 2011.  In Hollenbach, a federal court ruled that "[s]hortening the presumptive abandonment period [for traveler's checks] . . . is not rationally related to raising revenue for the state, even if revenue raising were a legitimate state purpose or objective." 

As to the specific claims, NJRMA alleges that the Zip Code Requirement is preempted by the Supreme Court's decision in Texas v. New Jersey, in which the Supreme Court held that unclaimed property owed to owners with unknown addresses are escheatable to the holder's state of incorporation.

The second count of NJRMA's complaint alleges that the Bill violates the "due process" rights of the gift card issuer.  In particular, NJRMA alleges that although the gift card issuer makes no profit at the time of sale, it nonetheless "receive[s] a vested interest in the money tendered by the purchaser" at that time, and the State's taking of that property violates those property rights. 

The third count of the complaint alleges that the Bill violates the Contract Clause of the federal and New Jersey constitutions because of its retroactive application to gift cards sold prior to enactment of the Bill.

The final count of the complaint alleges that the Bill violates the Constitution's takings clause by requiring retailers to turn over the full dollar value of an unused gift card without accounting for the lost profits of the retailer. 

In light of these arguments, the Complaint asks the court to deem the Zip Code Requirement, the Face Value Requirement, and the Bill's retroactivity as "void, unconstitutional and unenforceable as a matter of law."

Tomorrow, we will review the allegations of the American Express lawsuit against New Jersey regarding the changes to the travelers' check dormancy period.


  1. That's very interesting about the Hollenbach case. Considering the fact that the budget committee mentions the potential positive fiscal impact as being over $79 million per year, it shouldn't be too hard to argue that this legislation is meant to increase revenue.

    I guess NJ could get around the zip code gathering problem by telling merchants that they have to register the zip code of the owner of a card the first time he or she uses it.

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