Thursday, January 5, 2012

Breaking News: Appeals Court Rules in NJ Gift Card Litigation

The U.S. Court of Appeals for the Third Circuit just issued its opinion in the New Jersey gift card litigation.  First, a brief recap.  In July of 2010, New Jersey passed a wide-sweeping gift card law.  Among other things, that law:
  • Imposed a 2 year dormancy period on most stored-value cards;
  • Required sellers of stored value cards to collect name and address information (or at least zip code info) from purchasers (the "Zip Code Requirement");
  • Required sellers of "merchandise only" stored value cards (i.e., those redeemable solely for goods and services) to escheat the full dollar value of those cards retroactively.  In other words, gift card issuers were required to escheat the full dollar value of cards that were issued long before NJ passed this law (the "Face Value Requirement"); and
  • Created a "place of purchase presumption" for cards sold in New Jersey without collection of name and address, the presumption (of course) being that those cards were sold to owners in New Jersey (the "Location Presumption").
Unhappy with this legislation, a variety of groups sued New Jersey to prevent enforcement of the new law.  Ultimately, the district court's ruled that the state was prevented from (1) imposing a presumption that cards sold in New Jersey are escheatable to New Jersey and (2) requiring merchants to escheat the cash value of merchandise only gift cards issued prior to the effective date of the act.  At the same time, the court did allow NJ to require sellers to collect name and address information, and preliminarily held that the 2 year dormancy period was permissible.  Both sides appealed that decision and argument was heard by the appellate court last year.

The court of appeals issued its decision today.  In short, the Court of Appeals affirmed the entirety of the district court's ruling.  In particular, the Court held that, as a preliminary matter, the issuers had shown that they are likely to succeed on their claim that the retroactive Face Value Requirement unconstitutionally interfered with the sellers' contract rights and reasonable expectation of making a profit (because generally retailers do not sell $50 worth of merchandise for $50; there is usually a profit margin). 

The Court also ruled that the Location Presumption was (and thus could not be enforced) because of the Supreme Court's decision in Texas v. New Jersey.  Thus, cards sold in New Jersey without name and address (more on that later) are still escheatable to the holder's state of incorporation.

At the same time, the Court ruled in favor of New Jersey on two fronts.  First, the Court ruled that the 2 year dormancy period itself was permissible.  Moreover, the Court held that the law's requirement that sellers collect name and address information (or at least zip code info) from the purchaser is constitutional.

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