Gift Card Preemption Case Could Reach Supreme Court

  After a mediator failed to arrange a settlement of a potentially precedent-setting prepaid gift card case Nov. 8, the New Hampshire Attorney General's Office said it would continue to pursue its fight against Simon Property Group.
  The case, which ultimately could free nationally chartered banks from having to obey state gift card rules, currently is before the 1st U.S. Circuit Court of Appeals in Boston. If Simon prevails, as it did at the district court level, New Hampshire could ask the U.S. Supreme Court to overturn the decision, says David Rienzo, New Hampshire's assistant attorney general.
  "There's nowhere to go but there," Rienzo says. The state says the fees and expiration dates associated with the Visa-branded Simon gift card violate state law.
  An August ruling by U.S. District Judge Steven J. McAuliffe found that the Simon gift cards are products of the nationally chartered banks that issue them, U.S. Bank and MetaBank, and are subject to federal and not state regulation.
  The Simon gift card program was restructured to give the banks more control over pricing and terms of the cards. That came after a federal regulator, the Office of the Comptroller of the Currency, ruled early in 2005 that the way the program had been set up, with Simon in control, did not make the cards bank products. That left them subject to state laws.
  McAuliffe says the way the current program is set up the federal regulations preempt state law.
  If Simon ultimately wins, the case could provide a road map for national banks that want to offer retailers and shopping malls gift cards carrying such major brands as Visa and MasterCard but do not want to have to customize their programs to fit the laws of each of the 50 states.
  New Hampshire's apparent determination raises the stakes in the lawsuit.
  While McAuliffe's ruling now only applies to New Hampshire, a Supreme Court ruling would apply nationwide. If the high court declines to hear the case, the ruling from the 1st Circuit would stand but only apply to New Hampshire, Massachusetts, Maine, Rhode Island and Puerto Rico, the jurisdictions covered by that judicial circuit.
  "The bottom line is that when the Simon matter is over, the law in this field will be established," Rienzo says.
  But that resolution may not come from the nation's top court, says L. Richard Fischer, a partner at the Washington, D.C., law firm Morrison and Foerster, one of several firms defending Simon in gift card cases around the country. Fischer says he is confident Simon will prevail in the circuit court and doubts that the Supreme Court would see fit to hear an appeal. Still, letting the lower-court decision stand likely would give that decision considerable weight nationwide.
  While the New Hampshire case winds its way through the courts, other states are pursuing their claims against Simon, an Indianapolis-based mall operator that has taken the view that its gift cards are not governed by state laws. At least two other mall operators have avoided legal action by selling branded gift cards but foregoing fees in states that ban them.
  The attorneys general of Connecticut and Massachusetts also have been engaged in legal battles against Simon since 2004 over gift card fees and expiration dates. Connecticut, which prohibits expiration dates and service fees on gift cards, won its case in district court. Simon is appealing that decision in the 2nd U.S. Circuit Court of Appeals in New York City. This court hears appeals from Connecticut, Vermont and New York.
  COURT CONFLICT?
  Rienzo says that it is possible Connecticut's case could reach the Supreme Court before New Hampshire's does. If the two appeals courts come to different conclusions on whether state laws apply to the Simon gift cards, that would make it more likely that the Supreme Court would take the case to settle the matter, Rienzo says.
  Massachusetts, which bars gift cards from expiring for seven years after purchase, is still arguing against Simon in Superior Court, the first level of state court. A spokesperson for Attorney General Tom Reilly says the lawsuit, launched in 2004, is pending.
  Simon is a high-profile target. It has a stake in 286 U.S. shopping malls and calls itself the largest owner and developer of high-quality retail real estate. The company says its gift card sales increased by 14% in 2005 to $465 million.
  But it also has invited attack by charging fees, such as dormancy fees on accounts not used for a long period, in some states that ban them. At least two other shopping mall operators have avoided legal challenges by not charging gift card fees in states that ban them. According to the National Conference of State Legislatures, 29 states have rules on expiration dates or gift card fees.
  Taubman Centers Inc., a Bloomington Hills, Mich.-based developer of shopping malls, sells prepaid Taubman Mall gift cards with an expiration date and a $2 monthly service fee. The cards are issued by American Express Travel Related Services and are sold at the company's 23 malls in 11 states, including two in Connecticut. But Taubman's gift card rules state that the service fee is subject to applicable law.
  Chicago-based General Growth Properties sells GGP gift cards in its more than 200 shopping centers in 44 states, including three in Massachusetts, two in Connecticut and one in New Hampshire. The cards are issued by American Express and Discover Financial Services and also have a $2 monthly service fee that kicks in a year from the purchase date. The company states on its Web site that the service fees are also subject to applicable law.
  ILLINOIS DISPUTE
  Simon, meanwhile, continues to draw new attacks. In Illinois, state Treasurer Judy Baar Topinka has asked Attorney General Lisa Madigan to sue Simon for charging fees on its gift cards.
  Expiration dates, fees and a toll-free number must be easy for the gift cardholder to see, according to Illinois statute. Illinois law also says that unused money on gift cards must go back to the state, which in turn tries to unite funds with their rightful owners.
  Topinka says Simon has not followed the latter part of the gift card law for almost two years. Topinka's office says it has tried to get Simon to voluntarily comply with the law since February 2005. "The company has not even allowed treasurer office staff to examine their records, as the law requires," a spokesperson says.
  Simon operates nine shopping malls in Illinois. The company did not return repeated calls for comment.
  Simon also is battling the law firm of former Georgia Gov. Roy Barnes, who contends the mall owner illegally drained the value on cards held by his two clients through maintenance fees. Georgia's stature states that expiration-date and dormancy-fee information must be conspicuous to cardholders. This case is before the Georgia Supreme Court.
  But these state-court actions will have little effect if federal courts rule that the Simon gift cards as currently issued are bank products exempt from state laws. That is the issue before the federal courts, and it is their rulings that will shape the future of gift card programs of national banks.
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