Editor’s Note:

Daily Deals present a unique set of issues regarding consumer redemption rights and merchant obligations.  While a Daily Deal Voucher is a new instrument, leading vendors (notably, GroupOn) assume the most stringent “worst case” scenario, treating a Daily Deal as the equivalent to a Gift Card.  This article explores the implications of these regulations.

This informative guest post is from Seth Gardenswartz, VP of Business Development and General Counsel for SpaBoom, a leading marketing solution provider to Spas, Salons and Restaurants.

Article:

Pop Quiz: how long must you honor your gift cards? For extra credit: how long do you have to honor a Groupon? Think you know the answer?  You are likely wrong or a very rare exception.

If you’re lucky the answer is generally 36. That’s 36 months; the new minimum imposed by the CARD Act last year. However, it could be longer or shorter depending on your state law and the type of gift card you delivered. Here is a simple way to figure it out.

If the card or certificate has a “$” and a number on it (like “$50” or “$10”) then it’s subject to the CARD Act. To be precise, if it states a specific monetary value, it is covered by the CARD Act unless it qualifies for an exception. The minimum time you must honor gift certificates covered by the Card Act is five years from the date of purchase. However, the CARD Act sets a floor, not a ceiling. If your state has a seven-year minimum or prohibits expiration dates, you are subject to the longer expiration date.

The reason for the dollar sign and number short cut above is that the federal law does not apply to gift cards that are good for “experiences.” If your card is good for a “couples massage,” rather than a specific dollar amount the CARD Act simply does not apply. This is where your state comes into play again. For example, if you sell a card redeemable for $50 at a restaurant in Dallas, you must honor it for five years (since it is subject to the CARD Act).  However, if you charge $50 for a card entitling the holder to “Chateaubriand for two,” it can expire in a year since 1) the CARD Act does not apply, and 2) there are no minimum expiration requirements for gift cards or certificates under Texas state law.

Aside from the experience exclusion there are six exceptions to the CARD Act regulation. However, only one of them applies to most small businesses; the promotional or loyalty exception. Essentially, if you give gift certificates away, sell them below face value or provide them as part of a reward program they are not subject to the CARD Act’s five-year minimum but are subject to its disclosure requirements.  While each state law is different, many retailers allow consumers to redeem the purchase price of promotional gift certificates for the longer of five years or the state’s minimum expiration term even if a promotional value expires sooner.

What about Groupons?

The first thing to understand is that Groupon tells its clients that

“[t]he Merchant, not Groupon, is the seller of the Voucher and the goods and services and is solely responsible for redeeming any Voucher you purchase[]”and that you (the “Merchant”) are “fully responsible for any and all injuries,” including claims “for any unclaimed property liability arising from unredeemed Vouchers or portions thereof.”

Therefore the liability for Groupons sold is yours, not theirs.

Groupon takes the approach that the full promotional value of a Groupon can expire in a few months, but the value paid by the purchaser is valid for the minimum required by state law. They are requiring you the merchant to honor the coupon for the time frame required by state law. Furthermore, Groupon is covering their assets with an express policy of refunding the purchase price paid by consumers if a merchant fails to honor any Groupon.

Furthermore, a recent lawsuit is a perfect example of how Groupon’s one-size-fits-all fine print may create trouble for Groupon and its clients.  As described above, Groupons bear an expiration date, even if the purchase price is available for a longer period of time. That may be fine in many states, but in California it is “unlawful for any person or entity to sell a gift certificate” with an expiration date.  One enterprising Californian, with the other members of his class, has noticed this transgression and sued Groupon and one of its clients (Nordstrom’s) for the sin of using the “e” word.

Best Practices

First realize that this document is not legal advice. After that do your homework! You should know your state law regarding gift card and gift certificate expiration, including quirks like the California’s prohibition of the word “expiration.” The National Conference of State Legislatures has published a handy guide, which makes a great place to start your research.

A good practice is to assume that you are liable for any money the customer spends for the longer of 5 years or your state’s minimum time frame for gift certificate expiration. Note that if you sell a Groupon that amount will be approximately double what you receive after Groupon takes its cut.

If you are a sucker for in-depth analysis of the CARD Act you can read more about it in scintillating detail at our Guide for Businesses Selling Gift Cards. If you are reading this and feeling worried, seek guidance from the right advisors ASAP! They generally have Esq. or CPA on their business cards.