Legal Problems with Loyalty Programs

Many brands are offering loyalty programs to reward customers’ fidelity and capture data about their guests. This blog introduces many of the legal problems associated with implementing and running loyalty programs.

Q. What is the first thing a brand should do to create a legal loyalty program?

A. The first step is to vet and document the program’s structure. The program’s terms and conditions, when properly publicized, will serve as a binding contract with the consumer. Without those terms and conditions, the brand risks misunderstandings with consumers that can turn into legal liabilities. (In 2016, Staples settled for $2 million a class action lawsuit questioning the way it calculated reward points.) The terms should explain how the consumer earns and redeems points. Tiered programs need special attention for clarity.

Q. Are there legal issues associated with choosing a name for the loyalty program?

A. Some program names (“e.g. BRAND Rewards”) are so generic that no separate clearance may be necessary. Others cover new branding territory. These require a full trademark search to prevent third party trademark infringement. Brands should also consider whether they want to invest in protecting the name of their program with trademark registrations in the United States and abroad.

Q. What about data collection? How does that impact loyalty program set-up?

A. Another crucial step of setting up the program is data mapping. What data are you collecting? Who has access to the data (particularly third-party vendors and white labeled third party apps)? How is the data being stored and for how long? In particular, California’s new privacy statute, the California Consumer Privacy Act of 2018, is quickly establishing  data mapping as a best practice. Brands should start putting data mapping systems in place immediately (even if they do not have loyalty programs). Data mapping becomes even more important if the brand has any European data subjects so they can comply with GDPR. Loyalty programs need to be consistent with brand privacy policies. Those policies may need a rewrite timed with the launch of the loyalty program. (A full examination of data privacy issues is beyond is the scope of this blog post.)

Q. Can the program managers alter redemption values or make other structural changes over time?

A. Because loyalty programs are rarely static, the terms should be drafted proactively from the beginning to allow for changes or even termination. While program alteration clauses have generally been upheld in courts, marketers want to be careful with changes on redemption values without notice, particularly if they are retroactive. This is true even if the program terms permit any kind of change. In 2016, a class action lawsuit against AutoZone Parts challenged a rewards program for this very reason, and the case is still pending. Whenever a brand wants to shift the redemption values and structure of its loyalty program, it should do a complete legal vetting of the change. The legal and marketing team would balance brand rights based on the program’s terms with the practical impact any change would have on program participants.

Q. What current trends are shaping loyalty programs?

A. The first is gamification. Programs often offer a multitude of ways to earn points, through sweepstakes, contests, or auctions. Those programs are subject to 50 states’ sweepstakes and gambling laws and need legal review. A second trend is charitable giving. Some programs allow their customers to “gift” rewards to charities. In so doing, the brand may become a commercial co-venturer under many states’ laws. These laws may require registration, bonding, or specific advertising or contractual requirements. A third trend is recruiting loyalty program participants to serve as brand influencers. The legal issues here range from complying with FTC Endorsement Guidelines to shielding the brand from unsubstantiated claims. In addition, before a brand promotes its most “loyal” consumer, it may want to vet that consumer with complete background checks.  In addition,  an influencer spokesperson agreement with that customer is essential.

Q. What if my brand is a franchise? Are there special considerations for creating loyalty programs?

A.  Yes. The franchise agreement needs to be crafted carefully if franchisors want to mandate franchisees’ participation or to require franchisees fund program costs. In addition, general provisions in these agreement allowing changes to “systems standards” or “rules of operation” may not be sufficient to allow franchisors to change the terms of the loyalty program down the road. Franchisors will also want to ensure that franchisees are sending out marketing messages that are consistent with the program’s terms.

Q. Who might challenge a brand’s loyalty program?

A. The danger lies in many places. Consumers and class action attorneys may file suit if there are any gaps in uniformity or any perceived unfairness. State Attorneys-General, the Federal Trade Commission, or industry watch groups may investigate to ensure the program is neither deceptive nor unfair. In addition, franchisees may complain about being forced to participate in loyalty programs if their franchising agreement is improperly drafted.

Q. What kinds of loyalty program problems have resulted in litigation?

A. Too often, the program’s marketing materials do not match the program’s terms and conditions. The result often is consumer confusion and frustration, leading to litigation and challenges for unfair or deceptive advertising. In 2016, the New York Attorney General settled with Walgreens/Duane Reade for $500,000 in civil penalties, fees, and costs, along with requirements that it create consistent information about its Balance Reward Points Program.

Also, be careful of advertising the perks of the program with descriptions like “It’s just like cash” or “it’s like getting it for free.” The National Advertising Division of the Council of Better Business Bureaus recommended that Office Max and Staples alter such advertising claims. It reasoned that free merchandise and the chance to earn points are substantially different offerings. In addition, as of the date of this writing, litigation is currently pending, in California against Kohl’s Department Stores based on claims that “Kohl’s Cash” is equivalent to real money when used in-store.

It is also important to be clear that points have no redeemable cash values or the program could be subject to money transmission statutes, escheat laws, etc. These issues remain somewhat unsettled law, dependent on the facts. In September, 2018, a jury in the Superior Court of Delaware found Overstock.com guilty of hiding approximately $3 million in unpaid escheat claims.

Q. How else can advertising for the loyalty program create legal liability?

A. Statutes like CAN-SPAM or the TCPA have very specific requirements for this kind of marketing. Email or text message marketing for the program that fails to meet statutory requirements can also create significant risk of financial liability. In addition, failure to accurately describe the conditions and limits of any offer can result in legal trouble. For example, in 2013, the Missouri Attorney General settled a suit with Walgreens because, in part, its shelf tags were not clear about how to redeem points.

There is also pending litigation in several jurisdictions relating to the Americans with Disabilities Act (ADA)’s applicability to loyalty programs’ websites and apps. As of the date of this writing, the legal community awaits a decision from the 11^thCircuit on the ADA’s applicability to a website in Gil v. Winn-Dixie Stores, Inc. Previously, the Container Store lost in the First Circuit when the National Federation of the Blind challenged its loyalty program as discriminating against blind consumers.

Q. Is there a way to avoid class action litigations?

A. While it is not fully settled law, for now, it appears that a well-drafted arbitration clause that includes a class action waiver would achieve this goal. Again, the law is shifting in this area, so it is crucial to stay abreast of developments through legal counsel. In addition, a brand’s c-suite executives will want to make a well-informed decision when selecting an arbitration provider. The American Arbitration Association, for instance, has a separate set of procedural rules for business/consumer disputes.

Q. It seems like there are many issues for a marketer to think about. Is all this too difficult to implement?

A. There are many legal issues embedded in loyalty programs. And frequently, the third-party apps who are “selling” these programs may not consider all these legal risks. (That’s a reason to review your contracts with those vendors carefully.) But if the brand involves legal from the concept stage, there is no reason to avoid a loyalty program.

Are you interested in setting up a loyalty program to reward your customers? Or do you have a loyalty program and are concerned about shielding yourself from legal liability?  Contact Hilfer Law today for a free consultation.