Loyalty Programs: Points, Codes, and Gift Cards–Oh My!

As Dorothy Marketer and her team skip down the Yellow Brick Road, they gaze longingly towards the gleaming, green Emerald City in the distance, filled with loyal customers and financial profit. They decide that a loyalty program will help bridge the gap in brand communications and deliver them squarely to the gates of the Emerald City. But have they forgotten that there are real dangers along the way that may prevent them from a safe arrival?

A loyalty program is a tried and true marketing device that drives consumer recognition of a brand and interaction with the brand. Many brands offer gift cards or gift certificates to loyal consumers. In so doing, however, the brand subjects itself to the complicated maze of gift card laws.

Most states have gift card/certificate laws that deal with the thorny issues of expiration dates and fees. In addition, the  Credit Card Accountability Responsibility and Disclosure Act of 2009 (the “Credit Card Act”) amends the Electronic Funds Transfer Act to govern electronic store gift cards and certificates. The statute covers such issues as dormancy fees, service fees, and expiration date restrictions. The federal statute carves out an exception for certain types of loyalty, award, or promotional programs that incorporate codes or other devices are not subject to the numerous substantive requirements of the statute.

In structuring a loyalty program, brand managers and marketers should consider strategies that would allow them to avoid gift card/certificate classifications. Consider setting up a program that allows consumers to accumulate points (that have no monetary value) but can be redeemed for merchandise offered via website. An example of such a program is “Disney Movie Rewards.”* These programs are complex to establish, particularly if they have any overlay of sweepstakes, contests, or instant wins or if some of the points can be traded in for gift cards or discounts.

Depending on the loyalty program’s structure, aspects of gift card statutes may still apply. In January, 2011, an individual (Anthony Ferreira) filed a complaint seeking to certify a national class of plaintiffs in a lawsuit against Groupon and its retail partners. At issue is whether certain Groupon “daily deals” for discounts constitute gift certificates. The plaintiff alleges that consumers purchase the deals on a prepaid basis in exchange for specific discounts redeemable by a single merchant, making these deals gift certificates. He complains that expiration dates would then be prohibited under the Credit Card Act. While Groupon settled a similar case in 2010 and revised its Terms and Conditions to bring them in line with gift card statutes’ requirements, this case, if fully litigated, could lead to an expanded definition of “gift certificates” that could impact point loyalty programs.

In addition, with the proliferation of mobile marketing, more loyalty programs are incorporating an instant redemption aspect to point collection. Consumers are able to redeem their loyalty points in store by receiving scannable gift certificates on their mobile devices. As marketers seek to incorporate an instant rewards component into their loyalty programs, they need to be sure to reexamine the legalities of offering gift certificates and compliance with the variety of governing statutes.

The trip to the Emerald City can be plagued by flying monkeys and evil apple trees and deceptively sweet looking poppies. Similarly, the gift certificate statutes appear more straightforward than they really are. They can present a significant obstacle to a marketer’s loyalty program.Engaging legal counsel in the early planning stages will allow the marketing and legal teams to hash out the details of the program cooperatively and clear the way to the riches of the Emerald City.

*”Disney Movie Rewards” is a trademark of Disney, a company that has no affiliation or connection with this blog.