NFTs and Loyalty Programs: Essential Legal Questions for Marketers

As NFTs become a mainstream marketing tool, marketers are modernizing their loyalty programs. NFTs are driving exciting new reward opportunities for customers. At the same time, brands need to understand the essential legal issues of combining NFTs and loyalty programs.

What is a loyalty program?

A loyalty program rewards the member for purchases made of brand products or services. It is largely a creature of contract between the brand and the consumer. The terms and conditions of the program establish that contract. The consumer must agree to those terms and conditions in order to receive the membership rewards.

The brand must lay out procedures and benefits clearly and conspicuously so there can be said there is a meeting of minds between brand and consumer. The brand must also enforce its terms and conditions systematically so that consumers understand how their actions translate into benefits.

Legal problems with loyalty programs often stem from flawed terms and conditions. NFTs and loyalty programs may intensify the legal risk.

How might NFTs be incorporated into a loyalty program?

The ingenuity of marketers is endless. They are exploring many ways to merge NFTs and loyalty programs. Below are some popular methodologies and legal issues to consider.

Brands commonly use NFTs to reward program participants for purchasing a sufficient quantity of brand goods or services. Marketers should consider the full panoply of intellectual property legal issues in offering NFT rewards. For instance, does the brand fully own the right to transfer ownership of the NFT? What intellectual property rights will be given to the person who receives the NFT reward? Does the brand need to pursue supplemental trademark rights in connection with minting or offering NFTs? What resale/trade/license rights will the program participant acquire relating to the NFT?

There also may be other legal risks if each participant receives a different NFT with a different value. Especially if the NFTs have never been offered in the marketplace before, their values may vacillate wildly over time. Such value variance may require analysis under lottery and gambling laws.

In another scenario, a brand may deliver an NFT with purchase. The NFT then functions as a “key” to unlock rewards in the loyalty program. In this instance, the marketing team again needs to think about consistency. Will every program participant receive the same NFT at the same purchase level? Will everyone’s NFT key deliver the same rewards or same rewards tier? Is the program fully transparent, or are consumers spending money on the brand’s products or services with unknown loyalty program incentives?

The brand may want to keep a surprise the NFT reward or the tier of reward unlocked. If not executed properly, the surprise or lack of transparency may create an illegal lottery or even risk under gambling laws. Of course, legal risk mitigation is possible. The brand can either alter its loyalty program structure to include an alternate method of entry or switch to some skill-based task to unlock the tiers to the program.

Indeed, skill-based contests around NFTs are also popular. Brands are using them to provoke discussion and excitement relating to the loyalty program. For example, the purchaser could be given the opportunity to participate in a Discord skill-based tournament or quiz event related to the NFTs. Results could be tied to published tier levels for program membership. Other brands may use a Discord question of the day about their brand NFT, with responses judged on objective, even-handedly applied, published criteria for placement into a tier level as the prize.

These skill-based programs need to be vetted against state laws that prohibit a purchase to enter a skill game. In addition, the marketing team should work with legal advisors to ensure the programs’ execution does not inadvertently bring the brand back into an illegal lottery.

Does the brand need clear standards for giving program participants NFTs?

Federal and state UDAP and consumer protection laws prohibit merchants from engaging in unfair and deceptive acts and trade practices, such as

• Promoting a loyalty program in a false and misleading manner
• Failing to disclose material terms of the program clearly and conspicuously
• Failing to meet reasonable consumer expectations and assumptions

Accordingly, a loyalty program’s terms and conditions should clearly state the different ways to participate. The terms should also indicate to the customer what rewards she can expect to receive at different levels of point accumulation. To the extent that rewards may vary from time to time or be offered seasonally or on a discretionary basis, the program’s terms and conditions typically assert the brand’s discretion clearly.

The program rules may state that program offers are subject to certain restrictions. In addition, many loyalty programs’ terms incorporate strong language that protect the brand’s rights to make changes or cancel aspects of the program. Some brand discretion is acceptable so long as the terms and conditions establish clearly and conspicuously legal and contractual bases for the brand’s decisions.

On the other hand, vaguely drafted terms and conditions could make the brand subject to claims for breach of contract, breach of the covenant of good faith and fair dealing, unjust enrichment, or other causes of action. Even worse, the program may be susceptible to challenge as an unenforceable contract. If a loyalty program is vague about points needed to earn NFT rewards or which rewards an NFT key will unlock, the brand may have a problem.

In general, regulators expect that consumers can expect their purchases to generate clearly allocated points that can be redeemed for the full amount promised by program terms. If those terms are vague, a regulator may see the program as unfair or deceptive, and subject to the various consumer protection and UDAP laws.

In addition, the consumer must have opted in knowingly to the program terms before participating. Much of the class action litigation challenging loyalty programs has centered around the validity of opt in mechanisms or challenged the consumer’s acceptance of any changes to the terms. Furthermore, any gaps between advertising and marketing for the program and the written terms and conditions could escalate legal risk that the program is false and misleading.

Could discretion in awarding NFTs lead to a charge of discrimination?

States and federal laws in the USA are designed to protect human rights and civil rights. These laws prohibit discrimination on the basis of certain protected classes, such as, for example, gender, age, sexual orientation, religion, ancestry, marital status. California’s Unruh Act lists an expanded categories list for protection and declares that all people regardless of their categorization are entitled to full and equal treatment in all businesses.

Historically, courts that have examined challenged promotions or other branding initiatives have split in terms of finding discrimination or balancing harm with the rights protected. In 1985, a CA Supreme Court ruled that a car wash “Ladies’ Day” discount violated the state law. On the other hand, in 2005, a California court found that a Mother’s Day tote bag giveaway at a sporting event was a gift and not a discount. The court held that the giveaway did not violate the Unruh Act.

If a brand is selecting who will receive certain NFTs based on discretion and nonuniform criteria, it is conceivable that the program could be subject to a discrimination challenge. Class action lawyers, in particular, would be poised to act in this area. Presumably, in order for a plaintiff or regulator to be successful, they would have to prove that brand’s discretion discriminated based on a protected category under the applicable statute. Brands can mitigate against the risk of a discrimination charge with 1) internal records; 2) careful review of public perception; and/or 3) transparency. Note: even if the program were not seen as discriminatory, it could be seen as unfair or deceptive based on factors discussed above.

What other areas of legal risk exist with using NFTs in loyalty programs?

A range of other legal issues exist relating to use of NFTs and loyalty programs:

• Gift card/trading stamp laws: there could be implications under these laws depending on the execution of the program. Typically, these laws are not high risk for brands who do not rely on actual gift cards and who specifically disclaim any cash value for any component of their point system. If, however, an NFT has some value outside of the loyalty program ecosystem, risk under this law escalates. (Note: the current legal challenge in New York to Coca-Cola’s MyCokeRewards revised loyalty program focuses, in part, on trading stamp statutes.)
• Bank Secrecy Act, money transmission laws, and anti-money laundering laws: if there is a cash value for the NFTs, there could be legal implications under these statutes.
• Escheat/unclaimed property laws: These statutes provide that property may be presumed abandoned if there is no activity for a specified dormancy period, and in some cases such property must be turned over to the state. State regulators have been more aggressive recently in applying these statutes, but there is still some question as to whether they apply to loyalty program points that have no value outside the brand’s ecosystem.

A variety of other laws may also apply to the advertising and marketing of any loyalty program, regardless of whether NFTs are incorporated, including FTC requirements, antitrust laws, data privacy laws, CAN-SPAM/TCPA laws etc.

A flawed loyalty program can lead to legal risk and lost customers. For more information about the legalities of combining NFTs and loyalty programs or about loyalty programs in general, please contact us here.