Do Gift Certificate Laws Apply to Coupons?

Recently, Groupon and LivingSocial, two leaders in daily deal website offerings, have been hit with multiple lawsuits. These complaints allege that the sale of online prepaid discounted coupons with short-term expiration dates is illegal under the federal Credit Card Accountability Responsibility and Disclosure Act of 2009 and the Electronic Funds Transfer Act of 1978, as well as under similar state laws. The plaintiffs claim that the coupons are gift certificates under federal and state laws, and are therefore subject to federal and state law limitations on expiration periods.

Groupon and LivingSocial operate websites that allow consumers to purchase discount coupons for products and services. Purchasers pay a specified amount of money, and in return receive a redeemable coupon. For example, a consumer may pay $20 for $40 worth of food, or $50 for a $75 manicure. Coupons often expire within weeks or months of issuance.

1) Gift certificates

Federal and state laws have expiration date limitations for gift certificates. Under federal law, a gift certificate must be valid for at least 5 years from the date of issuance. State laws vary. For example, California prohibits expiration dates, whereas Illinois limits expiration dates to 5 years from issuance. Gift certificates are generally defined as a card, code, or other device that: (i) is not reloadable; (ii) is issued on a prepaid basis; (iii) is issued in a specified amount; and (iv) can be used only at a single or affiliated group of merchants. Under federal law, a card, code, or other device is not issued in a "specified amount" if it is redeemable for a specific good, service, or "experience" (e.g., spa treatment). However, a card, code, or other device is a gift certificate if issued in a specified/pre-denominated amount that can be applied to a specific good or service (e.g., "redeemable for a spa treatment up to $50") or a specific value is stated (e.g., "a $50 value").

Federal law and many state laws also provide that gift certificates issued in connection with a promotional program (such as a sales promotion where a consumer receives a coupon or discount redeemable toward a product or service) may expire at any time--so long as certain disclosure requirements are satisfied. Generally, a consumer is permitted to provide value or money in exchange for such promotional certificates. However, state laws differ and prohibit the exchange of money or other things of value for the promotional certificate.

2) Coupons

Coupons generally satisfy many of the definitional requirements of a gift certificate. Typically, they are redeemable at a single or affiliated merchant, are not reloadable, and are purchased on a prepaid basis. However, coupons may not meet the requirement that they be issued in a "specified amount." Specifically, if a coupon is redeemable for a specific experience with no value referenced, then arguably the "specified amount" requirement is not met, and the coupon is not a gift certificate subject to expiration date limitations. While couponing for a specific experience may appear as a reasonable strategy to avoid the application of federal and state gift certificate laws, in reality this may be difficult to implement since some state laws governing the issuance of coupons may require that the coupon have a stated cash value. In that case, the coupon will trigger the "specified amount" requirement and be subject to federal and state law expiration date limitations.

It may be possible to issue coupons with a stated cash value and a short-term expiration date if structured to take advantage of the promotional certificate exclusion. Generally, if the coupon is structured in this way, the purchase value (i.e., the amount paid for the coupon) will not expire, while the promotional value (i.e., the amount in excess of the purchase value) will. In order to fall within this exclusion, the coupon must be specifically structured and contain certain disclosures.

Courts have yet to decide whether coupons are gift certificates under federal or state laws, or whether they qualify for the promotional certificate exclusion. However, given the pending lawsuits in various jurisdictions, it is likely that one or more courts will address these issues in the near future. Until then, franchise systems offering coupons (including through daily deal offerers like Groupon and LivingSocial) should understand the potential application of federal and state laws and structure their coupon programs to minimize the risk of violating these laws.

Maureen E. Mulvihill is an attorney at the Chicago law firm of Cheng Cohen LLC. She practices primarily in the area of domestic and international franchising, licensing, and distribution transactions. Contact her at 312-957-8371 or maureen.mulvihill@chengcohen.com.