Recently, the Consumer Financial Protection Bureau (CFPB) published a final determination as to whether the unclaimed property laws of Maine and Tennessee were inconsistent with, and therefore preempted by, the Electronic Fund Transfers Act, 15 U.S.C. §§ 1693 et seq.(EFTA), as implemented by the CFPB’s Regulation E, 12 CFR Part 1005. 78 Fed. Reg. 24386 (April 25, 2013). Specifically, the CFPB looked at whether the dormancy periods in these unclaimed property laws were inconsistent with the expiration date provisions of the EFTA and Regulation E. This is important because many states are seeking to increase “revenues” by shortening the legal dormancy periods to accelerate the escheat of unclaimed property to the states. The CFPB determined that Maine’s law, as implemented, was not inconsistent while Tennessee’s law was inconsistent and thus preempted. While the CFPB’s decision only constitutes a determination with respect to the laws of Maine and Tennessee, the CFPB’s decision has broader implications for retailers and other gift card issuers.

The CFPB is tasked with determining “upon its own motion or upon the request of a state, financial institution, or other interested party, whether the [EFTA and Regulation E] preempt state law relating to … expiration dates in the case of gift certificates, store gift cards or general-use prepaid cards.” Regulation E § 1005.12(b). State law may only be preempted to the extent of any inconsistency, and state law is not inconsistent if it provides consumers with greater protection than the EFTA. 

Background

The EFTA and Regulation E generally prohibit gift certificates, store gift cards and general use prepaid cards (collectively, “gift cards”) from having an expiration date unless certain conditions are met. One of those conditions is that the expiration date must be at least five years after the date the gift card was issued, or last loaded in the case of a reloadable card.  Devices that are not subject to the expiration date provisions of the EFTA and Regulation E, such as gift certificates only issued in paper form and reloadable cards that are not marketed or labeled as “gift cards” or “gift certificates,” are not considered “gift cards” for this discussion.

Maine: No Preemption Determination

In Maine, gift cards are escheatable to the state two years after the most recent transaction involving the gift card. Section 1953 of the Maine Revised Statutes provides that “[a] period of limitation may not be imposed on the owner’s right to redeem the [gift card].” Once the holder (typically the gift card issuer) transfers the unclaimed property to the state, the holder is relieved of further liability with respect to such amounts, but “may subsequently make payment to a person reasonably appearing to the holder to be entitled to payment.” 33 M.R.S. §1961. The holder may then seek reimbursement from the state.

While the language above suggests that the holder has the option of honoring the gift card or directing the consumer to the state to claim its property, the Office of the State Treasurer for the State of Maine, which administers Maine’s unclaimed property laws, informed the CFPB that holders are required to continue to honor gift cards previously reported as unclaimed property. Consumers that attempt to claim their property from the state are directed back to the holder. In light of the State Treasurer’s interpretation, the CFPB’s determination provides that “[b]ecause the Maine Act does not interfere with consumers’ ability to use their gift cards at the point-of-sale for at least as long as they are guaranteed that right by the EFTA and Regulation E, the [CFPB] has determined that it has no basis for concluding that the provisions in Maine’s unclaimed property law relating to gift cards are inconsistent with, or therefore preempted by, federal law.”   

Tennessee Preemption Determination

In Tennessee, gift cards are escheatable upon the earlier of (i) the card’s expiration date, and (ii) two years from the date the gift card was issued. Certain gift cards are excluded from the scope of Tennessee’s unclaimed property laws, including open-loop gift cards and gift cards that both charge no dormancy fees and have no expiration date (and these cards are not considered “gift cards” for purposes of this portion of the discussion). Similar to Maine, once the holder transfers the unclaimed property to the state, the holder is relieved of further liability with respect to such amounts, but the holder may elect to honor the gift cards and seek reimbursement from the state.

Unlike in Maine, the holder is not required to honor the gift cards previously reported as unclaimed property and could instead require the customer to obtain the card’s value from the state. The CFPB found this distinction to be vitally important because it makes Tennessee’s law inconsistent with federal law.

“[B]y permitting issuers to decline to honor gift cards as soon as two years after issuance and relieving them of liability to consumers for the property, the effect of [Tennessee’s unclaimed property law] is to permit cards and their underlying funds to expire sooner than is permitted under the EFTA and Regulation E.”

As a result, the CFPB found Section 66-29-116 of the Tennessee Uniform Disposition of Unclaimed (Personal) Property Act to be preempted.

Greenberg Traurig Observations

1. These are the first preemption determinations by the CFPB. Similar determinations can be expected in the future where a state requires gift cards to be reported as unclaimed property less than five years from the date the card was issued or last loaded and the holder is not required by state law to honor such gift cards if presented at the point-of-sale.

2.  The CFPB’s determination may place an additional burden on gift card issuers complying with federal and state law. Gift card issuers will need to report gift cards to the states as unclaimed property in accordance with state law, honor the cards at the point-of-sale, and then seek reimbursement from the states for the amounts honored. Gift card issuers will need to implement systems, if they have not already done so, to track reimbursements requested and received from the states, especially in situations where the customer does not use the entire remainder of the gift card at the time of purchase. Potential acquirers of gift card issuers should be sensitive to this issue during their due diligence. 

3. The CFPB’s determination states:

“[T]he [CFPB] express no opinion on the constitutional due process concerns raised by certain commentators, because the [CFPB’s] role is solely to determine whether state law [is] inconsistent with the requirements of the EFTA and Regulation E, not to determine whether state law is constitutional.”

If gift card issuers find it burdensome to honor the gift cards at the point-of-sale and seek reimbursement later, we may start to see due process challenges brought against these types of state laws.