Friedman Law Group, LTD.

March 12, 2007 - In the first Federal Trade Commission (FTC) enforcement action involving gift cards, Kmart Corporation was charged with deceptive practices in the advertising and sale of gift cards. Kmart has agreed to modify the way it markets its cards.

According to the FTC’s complaint, Kmart failed to adequately disclose the dormancy fee and misrepresented that the card would never expire. Although the fee was revealed on the back of the gift card, the disclosure was in fine print and phrased in legalese. In some instances, including online sales, there was no disclosure of the fee to consumers prior to sale. This clearly impacts how other retailers advertise and sell their gift cards.

Despite its promotion of the gift cards as cash equivalents that didn’t expire, Kmart assessed a dormancy fee on unused cards. After 24 months of inactivity, Kmart deducted from the card’s balance a charge of $2.10 for each month of non-use, resulting in a minimum deduction of $50.40. Consequently, cards issued for under this amount would be valueless if not used within two years.

Under the proposed settlement subject to public comment until April 10, Kmart will not advertise or sell gift cards without clearly and prominently disclosing any expiration date or fee in all advertising and on the front of the card. In addition, Kmart will disclose, clearly and prominently, all material terms and conditions of any expiration date or fee at the point of sale and prior to purchase.

The proposed settlement also prohibits Kmart from collecting fees on any gift card activated before the consent order is issued and requires Kmart to establish a refund program for consumers previously affected by the fee. The terms of the settlement agreement do not apply to replacement fees for lost or stolen cards.

Although the Commission voted 5 – 0 to accept the proposed settlement, two of the Commissioners issued a separate statement dissenting, in part because they believed Kmart had been unjustly enriched by the “substantial amount of buried dormancy fees” and should be forced to disgorge all ill-gotten profits. The dissenting Commissioners considered the refund program an insufficient remedy because many consumers, having thrown out their seemingly worthless cards, would be unable to claim a refund.

This entry was posted on Tuesday, September 4th, 2007 at 2:02 pm and is filed under Promotion. You can follow any responses to this entry through the RSS 2.0 feed.