In a victory for gift card issuers, a federal appeals court has upheld an injunction that blocks New Jersey from fully enforcing provisions of its abandoned property law providing for the escheat of gift cards.

In New Jersey Retail Merchants Association v. Sidamon-Eristoff and several consolidated cases, the U.S. Court of Appeals for the Third Circuit addressed challenges to 2010 N.J. Laws Chapter 25, an amendment to New Jersey’s unclaimed property law that, for the first time, provided for the escheat of gift cards.

Under Chapter 25, gift cards are presumed to be abandoned after two years of inactivity. The law would require issuers to transfer to New Jersey’s Treasurer any remaining card value at the end of the two-year period. Chapter 25 also required issuers to obtain the name and address or zip code of each gift card purchaser. It also contained a presumption that when the address of the purchaser was not known, the address of the place of purchase was to be substituted for the purchaser’s address. As a result, if a gift card was purchased in New Jersey and the purchaser’s address was unknown, Chapter 25 would escheat the card’s value to New Jersey.

In a decision issued on January 5, 2012, the Third Circuit ruled that the district court did not abuse its discretion by preliminarily enjoining retroactive enforcement of Chapter 25 as to existing gift cards. It found that the issuers had shown a likelihood of success on the merits of their claim that Chapter 25 violated the Contract Clause of the U.S. Constitution.

The issuers contended that, by requiring them to turn over all of the remaining value of the cards, Chapter 25 effectively transferred to New Jersey (a) the profit expected by an issuer of “closed loop” cards when a card was redeemed for the issuer’s goods or services, and (b) the merchant fee expected by an issuer of “open loop” cards when a card was accepted by a retailer in payment for a sale. (“Closed loop” cards can only be redeemed for goods or services from the issuing retailer while “open loop” cards can be redeemed at a variety of retailers not affiliated with the issuer.)

The Third Circuit concluded that because the issuers’ reliance on such profits and merchant fees was vital to their contractual relationships, and because Chapter 25 imposed unanticipated, retroactive obligations on the issuers, the law would substantially impair their contractual relationships. The court found that the issuers had also satisfied the other conditions for a preliminary injunction, including that they would suffer irreparable harm without the injunction.  According to the issuers, if New Jersey could enforce Chapter 25, they would either face prosecution and fines for noncompliance or, if they turned over funds, be precluded by state sovereign immunity from getting the funds back should Chapter 25 subsequently be invalidated.

The Third Circuit rejected the issuers’ argument that Chapter 25’s two-year abandonment period was preempted by the Credit CARD Act’s requirement that gift card funds remain available for at least five years after the date a card is issued or the date on which funds are last loaded on a card. In so doing, it held that Chapter 25 was not inconsistent with the Credit CARD Act because it provided greater protection to the consumer since—even though the process might be more cumbersome—it imposed no time limits on the consumer’s right to recover the underlying funds.

However, the Third Circuit found that the issuers had satisfied the conditions for an order preliminarily enjoining New Jersey from prospectively applying Chapter 25’s place-of-purchase presumption because they had shown a likelihood of success on the merits of their claim that the presumption was preempted by federal common law escheat priority rules. Under the federal rules, when the address of a gift card purchaser is unknown, the unclaimed property law of the issuer’s state of incorporation determines whether the value of the card escheats.

Finally, the Third Circuit found that the issuers had not shown a likelihood of success on their claim that Chapter 25’s requirement for issuers to collect purchaser address information violated the Due Process Clause of the U.S. Constitution and ruled that the requirement could properly be severed from the place-of-purchase presumption.

A second decision issued by the Third Circuit on the same day, American Express Travel Related Services, Inc. v. Sidamon-Eristoff, addressed another provision of Chapter 25 that retroactively reduced the period after which travelers checks are presumed abandoned from 15 years to three years. The court affirmed the district court’s refusal to block New Jersey from enforcing this provision after concluding that American Express had not shown a likelihood of success on the merits of its claim that the provision violated the Due Process Clause, the Contract Clause, the Takings Clause, and the Commerce Clause of the U.S. Constitution.

Ballard Spahr’s Consumer Financial Services Group produces the CFPB Monitor, a blog that focuses exclusively on important Consumer Financial Protection Bureau developments. To subscribe, use the link provided to the right. The group is nationally recognized for its guidance in structuring and documenting prepaid cards and other consumer financial services products, its experience with the full range of federal and state consumer credit laws throughout the country, and its skill in litigation defense and avoidance (including pioneering work in pre-dispute arbitration programs).

For more information, please contact Practice Leader Alan S. Kaplinsky, 215.864.8544 or; Practice Leader Jeremy T. Rosenblum, 215.864.8505 or; John L. Culhane, Jr., 215.864.8535 or; Barbara S. Mishkin, 215.864.8528 or; or Mark J. Furletti, 215.864.8138 or


Copyright © 2012 by Ballard Spahr LLP.
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