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Tuesday, October 21, 2008

Gift Card Class Action Survives in NY Appellate Court

ImagesWe previously mentioned a federal class action against Amex over gift card fees. Well, in a separate state case against Simon Property Group over gift card fees, an appellate court in New York (Second Department) recently held that, in the absence of clear and unambiguous disclosure, the imposition of dormancy and administrative fees decreasing the redeemable value of a gift card constitutes a sufficient predicate for a cause of action to recover for breach of contract.

Plaintiffs commenced a class action challenging, among other things, a $2.50 monthly "dormancy fee" imposed by the defendant in connection with its promotion and sale of Simon Gift Cards, and the allegedly improper manner in which such fees were disclosed. The court explained:

The Simon Gift Card (hereinafter the card) is a prepaid, stored-value card, which is issued by Bank of America, N.A., pursuant to a license from Visa U.S.A., Inc., and may be used everywhere Visa is accepted. The card is programmed to hold a balance that is recorded on it at the time of purchase, and stored on it thereafter. Each time the card is used, the amount of the transaction is deducted from the available balance. The card is plastic and resembles a standard credit card. There is a magnetic strip on the back of the card, below which is recited, in relevant part, as follows: "An administrative fee of $2.50 per month will be deducted from your balance beginning with the seventh month from the month of card purchase." Once the card is activated, it is placed in a cardboard sleeve, which is styled as a cardboard folding "book" with the sleeve at the top, into which the card is inserted, along with five additional folding double-sided "pages" which are attached to the sleeve. On the front five "pages," general information about the card and its use is included, and on the back five "pages" the cardholder agreement and terms and conditions are articulated. The amended complaint alleges that the five "pages" on the back of the card sleeve that contain the terms and conditions of the card, including the dormancy fees, are in small print, in fonts materially less than that required pursuant to CPLR 4544, concealed, and in violation of General Business Law 396-i(3), which provides that "[t]he terms of a gift certificate or store credit shall be clearly and conspicuously stated thereon."

* * *

A section on the back of the card sleeve, entitled "Do I ever expire?" provided: "An administrative fee of $2.50 per month will be deducted from your balance beginning in the seventh month from the month of card purchase." The actual card term regarding the dormancy fees is placed on the very last page on the back of the 10 folding pages' of information included with the card sleeve. That section, entitled "Service Charges," provides, in relevant part, as follows:

"If a balance remains on the Gift Card after the sixth month, the Gift Card will be charged a $2.50 monthly service fee. The fee will be deducted automatically, starting on the seventh month after the month of purchase, from any remaining value on the card on the first day of the month until the value reaches zero."

Defendant moved to dismiss. The trial court denied the motion as to plaintiffs' causes of action for breach of contract and deceptive business practices. The Second Department affirmed. It explained in part:

Breach of the Implied Covenant of Good Faith and Fair Dealing

"Implicit in all contracts is a covenant of good faith and fair dealing in the course of contract performance . . . This embraces a pledge that neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract . . . Where the contract contemplates the exercise of discretion, this pledge includes a promise not to act arbitrarily or irrationally in exercising that discretion" (Dalton v Educational Testing Serv., 87 NY2d 384, 389 [internal quotation marks and citation omitted]). "If a factfinder concluded that the [fee] disclosure statement was not clear or conspicuous as required by [law], it could invalidate the fee provision or, alternatively, see it as a violation of the implied duty of good faith and fair dealing" (see Sims v First Consumers Natl. Bank, 303 AD2d at 290). The amended complaint alleges that the terms of the fee disclosure are not clear and conspicuous, but rather, unclear and hidden, which is sufficient to maintain a claim based upon a breach of the implied covenant of good faith and fair dealing.

Furthermore, the amended complaint alleges that the amount of the dormancy fee is grossly excessive. Even were the defendant entitled to charge dormancy fees, it is still precludedunder the implied covenant of good faith and fair dealing from setting such fees at grossly excessive amounts. Thus, the amended complaint sufficiently states a claim to recover damages for breach of the implied covenant of good faith and fair dealing (see Englade v HarperCollins Publs., 289 AD2d 159; Broder v MBNA Corp., 281 AD2d 369).

More coverage at Law.com.

Lonner v Simon Prop. Group, Inc., 2008 NY Slip Op 07877 (App. Div. 2d Dep't Oct. 14, 2008).

[Meredith R. Miller]

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