Kmart Settles With FTC Over Gift Card Sales Practices

Company Must Clearly Disclose Fees and Provide Refunds Kmart Corporation has agreed to settle Federal Trade Commission charges that it engaged in deceptive practices in advertising and selling its Kmart gift card. As part of the settlement, Kmart will implement a refund program and publicize it on its Web site. This is the agencys first law enforcement action involving gift cards. Consumers have a right to know when gift cards come with strings attached, FTC Chairman Deborah Platt Majoras said. If fees or restrictions apply, gift card issuers must fully and clearly disclose them. According to the FTCs complaint, Kmart promoted the card as equivalent to cash but failed to disclose that fees are assessed after two years of non-use, and misrepresented that the card would never expire. Kmart has agreed to disclose the fees prominently in future advertising and on the front of the gift card. The FTCs complaint alleges that since 2003, Kmart did not disclose adequately that after 24 months of non-use, a $2.10 dormancy fee would be deducted from the cards balance for each month of inactivity, resulting in a $50.40 reduction from the cards value if the card was not used for 24 months. In many instances, the Commission alleges, consumers did not learn of the fee until they attempted to use their cards. According to the complaint, the Kmart gift card was sold bearing inadequate disclosures that appeared in fine print on the back side and that were phrased in legalese. In some instances the disclosures on the card were wholly concealed before sale, and there were no pre-sale disclosures in online sales. The FTCs complaint alleges that since December 2005, Kmarts Web site stated that the gift cards never expire, even though the dormancy fee caused cards valued at $50.40 or less to expire after two years of inactivity. As of May 1, 2006, Kmart stopped charging a dormancy fee on all Kmart gift cards. Under the proposed settlement, which is subject to public comment, Kmart Corporation, Kmart Services Corporation, and Kmart Promotions LLC, will not advertise or sell Kmart gift cards without disclosing, clearly and prominently, any expiration date or fees in all advertising and on the front of the gift card. The proposed settlement further requires Kmart to disclose, clearly and prominently, all material terms and conditions of any expiration date or fee at the point of sale and before purchase. It bars Kmart from misrepresenting any material term or condition of the gift cards, and prohibits Kmart from collecting dormancy fees on any gift card sold before the proposed order is issued. The proposed settlement requires Kmart to reimburse the dormancy fees for consumers who provide an affected gift cards number, a mailing address, and a telephone number. Kmart will publicize the refund program on its Web site, including a toll-free number, e-mail address, and a postal address for eligible consumers to contact Kmart to seek a refund. The FTC has established a Consumer Hotline at (202) 326-3569 for consumers who have questions about the refund program. The Hotline will be updated as necessary. The FTC acknowledges the invaluable assistance of the Montgomery County, Maryland, Division of Consumer Affairs. Its 2006 annual report on gift cards is available at www.montgomerycountymd.gov/content/ocp/giftcardreportfinal2006.pdf. The Commission vote to accept the proposed consent agreement was 5-0, with Commissioners Pamela Jones Harbour and Jon Leibowitz issuing a separate statement concurring in part and dissenting in part. In their statement, Commissioners Harbour and Leibowitz said they concur in the decision to bring an action against Kmart, but dissent in part from the proposed consent agreement because they believe the remedy should include disgorgement of ill-gotten profits: Otherwise, Kmart will remain unjustly enriched by a substantial amount of buried ˜dormancy fees while many consumers will have lost the chance for reimbursement because they long ago threw out their seemingly worthless gift cards in frustration. The FTC will publish an announcement regarding the agreement in the Federal Register shortly. The agreement will be subject to public comment for 30 days, beginning today and continuing through April 10, after which the Commission will decide whether to make it final. Comments should be addressed to the FTC, Office of the Secretary, Room H- 135, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580. The FTC requests that any comment filed in paper form near the end of the public comment period be sent by courier or overnight service, if possible, because U.S. postal mail in the Washington area and at the Commission is subject to delay due to heightened security precautions. NOTE: Consent agreements are for settlement purposes only and do not constitute an admission by the defendant of a law violation. When the Commission issues a consent order on a final basis, it carries the force of law with respect to future actions. Each violation of such an order may result in a civil penalty of $11,000.