February 3, 2012
Authored by: Bryan Cave Leighton Paisner
The Third Circuit issued a long-awaited decision in the New Jersey Abandoned Property litigation, NJ Retail Merchants Association v. Andrew Sidamon-Eristoff. The court affirmed the District Court’s decision in this important escheat case with broad implications for members of the prepaid industry.
In 2010 New Jersey passed a new abandoned property law that, if upheld, would have been devastating for gift card and prepaid card issuers doing business in New Jersey.
- First, the new law shortened the dormancy period for prepaid cards and gift cards from being not even subject to escheat, to requiring escheat after 2 years of inactivity (a shorter period than other states, and far shorter than the required 5 years validity under the CARD Act).
- Second, the new law also required prepaid card issuers to retroactively escheat all funds from inactive prepaid cards sold in the last 5 years.
- Third, the new law required sellers of prepaid cards (both open and closed loop cards) to collect the name and address of the purchaser, or at the very least, the purchaser’s zip code. Later this requirement was modified so that only collection of the purchaser’s zip code was “mandatory.”
- Fourth, if the purchasers name and address (or zip code) was not known or collected, the purchaser’s address would be deemed to be the address of the store where the card was purchased.
NOTE — The reason New Jersey wants sellers to collect purchasers’ name and address, or otherwise wants to “deem” the purchasers’ address to be in New Jersey, is because under the uniform abandoned property laws, unused funds from gift cards and other prepaid cards would be paid to the state of the last known address of the purchaser. But if the last known address of the purchaser is not known (which is the case for virtually ALL gift cards), then the unused funds are paid to the state where the card issuer is domiciled. New Jersey’s new law, deeming purchasers’ addresses to be in NJ, or otherwise requiring collection of zip code data from purchasers, was intended to make sure that more of the unused funds escheat to NJ rather than to other states where the card issuers are domiciled. Since many prepaid card issuers are domiciled in states that don’t require escheat, the imposition of NJ’s new law as initially passed, with retroactivity, could have had serious consequences for many prepaid card programs.
The Third Circuit’s Opinion represents both good news and bad news for the gift card and prepaid card industry. See details below.