Three major gift card issuers have announced that their cards will no longer be available in New Jersey due to a law that lets the state claim the value of unredeemed cards after just two years of inactivity. In the past two weeks, Blackhawk Network, InComm and American Express each announced that they would stop offering gift cards in New Jersey because of the state’s recently passed unclaimed property law.

Specifically, an amendment to New Jersey’s unclaimed property statute, signed by New Jersey Gov. Chris Christie in June 2010, requires merchants to ask for address information, such as a ZIP code, each time a consumer buys a gift card. Thereafter, if the entire balance on the card has not been redeemed within two years of the last date of use, New Jersey residents can collect the remainder through the state’s Unclaimed Property Administration. Without such information, the value of unused cards would revert to the gift card issuer or to the state in which the retailer is incorporated. Thus, the collection of the address information prevents gift card issuers from keeping unredeemed card balances as profit.

Andy Pratt, a New Jersey Treasury spokesman, explained that the modifications to the unclaimed property law protect consumers from a variety of potential offenses by gift card issuers, including deflating the value of dormant cards and charging reactivation fees. Pratt also said by claiming unused balances, the state is able to prevent gift card issuers from receiving "windfall profits."

However, the law will have an impact on companies that are in the business of providing gift cards. American Express, the first company to react, pulled its cards from the shelves of New Jersey pharmacies, groceries and convenience stores. As of April 2nd, the only way for New Jersey consumers to buy American Express gift cards, which may be used practically anywhere, is direct from the company online. “Because American Express sells its gift cards through third-party independent retailers, we are not able to ensure compliance with that part of the law,” a spokeswoman for American Express said.

Similarly, Blackhawk Networks and InComm are third-party providers of gift cards to malls, groceries and convenience stores. These two companies are behind hundreds of major name-brand gift cards sold through thousands of vendors. For instance, California-based Blackhawk supplies 175 gift card brands to 1,300 New Jersey retailers, primarily grocery stores. Commenting on the issue, Blackhawk President Talbott Roche said, "Blackhawk Network and its retail partners do not have a cost-effective way to record data from gift card purchasers or their ultimate gift recipients."

Similarly, InComm President and CEO Brooks Smith said the company cannot ensure compliance with the law because its cards are sold through third parties. Further, the Atlanta-based company has claimed that compliance with the law is challenging because the technology to collect the required information from the buyer, such as the zip code, and route it through the multiple channels— the vendor, the partner brand, the card processor—does not exist. InComm supplies 2,500 retail locations with gift cards for such brands as Visa, MasterCard, iTunes, Macy's and Subway. Blackhawk Networks and InComm both promised that their cards would be removed from the shelves of New Jersey stores starting on June 30, unless the law is reversed.

The Legislature passed the law two years ago. Shortly after it was passed, lawsuits were filed by the New Jersey Retail Merchants Association (RMA) and others in the United States District Court for the District of New Jersey. RMA’s case was based on several United States Supreme Court decisions that created certain rules of priority to determine which state has the right to escheat intangible property. Under the “primary rule,” the state of the creditor/owner’s last known address as shown on the debtor’s record has the first right to escheat. If the primary rule does not apply because such information does not appear on the debtor’s records, then the “secondary rule” provides that the state of incorporation of the debtor has priority to escheat the unclaimed property.

Gift card issuers try to avoid the escheat of gift cards by relying on the secondary rule and incorporating in a state that does not escheat gift cards. They avoid the primary rule by not collecting any information on the owner or purchaser of the gift card. In their case, the RMA asserted that the new law attempts to circumvent this priority scheme by creating a third rule, under which gift cards sold in New Jersey are deemed to be sold to New Jersey residents if the issuer does not have the name and address of the gift card owner.

The lawsuits were all consolidated but the merits of the cases have yet to be argued. As a result of the suits, the collection of ZIP codes was temporarily suspended. Recently, however, the injunction was lifted, which paved the way for the New Jersey Treasury Department to issue guidance on new ZIP code collection requirements. The Assembly passed a proposal in March to reverse the changes, but the Senate has so far not acted. American Express, Blackhawk Networks and InComm’s announcements soon followed.

New Jersey appears to be the only state that has moved in this direction. While many states have a law that addresses the collection of unclaimed property—which does apply to gift cards—few seek to recover the full amount left on a gift card rather than a portion of the balance.

Arent Fox is monitoring this issue. Please contact the attorneys listed at left with questions.