Bearing Fruit: Reward and Loyalty Programs

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1 Bearing Fruit: Reward and Loyalty Programs Tuesday, March 25, 2014 Amanda Culp Card Compliant Charolette Noel Jones Day Richard Zuckerman Dentons 1

2 UPPO Presentation Disclaimer Use of the Unclaimed Property Professionals Organization, Inc., (UPPO) name or copyrighted materials in this presentation does not constitute an endorsement by UPPO of a member, vendor, product or service. The content represents the opinions of the author and not necessarily those of UPPO. This information is not intended as legal advice and should not be used to replace the advice of legal counsel. 2

3 UPPO Antitrust UPPO has a policy of strict compliance with federal antitrust laws. UPPO members and/or meeting attendees cannot come to understandings, make agreements, or otherwise concur on positions or activities that in any way tend to raise, lower or stabilize prices or fees. Members and/or attendees can discuss pricing models, methods, systems, and applications, as well as certain cost matters that do not lead to an agreement or consensus on prices or fees to be charged. However, there can be no discussion as to what constitutes a reasonable, fair or appropriate price or fee to charge for any service or product. Information may be presented with regard to historical pricing activities so long as such information is general in nature and does not include data on current prices or fees being charged in any trade area. Any discussion of current or future prices, fees, discounting, and other terms and conditions of sale, which may lead to an agreement or consensus on prices or fees to be charged, is strictly prohibited. 3

4 CPE Credit CPE credit is available at this conference. However, NASBA rules require proof you attended the sessions. For UPPO to provide verification of attendance, you MUST be scanned in AND out of each session to be eligible to receive credit(s). Please see the room monitor(s) at the back of room to have your name badge scanned. 4

5 Past, Present and Future of Promotional, Reward & Loyalty Programs Past: Sperry & Hutchinson In 1960, NJ Supreme Ct. dismissed action to escheat trading stamps, finding no property right. Present: Unliquidated, contingent obligations under loyalty programs generally not reportable as unclaimed property, for various reasons. But NAUPA recommends to refine the Uniform Unclaimed Property Act to "expressly include promotional and loyalty programs. Refine? Expressly? Future: Expanding functions of promotional, reward & loyalty programs raise new considerations for unclaimed property. 5

6 Overview of Promotional, Reward & Loyalty Programs Types of programs have evolved and are varied Structured marketing programs Reward and encourage loyal behavior Promote brand marketing Distinct but often related to stored value cards - New Jersey example 6

7 Legal Overview of Promotional, Reward & Loyalty Programs Involves legal concepts under Property Law Contract Law Consumer Protection Constitutional/Federal Common Law Conflicts Among the States 7

8 Property Law Concepts for Promotional, Reward & Loyalty Programs Are promotional points/stamps/miles "property?" What are the attributes of "property?" What legal tests should be applied? If there are conflicts in state law as to whether property exists, which law trumps? 8

9 Contract Law Concepts for Promotional, Reward & Loyalty Programs Can a State claim a right beyond that allowed under the program terms, and which is inconsistent with the very nature of a "promotion" or a "reward" for "loyalty?" Do the contractual terms control for establishing a fixed and determinable right? Do the contractual terms control for redemption limitations? 9

10 Consumer Law Concepts for Promotional, Reward & Loyalty Programs Promotional points/stamps/miles are often subject to special consumer protection laws Federal Law Examples CARD Act (defines an exemption for loyalty programs) CFPB is focusing on reward programs Fed Transport. Code, 49 U.S.C (b) (preemption relating to airline rates and services) State Law Examples Limits on expiration dates and fees 10

11 Constitutional Law Concepts for Promotional, Reward & Loyalty Programs Due Process Personal Jurisdiction and Notice Federal Preemption and Jurisdiction over Conflicts between State Laws Relevance of Domicile Federal Common Law 11

12 Other Key Legal Concepts for Promotional, Reward & Loyalty Programs Income Tax Law Concepts Are Promotional Points/Stamps/Miles taxable income? IRS Announcement IRS will not assert taxable income by reason of receipt or use of in-kind promotional benefits attributable Does not apply to benefits converted to cash, to compensation paid in the form of travel or other benefits, or where used for tax avoidance purposes. 12

13 History/Future of Promotional, Reward & Loyalty Programs Trading Stamps - offered to customers; involved third party obligations to accept completed books as method of exchange for products, upon satisfaction of conditions Promotional points/miles/stays to customers involving in-kind promotional benefits from a retail chain, subject to terms/conditions Promotional programs that offer ability to redeem for benefits provided by third parties Social media and other digital promotional programs 13

14 Key Legal Concepts for Promotional, Reward & Loyalty Programs Fixed and Certain Obligations Derivative Rights Doctrine: The Nature of the Obligation as a "promotion" or a "reward" for "loyalty" Bundled Transactions Law of De Minimis Transactions Essence of the transaction 10% de minimis analogy for sales taxes De minimis for income taxes 14

15 Overview of State Unclaimed Property Laws involving Promotional, Reward & Loyalty Programs In addition to certain federal preemptions, various state provisions confirm reward program points are either: Not unclaimed property (fails definitional provisions), or Exempt under one or more provisions 15

16 Pending Legislation involving Promotional, Reward & Loyalty Programs Update on recent pending legislation NAUPA, as presented to the Drafting Committee of the Uniform Law Commission has recommended to refine the Uniform Unclaimed Property Act to expressly include promotional and loyalty programs 16

17 Sample State Exemptions for Promotional, Reward & Loyalty Programs Example of State Specific Exemptions Arizona: "certificates evidencing property denominated in value other than a currency, including prepaid phone cards, frequent flyer miles, stored value cards and merchandise points" are not considered to be property subject to unclaimed property statutes. Ariz. Rev. Stat. Ann (15) Michigan: "gift certificates" does not include any certificate "distributed to a consumer or employee pursuant to an awards, rewards, loyalty, or promotional program, if the consumer or employee is not required to give consideration for the gift certificate." Mich. Comp. Laws e 17

18 Sample State Exemptions for Promotional, Reward & Loyalty Programs Texas: Stored value cards issued "to a person under an awards, rewards, loyalty, incentive, rebate, or promotional program [that are] not issued or reloaded in exchange for money tendered by the cardholder" are not required to be reported as unclaimed property. Tex. Property Code Ann (a)(1) California: gift certificates (exempt) issued pursuant to an awards, loyalty or promotional program without any money or other thing of value being given in exchange for the gift certificate by the consumer are permitted to contain an expiration date, as long as the date appears in capital letters in at least 10 point font on the front of the gift certificate. Cal. Civ. Code (d) 18

19 Sample State Exemptions for Promotional, Reward & Loyalty Programs Louisiana: certificates distributed by the issuer to a consumer pursuant to an awards loyalty or promotional program without any money or other thing of value being given in exchange for the gift certificate by the consumer" do not have to follow expiration date or service fee limitations that otherwise apply to gift certificates issued in Louisiana. La. Rev. Stat. Ann. 51:1423(D) If gift certificate is broadly defined, some statutes clarify exemption: Example - Florida: "[A] gift certificate may have an expiration date if it is provided to the recipient, or to a purchaser for transfer to the recipient, as part of a loyalty or promotional program when the recipient does not pay a separate identifiable charge for the certificate." 19

20 Sample State Exemptions for Promotional, Reward & Loyalty Programs If intangible property is broadly defined, some statutes clarify exemption: Example South Carolina: intangible property includes credit balances, customer overpayments, security deposits, refunds, credit memos, unpaid wages, unused airline tickets, and unidentified remittances except that intangible property does not include trading stamps and electronic entries representing trading stamps that are awarded to retail customers incident to the purchase of goods. 20

21 NAUPA Recommendation #9 February 4, 2014 Proposed Revision of the Uniform Unclaimed Property Act: Refine existing definitions of unclaimed property to expressly include promotional incentives and loyalty programs. Citation: 1995 Uniform Act Section 1(13)(ii), which defines Property to include: credit balance, customer s overpayment, gift certificate, security deposit, refund, credit memorandum, unpaid wage, unused ticket, mineral proceeds, or unidentified remittance. 21

22 Comments to the 1995 Act Comments to 1995 Uniform Act, Section 4(6): Paragraph (6) provides for a situation in which neither of the priority claims discussed in Texas v. New Jersey can be made, but the State has a genuine and important contact with the property. An example of the type of claim which might be made under paragraph (6) arose in O'Connor v. Sperry & HutchinsonCo., 412 A.2d 539 (Pa.1980). 22

23 Intertwining of Other Laws Recent cases involving loyalty programs Consumer actions Bankruptcy actions Others 23

24 Cutting Edge Programs Discussion of various types Structure considerations Audit experience 24

25 Questions/Comments Penny for your thoughts Co-promotions Digital accounts in the cloud Other 25

Assistant General Counsel Card Compliant 460 Nichols Rd., Ste. 300 Kansas City, MO 64112 913.871.

26 Presenters Contact Information CHAROLETTE NOEL, ESQ. Tax Partner Jones Day 2727 N. Harwood Street Dallas, Texas (fax) AMANDA CULP, ESQ. Assistant General Counsel Card Compliant 460 Nichols Rd., Ste. 300 Kansas City, MO Direct RICHARD ZUCKERMAN, ESQ. Partner Dentons US LLP 1221 Avenue of the Americas New York, NY (fax) 26

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