Kmart Settles with FTC Over Gift Card Practices

The Federal Trade Commission announced yesterday that it had entered into a consent order with Kmart regarding certain of the retailer's practices regarding its gift card program. This is the FTC's first law enforcement action concerning gift cards.

The FTC alleged that Kmart failed to disclose a dormancy fee it charged holders of its gift card. After 24 months of nonuse, Kmart levied a $2.10 per month service fee for each inactive month, retroactive to the issuance of the card. That means if you didn't spend your card in 2 years, Kmart would "zap" $50.40 from the balance of the card. This retroactive dormancy fee was often not disclosed before purchase, or was explained in tiny type or in text obscured by packaging. In addition, Kmart advertised that their gift cards function like cash and "never expire."

Under the consent decree, Kmart agrees to clearly and prominently disclose expiration dates and fees associated with its gift cards. In addition, Kmart will not attempt to collect dormancy fees on any cards issued prior to the consent order and will create a mechanism by which consumers who were charge such fees make seek reimbursement. The consent order does not constitute an admission of guilt by Kmart.

The consent decree was approved by the Commission on a 5-0 vote. Commissioners Harbour and Leibowitz, however, wrote separately stating their opinion that the order does not go far enough and that Kmart should be required to disgorge profits it made collecting the dormancy fees.

The FTC will accept public comments on the consent order through April 10, 2007 after which it will decide whether to make the order final.