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Pa., N.J. Federal Courts Greenlight Class Actions Over Gift Card Fees
The Legal Intelligencer
November 19, 2009
In a major setback for banks, federal judges in Pennsylvania and New Jersey have refused to dismiss a pair of class action consumer suits against TD Bank over allegedly deceptive practices used to market gift cards.
In both decisions, the judges rejected TD Bank's argument that such suits, brought under state consumer protection laws, are pre-empted by the federal National Bank Act.
At issue in both cases are so-called "dormancy fees" charged by TD Bank that reduce the value of gift cards each month after a period of non-use. Typically, if a card is not used for more than six months, the bank begins charging a monthly fee of $2.50, the suits say, so that a $25 card could be completely depleted before the holder makes a single purchase.
Gift cards are a $300 billion annual business, according to court papers, and consumer advocates have estimated that about 10 percent of the value of gift cards is never used, yielding a windfall profit to the issuers.
The central claim in the suits is that consumers are never properly warned of the fees, either at the time of purchase or in the materials that accompany the cards when they are presented as gifts. Attorneys Leonard V. Fodera and Michael P. Lalli of Silverman & Fodera are the lead plaintiffs lawyers in both cases.
TD Bank's lawyers -- Stephen G. Harvey, Angelo A. Stio III and Eric J. Goldberg of Pepper Hamilton -- moved for dismissal of both cases, arguing that the National Bank Act and the regulations promulgated by the Office of the Comptroller of the Currency completely pre-empt such claims.
Congress, the defense team argued, intended the NBA and OCC regulations to establish a uniform federal regulatory scheme for national banks. And since OCC regulations control the sale of gift cards, any lawsuits brought under state consumer protection laws would conflict with the NBA and OCC regulations.
In an interview, Harvey said TD Bank won on several key issues when the plaintiffs lawyers conceded that they were barred from suing over the amount or the timing of the gift card fees because such claims would be pre-empted.
As a result, he said, the suits focused only on allegedly deceptive marketing practices that violate state consumer laws by failing to properly and adequately notify purchasers and holders of the cards of the existence of the fee scheme.
Now federal judges on both sides of the Delaware River have sided with the plaintiffs and held that such consumer suits can no longer be barred under any pre-emption doctrine.
In Mwantembe v. TD Bank, U.S. District Judge Timothy J. Savage of the Eastern District of Pennsylvania found that a decision early this year by the U.S. Supreme Court "caused a sea change in the perception of the pre-emptive effect of the NBA and the OCC regulations."
Savage found that prior to the high court's decision in Cuomo v. Clearing House Association, the lower federal courts "appeared to be expanding the scope of federal pre-emption for national banks."
But Cuomo "reverses this trend," Savage said, "and has dispelled the popular notion that all state laws that affect national banks in any way or to any degree are pre-empted."
In Cuomo, the New York state attorney general sought information "in lieu of a subpoena" from national banks to determine whether they had violated New York's fair lending laws. The district court enjoined the attorney general from enforcing those state laws through demands for records or judicial proceedings, and the 2nd U.S. Circuit Court of Appeals affirmed, citing the pre-emptive effect of the NBA and OCC regulations.
But the Supreme Court rejected that reasoning, holding instead that courts must distinguish between a sovereign state's visitorial powers and its enforcement power. Only visitorial powers are pre-empted, the justices said, leaving the states free to enforce their laws so long as they are not contrary to or expressly pre-empted by federal law.
The decision cleared the way for state attorneys general to file suit against national banks for violating state consumer protection laws.
