It is estimated that consumers spent almost $100 billion on gift cards in 2007.  From the consumer’s perspective, a gift card is an attractive alternative to an actual gift because it is easy to obtain and reduces the hassle and guess-work of gift-buying.  From a retailer’s perspective, gift cards are a great way to attract new customers, strengthen brand loyalty, generate sales, provide an easy means of data-gathering, and reduce the costs of credit card processing.

Companies banking on capitalizing on the gift card market, however, are also seeing an increase in gift card fraud.  There are many types of gift card fraud scams, but all of them leave consumers vulnerable and cause losses to retailers.  One example of gift card fraud is found when a person returns stolen goods in exchange for store credit on a gift card.  This gift card is then sold anonymously online.  The buyer of the gift card then may end up with a card with little value left, or one that has been cancelled and is worthless.  Moreover, the consumer is left with almost no recourse—it’s buyer beware at its worst.

California laws with respect to gift cards are among the most restrictive in the nation.  Therefore, most national retailers apply California law to their gift card policies.  The framework of the laws in this area, however, highlight the tension between protecting consumers and encouraging sales, and enabling fraud and money laundering.  For example, in California, a gift card may not have an expiration date so that consumers never lose the value on the card.  Expiration dates, however, are one way retailers can protect themselves from gift card fraud, since they do not have to tolerate unredeemed gift cards floating in the market indefinitely.  Additionally, California law requires a cash refund if the value remaining on a gift card is under $10.  This system has resulted in successful money laundering schemes for those engaged in organized crime.

Retailers have very few defenses to such fraud.  One defense is to print terms and conditions on the face of the gift cards, providing that the card is not for resale and invalid if resold.  Further, when a fraudulent seller advertises or markets a gift card by using the retailer’s logo, for example, the retailer may bring an action for copyright or trademark infringement to deter that type of activity.  However, such defenses are of little help if the fraudulent seller cannot be located.

While gift cards have been of great benefit to retailers bottom-line, it is a relatively young system replete with challenges.  Until these challenges are addressed and overcome, fraudulent gift card schemes will continue to plague retailers and consumers alike.