Mall operator in gift-card settlement

Simon Property Group yesterday settled charges that its popular bank-issued gift card violates New York law, undermining the mall operator's federal preemption defense in a series of lawsuits brought by Massachusetts and other states.

The nation's largest mall operator has insisted that its gift card is subject only to federal regulation and not state gift card laws, but the settlement with New York Attorney General Eliot Spitzer would appear to undercut that argument.

Industry analysts say bank-issued cards, which differ from retail gift cards in that they can be used virtually anywhere Visa or MasterCard are accepted, may not be able to survive if they are forced to comply with state laws restricting the fees they charge.

As part of the settlement with New York, Simon agreed to comply with the state's gift card statute by eliminating $2.50 monthly service fees for the first 12 months after a card's issuance. Previously, the fees kicked in after six months. The company also agreed to pay $125,000 in penalties and costs.

Separately, effective yesterday, Simon said it is extending the expiration date of its card from 12 to 18 months in all states and doing away with a 50-cent fee for calls to the company's customer service line. Simon also said it would place an adhesive label on its cards spelling out all charges and fees.

''I am pleased that Simon has recognized the importance of complying with New York's gift card law," Spitzer said in a statement.

A Simon spokeswoman said the New York settlement doesn't address the federal preemption issue. ''We believe that the company has complied with all applicable laws," said Stewart Stockdale, chief marketing officer for Simon, in a statement.

Attorney General Thomas F. Reilly said he would continue his lawsuit against Simon to ensure compliance with the Massachusetts gift card statute, which requires that cards be redeemable at full face value for seven years. New Hampshire and Connecticut have filed similar lawsuits against Simon.

''We are continuing to fight this company in court to ensure that Massachusetts consumers get the full value of their Simon gift cards for seven years -- meaning that the card cannot expire, and that Simon cannot impose dormancy fees," Reilly said.

The US Office of the Comptroller of the Currency in early January said it disagreed with Simon's contention that its gift card is exempted from state laws because the card is issued by Bank of America, a federally chartered bank.

Bank-issued gift cards are soaring in popularity because of their flexibility. Simon, which operates 10 malls in New York and 14 in Massachusetts, said its sales grew 20 percent last year to 6.3 million cards, with a total value of more than $400 million.

The Tower Group, a Needham research firm, estimated total gift card sales last year would hit $55 billion, with bank-issued cards accounting for 13 percent of the total. Tower has projected that bank-issued cards would increase their share of the market to 35 percent by 2007.

Bruce Mohl can be reached at mohl@globe.com.