US boosts state's suit over terms of gift cards

Federal banking regulators yesterday undercut the chief defense of Simon Property Group in its battle with Massachusetts over whether the terms of the mall operator's gift card violate state law.

Regulators from the Office of the Comptroller of the Currency said federal laws and regulations do not preclude Attorney General Thomas F. Reilly from challenging the popular gift card issued jointly by Simon and Bank of America.

Simon has asserted that its Visa gift card is exempt from the state law because the card is technically issued by a national bank, which is subject to exclusive regulation by the comptroller's office.

The comptroller's acting chief counsel, Daniel P. Stipano, said in a letter to both parties that the state lawsuit is not preempted by either federal laws or regulations. He said the case should proceed in state, not federal, court and added that the state's restrictions on gift card fees are not preempted by either federal regulations or the National Bank Act.

''We're pleased that the OCC weighed in here and agreed that the state law applies," said Alice Moore, chief of Reilly's public protection bureau. She declined to comment further.

Simon, which operates 14 malls in Massachusetts, including Copley Place and the South Shore Plaza, issued a statement saying that it ''remains confident that, based on the underlying facts and applicable legal standards, its Simon Visa gift card complies with all legal requirements."

The statement also stressed how important the mall operator is to the state's economy. The statement described Simon as a powerful economic engine for Massachusetts, one of the state's largest taxpayers, and an employer of more than 28,000 state residents. The statement also said two-thirds of Boston-area residents visit a Simon mall every three months.

Reilly's aides yesterday filed Stipano's letter in US District Court, urging the federal court to remand the case to state court. Simon launched a preemptive suit in federal court against Reilly in November when he signaled that he was about to sue the mall operator in state court.

The attorneys general in Connecticut and New Hampshire have filed similar lawsuits against Simon, alleging violations of their gift card laws.

The Simon cases have attracted national attention because they target a popular new breed of gift card that could be undermined financially if the attorneys general prevail in court.

Sales of the cards have grown quickly (Simon sold more than $10 million worth of its cards in December) because they can be used virtually anywhere credit cards are accepted, but they rely heavily on fee income in turning a profit. The fees often violate state gift card statutes.

The Simon card, for example, comes with a Visa logo on it and can be used virtually anywhere Visa is accepted. But the card comes with a one-year expiration date, a $1.50 initial handling fee, and a $2.50-a-month dormancy fee that kicks in after six months.

Both the dormancy fee and the one-year expiration date would appear to violate the Massachusetts gift card statute, which requires gift cards to be redeemable at full face value for at least seven years.

Reilly has said that monthly fees would drive down the value of an unused $25 Simon card to $12.50 after 11 months and to zero when the card expires after a year.

Simon officials say most of their gift card customers use the entire balance on the card within the first six months, thereby avoiding dormancy fees.

The vast majority of gift cards being sold are issued by retailers, but bank-issued cards are rapidly gaining acceptance. The Tower Group, a Needham research firm, issued a report last year forecasting that bank-issued cards would account for 13 percent of gift card sales in 2004, rising to 35 percent in 2007.

The overall market for gift cards was forecast at $55 billion in 2004, and some analysts predicted gift cards would be the most popular gift item of the holiday season, surpassing clothing for the first time.

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