On Monday, September 12, 2011, the Third Circuit United States Court of Appeals heard oral arguments in the case of New Jersey Retail Merchants Association v. Sidamon-Eristoff. The litigation concerns the New Jersey gift card law passed in 2010 which, among other things, altered the unclaimed property jurisdictional priority rules for the reporting of gift cards in New Jersey. The new law required that holders collect zip codes from purchasers, and in the absence of information concerning the owner, the presumed address would be the place of purchase.
As detailed previously on this blog, the plaintiffs were granted a preliminary injunction against the place-of-purchase presumption in January 2011. Accordingly, New Jersey was also prohibited from enforcing the zip code collection and maintenance provisions while the litigation ran its course.
The litigation has reached another major step in the process as attorneys argued an appeal of the issues before the Third Circuit. Members of the unclaimed property team of Alston & Bird, LLP were in attendance and subsequently provided a detailed summary of the legal arguments presented by both sides.
As they argued at the District Court level, the plaintiffs contend that the New Jersey gift card law is preempted by both the Federal CARD Act and the federal priority rules for unclaimed property jurisdiction outlined in Texas v. New Jersey and subsequent case law. With respect to the Federal CARD Act, the District Court had determined that the New Jersey law provided more protection for consumers than the federal law, and that companies in New Jersey could follow both laws simultaneously by honoring gift cards for 5 years, and seeking reimbursement from the state if the company was forced to honor a gift card after reporting it pursuant to New Jersey’s two (2) year dormancy period. During oral arguments, the plaintiffs argued that this violated due process because it forced companies to “pay twice” – once to the state when reporting the property, and again to a cardholder seeking goods or services. Plaintiffs also argued that this responsibility to honor gift cards after escheatment contradicted the New Jersey unclaimed property law which relieves holders of obligations once they turn the property over to the state.
The parties spent a large portion of the oral arguments on the issue of whether or not the New Jersey gift card law violated the priority rules of Texas v. New Jersey. That decision requires holders to first report property to the state of the owner’s last known address. Where that address is unknown, the holder must report to its state of corporate domicile. During oral arguments, New Jersey argued that its place-of-purchase presumption is allowed when no other state with a higher priority is claiming a right to the gift card balance. The plaintiffs countered by pointing out that New Jersey’s new priority system renders the Supreme Court’s second priority rule meaningless in some cases. The plaintiffs supported their argument by stating that New Jersey’s additional priority rule further complicates a system mandated by the Supreme Court in order to simplify reporting for holders. Finally, as was clarified in the injunction order, the plaintiffs reiterated that the data collection provisions are directly related to the place-of-purchase presumption as the collection’s sole purpose is to facilitate the new priority system. If the place-of-purchase presumption should be found invalid, the plaintiffs argue, there would be no basis to enforce the data collection.
Other New Jersey Gift Card Legislation Issues
Violations of the U.S. Constitution were also at issue. Oral argument was heard on whether the new law violated Substantive Due Process and whether the retroactive escheat requirement in the new law violates the Contracts Clause of the Constitution.
As pointed out by the team from Alston & Bird, it is unlikely that a decision will come down quickly from the Third Circuit. A decision will likely take one to two months, and Keane will be alerting clients as soon as that occurs.