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Kmart settles with FTC over gift-card practices

March 23, 2007

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Troy, Mich.—Kmart Corp. has agreed to settle Federal Trade Commission (FTC) charges that it engaged in deceptive practices in advertising and selling its Kmart gift card.

As part of the deal, the company will implement a refund program that will be publicized on the Kmart Web site.

The settlement marks the first time the FTC has enforced legal action involving gift cards.

"Consumers have a right to know when gift cards come with strings attached," FTC Chairman Deborah Platt Majoras said in a statement. "If fees or restrictions apply, gift-card issuers must fully and clearly disclose them."

Kmart promoted the card as equivalent to cash, but didn't disclose that fees are assessed after two years of non-use, and misrepresented that the card would never expire, according to the FTC's complaint. Kmart agreed to disclose the fees prominently in future ads and on the front of the card.

The FTC complaint alleged that since 2003, Kmart didn't disclose adequately that after 24 months of non-use, a $2.10 "dormancy fee" would be deducted from the card's balance for each month of inactivity. The result was a $50.40 reduction from the card's value if it was not used in 24 months. In many instances, the FTC alleged, consumers were unaware of the fee until they attempted to use their cards.

That's because, according to the complaint, the card was sold bearing inadequate disclosures that appeared in fine print on the back side and were phrased in legalese. In some instances, disclosures on the card were wholly concealed before sale, and there were no pre-sale disclosures for online sales. The FTC complaint alleged that since December 2005, Kmart's Web site stated that the cards never expire. As of May 1, 2006, Kmart stopped charging a dormancy fee on all Kmart gift cards.

Under the proposed settlement, subject to public comment, Kmart cannot advertise or sell gift cards without clearly and prominently disclosing any expiration dates or fees in all ads and on the front of the card. Furthermore, the company must disclose this information at the point of sale before purchase and cannot misrepresent any material term or condition. It also prohibits the collection of dormancy fees on cards sold before the proposed order is issued.

Consumers who provide an affected card's number, a mailing address and a telephone number will be reimbursed for dormancy fees.

The FTC has established a consumer hotline at (202) 326-3569 for consumers with questions on the refund program.
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