Centers of Excellence: Loyalty programs

In an important ruling for the promotion industry, the United States Court of Appeal for the 9^th Circuit yesterday reversed a lower court decision in Reynolds v. Philip Morris USA Inc., which held that California’s gift certificate law applies to on-pack proofs of purchase issued by Philip Morris in connection with its Marlboro Miles loyalty program.

The plaintiff asserted, among other things, that Marlboro Miles were “gift certificates” regulated by California law, and that termination of the Marlboro Miles loyalty program violated the prohibition against imposing an expiration date on gift certificates. Under the California law, gift certificates distributed pursuant to a loyalty program could only expire if the expiration date was printed on the gift certificate, and no expiration date was printed on the Marlboro Miles.

Philip Morris moved to dismiss this claim on the basis that Marlboro Miles were not gift certificates, but proofs of purchase which are commonly used in connection with consumer loyalty programs. On June 5, 2007, the district court denied Philip Morris’ motion to dismiss, agreeing with the plaintiff that Marlboro Miles are gift certificates that fall under the purview of California’s gift certificate law. However, the 9^th Circuit disagreed, concluding in no uncertain terms that the Marlboro Miles were a proof of purchase, “just like a cereal box top,” and not a “gift certificate” as the term would ordinarily be understood.

If not reversed, the lower courts decision would have had far-reaching consequences for the promotion industry and the ability to offer loyalty programs where “points” are obtained through purchases of products. In order to avoid an obligation to accept such points in perpetuity, an expiration date would have had to be printed on each point “certificate” in capital letters in a 10-point font. It now appears safe for companies to continue to offer point certificates in connection with a loyalty program, without fear that doing so will violate California’s gift certificate law.

These materials have been prepared by Winston & Strawn for informational purposes only. These materials do not constitute legal advice and cannot be relied upon by any taxpayer for the purpose of avoiding penalties imposed under the Internal Revenue Code.