Kmart settles with FTC over deceptive gift card practices

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Kmart Corp. has agreed to settle Federal Trade Commission charges that it engaged in deceptive practices in advertising and selling its Kmart gift card.

As part of the settlement, Hoffman Estates, IL-based mass merchandiser Kmart, a wholly owned subsidiary of Sears Holdings Corp., will implement a refund program and publicize it on its Web site. This is the agency's first law-enforcement 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." Calls to Kmart were not returned.

According to the FTC's complaint, Kmart promoted the card as equivalent to cash but failed to disclose that fees are assessed after two years of non-use and misrepresented that the card would never expire. Kmart has agreed to disclose the fees prominently in future advertising and on the front of the gift card.

More specifically, the FTC's complaint alleged that, since 2003, Kmart did not 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, resulting in a $50.40 reduction from the card's value if the card was not used for 24 months. In many instances, the commission alleges, consumers did not learn of the fee until they attempted to use their cards.

According to the complaint, the Kmart gift card was sold bearing inadequate disclosures that appeared in fine print on the back side and that were phrased in "legalese." In some instances, the disclosures on the card were wholly concealed before sale and there were no pre-sale disclosures in online sales. The FTC's complaint alleged that, since December 2005, Kmart's Web site said the gift cards never expired, even though the dormancy fee caused cards valued at $50.40 or less to expire after two years of inactivity. As of May 1, 2006, Kmart stopped charging a dormancy fee on all Kmart gift cards.

Under the proposed settlement, which is subject to public comment up to 30 days beginning yesterday and continuing through April 10, Kmart Corp., Kmart Services Corp. and Kmart Promotions LLC will not advertise or sell Kmart gift cards without disclosing, clearly and prominently, any expiration date or fees in all advertising and on the front of the gift card. The proposed settlement further requires Kmart to disclose, clearly and prominently, all material terms and conditions of any expiration date or fee at the point of sale and before purchase. It bars Kmart from misrepresenting any material term or condition of the gift cards, and prohibits Kmart from collecting dormancy fees on any gift card sold before the proposed order is issued.

The proposed settlement also requires Kmart to reimburse the dormancy fees for consumers who provide an affected gift card's number, a mailing address and a telephone number. Kmart will publicize the refund program on its Web site, including a toll-free number, e-mail address and a postal address for eligible consumers to contact Kmart for a refund.

The FTC has established a consumer hotline at 202-326-3569 for consumers who have questions about the refund program.

In a statement, Kmart said: "In our effort to better meet customer needs, Kmart has removed all fees and expiration dates from its gift cards."

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