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Monthly Archives: March 2007

Kmart settles gift card fee case while others continue

In the Federal Trade Commission’s first enforcement action involving gift cards, Kmart Corporation 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, Kmart 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. “If fees or restrictions apply, gift card issuers must fully and clearly disclose them.”



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.The FTC’s complaint alleges 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 alleges that since December 2005, Kmart’s Web site stated that the gift cards never expire, 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, Kmart Corporation, Kmart Services Corporation, 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 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 to seek a refund.The FTC has established a Consumer Hotline at (202) 326-3569 for consumers who have questions about the refund program. The Hotline will be updated as necessary.

 In its press release, the FTC acknowledged the invaluable assistance of the Montgomery County, Maryland, Division of Consumer Affairs.  Its 2006 annual report on gift cards is available by clicking here.

The Commission vote to accept the proposed consent agreement was 5-0, with Commissioners Pamela Jones Harbour and Jon Leibowitz issuing a separate statement concurring in part and dissenting in part. In their statement, Commissioners Harbour and Leibowitz said they concur in the decision to bring an action against Kmart, but dissent in part from the proposed consent agreement because they believe the remedy should include disgorgement of ill-gotten profits: “Otherwise, Kmart will remain unjustly enriched by a substantial amount of buried ‘dormancy fees’ while many consumers will have lost the chance for reimbursement because they long ago threw out their seemingly worthless gift cards in frustration.”

The FTC will publish an announcement regarding the agreement in the Federal Register shortly. The agreement will be subject to public comment for 30 days, beginning today and continuing through April 10, after which the Commission will decide whether to make it final. Comments should be addressed to the FTC, Office of the Secretary, Room H- 135, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580. The FTC requests that any comment filed in paper form near the end of the public comment period be sent by courier or overnight service, if possible, because U.S. postal mail in the Washington area and at the Commission is subject to delay due to heightened security precautions.


Copies of the complaint, proposed consent agreement, and an analysis of the agreement to aid in public comment are available from the FTC’s Web site and also from the FTC’s Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580.  You can also view them by clicking here.

In November 2004, Massachusetts filed suit against a chain of shopping malls on similar claims involving gift cards. The then Massachusetts Attorney General Tom Reilly charged Simon Malls with selling gift cards that violate state consumer protection laws.  “These ‘gift cards’ are riddled with additional charges that Massachusetts consumers should not have to pay,” Reilly said. “Despite the name, these gift cards are not what they seem.”  The case is still pending in the Suffolk Superior Court (docket number SUCV2004-04993-BLS).


Meanwhile, the Massachusetts legislature is trying to rein in bank-issued gift cards by outlawing the fees the cards depend on for a profit.  The Boston Globe highlighted the bill in an April 2006 article.  The text of the bill can be viewed by clicking here.

Last August, a federal judge ruled that New Hampshire could not impose state laws restricting gift-card fees on Simon’s gift cards, because the bank-issued cards are governed by federal banking laws that supersede state laws.  You can view an article on that case by clicking here.

Free speech tested at Alaska high school

The United States Supreme Court will rule on the free speech rights of public school students by July. The controversy arises out of a prank which tests the limits of free speech in America’s high schools. Not since Hazelwood School District v. Kuhlmeier, 484 U.S. 260 (1988), has the Court had occasion to provide guidance to public schools — and to parents and students — with respect to the delicate balance between students’ constitutional rights, on the one hand, and the solemn duty of school administrators, on the other, to maintain order and instill fundamental values in the challenging context of public education.

On a snowy, January afternoon five years ago when the Olympic Torch Relay was passing through Juneau, Alaska on its way to the 2002 Salt Lake City Winter Games, a high school student, Joseph Frederick, had a plan to get his 15 minutes of fame. The event had attracted a fair amount of press coverage and television crews were out in full force filming the energetic crowd. Frederick and his friends, knowing there would be cameras there, had planned a prank to cause a stir.

That afternoon, Frederick showed up across the street from the school and stood with his friends who were waiting to see the Olympic torch. When television cameras panned by the group, Frederick unfurled a banner that read “Bong Hits 4 Jesus.” JDHS principal, Deborah Morse, quickly crossed the street and ordered Frederick to take down the banner. He refused and she took the banner away and informed Frederick that he would be suspended for 10 days.

Frederick appealed his suspension to the superintendent of the school district. Appeals court documents said that Frederick claimed that the banner had been “designed to be meaningless and funny in order to get on television.” However, the superintendent upheld the punishment, stating that the sign conflicted with the mission of the school and had created a disruption. Frederick appealed to the school board, but on March 19, 2002, the board upheld the punishment.

On April 25, 2002, Frederick filed a lawsuit against Morse and the school board in U.S. District Court for the District of Alaska claiming that his First Amendment right to free speech had been violated. His case also emphasized the fact that he was off school property and thus not subject to school rules. The federal court ruled in favor of the school district finding that it had acted within its rights when it disciplined Frederick for violating the school’s policy on offensive material.

Frederick appealed the case and on March 10, 2006, the 9th U.S. Circuit Court of Appeals reversed the decision of the lower court. The panel of three judges ruled that the school had violated Frederick’s free speech rights by “censor[ing] non-disruptive, off-campus speech.” They also ruled that Morse was not immune from incurring damages in the case.

The case was appealed to the United States Supreme Court, and the arguments were made on March 19, 2007, with a decision expected by July. The issues before the court were:

  1. Whether the First Amendment allows public schools to prohibit students from displaying messages promoting the use of illegal substances at school-sponsored, faculty-supervised events.
  2. Whether the Ninth Circuit departed from established principles of qualified immunity in holding that a public high school principal was liable in a damages lawsuit under 42 U.S.C. § 1983 when, pursuant to the school district’s policy against displaying messages promoting illegal substances, she disciplined a student for displaying a large banner with a slang marijuana reference at a school-sponsored, faculty-supervised event.

“I thought we wanted our schools to teach something, including something besides just basic elements, including the character formation and not to use drugs,” Chief Justice Roberts said Monday during the argument.

Justice Samuel Alito, who wrote several opinions in favor of student speech rights while a federal appeals court judge, seemed more concerned by the administration’s broad argument in favor of schools than did his fellow conservatives. “I find that a very, a very disturbing argument,” Alito told Justice Department lawyer Edwin Kneedler, “because schools have … defined their educational mission so broadly that they can suppress all sorts of political speech and speech expressing fundamental values of the students, under the banner of getting rid of speech that’s inconsistent with educational missions.”

Justice Stephen Breyer, in the court’s liberal wing, said he was troubled a ruling in favor of Frederick, even if he was making a joke, would make it harder to principals to run their schools. “We’ll suddenly see people testing limits all over the place in the high schools,” Breyer said. On the other hand, he said, a decision favorable to the schools “may really limit people’s rights on free speech. That’s what I’m struggling with.”

The National School Board Association (NSBA) filed an amicus brief submitted in support of the school district, which argued that the student’s speech was nonpolitical and properly regulated within the U.S. Supreme Court trilogy of student speech cases. The school district’s response to the ruling, posted on its website criticizes the decision for leaving school administrators with no clear guidance on various issues and, especially, for the court’s “disturbing… determination that Principal Morse is not entitled to qualified immunity from an award of damages.” Noting that the U.S. District Court had concluded that Ms. Morse “was not only entitled to discipline Frederick for his display of the banner, but that she may have been obligated to do so,” the statement says, “we don’t understand how the Ninth Circuit could conclude that a high school principal should have known that it wasn’t.”

The American Civil Liberties Union (ACLU) has a full page of reference materials on the case, including copies of all of the briefs filed. The Juneau, Alaska school district’s web-site also contains updated information on the case.

Court Upholds $7.4M Verdict Against Veteran’s Administration

The United States District Court for the Third Circuit held on Wednesday that the Department of Veterans Affairs (VA) committed gross negligence by discharging a mentally ill Vietnam veteran from a residential housing facility—just hours before he committed four murders and took his own life.

Alejandro DeJesus, a homeless Navy veteran, suffered from a mental illness which caused him to have violent outbursts when “frustrated or unemployed.” DeJesus had a history of domestic violence during such outbursts, and had once attempted to commit suicide. After entering a residential program for homeless, unemployed veterans, DeJesus was assigned to an unlicensed nurse who failed to disclose his history of violence and mental illness to another facility from which the VA ultimately recommended his discharge. Within a day of being discharged, DeJesus killed two of his children and two neighboring children, before taking his own life.

In an opinion by Judge D. Michael Fisher, the court applied a Pennsylvania law requiring mental health institutions to avoid grossly negligent treatment of their patients. Judge Fisher’s opinion held that the VA committed a “gross deviation from the required standard of care,” and upheld a $7.4 million jury award.

Florida still facing high malpractice rates despite alleged reforms

Doctors in Florida still pay the highest malpractice insurance rates in the country despite efforts to keep malpractice claims out of court. In fact, malpractice claims have gone down, but the insurance rates remain high. Payouts on claims and legal expenses dropped in Florida about 43 percent between 2003 and 2005, the most recent data available. In 2003, Florida companies paid over $989-million and by 2005 that figure was $557-million, according to National Association of Insurance Commissioners records.

In 2003, under pressure from doctors and insurers, Florida made it more difficult to sue. Thousands of doctors marched at the State’s capital, demanding relief and some protested by delaying surgeries. The Legislature met in three contentious special sessions before agreeing on a $500,000 cap on medical malpractice claims. Malpractice insurance rates were supposed to drop by 8% under the statute, but that never happened.

Now some doctors are requiring patients to sign waivers that forfeit their right to file a lawsuit before getting treatment. Before patients ever see a doctor with Tampa Bay Women’s Care, they must sign a two-page waiver and any disputes about care must go to an arbitration panel.   The center has even posted videos on-line explaining the waiver program.  Patients may even be required to sign a statement indicating that they have reviewed the video at their next office visit with a Tampa Bay Women’s Care provider.

For more on this story, you can view the article in the St. Petersburg Times by clicking here.