When is a gift card not a gift card? Consumer protection law and “avoidance”

Anyone who knows me knows I have particularly strong view about small overcharges. I wrote an LLM thesis on the topic.[efn_note]"Keep The Change?: A behavioural approach to class action antipathy where losses are trivial" (2018) [pdf].[/efn_note] Here's my thing: assuming companies deal with thousands or millions of customers, and assuming customers aren't going to sue for small amounts of money, then small overcharges are a terrific way for a corporate wrongdoer to amass huge profits.

That's where class actions come in. In a class action, one person sues on behalf of everyone who suffered the same wrong. The goals are (1) to try to provide justice for everyone even if they wouldn't seek it individually (access to justice), and (2) to make sure wrongdoing isn't profitable (behaviour modification).

I recently worked on a class action that offers a perfect case in point. In this post, I want to talk about the issues in that class action, and specifically about "avoidance", which is a legal code word for "trying to get away with things."

Overview of the case

There's a bank called Peoples Trust, and it sells prepaid credit cards. You've probably seen them before: they have a Visa or MasterCard logo on them, and they are often sold at grocery stores and pharmacies. One of the more popular cards on offer is called the Vanilla card. Years ago, in 2007 or so, Peoples called these cards Visa or MasterCard "Gift Cards". The packaging and ads usually have gift motifs (a present with a ribbon, or a Christmas elf, for instance), and were advertised with slogans like "The Gift of Possibilities".

Around 2007, the Ontario government decided to regulate gift cards, to limit when and how much companies can charge in fees, and to prohibit expiry dates. The Minister of Government Services described the government's reasoning as follows: "This is an issue of fairness. When people buy or receive a cash-equivalent gift card, they think they are getting just that: cash."[efn_note]Hon. Gerry Phillips (Minister of Government Services), Hansard Reports (May 29, 2007).[/efn_note]

Guess what happened next. Peoples' cards changed their names from "Visa Gift Card" to "Visa Prepaid". Go figure.

The Regulation came into force in October 2007. It has changed a number of times since then, but it basically made expiry dates illegal, capped "activation fees", limited when a company could start charging monthly dormancy fees, and set out disclosure requirements, so that purchasers would know what fees to expect. For example, it set a maximum activation fee of $1.50, and limited monthly fees so that they could only be charged 15 months after activation and only to a maximum of $2.50/month.

This is legislation, so of course it's not a friendly read. Once you get through its web of definitions, it defines "gift cards" as vouchers that consumers pay for in advance and can be applied towards goods and services in the future.

Once Peoples changed the names of its Vanilla cards ("prepaid", not "gift") and the Regulation came into effect, Peoples treated the cardholders as if the Regulation did not apply. It had a number of cards at the time, and the activation fees it charged varied from $3.95 to $7.50. Some had monthly fees charged from the seventh month after activation. And each card had a "valid thru" date after which it became unusable.[efn_note]Before July 1, 2012, the cardholder agreements permitted Peoples to seize unused funds after the “valid thru” date. After July 1, 2012, Peoples changed the cards' terms and conditions to allow cardholders, at least in theory, to request new cards in order to access the remaining funds (minus whatever fees were charged).[/efn_note]

In our lawsuit, the representative plaintiff claimed that she was given one of these cards by a friend, and when she eventually checked its balance found that the $35 card was entirely valueless. The claim was certified as a class action in 2017, on behalf of Ontario consumers who held prepaid cards sold and/or issued by Peoples between November 29, 2011 and April 30, 2014.

Spoiler alert: When the issue went to trial, Justice Perell found the fees and expiry dates on these single-load cards to be illegal.[efn_note]The lawsuit also questioned fees charged on Peoples' reloadable cards. The court found that these cards were different, and the gift card rules did not apply to them: Bernstein v Peoples Trust Company, 2019 ONSC 2867.[/efn_note]

Consumer protection & "anti-avoidance"

Consumer protection laws like Ontario's Consumer Protection Act (CPA) acknowledge that regular people face “an information or power imbalance” in their dealings with sophisticated companies in the marketplace,[efn_note]Wright v United Parcel Service Canada Ltd., 2011 ONSC 5044 at ¶601.[/efn_note] and often “do not have the time to think at length” about information presented to them by those companies.[efn_note]Richard v Time Inc., 2012 SCC 8 at ¶51, quoting Claude Masse, Loi sur la protection du consommateur: analyse et commentaires (1999) at 828 (translated by SCC).[/efn_note] The laws aim “to equitably reconfigure the imbalance in bargaining power” in the marketplace,[efn_note]Prebushewski v Dodge City Auto (1984) Ltd., 2005 SCC 28 at ¶33.[/efn_note] by establishing “more ethical trade practices calculated to afford greater protection to the consuming public.”[efn_note]Richard v Time Inc., 2012 SCC 8 at ¶¶43 & 50, quoting R v Colgate-Palmolive Ltd., [1970] 1 CCC 100 at 102 (Ont County Ct).[/efn_note]

Ontario's law does this in a number of ways. For example, it prohibits misleading advertising, it limits (or tries to limit) companies from putting too much pressure on consumers, and it requires courts to interpret ambiguous contract provisions in the consumer's favour.

This post, however, is about the "anti-avoidance" section of the Ontario law, which says:

"In determining whether [a consumer protection rule] applies..., a court or other tribunal shall consider the real substance of the entity or transaction and in so doing may disregard the outward form" (section 3).

Basically, this means that a company can tell you it's selling you a zebra, but if that zebra looks, walks and quacks like a duck, courts are going to regulate it as a duck.

Avoiding gift card rules

Selling gift cards and then rebranding them "prepaid cards" as soon as the government looks to regulate them is the essence of avoidance.

But it didn't stop there. Peoples threw whatever argument it could think of at the wall to see what would stick:

It said the cards are governed by BC law. (Nope. Ontario's CPA doesn't let companies get away with that one.)
It said the cards aren't gift cards because sometimes they aren't given away as gifts. (Nope. "Gifting" is not part of the definition.)
It said, if the cards are given away, then the recipient has no contractual relationship with Peoples. (Nope. The card agreements bind purchasers and users of the cards.)
It said that the law only applies to cards that "entitle" cardholders to make purchases, and that Peoples' cards only "enable" cardholders to make purchases. (Nope. The court agreed that "This argument makes no sense.")
It said that when people buy its cards, they are not prepaying for goods/services, but are merely paying for access to the payment network -- and that the regulations don't apply to cards that cover only one specific service. (Nope. This would lead to the absurd result that all gift cards are exempt from gift card rules.)

Justice Perell saw through this, calling Peoples' arguments "contortionist", and remarking that Peoples was able to make its arguments "without blushing". "It should blush..."[efn_note]Bernstein v Peoples Trust Company, 2019 ONSC 2867 at ¶¶183-184.[/efn_note]

Peoples also made the argument that there's no way to know whether cardholders are consumers or not. (Businesses don't get treated as consumers under the CPA.) This is despite the fact that the cards were marketed exclusively to consumers, for consumer purposes.

In the end, Justice Perell ordered Peoples to pay damages of $16,830,000, including $1.5 million in punitive damages, for its violations of the CPA.

Why does it matter?

Big companies deal with thousands or millions of consumers. And $15 million isn't nothing.

If a company can make millions and millions of dollars by charging each of its customers $2 here or $5 there, it's going to try -- unless it thinks there will be consequences. Here, the consequences would have to be that people refuse to purchase cards with illegal fees (assuming that people know what fees are illegal), or that people successfully demand their money back.

In Ontario, it costs $229 to file a lawsuit, and then there are lawyers' fees, the risks of paying costs if you lose, and the time and stress of taking it through to trial. No one is going to go through all that to recover the value of a $35 gift card. And I think companies know this.

The problem is that unless all customers fight to have illegal fees returned to them, the fees are profitable.

In cases like these, the only meaningful way to make sure a company pays for its illegal conduct is to make it answer to all of its customers, as a group. That's what class actions do. They remind companies that the law can't be avoided.

Have you been overcharged by a bank or phone company? Call them up, and fight for your what's yours. If you think the problem is widespread, a class action may be the answer.