First Circuit Holds that Federal Law Preempts State Regulation of Gift Cards

       SPGGC, LLC v. Ayotte is the first case to apply the Supreme Court’s decision in Watters v. Wachovia Bank, N.A.  In Watters, the Court held that federal law preempts state regulation of national bank operating subsidiaries.  Specifically, the Michigan Mortgage Brokers, Lenders and Services Licensing Act and the Michigan Mortgage Loan Act were preempted by National Bank Act provisions protecting national banks from significant state interference in the “business of banking.”  Thus, the power of an operating subsidiary of a national bank to engage in real estate lending could not be significantly impaired or impeded by state law. 

       SPGGC, LLC v. Ayotte takes Watters a step further.  It applies federal preemption to state regulation of third parties when such regulation impedes a power conferred on national banks by the National Bank Act.  In Ayotte a New Hampshire statute prohibited the sale of gift cards when the cards contained an expiration date and administrative fees diminishing the value of the card.  Even though it does not specifically regulate banks, the court held that National Bank Act and OCC regulations giving national banks the power to issue gift cards preempted the statute.  Citing to Watters, the court stated that it “is not whom the New Hampshire statute regulates, but rather, against what activity it regulates.”  Therefore, because federal law allows national banks to issue gift cards through a third party with an expiration date and certain administrative fees, the New Hampshire statute curtailing this power is preempted—even though as applied in this case, the statute only regulated a third party non-bank entity.

       This case shows that post-Watters, federal preemption will apply beyond the bounds of state banking codes into any state statute that could hamper permitted activities of a national bank.  As the scope of preemption for national banks broadens, the state charter faces yet another challenge as to the equal playing field for its products and services.  The ruling also illustrates some of the interesting issues that can arise from the growing gift card/stored value card industry. 

For further information contact Howard O. Hagen or Jeffrey J. Andersen of Dickinson, Mackaman, Tyler & Hagen, P.C.