[Federal Register Volume 72, Number 51 (Friday, March 16, 2007)]
[Notices]
[Pages 12613-12615]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-4798]


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FEDERAL TRADE COMMISSION

[File No. 062 3088]


Kmart Corporation, Kmart Services Corporation, and Kmart 
Promotions, LLC; Analysis of Proposed Consent Order To Aid Public 
Comment

AGENCY: Federal Trade Commission.

ACTION: Proposed Consent Agreement.

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SUMMARY: The consent agreement in this matter settles alleged 
violations of Federal law prohibiting unfair or deceptive acts or 
practices or unfair methods of competition. The attached Analysis to 
Aid Public Comment describes both the allegations in the draft 
complaint and the terms of the consent order--embodied in the consent 
agreement--that would settle these allegations.

DATES: Comments must be received on or before April 10, 2007.

ADDRESSES: Interested parties are invited to submit written comments. 
Comments should refer to ``Kmart Corporation, File No. 062 3088,'' to 
facilitate the organization of comments. A comment filed in paper form 
should include this reference both in the text and on the envelope, and 
should be mailed or delivered to the following address: Federal Trade 
Commission/Office of the Secretary, Room 135-H, 600 Pennsylvania 
Avenue, NW., Washington, DC 20580. Comments containing confidential 
material must be filed in paper form, must be clearly labeled 
``Confidential,'' and must comply with Commission Rule 4.9(c). 16 CFR 
4.9(c) (2005).\1\ The FTC is requesting that any comment filed in paper 
form 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. Comments that do not 
contain any nonpublic information may instead be filed in electronic 
form as part of or as an attachment to email messages directed to the 
following e-mail box: [email protected].
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    \1\ The comment must be accompanied by an explicit request for 
confidential treatment, including the factual and legal basis for 
the request, and must identify the specific portions of the comment 
to be withheld from the public record. The request will be granted 
or denied by the Commission's General Counsel, consistent with 
applicable law and the public interest. See Commission Rule 4.9(c), 
16 CFR 4.9(c).
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    The FTC Act and other laws the Commission administers permit the 
collection of public comments to consider and use in this proceeding as 
appropriate. All timely and responsive public comments, whether filed 
in paper or electronic form, will be considered by the Commission, and 
will be available to the public on the FTC Web site, to the extent 
practicable, at http://www.ftc.gov. As a matter of discretion, the FTC 
makes every effort to remove home contact information for individuals 
from the public comments it receives before placing those comments on 
the FTC Web site. More information, including routine uses permitted by 
the Privacy Act, may be found in the FTC's privacy policy, at http://www.ftc.gov/ftc/privacy.htm.

FOR FURTHER INFORMATION CONTACT: Peggy Twohig or Alice Saker Hrdy, 
Bureau of Consumer Protection, 600 Pennsylvania Avenue, NW., 
Washington, DC 20580, (202) 326-3224.

SUPPLEMENTARY INFORMATION: Pursuant to section 6(f) of the Federal 
Trade Commission Act, 38 Stat. 721, 15 U.S.C. 46(f), and Sec.  2.34 of 
the Commission Rules of Practice, 16 CFR 2.34, notice is hereby given 
that the above-captioned consent agreement containing a consent order 
to cease and desist, having been filed with and accepted, subject to 
final approval, by the Commission, has been placed on the public record 
for a period of thirty (30) days. The following Analysis to Aid Public 
Comment describes the terms of the consent agreement, and the 
allegations in the complaint. An electronic copy of the

[[Page 12614]]

full text of the consent agreement package can be obtained from the FTC 
Home Page (for March 12, 2007), on the World Wide Web, at http://www.ftc.gov/os/2007/03/index.htm. A paper copy can be obtained from the 
FTC Public Reference Room, Room 130-H, 600 Pennsylvania Avenue, NW., 
Washington, DC 20580, either in person or by calling (202) 326-2222.
    Public comments are invited, and may be filed with the Commission 
in either paper or electronic form. All comments should be filed as 
prescribed in the ADDRESSES section above, and must be received on or 
before the date specified in the DATES section.

Analysis of Agreement Containing Consent Order To Aid Public Comment

    The Federal Trade Commission has accepted, subject to final 
approval, an agreement containing a consent order from Kmart 
Corporation, Kmart Services Corporation, and Kmart Promotions, LLC 
(collectively, ``respondents'').
    The proposed consent order has been placed on the public record for 
thirty (30) days for receipt of comments by interested persons. 
Comments received during this period will become part of the public 
record. After thirty (30) days, the Commission will again review the 
agreement and the comments received, and will decide whether it should 
withdraw from the agreement or make final the agreement's proposed 
order.
    Respondents advertise, sell, and distribute the Kmart Gift Card 
through their retail stores and Internet Web site, http://www.Kmart.com. The Kmart Gift Card is a plastic, stored-value card, 
similar in size and shape to a credit or debit card, that can be used 
to purchase goods or services from Kmart retail locations. This matter 
concerns the respondents' alleged failure to disclose, or failure to 
disclose adequately, material terms and conditions of the Kmart Gift 
Card as well as a deceptive claim regarding the Kmart Gift Card.
    The Commission's complaint alleges that, in the advertising and 
sale of Kmart Gift Cards, respondents have represented, expressly or by 
implication, that a consumer can redeem a Kmart Gift Card for goods or 
services of an equal value to the monetary amount placed on the card. 
Respondents have failed to disclose, or failed to disclose adequately, 
that, after 24 consecutive months of non-use, a $2.10 fee is deducted, 
for each of the past 24 months, and again for each successive month of 
continued inactivity, from the value of the Kmart Gift Card. The 
proposed complaint alleges that the failure to disclose adequately this 
material fact is a deceptive practice.
    The complaint also alleges that respondents have represented on the 
Kmart.com Web site that the Kmart Gift Card never expires. In truth and 
in fact, after 24 months of non-use, the application of the Kmart Gift 
Card dormancy fee causes any Kmart Gift Card valued at less than $50.40 
to expire. The complaint alleges that the representation that the Kmart 
Gift Card never expires is false and misleading.
    The proposed consent order contains provisions designed to prevent 
respondents from engaging in similar acts and practices in the future.
    Part I.A. of the proposed order prohibits respondents from 
advertising or selling Kmart Gift Cards without disclosing, clearly and 
prominently: (a) The existence of any expiration date or automatic 
fees, in all advertising, and (b) all material terms and conditions of 
any expiration date or automatic fee, at the point of sale and prior to 
purchase. The effect of this provision is to require respondents to 
alert consumers to potential fees and expiration dates during 
advertising, and to fully disclose all relevant details at the point of 
sale, before consumers purchase the gift cards.
    Part I.B. of the proposed order prohibits respondents from 
advertising or selling Kmart Gift Cards without disclosing, clearly and 
prominently the existence of any automatic fee or expiration date on 
the front of the gift card.
    Part II of the proposed order prohibits respondents from making any 
misrepresentation about any material term or condition associated with 
the Kmart Gift Card.
    Part III.A. of the proposed order prohibits respondents from 
collecting or attempting to collect any dormancy fee on any Kmart Gift 
Card activated prior to the date of issuance of the proposed order.
    Part III.B. of the proposed order requires respondents to create, 
maintain, and distribute a written policy to reimburse consumers whose 
gift cards were diminished by fees. The policy: (1) Must specify a toll 
free number, a valid email address and a postal address that consumers 
can use to complete a request for reimbursement of dormancy fees from 
Kmart; (2) must be clearly and prominently disclosed on Kmart's web 
site for two years from the issuance of the order; (3) must be 
disclosed to anyone who complains or inquires to Kmart about a gift 
card balance; and (4) requires reimbursement to any eligible consumer 
who (a) contacts Kmart by phone, email, or postal mail, and (b) 
provides a Kmart gift card number, a mailing address, and a phone 
number. Once a consumer provides the required information, Kmart must 
issue a reimbursement within 10 business days, provided however, that 
for thirty (30) days after issuance of the order, respondents shall 
issue a reimbursement within fifteen (15) business days.
    Part IV of the proposed order contains a document retention 
requirement, the purpose of which is to ensure compliance with the 
proposed order. It requires that respondents maintain accounting and 
sales records for the Kmart Gift Card, copies of ads and promotional 
material that contain representations covered by the proposed order, 
complaints and refund requests relating to the Kmart Gift Card, and 
other materials that were relied upon by respondents in complying with 
the proposed order.
    Part V of the proposed order requires respondents to distribute 
copies of the order to various principals, officers, directors, and 
managers of respondents as well as to the officers, directors, and 
managers of any third-party vendor who engages in conduct related to 
the proposed order.
    Part VI of the proposed order requires respondents to notify the 
Commission of any changes in corporate structure that might affect 
compliance with the order.
    Part VII of the proposed order requires respondents to file with 
the Commission one or more reports detailing compliance with the order.
    Part VIII of the proposed order is a ``sunset'' provision, 
dictating the conditions under which the order will terminate twenty 
years from the date it is issued or twenty years after a complaint is 
filed in Federal court, by either the United States or the FTC, 
alleging any violation of the order.
    The purpose of this analysis is to facilitate public comment on the 
proposed order. It is not intended to constitute an official 
interpretation of the proposed order or to modify in any way its terms.

    By direction of the Commission.
Donald S. Clark,
Secretary.

Statement of Commissioners Pamela Jones Harbour and Jon Leibowitz 
(Concurring in Part and Dissenting In Part)

    Today, the Commission approves for public comment a proposed 
consent agreement with Kmart Corporation and two of its subsidiaries 
(collectively, ``Kmart'') to settle charges that Kmart misrepresented 
material aspects of its

[[Page 12615]]

gift cards and failed to disclose that, after two years of non-use, 
Kmart would deduct a $50 fee from the gift card and a $2.10 monthly fee 
thereafter. We concur in the Commission's decision to bring an action 
against Kmart, but dissent in part from the proposed consent agreement 
because we 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.\2\
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    \2\ Kmart applied a dormancy fee of $2.10 per month to the 
balance of every Kmart gift card that went unused for 24 months--
both retroactively ($50.40) and prospectively. Consequently, cards 
worth $50 or less were rendered worthless if unused for two years. 
Imagine stashing a $10, $25 or $50 gift card in a drawer and then 
pulling it out two years later for a trek to shop at Kmart, only to 
learn at the check-out counter that the card had no value. Kmart 
recently discontinued charging this dormancy fee after learning 
about the FTC's investigation, but only on a prospective basis.
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    Gift cards have become enormously popular with consumers and 
generated nearly $28 billion in sales during the 2006 holiday 
season.\3\ Gift card dormancy fees and expiration dates are material 
restrictions that affect the value of the cards. These restrictions 
must be clearly disclosed so that consumers can make informed 
decisions, whether they are purchasing the cards or receiving them as a 
gift.
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    \3\ Press Release, Nat'l Retail Fed'n, Gift Card Spending 
Surpassed Expectations as Last-Minute Shoppers Looked for Quick, 
Easy Gifts; Most Consumers Have Spent Less Than Half of Card Values 
(Jan. 23, 2007).
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    The proposed order settles the Commission's allegations that Kmart 
deceptively advertised its gift cards by, among other things, 
misrepresenting the existence of any expiration dates or fees 
associated with the cards. Not only did Kmart claim that the gift cards 
could be used ``like cash at all Kmart locations,'' but its Web site 
also affirmatively misled consumers by stating that the Kmart gift 
cards ``never expire.'' We agree that Kmart's alleged conduct justifies 
the order's injunctive provisions.
    But we believe the order should go further. It should require Kmart 
to disgorge the profits of its unlawful behavior, provide more complete 
consumer redress, or a combination of both.\4\ More than three decades 
ago, in sponsoring the Magnuson-Moss Act extending the Commission's 
authority under Section 19 to obtain monetary remedies, Senator 
Magnuson explained that the Commission cannot ``rely merely upon a slap 
of the violator's wrist to maintain fair play in the marketplace'' and 
that ``[a] mere cease-and-desist order has frequently let a wrongdoer 
keep his ill-gotten gains.'' \5\ The same rationale holds true today.
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    \4\ Commission consent orders have required advertisers to pay 
redress, offer refunds, or disgorge profits, and it is appropriate 
to do so here. See, e.g., Hi-Health Supermart Corp., FTC Dkt. No. C-
4136 (May 12, 2005) (requiring $450,000 in redress); ValueVision 
Int'l, Inc., FTC Dkt. No. C-4022 (Aug. 24, 2001) (requiring company 
to offer refunds to all purchasers of the challenged products); 
Weider Nutrition Int'l, Inc., FTC Dkt. No. C-3983 (Nov. 17, 2000) 
(requiring $400,000 in redress); Dura Lube, Inc., FTC Dkt. No. D-
9292 (May 5, 2000) (requiring $2 million in redress); Apple 
Computer, Inc., FTC Dkt. No. C-3890 (Aug. 6, 1999) (requiring 
company to honor representation that customers would receive free 
support for as long as they own the product); Azrak-Hamway Int'l, 
Inc., 121 F.T.C. 507 (1996) (requiring toymaker to offer refunds); L 
& S Research Corp., 118 F.T.C. 896 (1994) (requiring $1.45 million 
in disgorgement).
    \5\ 119 Cong. Rec. 29480 (1973).
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    In this case, Kmart deducted dormancy fees from consumers' gift 
cards. It failed to give adequate notice. In many instances, Kmart's 
actions rendered unused or partially used cards valueless, at 
significant monetary benefit to Kmart but considerable monetary 
detriment to consumers. The proposed consent order, in our opinion, 
stops the deceptive practices but does not completely cure the consumer 
injury or fully excise Kmart's ill-gotten gains. Pursuant to the order, 
Kmart may not assess additional dormancy fees on previously activated 
gift cards and must reimburse previously assessed dormancy fees if 
consumers complain and can provide the gift card number. Many consumers 
no doubt already have thrown out their gift cards and will have no 
remedy under this settlement. Moreover, the order does not require 
Kmart automatically to restore previously deducted dormancy fees 
(absent consumer inquiries) or disgorge the windfall profits it made 
from these fees. Although Kmart's reimbursement practices have been 
improved by the Commission's efforts, in our opinion the refund policy, 
without additional monetary relief, is still too little, too late.
    We commend staff for pursuing Kmart's failure to disclose its gift 
card dormancy fees and for challenging Kmart's affirmative 
misrepresentations that its gift cards do not expire. For the foregoing 
reasons, however, we respectfully dissent in part from the proposed 
order.

[FR Doc. E7-4798 Filed 3-15-07; 8:45 am]
BILLING CODE 6750-01-P