Gift cards–a new way to reduce liability

You are providing risk advice to a company accused of wrongdoing. What do you think about your client offering voluntary gift cards as a strategy to reduce liability?

The question is currently before the Ontario Superior Court of Justice in David v. Loblaw, which has not only drawn attention from the public, but also from businesses and the antitrust class actions bar, as noted by Paul-Erik Veel of Lenczner Slaght on CanLii Connects.

“For organizations that have engaged in misconduct looking to make a public response, Loblaws’ actions highlight both the potential benefits and risks of such voluntary remediation,” Veel writes.

The case before the courts is sparse on public details. The allegations, which have not been proven in court, are that Loblaws and its related companies engaged in some kind of retail price-fixing of bread products since as early as 2002.

Loblaws appears to have reported the activity to the Competition Bureau, obtaining immunity from criminal prosecution for doing so, the Ontario Superior Court of Justice states. All the same, numerous class action lawsuits have been filed seeking damages from the company.

In response to the lawsuits, Loblaws offered a $25 gift card to all consumers in December 2017. Customers registered for the gift card on a special website established by the company. On the website, customers declare if they had bought one of the bread products in question; they also agree to release Loblaws from the first $25 of liability in any settlement or damages award.

The Loblaws release does not bar consumers from participating in a class action against Loblaws, nor does it extinguish or discount claims for any amounts to which consumers would become entitled in excess of $25. Loblaws has publicly estimated the cost of the program at between $75 million and $150 million, depending on consumer uptake.

The courts have not yet passed judgment on whether such a release would be enforceable — or whether gift cards constitute a valid set-off against any ultimate damage award, Veel notes.

“[T]here has been some academic and judicial criticism of ‘coupon settlements’ of class actions—namely, settlements where consumers are provided with payments that can only be used to purchase products or services from the settling party,” Veel writes.

Thus far, in a Jan. 8 decision, the Ontario Superior Court has simply ruled that there is nothing inappropriate about Loblaws seeking to reduce its liability through gift cards.

“Loblaw has a right to engage in a marketing campaign, and it equally has a right to reach out to consumers to settle part of its exposure in class action litigation,” Ontario Superior Court Justice Edward Morgan ruled. “As long as they have not misled anyone – and the explicit language of the application form and accompanying release is appropriate and serves to counter any misinformation that the consumer may have gleaned from press coverage of the card program – both of these aims are acceptable and can be combined into one package.”

But is the strategy is risky, says Veel. He offers alternative strategies for companies wishing to pursue the gift card option while it is still under court review. Clear releases are essential, he said, and gift card offers should maximize the likelihood that the courts will subsequently agree that releases are effective and that gift cards will offset awards.

“For example, instead of simply giving gift cards, companies can consider giving consumers the option to elect between receiving gift cards or funds useable elsewhere, such as a prepaid credit card,” Veel said. “Alternatively, if a company wanted to provide gift cards, it could discount the scope of the release: for example, it could provide a $25 gift card that could only be used at the company’s stores, in exchange for which a consumer would agree to release its claim to only the first $10 of any settlement or damages.

“Each of those options would entail higher costs of the program for the firm, but would increase the likelihood that such voluntary restitution would be an effective release and set-off.”