California Affiliate Nexus Law Goes Into Effect

We have written frequently about the California affiliate nexus statute, AB 155, which was adopted in June 2011, but was temporarily repealed in September 2011, pending Congressional action on a bill rejecting the Quill physical presence test. Since Congress has not enacted such a law, AB155 is set to go into effect tomorrow.

The California Board of Equalization (“BOE”) undertook a lengthy rulemaking process over the past year to flesh out the requirements of the law. Much of this effort is reflected in the BOE’s newly amended version of California Regulation 1684. Here are some of the key points:

• The law provides that an affiliate relationship will create nexus only if the payment to the affiliate is based upon a completed sale of tangible personal property; i.e., a commission-based arrangement. Thus, pay-per-click payment arrangements with affiliates do not create nexus. 
• The statute, and Regulation 1684 which interprets the statute, provides that if the arrangement with the affiliate is for the purchase of advertisements to be delivered on the Internet, the retailer will not be deemed to have nexus if the affiliate does not directly or indirectly solicit customers in California through the use of flyers, newsletters, telephone calls, email, blogs, social networking sites, or other means of direct or indirect solicitation specifically targeted at potential customers in California. Thus, if a retailer places content on the website of a California affiliate that provides information regarding the retailer’s products and the affiliate links to the retailer’s website, so long as the affiliate does not make any solicitations on behalf of the retailer that specifically target CA residents, the retailer should not have nexus under the California statute. 
• Regulation 1684 provides for a safe harbor if (1) the agreement between the retailer and affiliate provides for a prohibition of California solicitation activities on behalf of the retailer, such as distributing flyers or coupons or sending emails; (2) the retailer obtains certificates annually from the California-based affiliates that it has not engaged in any such prohibited solicited activities; and (3) the retailer accepts such certificates in good faith. 

Borders’ Gift Card Holders Not Permitted Recovery in Bankruptcy

We’ve written about gift cards in this space in the past, and have covered escheat issues related to gift cards, as well. But, in a different wrinkle, last month, the Bankruptcy Court for the Southern District of New York addressed the impact of bankruptcy law on companies’ requirements to honor gift cards.

By way of background, in February 2011, Borders filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code. In general, retailers are not obligated to honor gift cards in bankruptcy, despite any state requirements that gift cards be honored for a certain period of time. Instead, gift card holders are generally treated like all other creditors and are required to timely file proofs of claim prior to a bar date set by the court in order to receive the value (or a portion of the value) of the gift cards. Note though, that in California, at least, retailers in bankruptcy may be required to honor gift cards.

But, via a motion filed with the Bankruptcy Court, Borders indicated that it planned to honor gift cards issued prior to the petition date. That is, customers could continue to use Borders gift cards in Borders stores and on its website. Later, following the September 2011 liquidation of Borders’ retail stores and the end of its e-commerce operations, Borders no longer honored its gift cards since it no longer had any retail channels through which it could do so. In January 2012, after confirmation of the bankruptcy plan, several holders of gift cards who had not yet redeemed the cards filed a motion seeking to allow late proofs of claim so that they could recoup the value of their unused gift cards. They argued that because of data systems Borders had in place, Borders should have been required to provide each gift card holder actual, individual notice of the bar date to file claims, rather than the general notice provided via publication in the New York Times. Since they did not receive adequate notice, they argued, their failure to file proofs of claim was due to excusable neglect and late claims should have been permitted.