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Award of bonus miles infringes German law

The Bundesgerichtshof (BGH), the highest civil court in Germany, has recently reminded all firms providing services and selling products in Germany of the need to ensure compliance with the terms of the so-called Ordinance on Free Gifts (Zugabeverordnung).

The Ordinance on Free Gifts prohibits a free gift being offered, announced or granted along-side the main product or service, unless the gift falls into one of the narrowly defined exemptions listed in the Ordinance (eg the gift is a customary accessory or a promotional product of negligible value). The gift itself can be in the form of a product or service. The Ordinance may, therefore, be applicable to banks considering offering incentive packages to attract customers to open accounts, in particular to new young customers; to credit card organizations and other firms issuing in-house cards which wish to award customers with a gift as part of a loyalty programme (eg free telephone calls); to firms, whether a financial institution or otherwise, which wish to attract customers by either offering free insurance or extended guarantees on products or by awarding loyality bonuses for existing customers who solicit new customers for the firm. Breach of the Ordinance on Free Gifts can result in a prohibitory injunction, a claim for damages and a fine of up to Dm10,000 ($5,413.00)

A gift by definition is a product or service which is ancillary to the main product or service being offered and is only conferred upon the purchaser if that purchaser purchases the main product or service. The Ordinance on Free Gifts aims, inter alia, at preventing a would-be purchaser from making an unobjective decision by reason of the offer of a free gift (unsachliche Beeinflussung) and/or from being misled as to the true price of the main product (Preisverschleierung). The purchaser could, for instance, be misled into believing that he or she is making a particularly favourable purchase, whereas in reality, the price of the main product may be increased by the costs of the gift, or the purchaser may not be in a position to assess the true value of the gift.

In the BGH decision of September 1998, the reasoning for which was published in February of this year, a credit card organization offered its customers the opportunity to collect bonus miles, depending on the volume of sales turnover achieved by the particular customer, which could then be exchanged for free flights or hotel accommodation.

The BGH held that the award of bonus miles was a gift which infringed the Ordinance on Free Gifts, because:

the offer of bonus miles in exchange for flights or hotel accommodation was an ancillary service to the main product of a credit card, the main function of a credit card being to allow customers to purchase goods and services in the form of cashless transactions;

the bonus miles were conferred without consideration (it expressly dismissed the argument that the consideration could be the annual fee charged for the credit card); and

the cardholder was misled as to the true value of the gift, because there was no means by which the he/she could assess its value or benefit. The BGH stated the cardholder received no information as to how the bonus miles could be converted nor how many were needed to convert into free flights or hotel accommodation. In addition, the credit card organization had not been prepared to guarantee its promises and, therefore, the cardholder did not even know whether they would receive any benefit at all from the bonus miles.

The BGH left open whether bonus miles offered by other branches (airline companies, car rental firms and hotels) are permissible.

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