Are Restaurant Loyalty Programs Worth Their Rewards?

Are restaurant loyalty programs worth their rewards?

Stacy Gilbert, CPA with Kyle-Beth Hilfer, Esq.

Many restaurants offer loyalty programs to reward customers’ fidelity and to capture customer data. While these programs can be a potential business boost, owners should be careful about how to structure them to reduce their legal exposure. Citrin Cooperman’s Restaurant and Hospitality Practice Co-Leader, Stacy Gilbert, speaks candidly with Hilfer Law attorney, Kyle-Beth Hilfer, about the legal issues restaurant operators face when launching a loyalty program.

Q. What is the first thing a restaurant operator should do, before they roll out a customer loyalty program?

KBH: Operators want to make sure that the loyalty program is legally sound, so the first step is to vet and document the program’s structure. The terms and conditions of the program will serve as a binding contract with the consumer – without them, the operator risks misunderstandings that can turn into potential legal liabilities. Essentially, the terms should explain how the consumer earns and redeems points. Also, because these programs are rarely static, the terms should allow the operator to make changes to the structure in the future.

Data mapping is another crucial step. What data are you collecting? Who has access to the data (particularly third-party vendors and white-labeled third party apps). This would be a good time to review and amend any existing brand privacy policies and to make them consistent with a new loyalty program.

Q. You mention allowing operators to make changes to the program structure in the future. Can the program alter redemption values over time?

KBH: You want to be very careful with changes on redemption values without notice, particularly if they are retroactive in nature. This is true even if the program terms permit any kind of change. I would analyze this kind of change based on the language of the program’s terms and the practical impact it would have on program participants.

Q. Can someone challenge a restaurant’s loyalty program?

KBH: Unfortunately, the danger lies in many places. Loyalty programs are vulnerable to class action suits if there are any gaps in uniformity or any perceived unfairness. Sometimes, the State Attorneys-General or the Federal Trade Commission may investigate to ensure the program is neither deceptive nor unfair. In addition, franchisees may resist participating in loyalty programs if their franchising agreement is improperly drafted.

Q. Are there special considerations for loyalty programs if my restaurant is a franchise?

KBH: Yes. The franchise agreement needs to be crafted carefully if you want to mandate franchisees’ participation or require franchisees to fund program costs. You will want to ensure that franchisees are sending out marketing messages that are consistent with the program’s terms. It is important to note that general provisions in these agreements, which allow changes to “systems standards” or “rules of operation,” may not give franchisors the flexibility they need to change the terms of the loyalty program down the road.

Q. So, what else can go wrong with a loyalty program?

KBH: One of the biggest slipups I see is when a client’s program terms and conditions don’t match their marketing materials. The result is consumer confusion and frustration, which leads to litigation. It is important to be clear when stating that ‘points have no redeemable cash values,’ or the program could be subject to money transmission statutes, escheat laws, etc. Be careful of advertising the perks of the program with descriptions like “It’s just like cash” or “It’s like getting it for free,” as statements like these have been successfully challenged by regulators.

Q. What can restaurant owners do to avoid class action litigation?

KBH: While the law is not fully settled right now, a well-drafted arbitration clause, which includes a class action waiver, would achieve this goal. Because the law is shifting in this area, it is crucial to stay abreast of developments through legal counsel. In addition, a restaurant operator will want to make a well-informed decision when selecting an arbitration provider. The American Arbitration Association, for instance, has a separate set of procedural rules for business/consumer disputes.

Q. What trends do you see in restaurant loyalty programs?

KBH: Gamification is the big one. Since programs often offer a multitude of ways to earn points (sweepstakes, contests, auctions, etc.), they are subject to 50 states’ sweepstakes and gambling laws and need legal review. Charitable giving is another trend, whereby customers can “gift” rewards to charities. In doing so, however, under many states’ laws, the restaurant operator may become a commercial co-venturer, which requires registration, bonding, or specific advertising or contractual requirements. A third trend I see is recruiting loyalty program participants to serve as brand influencers. The legal issues here range from complying with FTC disclosure requirements to shielding the brand from unsubstantiated claims. Before a restaurant operator promotes its most “loyal” consumer, it may want to vet that consumer with complete background checks and enter into an influencer spokesperson agreement with that customer.

Q. It seems like there are many issues for a restaurant operator to think about. Is all this just more trouble than it is worth?

KBH: While there are many legal issues embedded in loyalty programs, and third-party apps who are “selling” these programs may not always consider all of the legal risks - a reason to review your contracts with those vendors carefully - if the restaurant operator involves a legal advisor from the concept stage, there is no reason for them to avoid implementing a loyalty program.

*Kyle-Beth Hilfer, Esq. has over thirty years’ experience in advertising, marketing, and intellectual property law. She represents hospitality and restaurant clients in their branding efforts. At the Westchester County Bar Association, Ms. Hilfer serves as Chair of the Hospitality Law Committee . She has spoken previously for the National Restaurant Association’s annual show, the national restaurant industry FOHBOH conference, and various hospitality groups around the New York area. You can read more about her law practice at www.kbhilferlaw.com.

To sign up for NIBBLES Newsletter, please email Vicki Dill at vdill@citrincooperman.com