California Governor Gavin Newsom has signed SB 478 into law, expanding the state’s consumer protection laws to include a wide range of fees and charges, often referred to as “junk fees.” Effective July 1, 2024, businesses operating in California will be prohibited from advertising, displaying, or offering a price for goods or services that does not include all mandatory fees or other charges, excluding taxes and shipping fees. Violations of this law can result in penalties of at least $1,000 per violation.
SB 478 targets “drip pricing,” a practice where an initial low price is advertised, but additional mandatory fees are added later in the checkout process. Common examples include processing fees on event ticketing websites or service fees on hotel booking sites. To comply with the new law, all fees must be included in the initial advertised price.
The law includes specific carveouts for certain industries. For instance, rental car companies, regulated under California Civil Code Section 1939.19, will be considered compliant if they meet existing requirements. Other exemptions apply to automobile dealerships, property managers, and food delivery companies. However, SB 478 does not regulate how companies determine their pricing, meaning dynamic and algorithmic pricing models are still permissible, as long as the advertised prices comply with the new disclosure requirements.
Claims alleging violations of SB 478 can be brought individually or as class actions under the California Consumers Legal Remedies Act (CLRA). Successful plaintiffs are entitled to actual damages or $1,000 per violation, whichever is greater, as well as other remedies such as injunctions, restitution, punitive damages, attorney fees, and any other relief deemed appropriate by the court. Before filing a lawsuit, customers must notify the business of the alleged violation and give the business 30 days to rectify the issue. CLRA claims have a three-year statute of limitations.
The new law applies to virtually all businesses operating in California, which is the world’s fifth-largest economy. This means that both national and international companies doing business in the state must comply. The law’s broad language covers any activity intended to result in the sale or lease of goods or services to consumers, even if no transaction is completed. The term “doing business” in California has historically been interpreted broadly, potentially leading to litigation over the extent to which California can regulate transactions outside the state.
The law’s impact could extend beyond California’s borders. For example, the U.S. Supreme Court recently upheld a California law regulating all pork products sold in the state, regardless of their origin. Companies may find it challenging to avoid compliance with SB 478’s standards, even for consumers outside California, due to the law’s requirements for initial price disclosures.
Other states often model their laws after California’s, so SB 478 could inspire similar legislation elsewhere. This development coincides with increased federal scrutiny of “junk fees.” The Biden administration and agencies like the U.S. Consumer Financial Protection Bureau (CFPB) and the U.S. Federal Trade Commission (FTC) have recently focused on these issues. Shortly after Governor Newsom signed SB 478, the CFPB issued guidance on “junk fees,” indicating that even conduct not explicitly prohibited by the Dodd-Frank Act could be considered unfair, deceptive, or abusive if it violates state consumer protection laws.
The FTC has also proposed a new rule to regulate “junk fees” for all for-profit businesses in the U.S. This rule would require businesses to disclose the purpose of any additional fees and could be enforced by the CFPB against financial institutions. The proposed rule defines a covered “business” broadly, without excluding banks.
Given SB 478’s expansive scope, companies with significant activity in California should closely study the new law to ensure compliance. This includes scrutinizing price quotes, marketing plans, and advertisements to confirm that all fees are adequately disclosed. The steep penalties for violations heighten the need for careful compliance. Plaintiffs may argue that each advertising impression or price quote constitutes a separate violation, potentially leading to significant financial liabilities.
Companies should also review other federal and state laws governing disclosures to ensure compliance. A patchwork of state laws with distinct and possibly conflicting requirements is anticipated.
California Attorney General Rob Bonta, who co-sponsored SB 478 with the California Low-Income Consumer Coalition, praised the new law. “These deceptive fees prevent us from knowing how much we will be charged at the outset. They are bad for consumers and bad for competition,” Bonta said. “With the signing of SB 478, California now has the most effective piece of legislation in the nation to tackle this problem.”
Senator Bill Dodd, one of the bill’s co-authors, emphasized the importance of transparency. “Now we can put the consumer first and create a level playing field for those businesses that advertise the real price, up front,” Dodd said. Senator Nancy Skinner, another co-author, added, “California sent a clear message today: The days of bait-and-switch pricing practices are over.”
The legislation aims to address the growing problem of deceptive price advertising, which has proliferated across various sectors, including lodging, event tickets, and food delivery. These hidden fees often mislead consumers about the true cost of goods and services.
Source: NewsTeresa Goody Guillén, Jonathan Barr, John Carney, Jimmy Fokas Host Second Annual “Former SEC Speaks”07/01/2024
