Key Takeaways:

• On July 1, 2024, a new law in California will prohibit businesses from advertising a price that is less than the actual price that a consumer will ultimately have to pay for a good or service. The law, Senate Bill (SB) 478, is designed to increase transparency for consumers in the purchasing process by eliminating mandatory charges and fees, such as service fees and surcharges.
• The law is expansive, reaches any company conducting meaningful activity in California and applies to a wide variety of charges and fees that businesses may impose on consumers in the purchasing process.
• There are significant remedies available for consumers who bring claims for violation of SB 478, including a $1,000 per violation penalty, restitution and attorney’s fees. The law thus creates lucrative incentives for the plaintiffs’ bar to file class action lawsuits alleging violations of the law.

On Oct. 7, 2023, California Governor Gavin Newsom signed SB 478 into law. When it becomes effective July 1, 2024, the law will amend the California Consumer Legal Remedies Act (CLRA) to generally ban so-called drip pricing and junk fees. SB 478 applies to virtually all California businesses — i.e., any activity undertaken by any person in a transaction intended to result in the sale of goods or services to a consumer. California’s effort sits along the Biden administration’s focus on junk fees, which several federal agencies have now addressed by way of various advisory opinions, guidance documents and enforcement actions.

As noted above, the express purpose of SB 478 is to ban drip pricing, which the legislation describes as “advertising a price that is less than the actual price that a consumer will have to pay for a good or service.” Stated differently, drip pricing occurs when a seller promotes a low headline price to attract a customer and either discloses additional required fees in smaller print or reveals additional unavoidable charges later in the purchasing process. On July 1, it will thus be illegal to advertise, display or offer a price for a good or service at an initial price and then tack on additional mandatory fees later in the buying process.

The law is specifically designed to enhance price transparency because, as the legislature has reasoned, transparency and full disclosure in pricing are critical for fair competition and consumer protection. The law explains that the practical effect of including hidden or junk fees in the purchase price of goods and services, after putting out a lower advertised price, is that it misleads consumers and prevents them from properly assessing the best prices, thereby hindering the market. In identifying the fees that this new law would regulate, California Attorney General Rob Bonta, who sponsored this bill, specifically called attention to service charges and other unavoidable charges that are hidden in small type with vague descriptions or that are bundled in a misleading way with taxes.

While California regulatory authorities are expected to publish guidelines clarifying what exactly the law prohibits prior to July 1, there is uncertainty as to whether fees such as surcharges or service charges will be banned altogether or, alternatively, whether more conspicuous disclosure of such fees at the outset of the purchasing process will be sufficient to comply. If the former, companies will need to include the total amount of the good or service, which incorporates the charge into the advertised price. So, if a particular good costs $20 and the company includes a 5% service charge on all purchases, the quoted price of the good must reflect $21 at the outset.

Additionally, because the law only prohibits “[a]dvertising, displaying, or offering a price for a good or service that does not include all mandatory fees,” businesses may consider making their additional charges optional, such that a consumer can opt to remove the charge upon request. While the permissibility of this practice will likely be addressed by the forthcoming guidelines, making such a charge voluntary may raise other issues. For example, if companies decide to make the charge voluntary and subject to removal upon customer request, this raises potential issues with whether the charge should, in fact, be considered a gratuity. And because gratuities must be retained entirely by employees under California law, if the business retains the charge — to assist in covering the businesses’ operating expenses — this may constitute a separate violation of the California Labor Code.

Notably, SB 478 does not regulate the method by which businesses determine their pricing. It consequently does not govern the structure or operation of dynamic and algorithmic pricing models, although the manner of advertising those prices is regulated by the new law. The law also does not apply to taxes or fees imposed by a government or postage or carriage charges that will be reasonably and actually incurred to ship the physical good to the consumer. The law includes exemptions for companies in particular regulated industries, such as automobile manufacturers and those in the air transportation industry. Finally, the law also permits food delivery platforms to list menu prices that do not include service fees.

Claims alleging violations of SB 478 under the CLRA may be brought on an individual or class-wide basis. Successful plaintiff-consumers are entitled to:

• Actual damages or $1,000, whichever is greater per violation.
• An order enjoining the violative business practice.
• Restitution.
• Punitive damages.
• Attorney’s fees.
• Any other relief the court deems proper.

As with any claim under the CLRA, in order to recover damages, a consumer must, before filing suit, notify the business of its alleged violation and ask the business to correct or rectify the practice. The business then has 30 days to remedy the alleged violation. The consumer is unable to bring suit until this 30-day time period expires, and CLRA claims have a three-year statute of limitations.

While the impending guidelines expected from California regulatory authorities will provide clarity on exactly what the law prohibits, companies should closely review their business practices to determine which, if any, of their mandatory charges and fees will fall within the ambit of SB 478’s prohibition.

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