With his signature, California Governor Gavin Newsom signed into law SB 478, expanding California’s already sweeping consumer protection laws to include a broad array of fees and charges referred to by the bill authors as “junk fees.” Effective July 1, 2024, companies doing business in California will be prohibited from advertising, displaying, or offering “a price for a good or service that does not include all mandatory fees or other charges” other than taxes and shipping fees.

Penalties include actual damages of at least $1,000 per violation. CAL. CIV. CODE § 1750.

WHAT THE LAW REQUIRES

SB 478 is aimed at so-called “drip pricing,” which the statute describes as “advertising a price that is less than the actual price that a consumer will have to pay for a good or service.” The law makes it illegal to advertise a low initial price for a product and then tack on additional mandatory fees later in the checkout process.

The most common examples of this type of fee are the “processing” or “servicing” fees that are sometimes charged by event ticketing websites on top of an initial ticket price or hotel and lodging websites on top of listings. In order to comply with the law, all fees must be displayed as part of the initial price.

Importantly, the law contains carveouts for designated industries. For example, rental car companies, which are regulated under California Civil Code Section 1939.19, will be deemed to comply with the law if they satisfy extant requirements. Other carveouts exist for automobile dealerships, property managers, and food delivery companies.

Additionally, SB 478 does not regulate the method by which companies determine their pricing. As such, SB 478 does not govern the structure or operation of dynamic and algorithmic pricing models, though the manner of advertising those prices is covered.

Claims alleging violations of SB 478, similar to all California Consumers Legal Remedies Act (CLRA) claims, may be brought on an individual or classwide basis. Successful plaintiffs are entitled to

• actual damages or $1,000, whichever is greater per violation;
• an order enjoining the violative business practice;
• restitution;
• punitive damages;
• attorney fees; and
• any other relief the court deems proper.

As with any CLRA claim, in order to recover damages a customer must, prior to 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 customer cannot bring suit until the expiration of those 30 days, and CLRA claims have a three-year statute of limitations.

IMPACT IN CALIFORNIA AND BEYOND

The new law applies to virtually all California business. Any person or company “doing business” in California must comply with the new law. And, as the world’s fifth largest economy, topping the United Kingdom and just behind Germany, California is host to countless companies of all sizes, both national and international.

Because the law applies to any activity “undertaken by any person in a transaction intended to result or that results in the sale or lease of goods or services to any consumer,” SB 478 will have a far-ranging impact beyond California’s borders. Crucially, the law applies even when no transaction is consummated.

Moreover, the phrase “doing business” in California has historically been construed extremely expansively to include any activity that would satisfy federal constitutional due process requirements—i.e., the “minimum contacts” test—though how far the US Constitution permits California to regulate transactions outside the state will likely be the subject of litigation.

For example, the US Supreme Court recently upheld a broad California law regulating all pork products sold in the state regardless of where they originated. In practice, companies may have difficulty avoiding adherence to the law’s standards for even those consumers outside of California due to the law regulating what pricing is initially disclosed to consumers, and companies may not be able to determine whether a consumer is in California until too late in the transaction to comply.

What’s more, as other states often model California laws, SB 478 could trigger a spate of similar legislation in other states.

RELATED FEDERAL REGULATORY ACTIVITY

This development in California, perhaps not coincidentally, occurs at a time of intense scrutiny of “junk fees” at the federal level. Recently, the Biden administration and independent agencies with primary consumer protection authority—including the US Consumer Financial Protection Bureau (CFPB) and US Federal Trade Commission (FTC)—have focused on “junk fee” issues. A recent White House event highlighted those regulatory initiatives.

Shortly after Governor Newsom signed SB 478, the CFPB issued its own “guidance” related to “junk fees.” That guidance codifies the CFPB’s view that even conduct that does not violate a specific proviso of the Dodd-Frank Wall Street Reform and Consumer Protection Act may nonetheless be unfair, deceptive, or abusive within the meaning of that statute to the extent it violates state consumer protection laws.

While this guidance is not subject to rulemaking procedures under the Administrative Procedures Act—and thus does not carry the same force as a formally promulgated rule—the guidance does provide critical insight into the CFPB’s views and may inform its future enforcement activities.

The FTC, for its part, recently proposed a new rule regulating “junk fees,” which would apply to all for-profit businesses in the United States. The FTC’s proposed rule would not only bar hidden fees, but would also require businesses to disclose the purpose of any additional fees added to the overall price of a good or service. If adopted, the rule could also be enforced by the CFPB against financial institutions within its regulatory purview.

This is because the relevant statute authorizes the CFPB to enforce FTC trade regulation rules (TRRs) “to the extent such [a] rule applies to a covered person or service provider” (12 USC § 5581(b)(5)(B)(ii)). Although the FTC has historically drafted TRRs to exclude banks, the FTC did not do so here, and instead defined a covered “business” as any corporate provider of goods and services—without limitation or exclusion of banks.

TAKEAWAYS

Given SB 478’s expansive scope and wide geographical reach, any company with meaningful activity in the State of California should study this new law closely to ensure compliance with its requirements, including by scrutinizing price quotes, marketing plans, and advertisements to confirm adequate disclosure of all fees. The potentially steep penalties for violations of the law heighten the need for careful compliance.

While it remains to be seen how California will interpret the provision, if past is prologue, plaintiffs may argue that every advertising impression or price quote constitutes a separate “violation.” At $1,000 per violation, the damage provisions are likely to create significant incentives for the plaintiffs’ bar to file class action lawsuits alleging violations of the law.

Companies should also closely review other federal and state laws governing disclosures to ensure compliance with those requirements. Indeed, we anticipate a patchwork of state laws governing such disclosures, with different states imposing distinct and possibly conflicting requirements.

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