California Issues FAQs On Hidden Fee Law

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This week, the California AG's office released a set of FAQs on California's law addressing hidden fees. As a reminder, the law states that the following practices...
United States Consumer Protection
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This week, the California AG's office released a set of FAQs on California's law addressing hidden fees. As a reminder, the law states that the following practices will be unlawful under the Consumer Legal Remedies Act ("CLRA") starting on July 1, 2024:

Advertising, displaying, or offering a price for a good or service that does not include all mandatory fees or charges other than either of the following: (i) Taxes or fees imposed by a government on the transaction; [or] (ii) Postage or carriage charges that will be reasonably and actually incurred to ship the physical good to the consumer.

The AG notes that the law is "intended to specifically prohibit drip pricing, which involves advertising a price that is less than the actual price that a consumer will have to pay for a good or service" and that doing so "is a form of deceptive advertising that also violates existing state and federal law." Although "drip pricing" hasn't been a big focus for the AG in the past, that may soon change.

Here's a summary of some of the more notable answers.

Scope of the Law

  • The law applies to the sale or lease of most consumer goods and services. It doesn't apply to the purchase or lease of goods or services for commercial use, or to a small number of specified transactions and industries that are subject to other pricing laws.
  • The law does not limit what types of (non-deceptive) fees business can impose or how much they can charge. Instead, the focus is on transparency. As the new FAQs document states: "Put simply, the price a Californian sees should be the price they pay."

What Must be Included and What Can be Excluded

  • Except as stated below, companies must include all mandatory fees or charges in the advertised price. "Mandatory fees or charges" is not expressly defined in the statute or FAQs.
  • The advertised price does not need to include taxes or government imposed fees. Nor does it need to include reasonable third-party shipping costs. It does, however, have to include any handling charges imposed by the company.
  • Charges used to pay business costs, even if costs were caused by government requirements (such as recouping salary increases due to city ordinances), must be included in the overall price, although as disclosed below, they need not be itemized.
  • The advertised price doesn't have to include fees for optional services, features, or gratuities. Similarly, because fees that are contingent on certain later conduct by a consumer (such as late fees) are not mandatory, they do not need to be included in the advertised price.

Separate Disclosure of Fees

  • The document includes three questions asking essentially the same thing – whether a company can advertise a "base price" and separately disclose any mandatory fees that will apply. The answer to each question is exactly the same: "No. The price listed to the consumer must be the full price that the consumer is required to pay."
  • Companies can, however, separately list fees and mandatory charges, as long as those are included in the advertised price.

Restaurants and Food Delivery

  • Food delivery platforms are subject to special requirements under another new law, and the "hidden fees" law does not change those requirements. However, when these platforms advertise the price of the delivery service that they provide, they must advertise "the full, all-in price of the delivery service."
  • Fees for the delivery of food ordered directly from a restaurant do not need to be included in the advertised price of the food "because those fees are for the separate service of delivery." Again, the price of delivery must be "the full, all-in price of the delivery service." The AG here appears to be creating a distinction between delivery fees, which it says are not "mandatory fees" because they are for a separate service, and "service fees" and "gratuity payments that are not voluntary" that are considered mandatory and thus need to be included in the advertised price.
  • Notably, in response to many questions from the restaurant industry, the AG writes: "There are many factors that we consider when making enforcement decisions, but we do not expect that our initial enforcement efforts will focus on existing fees that are paid directly and entirely by a restaurant to its workers, such as an automatic gratuity. However, businesses may be liable in private actions."

Other Provisions

  • The AG clarifies that business can offer discounts and coupons without violating the law. It's OK to advertise a price that is higher than consumers will have to pay. "The law just prohibits advertising a price that is less than what the customer will have to pay for a good or service."
  • The AG mentions a scenario in which a business may not know the entire price at the start of a transaction and states: "Businesses that do not know how much they will charge a customer at the beginning of a transaction should wait to display a price until they know how much they will charge." For some companies, this is going to create a significant challenge.

These answers provide clarity in many areas (even if they aren't the answers companies were looking for). However, although there are many cases in which compliance may be relatively straightforward, there are many cases that are not as "simple" as the AG's comments suggest. Many companies will have to make difficult choices based on their risk tolerance and pay attention to enforcement trends. But in any risk calculation businesses should keep in mind that State AGs across the country – along with the FTC and CFPB – are already pursuing "hidden fees" either through proposed rules or statutes (click here and here, for example), or through enforcement of their existing UDAP laws.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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