Are Your Business Clients Ready for the End of ‘Drip Pricing’ in California Starting July 1

By: David Muellenhoff

Estimated reading time: 6 minutes

As of July 1, 2024, it will be unlawful for California businesses to advertise prices to consumers that do not include all mandatory fees or charges, exclusive of government-imposed taxes or fees such as shipping costs. This could result in some startling retail inflationary effects come July 1. At the least, it will dramatically change how many businesses communicate prices to the public. The California Attorney General recently provided some guidance to help businesses comply with the new law.

SB 478 Amends the CLRA

California’s Consumer Legal Remedies Act (CLRA) (Civ. Code, §§ 1750–1784) makes it unlawful to engage in certain unfair methods of competition and unfair or deceptive acts or practices – such as advertising goods or services to a consumer with the intent not to sell or lease them as advertised. It also provides for private suits by consumers for relief, which can include actual damages ($1,000 minimum in class actions), injunctive relief, restitution, punitive damages, and attorney fees. (Civ. Code, § 1780, subd. (a).) Senior citizens and disabled persons may be awarded additional damages up to $5,000. (Civ. Code, § 1780, subd. (b).)

As CEB covered last October, Gov. Gavin Newsom signed SB 478. The bill was intended to specifically prohibit “drip pricing,” which the bill defined as advertising a price that is less than the actual price the consumer will have to pay for a good or service. (Drip pricing is not to be confused with “drip marketing,” which refers to scheduling a campaign of targeted communications to help move a consumer through marketing and sales funnels.)

SB 478 declared (Stats. 2023, ch. 400, sec. 1(b)) the legislature’s finding that drip pricing, “like other forms of bait and switch advertising,” was already prohibited by existing statutes, including California’s Unfair Competition Law (UCL) (Bus. & Prof. Code, §§ 17200–17210) and False Advertising Law (Bus. & Prof. Code, § 17500). Nevertheless, SB 478 amended the CLRA to, among other things, make it unlawful effective July 1, 2024 to engage in

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.

(ii) Postage or carriage charges that will be reasonably and actually incurred to ship the physical good to the consumer.

(Civ. Code, § 1770, subd. (a)(29)(A).)

Attorney General Guidance

Businesses and their legal counsel had identified a number of practical issues with implementing the new law. Restaurants, in particular, were concerned about such matters as minimum-wage-increase charges, delivery fees, tips, and dynamic (i.e., “surge”) pricing. The Attorney General recently provided helpful guidance in the form of a FAQ.

The FAQ does not, of course, carry the force of law, and counsel should monitor possible litigation on SB 478’s constitutionality, and on its application to restaurant and other specific industry practices. But the FAQ certainly indicates the Attorney General’s interpretation of this provision of the CLRA, and the legal position the Attorney General will take when enforcing it.

Some highlights:

1. The FAQ states the law applies generally to the sale or lease of most goods and services for personal consumer use, such as event tickets, short-term rentals, hotels, restaurants, and food delivery. Sales or leases for commercial use are excluded, as well as certain transactions and industries (e.g., broadband internet bundling, real estate) excluded as specified in the law. (See Civ. Code, § 1770, subd. (a)(29)(B)–(C).)
2. Businesses may not disclose additional required fees before the consumer finalizes the transaction. The FAQ clarifies that the price listed or advertised to the consumer must be the full price the consumer is required to pay.
3. That said, businesses may include fees or charges in the total price. Separate from that total price, businesses may tell consumers that the price includes those fees or charges. For example, many restaurants have kept menu prices low by including charges to cover minimum wage increases as separate line items on the bill. Those charges must now be included in the menu price, but restaurants will still be free to explain the increased pricing to consumers.
4. The FAQ clarifies that restaurant delivery fees do not need to be included in the total price, because those fees are for the separate service of delivery of food. However, the FAQ emphasizes that the delivery fee must be the “full, all-in price of the delivery service.”
5. Voluntary tips are not considered “mandatory fees or charges,” and thus do not need to be included in the total price. Mandatory tips, however, must be included. The common restaurant practice of charging a mandatory minimum or automatic gratuity for large parties is, the FAQ observes, not going to be part of the Attorney General’s initial enforcement efforts – although the FAQ dryly notes that businesses remain exposed to private litigation on that issue.
6. The bill declared that it was not intended to prohibit algorithmic or dynamic pricing (Stats. 2023, ch. 400, sec. 1(c)), and the FAQ reiterates that point.
7. Businesses can exclude shipping charges from the total price, but not handling charges. The Attorney General considers a handling charge to be a “mandatory fee or charge” under the statute.
8. Many businesses do not currently know at the beginning of a transaction how much they will end up charging a customer, because their systems are designed to provide consumers with different pricing options as they move through the sales funnel architecture. Such businesses will be caught in the act July 1, because the FAQ 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.” Counsel should advise such clients to make immediate changes to their business processes in order to comply.

Possible Inflationary Effect?

This writer believes many businesses that choose to comply with the new law will simply jack up their advertised prices as of July 1 to cover all possible mandatory fees and charges, and then discount the actual price the consumer pays where they can.

For example, are credit card surcharges to defray merchant transaction processing costs for accepting credit card payments (e.g., capped by Visa at 3% and Mastercard at 4%) “mandatory fees or charges” that are required to be included in the advertised price? The FAQ does not say.

If the answer is yes, then how are businesses to implement this, when they will not know until point of sale whether the customer is paying by credit card or cash, and which card network’s fees will apply? At a practical level, to reflect these possible charges in the initial price the consumer sees, businesses may have to raise all posted prices by the maximum surcharge permitted, say 4%, and then offer discounts to the consumer who pays by a less costly card network or by cash.

Would a 4% jump in retail prices on July 1 be reflected in the Consumer Price Index and other inflation metrics? It won’t be long before we may get to find out.

© The Regents of the University of California, 2024.

This article is also accessible on CEB DailyNews platform located at: https://research.ceb.com/posts/applying-section-230-to-facebooks-ad-business-new-case-has-big-implications