Advisories June 24, 2024

Class Action and State & Local Tax Advisory: What Does California Drip-Pricing Law Mean for Retailers?

Executive Summary
Minute Read

Our Class Action and State & Local Tax teams answer the questions California’s SB 478 raises about how sellers can present prices to consumers.

  • Advertising, displaying, or offering a price that does not include all “mandatory fees or charges” will be deemed an unfair method of competition and deceptive act 
  • Exceptions include taxes, shipping costs, and registration fees
  • The new law becomes effective on July 1, 2024

What is changing?

Starting July 1, 2024, it will be unlawful in California to list the price of a product or service without including all “mandatory” fees. The new law (SB 478), also known as the Honest Pricing Law, amends the existing Consumers Legal Remedies Act (CLRA) to prohibit “[a]dvertising, displaying, or offering a price for a good or service that does not include all mandatory fees or charges.”

What does this mean for pricing?

The goal of the new law is price transparency for consumers. Businesses must now post the full price, including all “mandatory fees or charges,” at the outset, rather than tacking them on later in the checkout process. As stated in recent guidance from the California Attorney General’s Office, “[t]he price listed to the consumer must be the full price that the consumer is required to pay.” While the new law does not regulate how much can be charged for a product or service, it prohibits “drip pricing,” which occurs when fees or charges are introduced later in the transaction.

What fees must be included and what can be added later?

The law specifies that all “mandatory fees or charges” for any consumer good or service must be included in the list price. The term “mandatory fees” is not defined anywhere in the amendment or the CLRA generally, but the legislature has signaled that the term should be construed broadly, including “any fee which the consumer cannot avoid, and which is not imposed by the government.”

Two notable exceptions are costs for shipping and government-imposed charges that can be passed to the consumer later, such as taxes. Charges for shipping, though, are limited to only those costs that are “reasonably and actually incurred” to get the physical good to the consumer, closing a potential loophole. In other words, a business cannot offer a competitively low price only to later charge an inflated shipping charge that offsets the low base price unless those shipping charges are reasonably and actually incurred. On the other hand, “handling charges,” according to the attorney general, are not considered shipping fees and must be included in the list price.

Government-imposed charges include any taxes, fees, and a few agency assessments passed to the consumer later in the transaction.

What about fees from restaurants and food delivery services?

Mandatory Gratuities: Under SB 478, restaurants that charge mandatory gratuities are not exempt and must include those charges in the price of their food. This may soon change, however. On June 6, Senator Bill Dodd, who authored SB 478, introduced SB 1524. The new bill would add an exception for a “restaurant, bar, or … banquet or catering services,” allowing a charge, gratuity, or fee to be listed separately if it is clearly and conspicuously displayed to the consumer. UPDATE, JUNE 26: A new amended version of the bill now adds an exception for “a mandatory fee or charge for individual food or beverage items sold directly to a customer by a restaurant, bar, food concession, grocery store, or grocery delivery service, or by means of a menu or contract for banquet or catering services that fully discloses the terms of service.”

Delivery Charges: Section 14 of the bill states that the price of a menu item on a “food delivery platform” does not need to include any additional fees for delivery as long as those fees are clearly specified and disclosed to the consumer. The attorney general clarified that this also applies to items ordered for delivery directly from a restaurant. The logic behind this exception is that the delivery fee is “for the separate service of delivery.”

Does the new rule apply universally or are there exceptions?

Many businesses regulated by other existing laws related to pricing are exempt from the new regulation. These include:

  • Broadband internet service providers in compliance with 47 C.F.R. § 8.1(a).
  • Certain financial institutions.
  • Vehicle rental companies in compliance with California Civil Code Section 1939.19(a), (b), and (g).
  • Car and motorcycle dealerships excluding a fee or charge identified in new California Vehicle Code Section 11713.27(b).
  • Lease advertisements.
  • Air transportation provided by air carriers defined by 49 U.S.C. § 41713.
  • Advertising a motor vehicle manufacturer’s suggested retail price (MSRP).

What is the risk of noncompliance?

There is a significant consequence for failing to comply with the new regulation. According to the CLRA, an individual consumer or a permitted class may bring an action for damages incurred, injunctive relief, restitution, and even punitive damages. Consumers, however, must notify and allow businesses 30 days to cure the violation, and they generally must bring actions based on the CLRA within three years of the alleged violation.

What do I need to do to comply?

Under the attorney general’s guidance, there is no singular right way to comply with this new law. Businesses should prioritize checking their storefronts, websites, marketing materials, and anywhere prices are listed to ensure that they include all mandatory fees that the customer will be charged at the end of the transaction so that “the price they advertise or display [is] the total price that customers will have to pay for the good or service.” But “[b]usinesses are free to explain how they set their prices or to subsequently itemize the charges that make up the total price that they charge customers.”

SB 478 does not affect purely “optional” fees or discounts and coupons. While the law prohibits advertising a price that is less than what the consumer will ultimately pay, it does not prohibit businesses from offering discounts or coupons that ultimately charge the consumer a price that is less than what is advertised.

Could this law change in the future?

Yes. In 2023 the Biden Administration proposed the Junk Fee Prevention Act to regulate similar pricing and fees; the drafters of SB 478 acknowledged that the federal Act may preempt the state law. While the federal bill has only just been introduced, it could give the Federal Trade Commission broad authority to not only prevent mandatory fees from being added later but actually regulate what fees can be imposed. Businesses would do well to keep this in mind with their pricing models.

Meet the Authors
Media Contact
Alex Wolfe
Communications Director

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