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I. Overview
In October 2023, California Gov. Gavin Newsom signed a pair of bills (SB 478 and AB 537) into law banning so-called "junk fees." While SB 478 applies to California businesses generally, AB 537 specifically targets the hospitality industry. Both laws will go into effect on July 1, 2024. The term "junk fees" generally refers to hidden charges, surprise fees, service fees, processing fees, surcharges or additional costs that consumers were not aware of until the time to pay the bill. These fees may occur during online check out or when purchasing goods or services in person. Examples include mandatory "employee health fees" added to restaurant bills, hotel "resort fees," and "processing fees" included in concert ticket purchases. According to the legislature, the addition of these fees can be misleading, making advertised prices appear lower than the actual cost. SB 478 amends the California Consumer Legal Remedies Act to generally ban these "junk fees" and AB 537 adds a new provision to the California Business and Professions Code banning such fees in the hospitality industry. Many businesses are impacted by this important change in the law. We explain below.
II. SB 478
Beginning July 1, 2024, SB 478 amends the California Consumers Legal Remedies Act (CLRA) to ban so-called “junk fees”. The stated purpose of the law is to prohibit “drip pricing,” which involves advertising a price that is less than the actual price a consumer will have to pay for a good or service. As a result of this new law, most California businesses will be prohibited from advertising a low initial price for a product or service and then tacking on additional mandatory fees or charges thereafter. Importantly, the law only regulates how prices are advertised and does not impact how prices are calculated.
Under the new law, California businesses are prohibited from doing the following as of 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: (A) taxes or fees imposed by a government on the transaction; or (B) postage or carriage charges that will be reasonably and actually incurred to ship the physical good to the consumer.
Note that California businesses are already prohibited under the CLRA from advertising that a product is being offered at a specific price plus a specific percentage of that price unless: (i) the total price is set forth in the advertisement in a size larger than any other price; and (ii) the specific price plus the percentage of that price represents a markup from the seller's costs or from the wholesale price of the product.
Claims for violations of the new law may be brought on an individual or class-wide basis and successful plaintiffs are entitled to the greater of $1,000 per violation or actual damages, injunctive relief, restitution, punitive damages, attorneys fees, and any other relief a court deems proper.
III. AB 537 Targeting the Hospitality Industry
Along with SB 478, the California legislature passed another law targeting “junk fees” that goes into effect on July 1, 2024. However, unlike SB 478, AB 537 specifically targets the hospitality industry. AB 537 adds a new provision to the California Business and Professions Code prohibiting the following:
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Advertising, displaying, or offering a “room rate” that “does not include all fees or charges required to stay at the ‘short-term lodging’ except taxes and fees imposed by a government on the stay.”
The law applies to all private hotels, as “short-term lodging” is defined as any “hotel, motel, bed and breakfast inn, or other transient lodging,” including short-term rentals and residential properties rented to visitors for 30 consecutive days or less.
The scope of “room rates” covered by the law is broad and applies to more than just guest rooms. “Room rate” is defined as “the rates at which rooms or other accommodations are rented to occupants.” Thus, in addition to guest rooms, the disclosure requirements will also apply to any other accommodations rented to guests as well such as banquet facilities and the like.
Unlike SB 478, there is no private right of action to initiate a lawsuit against a hospitality employer under AB 537. That's because under AB 537 only the government (i.e., city attorneys, district attorneys, county counsels, and the Attorney General) may bring an action to enforce the law. Notably, violators are subject to a civil penalty up to $10,000 per violation if it can be established that the hospitality enterprise either knew or should have known that they advertised, displayed, or offered a room rate in violation of the law.
IV. Recommended Compliance Steps
As of July 1, 2024, hospitality and other affected businesses must include all mandatory fees or charges – other than government imposed taxes or fees – in the advertised, displayed, or offered price of a guest room. This includes items such as resort fees, amenity fees, service charges, and any other fees or charges that are required to book the stay. Additional add-on fees that are optional, such as fees for parking, late check-outs, mini-bar usage, internet or telephone usage, or pet stays, do not need to be included in the room price because they are not required for the stay.
Furthermore, the disclosure requirements of AB 537 and SB 478 apply to not just guest room prices but to all other goods, services and accommodations offered, advertised, or displayed to hotel guests and visitors as well. Thus, the listed price for all goods, services, and accommodations should include any and all mandatory fees and charges. Such items could include any mandatory charge associated with food and beverage, room service, the spa and fitness center, pool usage, cabanas, banquet and venue rentals, beach chairs, etc.
Customary service charges in restaurants for large party dining will be particularly impacted by SB 478. Under the plain language of SB 478, restaurants cannot list food prices on the menu that do not include a mandatory large party dining service charge. Simply including a disclaimer regarding the service charge while leaving the listed food price unchanged also appears to be insufficient under SB 478. Thus, unless and until California issues implementing regulations or guidance on the issue, we believe that any restaurants with this service charge must either adjust the listed prices on the menu to incorporate the additional cost or possibly have a separate menu for large parties with prices that include the additional charges added to the listed food prices.
Affected businesses should prepare for the impact of AB 537 and SB 478 by determining which mandatory fees and charges are not included in its advertised prices to address compliance. For example, many hotel websites offers rooms for stated rates and then add mandatory charges and fees for local taxes, occupancy taxes, tourism assessment fees, and resort fees. Under the new laws, a hotel cannot list the room price without including any mandatory fees and charges (except for taxes and other government-imposed fees) in the price.
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