New legal requirements in California and across the country will soon change the way businesses, in particular restaurants, must operate as the government seeks to eliminate the practice of “drip pricing” – i.e., advertising a price that is less than the actual price a consumer will have to pay for a good or service – through the use of so-called “junk fees.”
As of July 1, 2024, businesses in California will no longer be allowed to add additional fees or surcharges to the advertised price for a good or service. Under SB 478, businesses will be prohibited from advertising, displaying, or offering a price for a good or service that does not include all mandatory fees and charges, other than taxes or shipping fees. Initially, it was unclear whether, and to what extent, the law would impact restaurants. It appeared that additional surcharges might be permitted so long as the restaurants adequately disclosed the fees to consumers. However, a few days ago, the San Francisco Chronicle quoted Attorney General Rob Bonta as follows: “SB 478 applies to restaurants, just like it applies to businesses across California … The law is about making sure consumers know what they are going to pay and requires that the posted price include the full amount that a consumer must pay for that good or service.”
As a result of this new law and Bonta’s current stance on its implementation, restaurants and hotels will no longer be allowed to add a “service charge,” “resort fee,” “healthcare surcharge,” or other fee to a customer’s bill in addition to the price advertised to the guest. Similarly, the law could prevent an auto-gratuity such as those customary for large parties. Instead, restaurants would need to increase menu prices to offset increasing operational costs. The Attorney General’s office was expected to release guidance and regulations concerning compliance by May 1, but has not done so yet. Trade groups representing restaurant and hotel owners are seeking clarification on the law’s intended impact.
SB 478 notably contains an exemption for “food delivery platforms,” which will be permitted to add delivery fees on top of regular menu pricing.
Violations of the law could prove costly to California businesses. Consumers who allegedly suffer damages as a result of a business’ violation of the law may bring a lawsuit on an individual or class basis seeking damages of at least $1,000 per violation, plus attorney’s fees. Businesses that do not comply with these new requirements after July 1 risk facing what could be an onslaught of lawsuits brought by plaintiff’s attorneys across the state.
California joins a growing list of legislative and administrative actions around the country that have looked to end or limit the practice of businesses adding fees to the prices advertised for various goods and services. In March, the “Junk Fee Prevention Act” was introduced in the United States Senate, which if passed would require short-term lodging providers, such as hotels and ticketing services, to display the total price of the good or service provided to a customer, including any mandatory fees that a customer would pay, as well as prohibiting businesses from charging or advertising any “excessive or deceptive” mandatory fees. Also in March, President Biden introduced a number of measures intended to decrease the use of fees in higher education, such as the elimination or reduction of student loan origination fees and fees on certain bank accounts offered to college students.
Other states and municipalities have taken action against mandatory fees and surcharges. A bill is currently pending in the Illinois legislature that would require businesses to clearly and conspicuously disclose the total price consumers will pay for goods and services. In 2022, New York State enacted legislation that requires ticket sellers to list the total cost of a ticket, inclusive of all mandatory fees before the consumer can select the tickets to be purchased. This law has resulted in an influx of class action lawsuits targeting ticket sellers, concert venues, museums and other entertainment and cultural venues for alleged disclosure violations. New York City has long prohibited restaurants from adding a surcharge to a guest’s bill except for charges to split a meal or a mandatory gratuity for parties of eight or more if the charge is disclosed to consumers before food is ordered.
While regulations on the new California requirements have yet to be released, California businesses, especially in the hospitality industry, should take immediate steps to address the potential impact of this law and the steps they can take to comply with the law before July 1. We will be monitoring any updates with respect to SB 478 closely.
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