California recently passed AB 2426, a new law amending California’s existing false advertising laws to target various false or misleading digital advertising claims. Initially introduced in February 2024, the bill quickly gained momentum amid a series of controversies where consumers lost access to digital products that they believed they had fully purchased.
Background
In December 2023, a prominent game developer delisted its racing game from its digital stores. By April 2024, the developer had completely shut off its servers supporting the game, rendering the game unplayable for all users—whether they had purchased it digitally or in its physical form. Consumers who had purchased the game prior to December could no longer download it, and by April, even those who had already downloaded the game could no longer play. Aggrieved players sued the developer over this series of events, and the lawsuit is ongoing.
Another major game developer delisted seven popular games from its servers in the same month, rendering those games similarly unplayable.
Around the same time, a multinational media conglomerate announced plans to remove over 1,300 seasons of shows from its platform due to “current licensing arrangements,” affecting users who believed they had purchased access indefinitely. After facing intense backlash, the company renegotiated licensing deals to retain access for users.
In each case, the consumers believed they had purchased full ownership of the digital goods but received only a revocable license to access the media. When the distributor lost the rights to distribute the content, users were left without access.
AB 2426 Protects Consumers from Ambiguity in Advertising over the “Purchase” of Digital Goods
AB 2426 prohibits a seller from advertising digital goods using terms such as “buy” or “purchase,” or other similar terms that a reasonable person would interpret as obtaining an unrestricted ownership interest, unless one of two conditions are met:
- The seller receives affirmative acknowledgement from the buyer indicating all of the following:
- A complete list of restrictions and conditions of the license; and
- Access to the digital good may be unilaterally revoked by the seller if the seller no longer holds a right to license the digital good, if applicable.
- Prior to the sale, the seller provides the buyer with:
- a hyperlink, QR code, or similar means of accessing the full terms and conditions of the license; and
- a clear and conspicuous statement in plain language that purchase of the digital good only constitutes purchase of a license.
Importantly, statements to comply with I and II must be distinct and separate from any other terms and conditions of the transaction.
Scope of AB 2426
AB 2426 applies to sellers of and transactions involving digital goods, addressing advertising practices that may mislead consumers into believing they are purchasing full ownership rights. The law defines “digital goods” to include digital audiovisual works, digital audio works, digital books, digital code, and digital applications and games, whether or not the product is digitally delivered and accessed. The definition excludes cable television services, satellite relay television services, or any distribution of television, video, or radio service.
Additionally, AB 2426 will not apply to:
- subscription-based services that advertise access to digital goods solely for the duration of the subscription;
- any digital good advertised or offered for no monetary consideration; and
- any digital good where the seller cannot revoke access to the transaction, such as a digital good permanently downloaded to offline storage that does not require a connection to the internet for use.
How to Prepare for AB 2426
AB 2426 will become effective on January 1, 2025. Violations may result in civil penalties of up to $2,500 per violation, and in serious cases, could expose companies to individual and class actions by consumers under California’s Unfair Competition Law. As a result, sellers of digital goods will need to tread carefully and ensure that they meet AB 2426’s specifical requirements, including the requirement that buyers fully understand they are merely purchasing licensed access to digital goods terminatable at any time.
To comply with the law, sellers of digital goods should carefully evaluate their current business practices, decide whether they would like to license or sell full ownership to a digital good, and adjust their advertisement and sales procedures as necessary to comply with the law.
To the extent that sellers may themselves lose distribution rights to any digital goods, like the above example concerning the removal of over 1,300 seasons of shows, they should take care to revisit such contracts well in advance of any expiration dates to avoid similar misunderstandings.
