The distinction between owning and licensing digital goods has become blurred in an era increasingly dominated by digital transactions. While traditionally consumers purchasing physical items such as books and video games held unrestricted ownership, the digital marketplace operates under different rules, where “buying” often means acquiring a license with embedded usage restrictions. Frequently unnoticed by the average consumer, the distinction between owning and licensing has led to significant legal and consumer protection concerns. California’s AB 2426 seeks to address these challenges by enhancing transparency in the sale and licensing of digital goods.
This LawFlash summarizes the key terms of AB 2426, Chapter 513, Statutes of 2024 (the Law), and explores how companies can prepare to comply with this new digital marketplace law and the evolving digital marketplace regulatory landscape.
SCOPE AND EXCLUSIONS OF THE LAW
The Law broadly defines the range of digital goods it covers and applies to various digital media, including the following:
- Digital audiovisual works, which includes motion pictures, videos, television programs, and other visual media
- Digital audio works consisting of music, spoken word, ringtones, and other audio recordings
- Digital books, which covers any work generally recognized as a book or a publication, including novels, nonfiction, manuals, and other literary works
- Digital video games and applications including software programs, mobile and desktop applications, and digital video games accessed through various platforms
- Digital codes that provide access to any of the above digital goods, whether obtained directly or through secondary means
The bill also specifies exclusions to ensure clarity on what the Law does not govern:
- Digital goods accessed through ongoing subscription services, such as streaming music and video services where access is contingent upon maintaining a subscription, are not covered
- Any digital good offered to consumers at no cost and without any monetary transaction is not covered
- Digital goods that can be downloaded for permanent offline access on a device or external storage, which do not require further connectivity to access once obtained, are also excluded from the scope of the bill
KEY PROVISIONS OF THE LAW
The Law introduces several requirements aimed at protecting digital consumers:
Transparency in Advertising: Sellers must explicitly state if a digital good is being offered under a license agreement, ensuring that terms such as “buy” or “purchase” do not mislead consumers about the nature of the rights they are obtaining.
Affirmative Consumer Acknowledgment: Before completing a purchase, consumers must acknowledge their understanding that they are acquiring a license, not ownership, and are aware of any associated restrictions.
Clear and Conspicuous Disclosure: Sellers must provide details of the license agreement clearly and conspicuously, separate from other transactional details, to prevent the burying of important information.
Definitions from the Bill:
- Digital goods are broadly defined to include digital audiovisual works, digital audio works, digital books, digital applications or games, and digital codes, whether delivered electronically or accessed digitally.
- Clear and Conspicuous is defined as information presented in a way that is easy to notice and understand, often contrasting with the surrounding text in terms of size, color, or font to ensure it stands out.
- A license is clarified within the context of digital goods as the permission to use a digital product under specific conditions without transferring ownership.
COMPANY PREPAREDNESS FOR THE LAW
As the Law is expected to take effect January 1, 2025, companies operating in digital goods marketplace should prepare to ensure compliance with the law. Companies should consider taking the following actions:
- Reviewing and Revising Advertising Materials: Ensure all marketing materials are revised to align with the legal requirement if their digital goods are licensed, not sold. Terms such as “buy” or “purchase” should be clarified to indicate that they refer to licensing agreements.
- Implement Affirmative Acknowledgment Processes: Companies must develop a process where consumers affirmatively acknowledge that they are purchasing a license. This acknowledgment should clearly state:
- The consumer is receiving a license
- A complete list of the license restrictions and conditions
- That access to the digital good may be unilaterally revoked under certain circumstances
- Develop Clear and Conspicuous Disclosure Statements: Before any transaction, companies need to provide a statement that is distinct and separate from other transactional terms. This statement must:
- Clearly state in plain language that the transaction is a licensing agreement
- Include a hyperlink, QR code, or similar method to access the full terms and conditions of the license. Companies should be thoughtful about the placement of the terms, so that they have a strong basis to assert that consumers would have the opportunity to see the terms before making the purchase
TAKEAWAYS
- Enhanced Consumer Protection: The Law significantly bolsters consumer rights in the digital economy, ensuring buyers fully know the terms associated with their digital purchases.
- Enforcement: California, along with all states and territories as well as numerous federal agencies such as the US Federal Trade Commission and Consumer Financial Protection Bureau, has authority to penalize allegedly “unfair or deceptive” acts and practices (UDAP). Even if conduct does not fall within the ambit of the new law, it may well fall within the ambit of the more expansive UDAP law, which may be enforced by the state’s attorney general as well as county and some city attorneys and also may give rise to a private right of action.
- Standardization of Terms: The Law standardizes the terminology used in digital goods transactions, which could reduce confusion and legal disputes over the nature of digital ownership.
- Increased Regulatory Oversight: The Law will require oversight to ensure companies comply with its provisions, potentially increasing the regulatory burden on digital goods sellers.
- Global Influence: While the Law applies to companies operating within California, its adoption could serve as a model for similar legislation elsewhere. Moreover, because California’s is the fifth largest economy in the world, it is highly likely that given California’s expansive venue provisions, many transactions will be subject to California’s authority even if there are limited, but minimum, contacts.
- Necessity for Clear Consumer Communications: The Law’s requirement for a clear, separate statement before purchase detailing the license nature of the digital good mandates that businesses must be transparent in their communications, preventing any potential misinterpretation of ownership or rights by consumers. Companies should review and update their marketing materials, possibly their sales process, and develop a disclosure statement.
As digital goods continue to replace physical products, the distinction between buying and licensing is a critical issue for consumer protection. The Law represents a significant step toward clarifying the purchase of license of a digital product for consumers, promoting transparency, and safeguarding consumer rights in the digital marketplace. The Law addresses immediate consumer concerns, sets legal standards for digital transactions, and shapes the future landscape of digital commerce.
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