State Lawmakers Take Aim at Junk Fees

Restaurateurs are accusing the California attorney general of a bait and switch on legislation targeting bait-and-switch pricing practices employed by car rental companies, hotels and other businesses—and it could have serious ramifications nationwide.

In October California Gov. Gavin Newsom (D) signed into law SB 478, banning so-called “junk fees” or surcharges that businesses tack onto the cost of goods and services after the fact to initially make their prices appear lower than they actually are.

President Biden called out junk fees in his 2023 State of the Union Speech, saying: “They add up to hundreds of dollars a month. They make it harder for you to pay your bills or afford that family trip.”

In the run up to SB 478’s enactment, the publicity around the bill focused largely on the impact it would have on car rental agencies, hotels and concert ticket sellers.

“Transparency and full disclosure in pricing are crucial for fair competition and consumer protection,” said SB 478 sponsor Attorney General Rob Bonta (D) in an April 2023 press release. “Unfortunately, from car rental and hotel fees to concert ticket service charges, these hidden costs have been normalized in the purchasing process. Today’s legislation seeks to hold businesses accountable for their deceptive and misleading practices at the expense of the financial security of millions of Californians. My office will continue to work tirelessly to ensure an equal level playing field and demand transparency across the board for the protection of California consumers.”

After SB 478 was signed, California restaurateurs wanted to know if it would apply to them. Restaurants have increasingly turned to service fees in lieu of tips to guarantee their workers higher wages.

In late April, Bonta’s office released guidance and an FAQ indicating that SB 478 would apply to restaurants just like it would to other businesses in the state that sell or lease goods or services for consumers’ personal use, setting off a tidal wave of concern among restaurateurs who worry it will force them out of business.

The announcement comes just as the Illinois legislature is considering a similar bill and the Federal Trade Commission looks into a regulation against junk fees after Biden mentioned them again in his 2024 State of the Union address.

States Targeting Junk Fees

Lawmakers in at least six states have considered bills in the 2023-2024 biennium that would prohibit “drip pricing” or “junk fees,” charges added onto the advertised price of items such as hotel rooms, rental cars or concert tickets after the purchase process has been initiated. California enacted such a measure (SB 478) last year. 

‘Drip pricing’ Schemes in Political Crosshairs

These legislative and regulatory efforts take aim at a practice known as “drip pricing,” which the FTC defines as a “technique in which firms advertise only part of a product’s price and reveal other charges later as the customer goes through the buying process. The additional charges can be mandatory charges, such as hotel resort fees, or fees for optional upgrades and add-ons.”

“Too many corporations raise their prices to pad their profits charging you more and more for less and less,” the president said in his 2024 State of the Union speech. “That’s why we’re cracking down on corporations that engage in price gouging or deceptive pricing from food to health care to housing.”

Last fall the FTC proposed a regulation that would require businesses to include all of their fees in the original listed price. That hasn’t become law—yet—but the commission held an informational hearing on the topic in late April.

Meanwhile, in the Prairie State, nearly two-dozen Illinois lawmakers have sponsored HB 4629, the Junk Fee Ban Act, which effectively mirrors California’s SB 478. The Illinois proposal has already passed the state House of Representatives and awaits action in the Senate.

“This legislation marks a crucial step in protecting consumers and fostering fair competition in Illinois,” said Rep. Bob Morgan (D), one of HB 4629’s sponsors, in a press release. “We are committed to eradicating predatory practices that harm consumers and small businesses. In Illinois, we want to be sure that the price you see advertised is the price you pay.”

Statements like these have businesses owners of all types concerned. Late last year the global law firm Latham & Watkins warned its clients that these efforts “highlight a growing focus and scrutiny on fees and related pricing practices.”

“The increase in legislative and rulemaking activity in this area suggests that additional enforcement against how businesses advertise their prices and disclose fees could be on the horizon,” the client alert said. “Coupled with consumer protection enforcement and rulemaking initiatives around ‘dark patterns,’ these new legal authorities and regulatory announcements counsel caution in the manner in which businesses craft their pricing and disclosures surrounding fees.”

Small Businesses Welcome IL Bill

Illinois Rep. Morgan told SNCJ the biggest response to HB 4629 that he’s gotten from the business community has been from small business owners thanking him. He said junk fees levied by larger businesses undercut small businesses in the marketplace, making it harder for them to compete.

He also said that while some restaurants in the Prairie State have been upset about his proposal, “Restaurants by and large acknowledge to me that this needs to change.”

That doesn’t appear to be the case in California. On May 8 the California Restaurant Association released a statement on behalf of its over 22,000 member restaurants across the state saying it “strenuously disagrees with the AG’s expansive interpretation of the law to outlaw restaurant service fees.”

The statement went on to say: “Courts have consistently concluded that service fees are permissible under the Consumer Legal Remedies Act as long as they are properly disclosed on restaurant menus. Nothing in the plain language of the bill or legislative debate suggested an intent to change the pricing structure for every restaurant in this state. The office’s interpretation of the law itself is the ‘bait-and-switch’—suggesting an interpretation of this new law that was never presented or debated in the legislature, which we believe is clearly inconsistent with the Legislature’s intent.”

The statement concluded by saying the AG’s FAQ exhibited “a fundamental misunderstanding of the restaurant industry’s standard of transparent, up-front menu pricing, and we are considering all available options to block implementation of SB 478 in the manner suggested by the AG’s office.”

One notable difference between the Illinois bill and California’s SB 478 is that the Golden State law specifically exempts food delivery services like DoorDash—which likely rankles restaurateurs who are aware of that fact—while the Prairie State measure does not.

The California law is set to go into effect on July 1, which gives lawmakers in the state little time to act if they feel the attorney general’s interpretation of it is not in line with their intentions.

One possible solution that’s being discussed in Sacramento is adding language to the annual state budget bill, which by law must also go into effect on July 1. Given the tight timeline that’s viewed as perhaps the best option for addressing any potential concerns about the attorney general’s interpretation.

That said, while the marketing around SB 478 may have focused on other businesses, it seems as though restaurants were always going to be covered by the bill.

Whatever the case, you can be certain junk fees will continue to be a hot topic in Sacramento and other state capitals for the foreseeable future.

—By SNCJ Correspondent BRIAN JOSEPH

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