25 June 2024 [updated 27 June 2024]
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On June 25, 2024, the California Assembly unanimously approved emergency legislation in the form of SB 1524’s so-called “restaurant exception” from SB 478’s Honest Pricing Law. As the Senate’s concurring approval and the governor’s signature are expected by the end of the week, this emergency provision will be effective immediately and thus will prevent the Honest Pricing Law from applying to any restaurant, bar, food concession, grocery store, or grocery delivery service. [As noted below, on June 27, 2024, the Senate unanimously approved the bill, and it was presented to the Governor at 3:00 PM]
The political gymnastics to accomplish this result are extraordinary and somewhat controversial with consumer advocacy groups.
Mark Adams gives us the details of the situation.
Junk Fee Law: Exception to SB 478
for California Restaurants Moves Forward
by
Mark S. Adams
Hotel Dispute Lawyer, Partner & Senior Member
JMBM’s Global Hospitality Group
California restaurants are likely to avoid SB 478’s Honest Pricing Law effective July 1, 2024.
[Update note: The Senate unanimously approved the Assembly’s version of SB 1525 on June 27, 2024. The bill was enrolled and sent to the Governor at 3:00 PM on that date.]
In the morning hours of June 25, 2024, the California Assembly unanimously approved Senate Bill 1534, an emergency response to the special interests of restaurants and labor (the California Restaurant Association and UNITE HERE), exempting any “restaurant, bar, food concession, grocery store or grocery delivery service” from application of the SB 478’s Honest Pricing Law that was passed in last year to become effective on July 1, 2024.
It is too cumbersome to use the complete list of carveouts in this discussion. So, we will use the phrase “Restaurants and Bars” to refer to any exempted business in HR 1524’s list of any “restaurant, bar, food concession, grocery store or grocery delivery service”.
The State Senate is scheduled to approve SB 1524 in a concurrence vote this week, and send the bill to the governor for signature and immediate effectiveness. [Update: Senate approval was given.]
Without this extraordinary last-minute action, Restaurants and Bars would be subject to the Honest Pricing Law that applies to all other businesses as of July 1, 2024.
While many Restaurants and Bars are relieved by the exemption, there is considerable consumer sentiment against carveout to the new consumer protection law that requires pricing transparency and eliminates hidden mandatory fees and charges.
If mandatory hidden fees are banned for hotels, short-term rentals, ticket sellers, internet providers, and software companies, why should they be OK for Restaurants and Bars? What happened to the politicians’ promise that the law means that “the price you see, is the price you pay”?
If SB 1524 is signed into law, what would it do?
Goodbye to transparent pricing for Restaurants and Bars!
It is currently expected that SB 1524 will be approved by the California Senate and signed by Governor Newsom this week—just in time to save Restaurants and Bars from compliance with the law applicable to everyone else.
This bill specifically amends Section 1770 of the California Civil Code as follows:
CC 1770(a)(29)(D)
(i) . . . [ CC 1770(a)(29)] does not apply to a mandatory fee or charge for individual food or beverage items sold to a consumer by any restaurant, bar, food concession, grocery store or grocery delivery service, or by means of a menu or contract for banquet or catering services that fully discloses the terms of service.
Under SB 1524, such Restaurants and Bars would still be required to “clearly and conspicuously” display all mandatory fees (on or before July 1, 2025), and the purpose of such fee in any advertisement or other offer or display of prices. But they are permitted to use drip pricing – offering an attractive low, come-on price as long as the ad, menu or other display discloses other charges. However, there is no requirement to show consumers the total price they will have to pay until they get the bill.
Rationale for SB 1524’s restaurant exemption
When California Attorney General Rob Bonta issued the DOJ’s SB 478 FAQs (“FAQs”) on May 8, 2024, Restaurants and Bars went into panic mode. The FAQs stated what was evident to all previously. The FAQs set forth the following question and answer:
What about mandatory fees charged by restaurants?
If a restaurant charges a mandatory fee, it must be included in the displayed price. Under the law, a restaurant cannot charge an additional surcharge on top of the price listed. Gratuity payments that are not voluntary must be included in the list price.
This “clarification” for Restaurants and Bars ignited the California Restaurant Association and the influential UNITE HERE labor union. They asked Senator Dodd to create the exemption for Restaurants and Bars which he deftly accomplished with SB 1524.
Dodd and the special interests behind him argue that SB 1524 is critical because otherwise, SB 478 will eliminate negotiated service fees and, therefore, deprive workers of income.
This is a specious argument. It is simply not accurate!
SB 478’s Honest Pricing Law does not eliminate or restrict any charges. It only requires that all mandatory charges are included in a total price in any advertisement or display of prices. Ironically of course, at the present time, many of the mandatory “service charges” at restaurants do not go to employees at all.
Why the rationale for SB 1524 is flawed and misleading
There is nothing in SB 478’s existing Honest Pricing Law that restricts what Restaurants and Bars can charge. They can charge whatever they want as long as they include those extra mandatory charges in the displayed price. They are free to use the income for any purpose they choose.
Let’s say a restaurant currently lists a hamburger for $10, but adds mandatory charges. Say it charges a 20% service fee, a 5% “health compliance fee”, and a 5% “table set up” or “administrative fee”. Without Dodd’s special exception, on July 1, 2024, that restaurant would have to display the price of the hamburger as $13.00 ($10 as the nominal price for the burger, $2 for the service fee, $.50 for the compliance fee, and $.50 for the table set up or administrative fee).
Under the current provisions of SB 478, they are able to add all those charges into a single displayed price, and they can offer any justification for their price, as long as the disclosed reasons are not misleading. For example, they can say that the price of each item includes 20% additional pay for workers, extra costs they incur for compliance with local regulations, or other reason.
Compare a similar situation for a hotel that has a $100 room rate, a $50 resort fee, and $25 Wi-Fi access fee (whether or not a guest uses the Wi-Fi). On July 1, that hotel will have to include the mandatory resort fee and Wi-Fi fee in the total price of the room in any advertisement or offer. In other words, it will have to list the price of the room as $175. It cannot hide any charges in the fine print, or even delay showing the total cost.
The basic rule of the present Honest Pricing Law under SB 478 is that “The first price a customer sees is the price the customer pays” (plus taxes and government charges). Pricing transparency drives competition because consumers (and competing hotels) can immediately compare the total price of one room to others available – no hidden fees for hotels.
What is the consumer reaction?
It appears inevitable that with its “fast track” process, SB 1524 will be signed into law despite a consumer sentiment. The consumer reaction is summarized well by a San Diego Union Tribune editorial piece published June 21, 2024, as follows:
On July 1, a much-needed state law takes effect that bans deceptive pricing that hides the true cost of services and goods. . .
But when Attorney General Rob Bonta made clear that the new law applied to restaurants, lawmakers under pressure from labor groups rushed to pass legislation that would exempt restaurants so long as their menus had “clear and conspicuous” notices about their tacked-on fees.
This is ridiculous. Menu prices should be no different from those at any other businesses. Customers should be able to count on paying those prices, plus sales tax — AND NOTHING MORE.
As Dan Walters, opinion columnist for CALmatters wrote on June 22, 2024, in the Marin the Marin Independent Journal:
Restaurant industry lobbyists and union officials contend that SB 478 would, in effect, eliminate negotiated service fees and therefore deprive employees of income. It is, however, a specious argument. . .
The real reason the industry dislikes the new law is a fear that disclosing complete prices of meals would discourage customers from dining out. In other words, they want to continue their bait-and-switch tactics with the Legislature’s blessing.
Only time will tell. Many consumer advocates believe that restaurant surcharges are irritating many loyal restaurant-goers, who have supported restaurants through recent difficult times, but are now becoming offended at the lack of transparency.
Mark S. Adams, Hotel Dispute Lawyer, is an experienced trial lawyer and a senior member of JMBM’s Global Hospitality Group®. A primary focus of Mark’s practice is devoted to representing clients on hundreds of matters involving Hospitality Litigation, Arbitration & Dispute Resolution – from avoiding litigation to conducting complex, multi-state litigation, arbitration, and mediation.
Mark’s expertise is in business litigation involving contracts, corporate and partnership disputes, and hospitality disputes and litigation. On behalf of hotel and resort owners, Mark has successfully litigated the termination of long-term, no-cut, hotel management agreements, franchise agreements, fiduciary duty issues, investor-owner disputes, TOT assessments, and more. He has wide-ranging trial experience in various commercial disputes, including complex multi-party litigation and class actions. He has tried numerous cases in state courts, federal courts, and domestic and international arbitrations and is a frequent author and speaker on trial practice. Forbes, Reuters, and other publications have covered Mark’s trial wins. He obtained two of California’s 50 largest jury verdicts in the same year.
Mark has taken or defended nearly 1,000 depositions throughout North America, Europe, and the Middle East. The Wall Street Journal has quoted him as an expert on noncompete agreements. For more information, contact Mark at 949.623.7230 or markadams@jmbm.com.
For more recent articles written by Mark S. Adams, please see the following links:
Junk Fee Law: Exception for California restaurants moves forward
New Federal Junk Fee Law – The No Hidden FEES Act of 2023 (HR 6543)
Disclosing Mandatory Resort Fees – What Hoteliers Need to Know
The better way to resolve hotel contract disputes: Judicial Reference or Arbitration?
Should New York law govern your hospitality contract? How about Texas, California or Florida law?
Meet Mark S. Adams, Hotel Dispute Lawyer – Hospitality Litigation, Arbitration & Dispute Resolution
How Pennsylvania Resort Fees Settlements Could Play Out for US Hotel Industry
Force Majeure – Contract provisions and governing law are important
History & origins of Force Majeure as a contract defense
JMBM’s Global Hospitality Group® announces 5th edition of The HMA & Franchise Agreement Handbook
Hotel Lawyer on HMAs: “The shrinking terms of hotel management agreements”
This is Jim Butler, author of www.HotelLawBlog.com and founding partner of JMBM and JMBM’s Global Hospitality Group®. We provide business and legal advice to hotel owners, developers, independent operators, and investors. This advice covers critical hotel issues such as hotel purchase, sale, development, financing, franchise, management, ADA, and IP matters. We also have compelling experience in hotel litigation, union avoidance and union negotiations, and cybersecurity & data privacy.
JMBM’s Global Hospitality Group® has been involved in more than $125 billion of hotel transactions and more than 4,700 hotel properties located around the globe. Contact me at +1-310-201-3526 or jbutler@jmbm.com to discuss how we can help.