BILL ANALYSIS                                                                                                                                                                                                    





                             SENATE JUDICIARY COMMITTEE
                         Senator Hannah-Beth Jackson, Chair
                             2015-2016  Regular  Session


          SB 1428 (Hernandez)
          Version: February 19, 2016
          Hearing Date: May 3, 2016
          Fiscal: No
          Urgency: No
          NR   


                                        SUBJECT
                                           
                                  Online contracts

                                      DESCRIPTION  

          This bill would require a contract that includes a provision for  
          the automatic renewal of the contract, which is entered into  
          online, to include a provision that allows a party to terminate  
          the contract in the same manner as it was entered into.

                                      BACKGROUND  

          In 2009, the Legislature passed SB 340 (Yee, Ch. 350, Stats.  
          2009), which requires any business making an automatic renewal  
          or continuous service offer to clearly and conspicuously  
          disclose the terms of the offer, obtain the consumer's  
          affirmative consent, and also requires that the business provide  
          easy-to-use mechanisms for cancellation.  SB 340 was prompted  
          after subscribers to Time, Inc. magazines were discovering that  
          their subscriptions were automatically renewed despite their  
          lack of knowledge of providing any consent to the renewal.

          In 2010, Congress passed the Restore Online Shoppers' Confidence  
          Act (ROSCA) to address consumer complaints regarding the privacy  
          of consumer information.  ROSCA prohibited an online merchant  
          from sharing billing information with a third party seller,  
          unless it obtained the consumer's informed and express consent  
          prior to charging their accounts. It also required sellers to  
          provide simple mechanisms for a consumer to stop recurring  
          charges from being placed on his or her account. 









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          Recently there have been many news stories about the  
          difficulties consumers face when attempting to cancel certain  
          memberships or subscriptions including, gym memberships,  
          cellular phone plans, or cable television plans.  In 2014, the  
          public was outraged after a recording of a customer trying to  
          repeatedly cancel Comcast service went viral, which prompted a  
          public apology from the company.  Regarding gym memberships, ABC  
          News recently reported: 
            At one gym - a Gold's Gym franchise in Oxnard, California -  
            members found it so hard to cancel that the Ventura County  
            district attorney's office compared that location to the  
            popular Eagles song "Hotel California," where, according to  
            the lyrics, guests can check out anytime but can never leave.

            Prosecutors opened an investigation and even sent in an agent  
            undercover. 

            In an audio recording, the investigator can be heard saying:  
            "I'm doing exactly what the contract says and you're not  
            letting me cancel."

            The gym's representative replied: "So would you like to leave  
            your phone number?"

            The case resulted in a $6 million judgment against that  
            particular gym, which has since gone out of business.  (Sarah  
            Messer, 'GMA' Investigates: Tips to Help You Cancel Your Gym  
            Membership <  
            http://abcnews.go.com/Lifestyle/gma-investigates-tips-cancel-gy 
            m-membership/story?id=29176198> [as of April 28, 2016].)

          This bill, seeking to ensure consumers have the ability to  
          easily cancel contracts, memberships, or subscriptions, would  
          require that an automatically renewing contract that is entered  
          into online shall also allow a party to terminate the contract  
          online.

                                CHANGES TO EXISTING LAW
          
          Existing law  establishes requirements governing automatic  
          purchase renewals and states the Legislature's intent to end the  
          practice of ongoing charging of consumer accounts without the  
          consumer's explicit consent.  (Bus. & Prof. Code Sec. 17600 et  
          seq.)








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           Existing law  prohibits a business making an automatic renewal or  
          continuous service offer from doing any of the following:
           failing to present the terms in a clear and conspicuous manner  
            before the subscription or purchasing agreement is fulfilled,  
            as specified;
           charging the consumer's credit or debit card or the consumer's  
            account with a third party for an automatic renewal or  
            continuous service without first obtaining the consumer's  
            affirmative consent; and
           failing to provide an acknowledgment that includes the  
            automatic renewal or continuous service offer terms,  
            cancellation policy, and information regarding how to cancel,  
            as specified. (Bus. & Prof. Code Sec. 17602(a).)

           Existing law  requires a business making an automatic renewal or  
          continuous service offer to provide a toll-free telephone  
          number, electronic mail address, or other cost-effective,  
          timely, and easy-to-use mechanism for cancellation, as  
          specified. (Bus. & Prof. Code Sec. 17602(a).)

           Existing law  exempts certain services and businesses from the  
          above provisions, including: 
           a business or affiliate that is regulated by the California  
            Public Utility Commission, the Federal Communications  
            Commission, or the Federal Energy Regulatory Commission;
           an entity regulated by the Department of Insurance;
           alarm company operators; 
           licensed banks and bank holding companies; and
           service contract sellers and service contract administrators  
            regulated by the Bureau of Electronic and Appliance Repair. 

           Existing law  provides, generally, for the modification and  
          cancellation of contracts. (Civ. Code Sec. 1697 et seq.)
           
          This bill  would provide that a contract that is entered into  
          online that includes a provision for the automatic renewal of  
          the term of the contract shall also include a provision that  
          allows a party to terminate the contract in the same manner as  
          the contract was entered into.

                                        COMMENT
           
           1. Stated need for the bill
           
          According to the author: 







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            Current law establishes that companies must provide a toll  
            free number, email, or other "easy method" to cancel  
            contracts. [?] There have been numerous news stories that  
            reference customers who must spend hours on the phone with  
            customer service agents just to simply cancel service. While  
            these are egregious examples, even spending short amounts of  
            time having to navigate the system of customer service can be  
            burdensome to someone who is solely looking to cancel. This  
            bill seeks to address this problem by providing an online  
            cancellation method, which will be good for consumers and  
            potentially allow companies to provide better customer support  
            by alleviating some call volume.

            The bill seeks to allow consumers a means to cancel services  
            online. Currently, it targets automatic renewal contracts and  
            states that if allowed to sign up online, then a similar means  
            of cancellation should be provided to consumers.
           
            2.Consumers should be able to communicate a decision to not  
            renew subscriptions, contracts, or purchase agreements easily  
            to a business
           
          This bill would require that specified contracts entered into  
          online must be able to be terminated online.  In support, the  
          Consumer Federation of California argues that this is necessary  
          because, "though businesses make it easy for consumers to enter  
          into contracts and easy to maintain or update their contact or  
          billing information during the life of the contract, the same  
          convenience does not exist when it comes to cancellation.  
          Consumers are frequently required to call and speak with a  
          representative in order to terminate the contract. These hurdles  
          result in situations where consumers are aggressively pressured  
          by representatives to remain in the contract, despite their  
          desire to simply end the business relationship."

          In opposition, a coalition including the California Chamber of  
          Commerce and the California Cable & Telecommunications  
          Association (CCTA), argue that there are many benefits to the  
          consumer which can only be exercised through verbal  
          communication, and that consumers may actually be harmed if  
          denied the opportunity to consult with a representative of the  
          business prior to cancellation.  The coalition writes: 

            SB 1428 discourages consumers from resolving problems in a way  







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            that is beneficial to them.  [?] For a customer who  
            participates in a bundled offering and wants to cancel one  
            service but keep the others, canceling that one service may  
            affect the price of remaining services.  This consequence  
            needs to be explained to the customer to prevent confusion  
            and, ultimately, unhappiness when the next bill comes.

            Some customers may need to cancel after a family tragedy or  
            natural disaster, and product or service representatives have  
            discretion to waive certain charges or fees in these  
            situations.  There is no way for an online program to allow  
            for this that would not be abused.  

          CCTA further notes that requiring a company to enable a customer  
          to cancel a service online would "deprive consumers of an  
          opportunity to benefit from service options, pricing  
          concessions, or other benefits that may be offered by a company  
          through a real-time communication."  

          Staff notes that nothing in this bill would require that  
          contract termination must be completed online.  Companies are  
          still free to create other avenues for cancellation in addition  
          to those required under this bill. Furthermore, there is nothing  
          prohibiting consumers who are looking to enhance their service  
          from calling the company directly to describe their  
          dissatisfaction.  The company may then offer whatever incentives  
          it sees fit to ensure customer satisfaction.  

           3.Protecting consumers against unintended consequences
           
          This bill would allow for the "termination" of a contract that  
          automatically renews, as specified.  Terminating a contract  
          before the expiration of the term, however, may subject the  
          consumer to a number of penalties, including early termination  
          fees. However, "terminating" a contract is distinct from a  
          decision to "not renew" a contract, which, despite when  
          communicated, necessarily takes effect at the end of the  
          contract term.  

          In addition, this bill does not specify what is required to  
          "enter into a contract online."  Would sending an acceptance by  
          electronic mail be sufficient? Would setting up an appointment  
          online to have a technician install a product in the consumer's  
          home, at which point the consumer signs physical documents, be  
          considered entering into a contract "online?" The bill also does  







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          not require any guidance as to how one would "terminate" a  
          contract online, and does not provide any mechanism whereby a  
          consumer would be assured that the transaction was received by  
          the business.

          The following amendments would instead require a business that  
          makes automatic renewal contract offers to provide an electronic  
          mail address or option on their Internet Web site for the  
          purpose of allowing a consumer to communicate to the business  
          his or her decision to not renew the contract.  

          The amendment would require the business to notify the consumer  
          of receipt of the electronic message or Internet transaction.   
          Thus, because this amendment addresses only a desire to not  
          renew a contract, it would ensure that businesses who wish to  
          have real-time communication with customers who seek to  
          terminate a contract prior to the completion of the contract's  
          term, may discuss with the customer any penalties to which he or  
          she may be subjected. These amendments would also not foreclose  
          the right of a business to reach out to a consumer to explain  
          any remaining fees associated with the account, or any further  
          action that might be required of the consumer. For example, a  
          business would be able to communicate to the consumer the need  
          to return equipment to the company when the contract comes to  
          term.  Staff additionally notes that the amendment would limit  
          the provisions of this bill to companies that are not regulated  
          by the Federal Communications Commission, thereby removing the  
          bill's application to much of the opposition, including  
          cellular, internet, and cable providers.   

           Author's amendment: 
           
             1)   Strike the contents of the bill
             2)   Section 1702 is added to the Civil Code: 

          A business making automatic renewal or continuous service  
          offers, subject to Business & Professions Code Section 17601,  
          shall provide an electronic mail address or option on their  
          Internet Web site for the purpose of a consumer to communicate  
          to the business his or her decision to not renew the  
          subscription or purchasing agreement. The business shall, within  
          24 hours, notify the consumer of receipt of the electronic mail  
          or Internet Web site transaction, and shall honor the consumer's  
          decision to not renew the contract or service. 








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           Support  :  Consumer Federation of California

           Opposition  :  California Chamber of Commerce; California Cable &  
          Telecommunications Association; California Communications  
          Association; California Retailers Association; CompTIA; CTIA-The  
          Wireless Association; Direct Marketing Association; MPA-The  
          Association of Magazine Media; TechNet

                                        HISTORY
           
           Source  :  Author

           Related Pending Legislation  :  AB 2867 (Gatto) would require a  
          cable or Internet service provider, if it enables an individual  
          to subscribe to its services through an Internet Web site, to  
          also enable all of its customers to cancel their subscriptions  
          through the Internet Web site.  

           Prior Legislation : SB 340 (Yee, Ch. 350, Stats. 2009) requires  
          any business making an "automatic renewal" or "continuous  
          service" contract to clearly and conspicuously disclose terms of  
          the offer and obtain the consumers' affirmative consent to the  
          offer. 

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