BILL ANALYSIS
AB 357
Page 1
Date of Hearing: April 24, 2001
ASSEMBLY COMMITTEE ON BUSINESS AND PROFESSIONS
Lou Correa, Chair
AB 357 (Correa) - As Amended: April 16, 2001
SUBJECT : Health studios contracts.
SUMMARY : Prohibits a health studio from having contract in
excess of $2,000 for the use of its facilities and creates an
exception to that limit. Specifically, this bill :
1)Increases the current contract limit between a health studio
and a member or other person from $1,000 to $3,000.
2)Allows a health studio to enter into contracts in excess of
the specified limit as long as:
a) The contract establishes the right of the consumer to
cancel his or her obligation at any time during the term of
the contract under specified conditions. However, the
contract may provide a clause that says if a consumer
cancels for reasons other than those specified, the
consumer will be liable for an amount not less than $1,000.
a) The health studio has been conducting business in the
state for more than three years under the same ownership
and management; or the studio maintains a surety bond and
the amount of the bond is 25% of the studio's gross
earnings of the previous business year, except that the
principal bond shall not be less than $100,000 if the
studio has been in business for less than one year.
1)Provides a pro rata refund mechanism to protect consumers form
loosing entire fees paid to health studios in the event that a
consumer opts to terminate his or her contract before the
contract expires, minus initiation fees.
EXISTING LAW requires a health studio contract to be in writing
and no contract shall require payments or financing by the
consumer for a period of more than three years. Health studios
may not require payment from consumers in excess of $1,000 for
the use of their facilities.
FISCAL EFFECT : Unknown
AB 357
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COMMENTS : The purpose of the bill is to increase from $1,000
to $3,000 the amount for which a studio may contract with a
person for the use of the health studio's facilities. The
$1,000 limit was originally enacted to address the problem of
health studios that induced people to sign up for lifetime
memberships for a substantial sum of money, only to find
themselves with no recourse if the health studios went out of
business a short time later.
The bill is intended to allow contracts in excess of the
proposed $3,000 limit for a health studio that has been doing
business in California for more than three years. It also would
allow contracts in excess of the specified amount for health
studios that have been doing business in California for less
than three years as long as the studio maintains a surety bond
issued by a surety company admitted to do business in this
state. The bond is to be filed with the Secretary of State.
The principal sum, for a health studio doing business in
California for more than three years, shall be 25 percent of the
health studio's gross income during the last fiscal year. If a
company expects to require consumer contracts in excess of the
$3,000 limit, and the company has been doing business in
California less than three years, the surety bond may not be
less than $100,000.
The bill also creates a pro rata return mechanism to protect
consumers from loosing entire contract fees in the event the
consumer opts to terminate his or her the contract before the
specified termination date, minus initiation fees.
This bill would require the Secretary of State to enforce the
provisions that govern the filing and maintenance of bonds. It
also requires the Secretary of State to charge and collect
filing fees not to exceed the cost of the filing of the surety
bond.
The requirement for a surety bond is a consumer protection
measure. The Secretary of State is the repository for similar
bond filings for several other types of businesses, including
auction companies, immigration consultants, and employment
counseling services.
A related measure passed by the legislature last year, Senate
Bill 1744 (Murray), was vetoed by the Governor. Unlike the
AB 357
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current bill, however, SB 1744 totally eliminated the $1,000
limit on contracts and did not provide for a pro rata return of
funds to individuals who terminated their memberships before the
specified expiration on the contract. SB 1744 also required
health studios to maintain a $500,000 bond for 10 years. The
concerns cited by the Governor in his veto message of SB 1744
were that he was not convinced the bill would ensure consumer
protections against excessive fees charged by some health
studios. And he thought that requiring a $500,000 surety bond
for the first ten years that a health studio was in business was
excessive and could adversely impact smaller health clubs. The
current bill appears to address the Governor's concerns with the
earlier bill.
From the mid 70's to the late 80's, the likelihood of a health
studio closing up shortly after opening was far more prevalent
than today. Health clubs have since evolved into a more
professional and higher profile corporate industry, thereby
dismissing the likelihood of a health club opening and closing
shortly thereafter.
SUGGESTED AMENDMENTS TO CORRECT DRAFTING ERRORS :
The bill contains two drafting errors:
1)On page 2, line 8, the specified limit amount of $2,000 should
read $3,000.
2)On page 3, line 25, strike the 0 before the word "fiscal".
REGISTERED SUPPORT / OPPOSITION :
Support
California Clubs of Distinction (Sponsor)
Opposition
None on file.
Analysis Prepared by : Chris L.Gallardo / B. & P. / (916)
319-3301