BILL ANALYSIS
SENATE JUDICIARY COMMITTEE
Martha M. Escutia, Chair
2001-2002 Regular Session
SB 916 S
Senator Ackerman B
As Amended May 15, 2001
Hearing Date: May 22, 2001 9
Civil Code 1
BB/PH:cjt 6
SUBJECT
Discount Buying Organizations: Requirements for
Alternative
Exemption for Publicly Traded Organizations from
Discount Buying Organization Statute
DESCRIPTION
The "discount buying act" of 1976 regulates discount buying
organizations. The Act requires specific consumer
disclosure, written contracts, establishment of trust funds
for collection of funds, and other provisions. Some
organizations are exempted from some of these regulations,
for a variety of reasons. One exemption is for
organizations that provide access to discount goods and
services through toll-free telephone or computer access,
provided they have an unconditional refund policy for the
first 12 months of membership and that post a bond.
This bill would, for publicly traded corporations such as
direct telemarketing firms, create an alternative refund
process that would retain the exemption and allow the
corporation to recognize income from first-year membership
fees received that year. This alternative exemption would
require disclosure of the type of products and services
provided by the entity, establishment of escrow accounts
against which members may claim refunds of their membership
fees, conspicuous disclosure of membership fee cancellation
and refund terms, and in certain circumstances, a
(more)
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requirement that membership agreements be subject to
written contracts. This exemption is also conditioned upon
the Attorney General's satisfaction with the cancellation
and refund terms.
(This analysis reflects author's amendments to be offered
in committee.)
BACKGROUND
In 1976 the Legislature enacted the "discount buying act"
or statute (Chapter 237, Statutes of 1976) to require
organizations offering goods and services to the public at
discounted prices in return for a membership fee to provide
certain disclosures to consumers and to provide mechanisms
to give consumers remedies when they suffer pecuniary
damages.
The Act exempted certain types of entities from its
provisions. As initially passed, the Act exempted
organizations whose membership fees were below certain
thresholds. In 1985, the Act was amended to exempt
entities that provide the majority of their goods and
services at fixed locations (Chapter 558, Statutes of
1985). In 1986, the Legislature created an additional
exception for entities providing access to discounted goods
and services through toll-free telephone access, computer
access, or video shopping terminals, provided they provide
unconditional refunds of membership fees in the first year
of membership and post a $20,000 bond (Chapter 345,
Statutes of 1986).
This bill attempts to deal with a problem for publicly
traded corporations, which operate under the latter
"unconditional refund" exemption, in reporting income
derived from membership fees. U.S. Securities and Exchange
Commission (SEC) guidelines, as set forth to SEC Staff
Accounting Bulletin No. 101, prohibit such entities from
recognizing as income membership fees prior to the
expiration of any full refund period that applies to the
fees. Because the current exception in the discount buying
law requires, as a condition of using the exception,
"unconditional refunds" of membership fees in the first
year of membership, and since the discount buying law lacks
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any mechanism for estimating the amount of refunds that
could occur, the SEC guidelines require exclusion of those
fees from revenue recognition until the refund period
expires.
This bill would permit publicly traded corporations to
declare more of their membership fee income for SEC
purposes, by qualifying for an alternative exemption from
the discount buying act, when it establishes an escrow
account to service "no questions asked" refunds. The
account would contain a first year minimum deposit of
$50,000 for refunds with a first year maximum deposit of
$100,000. In each year thereafter, the account would
require the amount of the previous year's refunds but no
less than $50,000. This would allow publicly traded
companies to declare more of their membership fee income,
excluding from revenue recognition only the amount that is
derived from the previous year's refunds, or no less than
$50,000.
This bill is the product of discussions between the
Attorney General's office and MemberWorks, Inc., a publicly
traded direct telemarketing company, the sponsor of this
legislation. The addition of enhanced consumer protections
were requested by the Attorney General's office and agreed
to by the sponsor.
CHANGES TO EXISTING LAW
Existing law defines as a discount buying organization
persons or entities that, for consideration, provide
persons with the ability to purchase goods and services at
discount prices (Civil Code, Section 1812.101).
Existing law requires organizations functioning as discount
buying organizations, which are not otherwise exempt from
the definition of a discount buying organization, to do a
number of things, including:
Disclose to prospective clients and members the specific
types of goods and services provided, applicable handling
and delivery charges, and warranty policy (Civil Code,
Sec. 1812.106);
Employ written contracts for membership agreements (Civil
Code, Sec. 1812.107);
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Establish trust accounts to receive membership fees and
purchase funds from members (Civil Code, Sec. 1812.116).
Existing law allows consumers who are injured by entities
subject to the discount buying statute to recover treble
damages plus attorney's fees (Civil Code, Sec. 1812.123)
and provides misdemeanor penalties for certain violations
(Civil Code, Sec. 1812.125).
Existing law exempts a number of organizations from the
definition of a discount buying organization, including
those in which the consideration paid by clients or members
does not exceed certain thresholds and who provide the
majority of their goods and services at fixed locations
(Civil Code, Sec. 1812.101)
Existing law additionally exempts organizations from the
definition of a discount buying organization which, in
addition to receiving consideration below a certain level,
offer buying services to clients or members through
toll-free telephone access, computer access, or video
shopping terminals, provide a full refund of membership
fees without conditions during the first year of
membership, and maintain a $20,000 bond (Civil Code,
Section 1812.101).
This bill would create an alternative full refund exemption
for publicly traded corporations. Specifically, such
entities would be required to:
Establish an escrow account of with a federally
insured financial institution to issue refunds of
membership fees at the request of the member.
During the first year of operation, replenish the escrow
account within three business days of the depletion of
the initial $50,000.
For subsequent years, fund the escrow account at the
level of actual claims for the prior calendar year, but
in any case no less than $50,000 and replenish this
account within three business days whenever the fund is
depleted to 50% of its beginning funding for that year.
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Provide proof of the establishment of the escrow account
to the Secretary of State and maintain records of all
requests for refunds and actual refunds.
As a further condition of the exemption, obtain the
Attorney General's satisfaction with regard to the
membership cancellation and refund terms, including the
amount of initial membership charge and how and when it
will be charged; the existence of any policy to not ask
consumers for billing information; the duration of any
trial membership period and any policy to charge
consumers a membership fee who do not cancel within the
trial period; and how the consumer may cancel membership.
Failure to comply with these requirements would be cause
for the Attorney General to require the entity to obtain
written contracts from members and comply with other
specified provisions of the discount buying law.
This bill would provide that its provisions do not affect
or limit any remedy available to a consumer.
COMMENT
1. Stated need for bill
The sponsor states that the bill addresses the fact that
the current exception is a problem for publicly traded
companies that derive significant portions of income from
membership fees. For publicly traded companies,
regulated by the Securities and Exchange Commission
(SEC), the requirement that a company provide on request
an unconditional refund of first year membership fees
prevents any of those revenues from being recognized as
income until the refund period expires.
In short, compliance with the full refund provision
condition in the exception would prohibit (due to
application of SEC Staff Accounting Bulletin 101) the
recognition of certain revenue which, but for the Act,
would otherwise be recognizable. This, in turn,
depresses the income reported by the organization in its
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quarterly reports. Therefore, the publicly traded
corporation is hindered in attracting new capital and
growing the company. This may result in depressing the
stock price or discouraging business activity in
California.
2. Bill attempts to solve problems of publicly traded
telemarketers while
offering greater consumer protections
While the impetus for the bill is to address the income
reporting problems of publicly traded telemarketers
operating as discount buying organizations the bill as
amended imposes a number of additional consumer
protections on such entities. Under current law,
publicly traded telemarketers operating under the
exemption do not have to do several things that this bill
requires, for example, establish to the satisfaction of
the Attorney General that it is providing specified
disclosures regarding membership, billing and refunds.
In addition, while such corporations must post a $20,000
bond, they do not have to establish escrow accounts at
prescribed levels to provide refunds of membership fees,
nor do they need Attorney General approval of their terms
and conditions for membership cancellation and fee
refunds.
Many of these features have been added to the bill at the
request of the Attorney General. Staff understands that
with these changes the Attorney General may support the
bill although as of May 21st, no formal position of
support had been received.
3. Author's amendments to be offered in committee
If the $50,000 deposited in escrow is depleted
during the first year of the existence of the escrow
account, the corporation shall within three business
days of depletion replenish the account in the amount
of $50,000.
For each calendar year thereafter, any time the
balance in the escrow account decreases to 50% of the
amount funded that year (but never less than $50,000,)
the corporation shall within three business days
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replenish the account back to the required balance as
established at the beginning of that calendar year.
Refund requests made directly to the corporation
may be paid directly by corporation. (These
reimbursements shall not be made out of the escrow
account.)
There would be a maximum waiting period for refunds
of 10 days from the date the written request is
received by the escrow trustee.
Conspicuous written disclosures of the right of
cancellation and refund procedures:
a. The written disclosure shall be in bold capital
letter minimum 14-point
font.
b. The written disclosure shall indicate who to
contact, both directly
through the company and through the escrow account,
for a refund.
c. The written disclosure shall be made at the time
of solicitation, and at
the time an enrollment package is sent to
consumers.
The exemption is null and void if the corporation
fails to comply with the conditions for the exemption
or if the Attorney General's office revokes the
exemption when a corporation is not in full compliance
with all the provisions of this section.
The corporation would be required to provide a full
refund without conditions other than the surrender or
destruction of materials which allow the member to
access or use the service.
A customer must be advised, before any charges are
applied, if they need not provide billing information
in order to be charged a membership fee, in
circumstances where the telemarketing firm has prior
access to the customer's billing information.
4. Suggested technical amendments
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On page 3, line 26, following "or" insert:
federally insured
On page 4, line 27, strike "(i) to (iv)" and
insert: (I) to (IV)
5. Additional background
On April 27th, MemberWorks and the California Attorney
General's Office entered into a settlement agreement
under which MemberWorks has agreed to comply with some
provisions similar to those contained in this bill.
However, the settlement agreement provisions do not
address the SEC reporting problem. The impetus for the
bill was the sponsor's desire to comply fully with both
California law and SEC reporting guidelines.
Support: None known
Opposition: None known
HISTORY
Source: MemberWorks, Inc.
Related Pending Legislation: None known
Prior Legislation: None known
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