BILL ANALYSIS
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|SENATE RULES COMMITTEE | SB 916|
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UNFINISHED BUSINESS
Bill No: SB 916
Author: Ackerman (R)
Amended: 7/5/01
Vote: 21
SENATE JUDICIARY COMMITTEE : 5-0, 5/22/01
AYES: Escutia, Ackerman, Haynes, Kuehl, O'Connell
SENATE FLOOR : 40-0, 6/6/01 (Consent)
AYES: Ackerman, Alarcon, Alpert, Battin, Bowen, Brulte,
Burton, Chesbro, Costa, Dunn, Escutia, Figueroa, Haynes,
Johannessen, Johnson, Karnette, Knight, Kuehl, Machado,
Margett, McClintock, McPherson, Monteith, Morrow, Murray,
O'Connell, Oller, Ortiz, Peace, Perata, Polanco,
Poochigian, Romero, Scott, Sher, Soto, Speier, Torlakson,
Vasconcellos, Vincent
ASSEMBLY FLOOR : 77-0, 7/16/01 - See last page for vote
SUBJECT : Discount buying organizations
SOURCE : MemberWorks, Inc.
DIGEST : This bill creates, for publicly traded
corporations such as direct telemarketing firms, 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 requires disclosure of the type of
products and services provided by the entity, establishment
of escrow accounts against which members may claim refunds
CONTINUED
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of their membership fees, conspicuous disclosure of
membership fee cancellation and refund terms, and in
certain circumstances, a requirement that membership
agreements be subject to written contracts. This exemption
is also conditioned upon the Attorney General's reasonable
satisfaction with the cancellation and refund terms.
Assembly Amendments made clarifying changes agreed upon by
the sponsor and the Attorney General's office.
ANALYSIS : 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:
1.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);
2.Employ written contracts for membership agreements (Civil
Code, Sec. 1812.107);
3.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)
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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 $50,000 with a federally
insured bank or financial institution to issue refunds of
membership fees at the request of the member.
1.During the first year of operation, replenish the escrow
account within three business days of the depletion of
the initial $50,000.
2.For each calendar year thereafter, the corporation would
be required to 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.
3.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. The records
must be made available for review upon request by the
Attorney General, any district attorney or the Department
of Justice.
4.Refunds must be made from the escrow account to any
member who requests a membership refund, and has not
previously received a refund.
5.Requires the escrow trustee to issue the refund within 10
days of the date the written request for a refund is
received. In addition, requests for a refund may be sent
directly to and paid by the corporation.
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6.Provides for at least 15 toll-free service lines to
California consumers devoted to service questions and
complaints.
7.Requires a 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.
1.The organization 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.
2.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.
3.As a further condition of the exemption, possesses an
unrevoked acknowledgement from the Attorney General that
the organization has provided to the Attorney General, to
the Attorney General's reasonable satisfaction, marketing
procedures and documents 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.
4.Failure to comply with these requirements would be cause
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for the Attorney General to require the organization 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.
Background :
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.
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.
FISCAL EFFECT : Appropriation: No Fiscal Com.: No
Local: No
SUPPORT : (Verified 7/17/01)
MemberWorks, Inc. (source)
Attorney General
ARGUMENTS IN SUPPORT : 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.
ASSEMBLY FLOOR :
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AYES: Aanestad, Alquist, Aroner, Ashburn, Bates, Bogh,
Briggs, Calderon, Bill Campbell, John Campbell,
Canciamilla, Cardenas, Cardoza, Chan, Chavez, Chu,
Cogdill, Cohn, Corbett, Correa, Cox, Daucher, Diaz,
Dickerson, Dutra, Firebaugh, Florez, Frommer, Harman,
Havice, Hollingsworth, Horton, Jackson, Keeley, Kehoe,
Kelley, Koretz, La Suer, Leach, Leonard, Leslie, Liu,
Longville, Lowenthal, Maddox, Maldonado, Matthews,
Mountjoy, Nakano, Nation, Negrete McLeod, Oropeza, Robert
Pacheco, Rod Pacheco, Papan, Pavley, Pescetti, Reyes,
Richman, Runner, Salinas, Shelley, Simitian, Steinberg,
Strickland, Strom-Martin, Thomson, Vargas, Washington,
Wayne, Wesson, Wiggins, Wright, Wyland, Wyman, Zettel,
Hertzberg
RJG:jk 7/17/01 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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