BILL ANALYSIS
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|Hearing Date:July 7, 2003 |Bill No:AB |
| |558 |
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SENATE COMMITTEE ON BUSINESS AND PROFESSIONS
Senator Liz Figueroa, Chair
Bill No: AB 558Author:Correa
As Introduced Fiscal:No
SUBJECT: Health studio contracts: maximum fees.
SUMMARY: Requires the existing $1,000 limit on health
studio services contracts to be adjusted annually according
to a specified consumer price index.
Existing law:
1)Regulates the contracts entered into between health
studios and members of the health studios.
2)Defines "contract for health studio services" to include
membership in a club, group or organization formed for
purposes of providing instruction, training or assistance
in physical culture, body building or exercise, or other
physical skills, or for the use of facilities of a health
studio, gymnasium, or other facility used for the above
listed purposes.
3)Requires every contract for health studio services to be
in writing and requires a copy of the written contract to
be given to the customer at the time he/she signs the
contract.
4)Limits the amount a member can be obligated to pay under
the contract to $1000, exclusive of interest and finance
charges.
5)Prohibits a contract for health studio services from
requiring payments or financing by the buyer to exceed
the term of the contract, and prohibits the term of the
contract from exceeding 3 years.
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6)Provides that every contract for health studio services
shall provide that performance of the agreed upon
services will begin within six months from the date the
contract is entered into.
7)Provides for termination of the contract or relief from
the obligation to continue to pay, and for refund of sums
already paid, in the event of death or disability of the
member, and to a limited extent, in the event the member
moves to another location.
This bill requires, commencing January 1, 2004, the $1,000
limit on health studio services contracts to be annually
adjusted to reflect changes in the California Consumer
Price Index for All Urban Consumers, as published by the
California Department of Industrial Relations, based on
regional data from the United States Department of Labor,
Bureau of Labor Statistics.
FISCAL EFFECT: Legislative Counsel has determined that
this is a non-fiscal measure.
COMMENTS:
1.Purpose. According to information provided by the
Author's office, under existing law, no contract for
health club services can exceed $1,000. This means that
if an individual is offered a one-year contract for
membership in a health club, the monthly fee cannot
exceed $83.33. While there are many clubs that charge
$20 to $40 a month for access to basic equipment and
fitness classes, there are also clubs that provide a much
greater range of services in more accommodating
surroundings. The provisions of this bill make a
straightforward change to provide for an annual
adjustment for cost of living increases by utilizing the
state Consumer Price Index as published by the California
Department of Industrial Relations, based on regional
data from the United States Department of Labor, Bureau
of Labor Statistics.
2.Historical Regulation of Health Studios. Health studio
contracts have long been regulated by the Civil Code.
Historically, the purpose of the regulation was to
prevent unfair long-term commitments, or commitments that
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obligated the member when it was impossible or
impractical for the member to enjoy the benefit of
memberships. Thus, existing law provides that if the
member dies or becomes disabled, the obligation will
terminate and pre-paid sums are refundable. Or, if the
member moves more than 25 miles away, he or she becomes
relieved of the contractual obligations.
The cap on total financial obligation was adopted to
prevent contracts from requiring excessive future
commitments. Since 1981, the cap has been $1,000. The
need to enact a cap, as well as the 3-year durational
limit, arose because consumers were being bilked out of
thousands of dollars. "Lifetime" health programs, with
initial buy-in prices in the tens of thousands of
dollars, were sold to consumers by companies that
ultimately did not stay in business. These consumers
were left with no recourse.
3.Consumer Price Index. The Consumer Price Index (CPI) is
a measure of the average change over time in the prices
paid by urban consumers for a fixed market basket of
goods and services. The CPI provides a way to compare
what this market basket of goods and services costs this
month with what the same market basket cost, say, a month
or year ago. The CPI represents all goods and services
purchased for consumption. The CPI reflects spending
patterns for each of two population groups: All Urban
Consumers (CPI-U) and Urban Wage Earners and Clerical
Workers (CPI-W). The CPI-U represents about 87 % of the
U.S. population. It is based on the expenditures of
almost all residents of urban or metropolitan areas,
including professionals, the self-employed, the poor, the
unemployed, and retired persons, as well as urban wage
earners and clerical workers. All expenditure items have
been classified into more than 200 categories, arranged
into eight major groups. Major groups and examples of
categories in each are as follows: food and beverages;
housing; apparel; transportation; medical care;
recreation; education and communication; other goods and
services. The CPI is not a cost-of-living index. CPI
information is readily available from the California
Department of Industrial Relations.
4.Prior Legislation Aimed at Raising the Cap.
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a) SB 1744 (Murray). In 2000, Governor Davis vetoed
SB 1744. SB 1744 did not raise the $1,000 cap,
instead, it provided an exception to the cap if the
health studio maintained a $500,000 bond during the
first 10 years of the health studios operation. SB
1744, did not provide a pro rata refund mechanism. In
his veto message, Governor Davis stated, "I understand
that this bill would provide health studios with
greater flexibility in providing a variety of services
to their customers. However, I am not convinced that
this bill would continue to ensure consumer
protections against excessive fees charged by these
studios. Additionally, the requirements that health
studios maintain a $500,000 surety bond for the first
ten years that they are in operation appear to be
excessive. This provision could adversely impact
smaller health clubs and force them to go out of
business. Finally, this bill would place unnecessary
limitations on health studio businesses operating in
California, and would impose unwarranted government
regulation on industry."
b) AB 357 (Correa). In 2001, Governor Davis vetoed AB
357. AB 357 raised the $1,000 cap on health clubs to
$2,500. It also provided that consumers who cancel
health club contracts would get a pro rata refund on
any portion of the unused contract, but would exclude
from this provision: 1) contracts of less than $750;
and 2) initiation fees which equal less than half of
the total contract amount. In his veto message,
Governor Davis stated, "Although this bill may provide
health studios with greater flexibility in providing a
variety of services to their customers, I am concerned
that this bill will permit health club studios to
increase fees by up to 150%. I would be willing to
consider a bill that raises the $1,000 limit on
contracts, but only if it truly adds meaningful
consumer protections such as a lower threshold for
pro-rated refunds and a reasonable limitation on
nonrefundable initiation fees."
c) AB 356 (Correa). In 2002, AB 356 increased the
statutory limit on the amount of a health studio
contract from $1,000 to $2,000 per person, inclusive
of initiation fees, but exclusive of interest, finance
charges, and payments for optional services, as
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specified. Commencing January 1, 2005, the bill
provided that this monetary limit would be annually
adjusted for cost-of-living changes, as specified.
Additionally, it provided that a health studio
contract could exceed the newly established $2,000 if
the health studio operator established and maintains a
bond issued by a surety company admitted to do
business in this state, the principal sum of which is
at least $300,000 per operator. It also required any
health studio opening on or after January 1, 2003, to
maintain a bond of $250,000 for a period of 5 years.
AB 356 was ultimately held on the Senate Floor.
SUPPORT AND OPPOSITION:
Support : None reported to the Committee as of July 2,
2003.
Opposition : None reported to the Committee as of July 2,
2003.
Consultant:Kristin J. Triepke