Do you sell online – and – Have you ever sold to a customer in California? If the answer is “yes” then you need to read on and make some significant changes to your “click-consent” contracts on your web page.
California now requires mandatory online disclosures as of January 1, 2025 for digital “goods” sold online in California, USA. The disclosure requirement attaches (1) at the time of sale and before executing ‘each’ transaction; and (2) attaches to the sale of virtually any electronic “goods” including audio, video, games or (potentially) block-chain assets.
The law, AB 2426,1 amends False Advertising Law, Business and Professions Code §175002
to add new law at §17500.6 which protects the “public in this [California] state” by prohibiting;
- Selling or renting digital assets using the words “buy” “purchase” or similar terms implying permanence or unrestricted ownership – when in fact – the asset is held subject to a license agreement;
- The law further provides that the license agreement must contain a clear and conspicuous statement that the customer is only getting a use license the terms of which are made readily available; and
- The seller’s transaction documentation must expressly obtain (click-consent) in an “affirmative acknowledgement” from the customer that the sale is;
- (1) for “ a license to access the digital good;”
- (2) contains a complete list of the license restrictions; and the sale is wholly subject to the license, and
- (3) resulting in the digital access being revoked as per the license. The State maintains that the violation of law is a “misdemeanor” subject to civil penalties.3
There are several exemptions from the law. Items delivered online for free, or items which are downloaded by the user onto a device (no longer under the control of the supplier). Further, it is not yet possible to determine if the purchase of an NFT is subject to the law. Typically, an NFT or block-chain transaction is “irrevocable” but then again there is the artist Banksy and his ilk to contend with when applying the law to “art.” The law is silent on a class of online gaming products known as “Freemium” games in which the platform is free but there are “features” available to be purchased while inside the gaming architecture. These uncertain points of law arise from the broad definition of a “Digital Good” under the law. The courts will be busy with this one.
Existing law4 (False Advertising Law, Business and Professions Code § 17500)5 makes it unlawful for any person doing business in California and advertising to consumers in California to make any false or misleading advertising claim.6 Existing law makes a person who violates specified false advertising provisions liable for a civil penalty, as specified, and provides that a person who violates those false advertising provisions is guilty of a misdemeanor. A Code § 17500 violation is a misdemeanor, punishable by up to six months in jail or by a fine of up to
$2,500.00. Also, violations may expose the company to private claims for restitution or injunctive relief under the False Advertising Law.
This bill AB 2426 adds Section 17500.6 to the Business and Professions Code, which would, subject to specified exceptions, additionally prohibit a “seller of a digital good” from advertising or offering for sale a digital good, as defined, to a purchaser with the terms “buy, purchase, or any other term” which a reasonable person would understand to confer an unrestricted ownership interest in the digital good. The new law also prohibits many predictable “work- arounds” such as an option for a “time-limited rental”. The new law states that the seller must receive “at the time of each transaction” an affirmative acknowledgment from the purchaser that the seller is not obtaining any ownership in the digital good. Alternatively, the seller provides (pushes) to the consumer before executing “each transaction” a clear and conspicuous statement, of the absence of ownership in the digital good.7
California’s new law forces digital stores to admit that the customer is just licensing content, and not buying it.8 Gamers who lose access to a game, for example, may not be protected from the loss – but – they will know in advance of purchase in the future that they are just “borrowing” the game and the game may be shut off at any time the license agreement allows.
Imperfect Laws Will Guarantee Imperfect and Inconsistent Results When Tested – The new law does not define “purchaser” or “purchase”. Is a business considered a “purchaser” as much as an individual? This is one of several legislative omissions that may result in plenty of future litigation (i.e., how much contact with California is required before the “seller” is subject to personal jurisdiction in California? Does long-arm personal jurisdiction statute apply to one or more violations of the law for Internet sales?) However, the California Uniform Commercial Code (“UCC”) defines “purchaser” as “a person that takes by purchase”. Cal. Comm. Code § 1201(b)(30). The UCC defines “purchase” to mean “taking by sale, lease, discount, negotiation, mortgage, pledge, lien, security interest, issue or reissue, gift, or any other voluntary transaction creating an interest in property”. Cal. Comm. Code § 1201(b)(29). Thus, a “purchaser” may be a whole list of entities or individuals under the UCC. However, AB 2426 amends the Business & Professions Code at §17500 (the Consumer Protection Act “CPA”) rather than amends the UCC (referenced here). Thus, the UCC definitions of “purchaser” and “purchase” as applied by law in the UCC context are not controlling for the purpose of judicial decisions involving the interpretation of the CPA and AB 2426. While, it is reasonable to expect that judicial interpretations will read the terms in tandem with other provisions of the Consumer Protection Act and more or less consistent with the Uniform Commercial Code, it is not a sure thing that anyone should rely upon in the absence of legislation clarifying the matter.
You Are Not “Selling Inside California!” Too Bad – They Can Still Get You! – The California long-arm statute allows any California court (State and federal) to exercise jurisdiction over a “seller” from another state or country if they have a judicially defined “connection” to California. While the new law AB 2426 doesn’t expressly reference the long-arm statute it is reasonable to believe that eventually the courts will find apply the precedents of Business & Professions Code §17500, and find that the long-arm statute applies to the Internet activities regulated by Business & Professions Code at §17500.6 and AB 2426. Who are Internet based “sellers” whose transactions deliver enough products to a California resident for personal jurisdiction to arise?9
Specifically, California’s long-arm statute, Section 410.10 of the Code of Civil Procedure10, gives California courts the authority to exercise jurisdiction over out-of-state defendants in a wide range of circumstances in particular in the context of consumer protection laws and companion regulations.11 The cases arising under the Code Section 17500 are heard by a judge rather than a jury, and nothing in AB 2426 appears to change this established precedent of denial of a right to a jury trial.12
Protect Your Business From California Laws – It is possible to take simple steps through online tools to protect your business from California “haling you into court”13 under this new consumer protection law AB 2426 which changes the rules on Internet sales.
- First, the business may block sales which use a California postal code or address for the payment method.
- Second, more sophisticated software will allow the business to block access to potential customers using a California based Internet Service Provider (“ISP”).
- Third, comply with the new law and amend the business disclosures in the manner the law demands.
The burden remains on the business to Know Your Customer (“KYC”) and California is the 5th largest economy in the world so any business using the Internet to conclude sales will eventually encounter a California customer. Perform KYC using your online sales engine and monitor your business for compliance on a random basis. The legal penalties are simply too significant to ignore the possibility of a California lawsuit entangling the business regardless of where the business calls “home.”
References
1 https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?sectionNum=17500.6.&la wCode=BPC
2 https://leginfo.legislature.ca.gov/faces/codes_displayText.xhtml?lawCode=BPC&division=7.& title=&part=2.&chapter=4.&article=2.
3 https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=202320240AB2426
4 https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?sectionNum=17500.&law Code=BPC
5 In California, there are usually three statutory based consumer claims: (1) the Unfair Competition Law (“UCL”); (2) the False Advertising Law (“FAL”); and (3) the Consumer Legal Remedies Act (“CLRA”).
6 The law prohibits businesses from making any statement that is untrue or misleading, including claims that are based on factual evidence or compare the product to others.
7 https://digitaldemocracy.calmatters.org/bills/ca_202320240ab2426
8 https://www.engadget.com/entertainment/new-california-law-will-force-companies-to-admit- you-dont-own-digital-content-203053750.html?guccounter=1&guce_referrer=aHR0cHM6Ly93d3cuZ29vZ2xlLmNvbS8&gu ce_referrer_sig=AQAAACIEXLYFn8QOFqZFA_N8_n- dayENFGGzaedwv3JacFV_CSSG9Y7ApIn16KRVfFJlaQ75- yAv5_pc5chTkeRohMwMnBawH2_j1C7M0uNw9IexzJgRrr4tavtLkNsIiOfd9tItGkJqhhObU4 k7nQ20OidU_TCygKirL8vsemK3ZQEn
9 There is precedent in California that small or random amounts of Internet connection to the State is not sufficient to invoke a more general personal jurisdiction over the charged party. In particular where the federal government has a strong presence in the area of law (such as Internet trade regulations) the laws of a State could, might, maybe, “preempted” by the federal presence even to the extent of becoming unenforceable laws. For example, where a defendant’s only contacts with California (in an antitrust case) are through the Internet, the court found that the amount or nature of this contact was not sufficient contacts for to give rise to personal jurisdiction in California over the defendant even when the defendant knows that its conduct may violate the law in California. Pavlovich v. Superior Court, 29 Cal. 4th 262 (2002). California looks closely at Internet based claims and distinguishes between passive and active solicitations of California customers when assessing whether there is personal jurisdiction over the Internet seller. Cybersell, Inc. v. Cybersell, Inc., 130 F.3d 414, 418 (9th Cir. 1997).
10 “ A court of this state may exercise jurisdiction on any basis not inconsistent with the Constitution of this state or of the United States”
11 The statute allows courts to exercise jurisdiction on any basis that doesn’t violate the California or US Constitution. It’s considered the most comprehensive long-arm statute in the country. It’s intended to establish personal jurisdiction, which is the ability of a court to make decisions. See., Goehring et al v. Bernier, 62 Cal. App. 4th 900 (1989) California’s long-arm statute permits California courts to exercise jurisdiction on any basis not inconsistent with the federal or state Constitution. (Code Civ. Proc., § 410.10.) Under the federal Constitution’s due process clause, a court may assume jurisdiction over a nonresident defendant if the defendant has constitutionally sufficient “minimum contacts” with the forum state. Vons Companies, Inc. v. Seabest Foods, Inc., (1996) 14 Cal. 4th 434, 444, 58 Cal. Rptr. 2d 899, 926 P.2d 1085 “The overriding constitutional principle is that maintenance of an action in the forum must not offend ‘traditional conception[s] of fair play and substantial justice.’ [citation omitted] The defendant’s ‘conduct and connection with the forum State’ must be such that the defendant ‘should reasonably anticipate being haled into court there.’ [citations omitted] see, Vons Companies, Inc. v. Seabest Foods, Inc., supra, 14 Cal.4th at pp. 444-448.) A court may assert general jurisdiction over a defendant if the defendant’s contacts with the forum state “are ‘substantial . . . continuous and systematic.’ [Citations omitted]” see., Vons Companies, Inc. v. Seabest Foods, Inc., supra, 14 Cal.4th at p. 445. Where general jurisdiction cannot be established, a court may assume specific jurisdiction over a defendant in a particular case if the plaintiff shows: (1) “the defendant has purposefully availed himself or herself of forum benefits”; (2) the ” ‘controversy is related to or “arises out of” a defendant’s contacts with the forum’ “; and (3) the assertion of jurisdiction ” ‘would comport with “fair play and substantial justice.” ‘ ” (Id. at pp. 446-447 [citations omitted].
12 Nationwide Biweekly Administration, Inc. v. Superior Court of Alameda County. 462 P. 3d 461, 9 Cal. 5th 279, 261 Cal. Rptr. 3d (2020) (Claims under California Business & Professions Code Sections 17200 et seq. and 17500 et seq “***there is no right to a jury trial under California law either as a statutory or constitutional matter”).
13 Cybersell, Inc. v. Cybersell, Inc., 130 F.3d 414, 418 (9th Cir. 1997)
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