California Bans Drip Pricing: What It Means for Travel Advisors

On October 7, 2023, California Governor Newsom signed amendments to California’s arsenal of consumer protection laws that, effective July 1, 2024, end the use of drip pricing in all but a few specific categories of commercial transactions not relevant here (except two I will come to shortly). Carnival Cruise Lines’ reaction to the changes was discussed in a TMR article on April 19. Other suppliers will not be far behind.

Under the new California law, Drip Pricing—advertising, displaying, or offering a price for a good or service that does not include all mandatory fees or charges (other than taxes or fees imposed by a government on the transaction)—is unlawful as regards advertising directed at California consumers. The exact language added to the existing laws is:

(29) (A) Advertising, displaying, or offering a price for a good or service that does not include all mandatory fees or charges other than either of the following:
(i) Taxes or fees imposed by a government on the transaction.
(ii) [delivery charges related to physical goods not relevant here]

In practice, I expect this will affect advertising in all markets of the covered products/services; otherwise, companies will be advertising two sets of prices for the same products/services, a practice that would, I believe, produce massive confusion.

Drip Pricing, also known as “junk fees,” is also the subject of a Federal Trade Commission rulemaking that I discussed at Will the U.S. Government Really Regulate Junk Fees?; The Travel Industry Is One Step Closer to the End of Junk Fees; and The Battle Against Junk Fees: Big Business Defends Deceptive Practices. 

California isn’t waiting on the federal government
While Carnival may be the first out to announce pricing changes in response to California’s initiative, travel advisors must understand that: 

1. The California drip pricing changes apply to advisors’ advertisements not only of cruises but of everything they advertise with a stated price; as suggested above, I don’t expect product/service advertisers to attempt to set out two price sets in ads, one directed at California consumers with full prices shown and one directed to everyone else with the drip-drip of extra charges presented as they have often been in the past;

2. The restrictions on drip pricing will apply to everything, including hotels, whose notorious “resort fees” have already been yielding to pressure from the FTC in many cases; and

3. The text of the California law allows for exceptions only for limited enumerated services; therefore, the intent seems to be that if a travel advisor is advertising a cruise, for example, and charging a mandatory fee to the client for the transaction, the advisor’s advertisement of the cruise must include the service fee in the advertising total price of the cruise.

If my belief in (3) above is correct, advisors’ advertisements where the advisor adds a mandatory fee/commission will show higher total prices for the same services than the suppliers’ own advertisements of the same underlying services. This seems clearly the outcome intended by the California legislation. If correct, one additional complication will arise: how will the mandatory commission calculated by the advisor on the entire transaction be allocated in the advertising of the component parts that may not be part of a tour but are simply elements of a multi-service transaction handled by the advisor for the client?

Hopefully, these intended or unintended consequences of the new law will be addressed in regulations adopted soon, to provide sufficient notice to industries like travel advisors as to how to adjust their advertising practices before July 1. Time is short to accomplish this, especially if industries are to have an opportunity to comment on the proposed regulations.

One other question that has been raised about the cruise sector: must gratuities that are automatically charged to a client’s onboard account be included in the total advertised pricing? The answer, I believe, is yes, if the gratuities are truly not optional at the guest’s direction during the cruise. If the traveler can opt out or change the gratuities before final settlement, the gratuities are, in economic effect, still optional and not “mandatory.”

However, the way the gratuities are explained to the consumer will be important. I do not expect California will be satisfied with wordplay designed to mislead the consumer into paying the gratuities that could have been avoided. Travel advisor advertising that indicates gratuities are automatically applied, but subject to change before settlement, must be clear about this. If not, and the reasonable impression from viewing the advertising is that the consumer is being misled into thinking the gratuities are unavoidable, I expect California to require the gratuities to be included in the advertised cruise price.

The same principle should be applied to other components of a trip, including cruises, tours, and hotel stays. Clarity in advertising additional charges, such as the infamous resort fees, will be essential. Otherwise, absent contrary direction from California, I believe those fees must be included in the advertised price to satisfy the California law.

The law excludes two categories of services relevant to travel advisors: (1) car rentals if specified disclosures are met, and, (2) air carriers, based on the federal preemption provisions of the Federal Aviation Act that prevent state regulation of “routes, rates, and services” of air carriers. At least for now, contracts for car rentals and the airline contract of carriage, embodied in the “ticket,” will remain subject to a multitude of add-ons that affect the final price to be paid by the consumer.

Travel advisors who follow the principle of “when in doubt, include it” should safely be in compliance with the California drip pricing law. This development is predicted by California and others to be a boon for consumers who will finally be able to avoid mathematical exercises to compare all-in prices for the products/services they buy in travel and other categories. California must, however, address and resolve some of the related consequences of the law for adjacent industries such as travel advisors.