Drip Pricing: Shipping & Handling Fees Turn Risky

Most of us have experienced drip pricing — where the price seems like a bargain until you go through check-out and find that you’re responsible for additional fees.

Of course, we’re all free to say “no” at that point, but politicians in the Golden State don’t see it that way.

The Department of Redundancies Department

As is their way, California legislators concluded that that there was a gap in their consumer protection laws that had to be filled with yet another statute, and so the state legislature enacted SB 478, an amendment to the state’s Consumer Legal Remedies Act, to combat drip pricing. Rather than relying on existing laws against “bait and switch” advertising, they predictably decided that a heavier compliance burden was in order. Why have fewer rules when you can have more, after all?

Of course, every time California adds to the mountain of laws impacting on commerce, they do so without any discernible concern for whether the new law is practical, or whether it creates more intractable problems for law-abiding companies than it fixes for consumers.

SB 478 is also another example of California’s blunderbuss approach to regulating commerce which entrusts mainly to private attorneys enforcement of stifling, complex, and even ill-considered statutes and initiatives like Proposition 65 (proving the citizens may be getting the legislators they deserve). And with a per violation penalty and an enforcement regime that allows a claim to be brought against you by anyone (and everyone) casually browsing your website — including non-purchasers — costly class action litigation and arbitrations will surely follow.

Deceptive Simplicity: Drip Pricing In a Nutshell

Under the law, effective July 1, 2024, all advertised prices — on the web, in catalogs, and in stores — must include all mandatory charges, with exceptions so narrow and impractical that companies that never thought they were engaging in misleading advertising are now caught in a trap.

To make matters worse, it’s a trap that for many will be impossible to escape without radically changing their business model into one that defies consumer expectations and may rupture the competitive marketplace for remote sellers.

The Narrow Exclusions

Government Imposed Taxes & Fees. Of course, consistent with California’s deceptive approach to the costs of running its dystopian idea of state governance, you don’t need to include these in the total price. Shock and surprise at “drip taxes and fees” just aren’t a problem, apparently.

Restaurant Add-Ons. Restaurants can exclude service charges, mandatory gratuities, and similar fees. But just how fair is it where these extra costs can be shoved down your throat only after your meal is over and you have no recourse? Online, of course, you can say “no” at any time. A convergence of lobbying interests are no doubt behind this irrational exception.

Shipping Fees. If you’re guessing that this is an inflexible and impractical exclusion, you’d be right. Your mandatory shipping charge must be included unless it only reflects strictly the “[p]ostage or carriage charges that will reasonably and actually be incurred to ship the physical good to the consumer.” Leave it to California to write a statute which suggests that some “actual” shipping costs are not “reasonably” incurred. If governments could be diagnosed with histrionic personality disorder, this would be the proof.

The Shipping Fees Trap

Had they bothered to ask, California legislators would have learned that most companies can’t predict the exact shipping charges for an order that has yet to be placed. These public servants might have then learned that most shipping fees charged to consumers reflect good faith approximations that try to take into account the fact that the actual shipping cost for each order can vary for a number of reasons that can’t be known before an order is placed in a cart and the total calculated, and, once in the cart, the actual shipping cost may be more or less than the “shipping fee” that’s charged. We’re thus on thin ice already.

Had legislators probed just a little deeper, they would have discovered that most remote sellers calculate a uniform shipping fee that makes sense from an overall business cost perspective. Thus, one order may cost $5.00 to ship, another may cost $20.00, but the average shipping cost across all products to all destinations may be $15.00. In this situation, the retailer may assess a $15.00 shipping charge to all orders so that it breaks even on shipping, even though, in individual instances, customers may be charged more or less than the actual shipping costs. It’s simply a practical solution to a difficult problem which has become a standard industry approach that promotes a level playing field for sellers, i.e., a fixed shipping fee that allows apples to apples comparisons on price.

But, you see where this is going. If on any individual sale you’re charging even slightly more than the unpredictable actual cost for shipping that order that you don’t know in advance, the shipping exception evaporates. Poof.

It’s even worse if you charge combined shipping and handling charges to include costs directly associated with shipping, but above and beyond narrow postage and carriage charges — costs which every company incurs. Don’t even dream of an exception if you follow this ordinary commercial practice.

California Intentionally Created This Mess

Official guidance published by the Attorney General’s office makes clear that businesses that impose combined shipping and handling (the latter of which are as much costs of shipping as postage) must include this combined charge in the advertised price:

A business can exclude shipping charges, but not handling charges. In the words of the statute, a business can exclude from its advertised price “[p]ostage or carriage charges that will be reasonable and actually incurred to ship the physical good to the consumer.” Like any other mandatory fee or charge, a handling charge must be included in the advertised price.

SB 478 – Frequently Asked Questions

He also makes clear that disclosing such fees and charges “before a consumer finalizes a transaction” does not satisfy the statute, and even fees and charges which are variable must be included in the price — which, of course, means that variable fees are no longer permitted.

And if a business does not know how much the shipping and handling fee will be for an individual customer, too bad:

Businesses that do not know how much they will charge a customer at the beginning of a transaction should wait to display a price until they know how much they will charge. Businesses should be aware that other state and federal laws prohibit certain forms of price discrimination.

SB 478 – Frequently Asked Questions

In other words, they are expecting you not to give consumers any price at all until the very end of a transaction after the variable mandatory fees are added, i.e., bring your order to the counter or place into your online shopping cart without any idea of the price. Who are these people? And what’s this reference to “price discrimination”? Do you have to charge every customer the same amount even if they live in Antarctica?

The FTC May Soon Promulgate Final Drip Pricing Regulation

The FTC has been working for over a decade on how to address drip pricing. A proposed regulation has been the subject of multiple rounds of comments. I’ll be writing more about the FTC’s proposed rule in the near future. As you’ll discover, the exclusions being proposed by the FTC are more flexible than California’s. But, there won’t be preemption, so you’ll have to comply with both if you sell to consumers in California.

Thoughts On Compliance: Get Ready For Some Difficult Yoga Moves

There is no grace period for compliance with SB 478, so consult with your lawyer right away to come up with a solution that works for you. The key points of potential flexibility include whether a charge is “mandatory” or not. If there are ways to avoid a fee entirely, this may give you some flexibility. But note that it will be a while before we get any court guidance on this kind of question. Offering the option to pick up a product without incurring a shipping or shipping and handling charge is another potential option for companies that can offer such an option, either at their own facilities or third party locations contracted to serve such a function. If this sounds a lot like requiring your business to do the equivalent of the Scorpion Handstand or the One-Legged Crow Pose, welcome to San Francisco!