Date of Hearing: May 21, 2020

ASSEMBLY COMMITTEE ON BUSINESS AND PROFESSIONS

Evan Low, Chair

ABPCA Bill Id:AB 3235

Author:Chu – As Amended Ver:May 18, 2020

SUBJECT: Short-term lodging rates.

SUMMARY: Prohibits a place of short-term lodging, an internet or mobile website, application, or centralized online platform from advertising a room rate that does not include all of the required fees to be paid in order to stay at the place of lodging, as specified. States that provisions regarding fee disclosures are intended to clarify existing law. Provides for an implementation date of July 1, 2024.

EXISTING LAW:

Defines the activities constituting false advertising, and specifies related criminal penalties. (Business and Professions Code (BPC) 17500 et seq.)
States that it is unlawful for a person doing business and advertising in California to make any false or misleading advertising claims. (BPC Section 17508 (a))
Defines “room rate” as rates at which rooms or other accommodations are rented to occupants. (BPC 17561)
Defines “short-term rentals” as a residential property that is rented to a visitor for fewer than 30 days through a centralized online platform whereby the rental is advertised and payments for the rental are securely processed. (Government Code 19822.4 (a)(1))

THIS BILL:

Defines “short-term lodging” as any hotel, motel, bed and breakfast inn, or other similar transient lodging establishment, and any short-term rental, or a residential property, that is rented to a visitor for fewer than 30 days through a centralized online platform whereby the rental is advertised and payments for the rental are securely processed.
Prohibits a place of short-term lodging from advertising a room rate, once specific dates are chosen by a consumer, that does not include all of the required fees needed to stay at the place of short-term lodging.
Prohibits an internet or mobile website, application, or other similar centralized online platform from advertising a room rate, once specific dates are chosen by the consumer, that does not include all of the required fees needed to stay at the place of lodging.
Excludes any local and state taxes from the fee inclusion requirements.
States that the requirements to include all mandatory fees in advertising are intended to clarify existing law.
Specifies that an entity violating the provisions of the bill shall be subject to a civil penalty not to exceed $10,000 for each violation.
States that a city attorney, district attorney, or the Attorney General may enforce the provisions of the bill.
Specifies an implementation date of July 1, 2024.

FISCAL EFFECT: Unknown. This bill is keyed fiscal by legislative counsel.

COMMENTS:

Purpose. This bill is sponsored by the Consumer Federation of California. According to the author: “When booking travel online, consumers should know exactly the costs for their stay. A recent survey showed that 34 percent of respondents had experienced a hidden or surprise fee when booking a hotel, and over half of those consumers said it caused them to go over budget. In some cases, a resort fee can be as much as $95 a night, which could make a difference in a consumer’s choice of place to stay. This practice has been going on for years and it is time we put transparency into the lodging reservation process. AB 3235 remedies this by prohibiting short-term lodging establishments from excluding mandatory fees from their advertised rate. The hotel industry collected almost $3 billion in resort fees in 2018 alone. The least they could do is tell their customers upfront what they’re charging.”

Background.

Resort Fees. Resort fees, also known as vacation fees or destination fees, are mandatory fees added onto a nightly room rate charged at hotels and other places of short-term lodging. Resort fees are generally advertised or disclosed separately from the basic room rate, and are intended to cover the cost of amenities a guest may use, such as printing services, spas and pools, or newspaper delivery.

The use of resort fees can be traced back to the 1990s, and were originally used by high-end luxury resorts to cover the cost of upkeep and maintenance. Over the following decades, resort fees were introduced in the hotel industry to address guest complaints about having to separately pay for every single amenities offered by a hotel. By bundling services into a mandatory fee, hotels have argued that the practice allows for providing guests with amenities that consumers want, such as free wireless internet, access to fitness centers, airport transportation, and more.

According to Bjorn Hanson, adjunct professor at New York University’s Jonathan M. Tisch Center for Hospitality and Tourism, it is estimated that hotels in the United States have generated nearly $3 billion in mandatory fees in 2018. This figure represents an 8.5% increase from the prior year.

The American Hotel and Lodging Association (AHLA) notes that charging resort fees has become a declining practice. According to a 2018 Lodging Survey published by AHLA, 6% of hotels charged a resort fee that year.

Disclosure of resort fees. The current policy debate on resort fees centers on the proper advertising, displaying, and disclosure of the fees themselves. Consumers and advocacy groups argue that the fees are deceptive and misleading, because they are not included in the basic room rate. In a 2019 review of 34 hotels and 11 online travel agencies, Consumer Reports note that “hotels show only the base cost of the room on the first pricing page, without including additional mandatory charges, though some mentioned the existence of fees in small print or via a hyperlink. […] Customers have to make multiple clicks to arrive at a checkout page to see the total costs, including fees.”

The Federal Trade Commission (FTC) labels this practice of partitioning fees across various stages of the booking process as “drip pricing,” or advertising only part of a product’s price upfront, and revealing additional charges later in the buying process. Consumer groups argue that drip pricing is harmful to consumers, and hinders their ability to comparison shop and make the best financial decisions when searching for hotel accommodations.

Hotels and lodging groups contend that the industry is transparent about the fees it charges, breaking them out separately to provide clarity, and disclosing the amount prior to a guest booking online. According to the AHLA, the “hotel industry embraces a competitive business model that is driven by transparency. Ensuring guests have all the necessary information prior to booking their rooms is central to that model and consumer satisfaction.”

This bill seeks to implement transparency measures for resort fees in advertising. Specifically, the bill prohibits a place of short-term lodging from advertising a room rate, once specific dates are chosen by a consumer, that does not include all of the required fees to be paid in order to stay at the place of short-term lodging. In practice, this means that a consumer would select specific travel dates, and subsequently see the room rates available to them, inclusive of all the required fees. The bill specifies for the consumer input of a travel date in order account for any seasonal differences, as room prices vary depending on the day of the week (weekday vs. weekend rate) or the season. The bill does not include any other consumer input that may impact pricing, such as number of travelers or bed sizes.

Action by the Federal Trade Commission. In 2012, the FTC issued 22 warning letters to several hotel chains for not adequately disclosing resort fees on reservation websites, noting that such practice may be considered deceptive marketing and in violation of federal law. In those letters, the FTC writes: “We believe that online hotel reservation sites should include in the quoted total price any unavoidable and mandatory fees, such as resort fees, that consumers will be charged to stay at the hotel. While a hotel site may breakdown the components of the reservation estimate (e.g., room rate, estimated taxes, and any mandatory, unavoidable fees), the most prominent figure for consumers should be the total inclusive estimate.”

In response to these warning letters, many hotels have since then modified their approach to resort fees, and added more adequate disclosures. Despite improvements however, the FTC notes that consumer complaints about the fees persist. Since issuing the warning letters, the FTC has not taken any additional enforcement action on the matter.

Recent Legal Action. In 2019, the Attorney General for Nebraska filed a lawsuit against Hilton, alleging that the hotel chain hid the true price of hotel rooms, failed to clearly disclose all booking fees, and misled consumers on what resort fees actually pay for. A similar lawsuit was filed by the Attorney General for the District of Columbia against Marriott, adding to the allegations that the chain also misrepresented resort fees as imposed by the government, by labeling them “taxes and fees.” In the press release announcing the lawsuit, the District of Columbia Attorney General indicates that the effort “follows an investigation into the hotel industry’s pricing practices by the Attorneys General in all 50 states.”

California False Advertising Laws. Under BPC 17500 et seq., California law enumerates several consumer protections against false advertising claims, and broadly prohibits false or deceptive advertising regarding any products or services, including any advertised price. Similarly, California law prohibits the practice of advertising one price and then attempting to charge consumers a higher price after the consumer has responded to the advertisement, a practice often referred to as “bait and switch.” This bill provides that its provisions related to the disclosure of mandatory fees are intended to clarify such existing laws on false or misleading advertising. According to the author, this bill would clarify the application of California’s existing consumer protection statutes to the advertised price of rooms in places of short-term lodging.

Online Travel Agencies, short-term rentals, and internet platforms. Online Travel Agencies (OTAs) are generally defined as a website or online platform specializing in the sale of travel products. OTAs can aggregate information from various travel companies, display prices and rates, and facilitate the booking of hotels, flights, rental cars, cruises and activities. In the past decade, the popularity of OTAs surged as a digital middleman for booking travel, allowing consumers to aggregate travel options in one place and comparison shop accordingly. The business model for OTAs can vary, but generally centers around either purchasing inventory directly from travel companies for resell, or operate on a commission-based agreement.

In a 2017 economic analysis of resort fees, the FTC showed that many OTA platforms also partition mandatory fees. In the examples reviewed, the FTC describes that “the hotel comparison page lists hotel room rates exclusive of the resort fee, and does not even mention whether a hotel charges a resort fee. To learn whether a hotel charges a resort fee and see the amount of the fee, a consumer must click on the listed hotel and go to a hotel-specific page.” With increased scrutiny and consumer sensitivity on resort fees, OTAs have recently begun to modify their strategies on mandatory charges. In 2019, the Expedia Group, a major OTA, announced that hotel listings would appear lower in the rankings on its platform if the lodging added mandatory fees to room rates. Similarly, the OTA company Booking.com announced that it would charge a commission on resort fees collected by hotels in the United States and in Europe. Booking.com previously collected a commission only on the base nightly room rate for every hotel room booked through its platform. Although these changes do not outright address the underlying issues of drip pricing or price disclosure, they indicate a broader shift in attitude towards resort fees.

Short-term rental online platforms – which allow consumers to book private residential properties for short stays – have also their own form of added mandatory fees. Consumer groups found that property managers often charge mandatory “cleaning fees” or “service fees,” and that although these charges are set directly by the property owners, the short-term rental platform interface may not adequately disclose those fees. After studying 600 short-term rental listings across multiple platforms, Consumers’ Checkbook found that “every one of them featured mandatory but poorly disclosed fees, often tacking on hundreds of dollars to the bill. […] On average, these fees inflated prices by more than 25 percent.” In response to those concerns, some short-term rental platforms have begun changing their display algorithms to include mandatory fees on property listings.

The bill aims to apply the same price transparency standards it enacts on hotels to online travel booking platforms. Specifically, the bill would apply to any internet website, application, or other similar centralized online platform on which a rental of a place of short-term lodging is advertised. In practice, this would mean that any entity advertising a hotel room online would be subject to the bill’s requirements.

With the technology industry constantly evolving, the bill will apply to a broader set of entities beyond OTAs or short-term rental online platforms. For example, search engines similar to Google or Bing, GPS web mapping applications, and other systems that can display hotel and lodging rates to a consumer, would be required to comply with the bill’s provisions. The same would apply to metasearch engines: aggregators that pull and display data from third-party sources, but do not facilitate any actual bookings.

Current Related Legislation. None.

Prior Related Legislation.

SB 1130 (Wieckowski, Chapter 38, Statutes of 2016) – Authorized a county counsel to request that a person or business suspected of engaging in false or misleading advertising provide evidence to support the advertising claims.

ARGUMENTS IN SUPPORT:

Consumer Federation of California writes in support: “Deceptive advertising in the lodging industry has increased over the last few years, with many hotels, motels, and short-term rentals not disclosing hidden fees upfront. Several hotels and Airbnbs charge separate mandatory “resort fees” or “cleaning fees”, but fail to disclose them until much later in the booking process […] As these deceptive practices continue to grow across the state and country, California should stand up for consumers and ensure that lodging establishments are disclosing their entire cost upfront. Without this disclosure, consumers will continue to be deceived through these advertising practices. Consumers deserve to transparently know the full true price of their lodging options before making a purchasing decision.”

AirBnB write as support if amended: “The fact is that whether it is a plane ticket, a rental car, or an accommodation, travelers should know what they are paying for before they book. To that end, on Airbnb, all mandatory taxes and fees set by the host on the platform are disclosed to consumers prior to booking. Like the Hotel Advertising Transparency Act ( H.R. 4489 ), a bipartisan bill in Congress to require increased price transparency across the lodging industry, AB 3235 has the potential to bolster transparency for consumers while ensuring competitive parity. As a result, with amendments, Airbnb stands in support of AB 3235.”

ARGUMENTS IN OPPOSITION:

The California Hotel and Lodging Association writes as opposed unless amended: “The ‘clarification’ language will no doubt be used against the parties in pending litigation and in future litigation that may be prompted by this language. This provision may therefore effectively make the statute retroactive, exposing the industry to additional liability for complying with current law and FTC guidance. CH&LA must strongly oppose this bill as long as that “clarification” is in the bill. If it is removed, CH&LA’s position would be Support if Amended.”

ISSUE(S) FOR CONSIDERATION:

Clarification of existing law on false advertising. As currently written, this bill provides that its provisions related to the disclosure of mandatory fees are intended to clarify existing law on false and misleading advertising. In the context of the pending litigations filed against several hotel chains, the hotel industry has expressed significant concerns that such clarification would be applied retroactively – and would expose the industry to additional legal action.
Liability considerations. As currently written, the bill specifies that an entity in violation of its provisions shall be subject to a civil penalty not to exceed $10,000 for each violation. In the context of hotels and Online Travel Agents, it is unclear whether the final responsibility of disclosing all fees – and the associated liabilities – rest on the hotels, the OTAs, or both. The dynamics between the two industries are complex, and involves diverse economic and contractual factors. From an enforcement perspective, it may be a significant challenge to determine who was ultimately responsible for setting and disclosing mandatory fees among the many contracts, agreements, sales and commissions that interplay between hotels and OTAs.
Additional implications for the technology sector. As noted in this analysis, the bill broadly applies its provisions to any internet website, application, or other similar centralized online platform on which a place of lodging is advertised. As a result, entities beyond OTAs or short-term lodging rental platforms are expected to be impacted by the bill’s requirements. This would include search engines like Google or Microsoft Bing, who currently provide the ability to lookup and compare hotels rates; and metasearch engines, such as TripAdvisors, which aggregate and display third-party data.
Additional consumer input before triggering fee disclosure. As currently drafted, the bill specifies that all fees must be included on a room advertisement once specific travel dates have been selected. Selection of the travel dates allow the room rate to account for seasonal differences, such as day a week day or weekend rate. However, travel booking systems current require additional consumer input before prices are displayed, such as number of travelers and number of rooms. The author and committee may want to consider if additional consumer input is required before generating price information.
Impact of the coronavirus pandemic on the hotel industry. The global coronavirus pandemic has profoundly impacted the hotel and lodging industry. With the combination of stay-at-home orders issued across the United States, travel restrictions, and cancellations of major events and gatherings, hotels have suffered considerable financial damage. Data from the Smith Travel Group notes that occupancy rates for late March fell 67.5% compared to the same week in 2019 – leading to closures, furloughs, and staff cuts. An Oxford Economics study commissioned by the AHLA concluded that 44% of hotel employees in every state are projected to have lost or lose their jobs in the wake of the virus. The bill provides for an implementation date of July 1, 2024 in order to account for the significant challenges the industry is currently facing due to the global pandemic.

REGISTERED SUPPORT:

Consumer Federation of California (Sponsor)

AirBnB (Support if Amended)

REGISTERED OPPOSITION:

California Hotel and Lodging Association

Analysis Prepared by: Patrick Le / B. & P. / (916) 319-3301

AB 3235: Short-term lodging rates.

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