Senate Passes Bill Limiting Fraud Protection Efforts

 

The February 7th CalChamber Alert Newsletter reported that a California Chamber of Commerce-opposed bill that reduces and stifles innovation, making it more difficult to purchase digital goods and services online, leading to endless litigation, and hampering efforts to reduce fraud and identity theft, passed the Senate last week. SB 383 (Jackson; D-Santa Barbara) imposes enormous burdens on online retailers of digital products because it would require companies to bifurcate their digital product offerings into two categories depending on the amount of information shared by the consumer.

The bill also creates a lot of consumer confusion and dissatisfaction. Under SB 383, individuals who do not opt-in and provide certain information frequently will receive an inferior product/service/subscription, since it will not be possible to share a product across platforms, send software update notifications, provide replacement downloads, grant upgrade pricing, or provide online support, without the appropriate data.

It is quite foreseeable that many consumers, post purchase, will be unhappy with a decision to not opt-in, but the terms of SB 383 will make it very difficult for a retailer to resolve those concerns.

Many of the world’s most innovative technology companies rely on account-based business models to offer their digital goods and services to customers, and many of these companies are based in California. These account-based models simplify a consumer’s experience by saving information from previous transactions so that past activity is readily at the customer’s fingertips, repetitive information doesn't need to constantly be reviewed, and consumers can find products simply and quickly. The SB 383 approach would practically eliminate account-based transactions.

SB 383 is also unworkable in that it would essentially require websites to set up a separate transaction page for California customers. 

In fact, at the beginning of any potential purchase of a downloadable product, online retailers would have to ask for a customer’s home state and then create several "California only" pages. Dividing the online shopping experience in such a way will likely confuse customers further, lead to fewer transactions and have a negative economic impact on the state.

In today’s global world of online commerce, a California-only requirement makes no sense and will hurt many California-based Internet businesses.

SB 383 also strengthens the specter of class-action litigation in multiple ways. 

The Song-Beverly Act has a $250/$1,000 per occurrence civil penalty, which in the modern, online world could quickly reach enormous sums of money for a simple misinterpretation of the statute. The complexity of the act, combined with subjective judgments required by SB 383, will result in several unintended consequences, in addition to frivolous litigation.

Although the high cost of keeping meticulous records of how, when and where consumer information is collected is a significant issue, the most problematic aspect is the chilling effect the act will have on efforts to combat fraud and identity theft.

The bill allows the collection of only information a company requires to combat fraud, and it mandates destruction of the information when it is no longer necessary to combat fraud without defining that standard.

Given the risk of catastrophic litigation, SB 383 significantly complicates the incentives of companies to monitor for and prevent fraud and identity theft.

SB 383 passed the Senate on January 30, 21-13.

Ayes: Calderon (D-Montebello), Corbett (D-San Leandro), Correa (D-Santa Ana), de León (D-Los Angeles), DeSaulnier (D-Concord), Evans (D-Santa Rosa), Hancock (D-Oakland), Hueso (D-Logan Heights), Jackson (D-Santa Barbara), Lara (D-Bell Gardens), Leno (D-San Francisco), Lieu (D-Torrance), Liu (D-La Cañada Flintridge), Mitchell (D-Los Angeles), Monning (D-Carmel), Padilla (D-Pacoima), Pavley (D-Agoura Hills), Roth (D-Riverside), Steinberg (D-Sacramento), Wolk (D-Davis), Yee (D-San Francisco/San Mateo).

Noes: Anderson (R-Alpine), Berryhill (R-Modesto), Fuller (R-Bakersfield), T. Gaines (R-Rocklin), Galgiani (D-Stockton), Hernandez (D-West Covina), Hill (D-San Mateo), Huff (R-Diamond Bar), Knight (R-Palmdale), Torres (D- Pomona), Vidak (R-Hanford), Walters (R-Irvine), Wyland (R-Escondido).

No Vote Recorded: Beall (D-San Jose), Block (D-San Diego), Cannella (R-Ceres), Nielsen (R-Gerber), Wright (D-Inglewood).

The bill is currently at the Assembly Desk awaiting its first Assembly policy committee assignment.