California Becomes First State to Pass Law Targeting Advertising of Digital Media Licenses

California recently passed a new law that will require companies to change the way they advertise and sell licenses to access digital goods. Effective January 1, 2025, the law will require companies to disclose to consumers when they are purchasing a revocable license to access digital media, rather than an unrestricted ownership right. With its enactment, California becomes the first state to impose explicit regulations on the advertising and sale of digital media licenses.

California Governor Gavin Newsom recently signed into law AB 2426, a consumer protection bill that imposes certain restrictions and requirements on the advertising and sale of digital goods, such as e-books, digital music, and digital applications or games. Effective January 1, 2025, AB 2426 will require companies to more clearly convey when they are selling a revocable license to access a digital good, rather than an unrestricted ownership interest in that digital good. For companies engaged in the advertising and sale of digital media licenses, AB 2426 will require modifications to current business practices—both at the point of purchase and in consumer-facing interactions leading up to (and potentially after) a transaction.

Background

AB 2426 is one of more than a dozen consumer protection bills signed into law by Governor Newsom on September 24, 2024 in an effort to “strengthen protections for consumers” and “address[] issues that have put financial strain on Californians while setting new standards for transparency and accountability across industries.” [1] AB 2426 amends California’s existing false advertising laws, which are codified at Section 17500 of the California Business and Professions Code. [2] AB 2426 was enacted in response to what its author, California State Assemblymember Jacqui Irwin, characterizes as “the increasingly-common instance of consumers losing access to their digital media purchases through no fault of their own.” [3]

In today’s marketplace, digital goods, such as e-books or movies, are often advertised for sale in the same way as their physical counterparts. But in many transactions involving digital goods, the consumer is not purchasing ownership of the digital item—rather, the consumer is purchasing a revocable license to access the digital good that could, in many circumstances, be removed or revoked at the seller’s discretion.

For example, when a consumer purchases an e-book online from a digital media retailer, they are likely purchasing a revocable license to download and access the e-book. Under such circumstances, unless a permanent offline download of the e-book is available, the retailer can revoke the consumer’s access to the e-book at any time.

AB 2426 seeks to address what it regards as a potential source of consumer confusion by imposing restrictions and conditions on the advertising and sale of digital media licenses.

What the Law Does

AB 2426 prohibits sellers from using terms that “a reasonable person would understand to confer an unrestricted ownership interest in the digital good”—such as “buy” or “purchase”—unless the seller does one of the following, subject to certain conditions:

• Receives an affirmative acknowledgment from the purchaser indicating his, her, or their understanding of the purchase at the time of the transaction
• Provides (1) a clear and conspicuous statement to the consumer disclosing that the consumer is purchasing a license to access the digital good being advertised, and (2) a hyperlink or other method to access the terms and conditions of the license

As summarized by its proponents, AB 2426 will “requir[e] sellers of digital goods to provide an explicit disclosure for each purchase of a digital good informing the consumer of the true nature of their purchase, ensuring that consumers have a full understanding of exactly what they have bought.” [4]

There are a number of limited exceptions to which AB 2426 will not apply, including transactions for subscription-based services (i.e., the sale of limited access to a digital good for the duration of the subscription), the sale of digital goods for which access cannot be revoked after the transaction (e.g., digital goods that can be permanently downloaded offline and externally stored for use), and advertising or offering of digital goods for no monetary consideration (e.g., no-cost downloads).

Key Takeaways

What Does it Apply to?

AB 2426 will apply to transactions involving the sale of a license to access a digital good, rather than an unrestricted ownership interest in that digital good, as well as related advertising. The term “digital goods” encompasses a wide range of content, including digital applications, digital games, digital audio works (e.g., prerecorded or live songs, music, and other sound recordings), digital audiovisual works (e.g., motion pictures, musicals, videos), and digital books (e-books). [5]

Who Does it Apply to?

AB 2426 will impact advertisers and sellers of digital goods. Specifically, the law prohibits companies from the unqualified use of terms like “buy” or “purchase” when advertising or selling licenses to access digital goods, unless they receive an affirmative acknowledgment from the purchaser about the license terms or provide a clear and conspicuous statement about the license before the transaction.

When Will it Apply?

The law goes into effect on January 1, 2025.

What Are the Potential Consequences?

As noted above, AB 2426 amends Section 17500 of the California Business and Professions Code, which generally prohibits false advertising. As such, a violation can constitute a misdemeanor and create exposure to civil penalties. [6] Acts prohibited by AB 2426 and by California’s false advertising laws, more generally, can provide a basis for action under California’s Unfair Competition Law [7], creating exposure to government enforcement actions and individual or class actions by consumers.

Although California is the first state to enact legislation of this kind, it is likely not the last. As the shift toward a digital marketplace continues to redefine consumer experiences and transactions, we can expect to see similar consumer protection laws relating to the purchase of digital goods. At the federal level, the issue of so-called “disappearing media” was examined by the US Department of Commerce (DOC) in 2016.

In a lengthy report, the DOC’s Internet Policy Task Force concluded that consumers do not appear to have “a clear understanding whether they own or license the products and services they purchase online” due to, among other factors, the labelling of “buy” buttons and “the lack of clear and conspicuous information regarding ownership status” of digital goods. Whether the federal government and other states will enact similar (or more stringent) legislation on this issue remains to be seen. In the interim, companies engaged in the advertising and sale of digital media licenses would be wise to conform their practices to California’s new law and monitor for related developments at the state and federal levels.