BILL ANALYSIS
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|Hearing Date:April 25, 2005 |Bill No:SB |
| |581 |
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SENATE COMMITTEE ON BUSINESS, PROFESSIONS AND ECONOMIC
DEVELOPMENT
Senator Liz Figueroa, Chair
Bill No: SB 581Author:Figueroa
As Introduced: February 18, 2005 Fiscal:
Yes
SUBJECT: Health studio contracts: maximum fees:
cancellation rights.
SUMMARY: Provides specified conditions, circumstances and
timeframes under which a person may cancel a contract for health
studio services when facilities or services are not offered,
eliminated or substantially reduced. Raises the amount that a
health studio can require as part of the contract, allows for a
right to cancel the contract and provides for prorated
reimbursement within a specified period of time, depending on
the amount of the contract, and requires facilities that have
not yet opened to hold moneys received in trust and meet other
requirements, as specified.
Existing law:
1)Regulates the contracts entered into between health
studios and members of the health studios.
2)Defines "contract for health studio services" to include
membership in a club, group or organization formed for
purposes of providing instruction, training or assistance
in physical culture, body building or exercise, or other
physical skills, or for the use of facilities of a health
studio, gymnasium, or other facility used for the above
listed purposes.
3)Requires every contract for health studio services to be
in writing and requires a copy of the written contract to
be given to the customer at the time he/she signs the
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contract.
4)Limits the amount a member can be obligated to pay under
the contract to $1000, exclusive of interest and finance
charges.
5)Prohibits a contract for health studio services from
requiring payments or financing by the buyer to exceed
the term of the contract, and prohibits the term of the
contract from exceeding 3 years.
6)Requires that every contract for health studio services
provide that performance of the agreed upon services will
begin within six months from the date the contract is
entered into.
7)Provides for termination of the contract or relief from
the obligation to continue to pay, and for refund of sums
already paid, in the event of death or disability of the
member, and to a limited extent, in the event the member
moves to another location.
This bill:
1)Allows a consumer to cancel the contract and receive a
prorated refund if the health studio fails to provide the
facilities or services offered within the time indicated,
which may not be later that six months after the execution of
the contract, or if no time is indicated, within six months
after the execution of the contract.
2)Allows a consumer to cancel the health studio agreement within
the fifth business day for any reason as long as notice is
given to the health studio.
3)Requires the health studio contract to provide a description
of the services, facilities, and hours of access to which the
consumer is entitled and specifies that any services,
facilities, and hours of access that are not described in the
contract shall be considered optional services.
4)Provides that if at any time during the term of the contract,
the health studio eliminates or substantially reduces the
scope of the facilities, that the consumer may cancel the
contract and receive a prorated refund unless the facilities
are temporarily out of operation for reasonable repairs,
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modifications, substitutions, or improvements.
5)Specifies that if a contact for health studio services
requires payment of $1,500 to $2,000 for use of the facility
by a person, including initiation fees or membership fees, the
consumer shall have the right to cancel the contract within 30
days after the contract is executed, and receive a prorated
payment based on use of the facilities for the 30-day period.
6)Specifies that if a contact for health studio services
requires payment of $2,001 or more for use of the facility by
a person, including initiation fees or membership fees, the
consumer shall have the right to cancel the contract within 60
days after the contract is executed, and receive a pro rata
payment based on use of the facilities for the 60-day period.
7)Provides that as of January 1, 2006, no contract for health
studio services shall require payment by the person receiving
the services or the use of the facilities of a total amount in
excess of $3,000, inclusive of initiation or membership fees,
and exclusive of interest or finance charges.
8)Provides that after January 1, 2009, no contract for health
studio services shall require payment by the person receiving
the services or the use of the facilities of a total amount in
excess of $4,400, inclusive of initiation or membership fees,
and exclusive of interest or finance charges.
9)Requires the right of cancellation as specified be set forth
in the membership contract.
10) Requires that all moneys received by the seller of
health studio services from a consumer for a facility that has
not yet opened for business shall be held in trust and
deposited in a bank trust account, and prohibits the seller
from using such funds until the facility has been open for
five days and all refunds to consumers who have canceled their
contracts have been fully paid.
11) Allows a consumer to cancel a contract for health
studio services up until five days after the health studio has
finally opened for business.
12) Allows the seller of health studio services to
offset funds used for specified purposes with a bond issued by
a surety insurer.
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13) Exempts sellers of health studio services from
holding moneys in trust if at the time the money is received
from the consumer, the seller has at least five health studio
facilities in operation in this state that have been operating
for a period of at least five years, and that has current
tangible assets, based on book value, that exceed current
liabilities by at least one million dollars ($1,000,000).
FISCAL EFFECT: None. This bill has been keyed
"non-fiscal" by Legislative Counsel.
COMMENTS:
1.Purpose. The Author is the sponsor of this measure.
According to the Author, current law regarding health
club contracts was enacted in 1961 and has not been
changed to any significant degree since 1980. The growth
of health clubs, and those who purchase memberships to
these clubs, has grown significantly since that time.
Today nearly 40 million people belong to more than 24,000
health clubs in the United States with over $14 billion
in revenues received from the public. This is in sharp
contrast to only 15 years ago when only about 20 million
people belonged to about 13,000 health clubs. The Author
points out that since enactment of the health studios law
in 1961, many changes have occurred in the overall costs
for joining health clubs, the facilities and services
provided, and the type of contracts that consumers enter
into with these clubs.
As indicated by the Author, there is still concern that
consumers are being locked into health club contracts
without an opportunity to consider whether they want to
continue using the services and facilities of the health
club, or to cancel the contract if services or facilities
are not provided as advertised or as promised, or at some
later time, are substantially reduced or eliminated.
Consumers sometimes give into high pressure sales
tactics, and in some instances, feel obligated to sign a
contract immediately without adequate time to actually
use the services or facilities or to think about whether
they want to continue their membership. Also, fees may
be paid up-front for a health club that never opens or
goes out of business at a later date and consumers have
no recourse but to seek legal action to collect fees that
have already been paid. Since seeking court action is
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difficult, if not impossible for many, consumers are
basically left with worthless prepaid memberships.
The Author also points out that permissible contract
amounts for health clubs have not changed since 1980, and
are not reflective of the current initiation and
membership fees charged by health clubs. Most health
clubs have had to come up with ingenious ways of charging
the appropriate fees to cover facility expansion and
increased services provided to the consumer. The current
cap of $1,000 on contract amounts charged by health clubs
is outdated and confusing for consumers who may want the
flexibility to pay over time rather than being locked
into higher up-front initiation fees and monthly
payments.
The Author indicates that last year, near the end of
session, there were negotiations that began in earnest
between the health club industry and with the Attorney
General's Office (AG) regarding AB 558 (Correa), which
was on the Senate Floor. Many of the provisions in this
bill reflect those negotiations. The Author believes
that all parties are very close to reaching agreement and
that this measure will provide adequate opportunity for
negotiations to continue and to finally reach consensus
on the appropriate and necessary changes to the Health
Studios law.
2.Historical Regulation of Health Studios. Health studio
contracts have long been regulated by the Civil Code.
Historically, the purpose of the regulation was to
prevent unfair long-term commitments, or commitments that
obligated the member when it was impossible or
impractical for the member to enjoy the benefit of
memberships. Thus, existing law provides that if the
member dies or becomes disabled, the obligation will
terminate and pre-paid sums are refundable. Or, if the
member moves more than 25 miles away, he or she becomes
relieved of the contractual obligations.
The cap on total financial obligation was adopted to
prevent contracts from requiring excessive future
commitments. Since 1981, the cap has been $1,000. The
need to enact a cap, as well as the 3-year durational
limit, arose because consumers were being bilked out of
thousands of dollars. "Lifetime" health programs, with
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initial buy-in prices in the tens of thousands of
dollars, were sold to consumers by companies that
ultimately did not stay in business. These consumers
were left with no recourse.
3.Previous Related Legislation.
a) SB 1744 (Murray). In 2000, Governor Davis vetoed
SB 1744. SB 1744 did not raise the $1,000 cap;
instead, it provided an exception to the cap if the
health studio maintained a $500,000 bond during the
first 10 years of the health studios operation. SB
1744 did not provide a pro rata refund mechanism. In
his veto message, Governor Davis stated, "I understand
that this bill would provide health studios with
greater flexibility in providing a variety of services
to their customers. However, I am not convinced that
this bill would continue to ensure consumer
protections against excessive fees charged by these
studios. Additionally, the requirements that health
studios maintain a $500,000 surety bond for the first
ten years that they are in operation appear to be
excessive. This provision could adversely impact
smaller health clubs and force them to go out of
business. Finally, this bill would place unnecessary
limitations on health studio businesses operating in
California, and would impose unwarranted government
regulation on industry."
b) AB 357 (Correa). In 2001, Governor Davis vetoed AB
357. AB 357 raised the $1,000 cap on health clubs to
$2,500. It also provided that consumers who cancel
health club contracts would get a pro rata refund on
any portion of the unused contract, but would exclude
from this provision: 1) contracts of less than $750;
and 2) initiation fees which equal less than half of
the total contract amount. In his veto message,
Governor Davis stated, "Although this bill may provide
health studios with greater flexibility in providing a
variety of services to their customers, I am concerned
that this bill will permit health club studios to
increase fees by up to 150%. I would be willing to
consider a bill that raises the $1,000 limit on
contracts, but only if it truly adds meaningful
consumer protections such as a lower threshold for
pro-rated refunds and a reasonable limitation on
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nonrefundable initiation fees."
c) AB 356 (Correa). In 2002, AB 356 increased the
statutory limit on the amount of a health studio
contract from $1,000 to $2,000 per person, inclusive
of initiation fees, but exclusive of interest, finance
charges, and payments for optional services, as
specified. Commencing January 1, 2005, the bill
provided that this monetary limit would be annually
adjusted for cost-of-living changes, as specified.
Additionally, it provided that a health studio
contract could exceed the newly established $2,000 if
the health studio operator established and maintains a
bond issued by a surety company admitted to do
business in this state, the principal sum of which is
at least $300,000 per operator. It also required any
health studio opening on or after January 1, 2003, to
maintain a bond of $250,000 for a period of 5 years.
AB 356 was ultimately held on the Senate Floor.
d) AB 558 (Correa). In 2003, AB 558 raised the $1,000
limit on health studio services contracts to be
annually adjusted to reflect changes in the California
Consumer Price Index for All Urban Consumers, as
published by the California Department of Industrial
Relations, based on regional data from the United
State Department of Labor, Bureau of Labor Statistics.
AB 558 was ultimately held on the Senate Floor.
4. Similar Legislation This Session. AB 602 (Spitzer), similar
to this bill, requires that all moneys received by the seller
of health studio services from a consumer for a facility that
has not yet opened for business shall be held in trust and
deposited in a bank trust account, and prohibits the seller
from using such funds until the facility has been open for
five days and all refunds to consumers who have canceled
their contracts have been fully paid. Allows a consumer to
cancel a contract for health studio services up until five
days after the health studio has finally opened for business.
Allows the seller of health studio services to offset funds
used for specified purposes with a bond issued by a surety
insurer. Exempts sellers of health studio services from
holding moneys in trust if at the time the money is received
from the consumer, the seller has at least five health studio
facilities in operation in this state that have been
operating for a period of at least five years, and that has
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current tangible assets, based on book value, that exceed
current liabilities by at least one million dollars
($1,000,000).
5. Arguments in Support. The American Federation of State
County Municipal Employees (AFSCME) is in support of this
bill and believes this measure will provide a fair
contractual withdrawl for consumers who enter in a contract
in which they are not satisfied with. Furthermore, by
providing a buyer's remorse clause for a five-day withdrawl,
citizens are receiving a service they really want. It is
very plausible that an individual could enter into a contract
and then later realize that they do not maintain the funds to
meet that contract.
NOTE : Double-Referral to Senate Judiciary Committee.
SUPPORT AND OPPOSITION:
Support: American Federation of State County Municipal
Employees
Opposition: None reported to the Committee as of April 20,
2005.
Consultant:Bill Gage