The law assumes that the prior practice of characterizing acquisition of digital products as “buying” or “purchasing” them was confusing to consumers and gave the impression that consumers then had unfettered ownership of the digital goods.

A new California law, AB 2426, signed by Governor Gavin Newsom on September 24, 2024, requires any company offering online-only digital goods to California consumers using “buy,” “purchase” or similar terms to clarify whether or not the goods are a transfer of ownership or are instead a license to the purchaser.

In essence, the law bans digital storefronts from using terms like “buy” or “purchase” if there is no transfer of ownership unless they also inform customers that they are not getting unrestricted access to the digital items they are paying for. Online sites using “buy,” purchase” or similar terms when offering digital goods will have to prominently state that customers are getting a license that can be revoked and provide the terms of the license. Companies that do not could be fined for false advertising or potentially sued by consumers.

Digital media that are affected include a broad array of online content, including games, videos, audio, digital books, digital codes that provide access to digital goods, and other kinds of digital assets (potentially including NFTs and other blockchain-based digital assets). The law takes effect on January 1, 2025, and a violation constitutes a misdemeanor that could give rise to civil penalties. The law does not apply to subscription services, free content or content the consumer can download to permanent offline storage.

Before the law takes effect, affected companies should review their point of purchase sites and terms and may need to update the purchase process for digital content to provide the required notices and obtain customer acknowledgements of the license terms at the point of sale.

What Inspired This New Law?

Two relatively recent events appear to have inspired the new statute: A December 2023 announcement by an online platform that it would remove some content because it was unable to reach a successful deal with the content producers, and the removal of a popular online-only game that had been available to paying users. Both of these generated extensive media coverage and consumer complaints, which appear to have caught the attention of California’s 42nd Assembly District Representative Jacqui Irwin, who introduced the bill in February 2024. Irwin is a member of the Privacy and Consumer Protection Committee of the California Assembly.

“As retailers continue to pivot away from selling physical media, the need for consumer protections on the purchase of digital media has become increasingly more important,” Irwin said in a recent press release. “I thank the governor for signing AB 2426, ensuring the false and deceptive advertising from sellers of digital media incorrectly telling consumers they own their purchases becomes a thing of the past.”

What Does the New Law Say?

The law assumes that the prior practice of characterizing acquisition of digital products as “buying” or “purchasing” them was confusing to consumers and gave the impression that consumers then had unfettered ownership of the digital goods. The new law requires that providers of digital content disclose that purchasers are paying for a limited license to access the applicable content if they also use “buy,” “purchase” or similar terms. While most terms of service already specify the rights purchasers are obtaining, the new law requires that such disclosures be made at the point of sale for each transaction clearly, conspicuously and separately from other applicable terms, and that purchasers affirmatively acknowledge the disclosure prior to completing the purchase.

In short, sellers of a “digital good” as defined under the new statute cannot advertise or offer those digital goods using the terms “buy” or “purchase,” or any other term that a reasonable person would understand to confer an unrestricted ownership interest, or use those terms “alongside an option for a time-limited rental,” unless the advertisement or offering also complies with one of the following:

• At the time of the transaction and prior to completion of the sale, the seller receives an affirmative acknowledgement from the purchaser indicating all of the following:
  • That the purchaser is receiving a license to access the digital good.
  • That a complete list of restrictions and conditions of the license is provided.
  • That access to the digital good may be unilaterally revoked by the seller if they no longer hold a right to the digital good, if applicable.
• The seller provides to the consumer before executing each transaction a clear and conspicuous statement that does both of the following:
  • States in plain language that buying or purchasing the digital good is a license.
  • Includes a hyperlink, QR code or similar method to access the terms and conditions that provide full details on the license.

Any affirmative acknowledgement from the purchaser or clear and conspicuous statement under the options above must be distinct and separate from any other terms and conditions of the transaction.

The statute expressly exempts three classes of digital goods:

• Any subscription-based service that advertises or offers for sale access to any digital good solely for the duration of the subscription.
• Any digital good that is advertised or offered for no monetary consideration (e.g., bonus content, freemium content without in-app, paid purchases).
• Any digital good that is advertised or offered for which the seller cannot revoke access to after the transaction. This includes making the digital good available at the time of purchase for permanent offline download to an external storage source to be used without a connection to the internet.

What Should Sellers Do Next?

For digital goods that don’t qualify for one of the three exemptions listed above, sellers who want to use “buy,” “purchase” or similar terms in advertising or the purchase stream must provide clear and conspicuous disclosures at the appropriate points in the transaction stream and obtain the required acknowledgements from purchasers. Therefore, companies that offer digital goods should audit their advertising and transaction streams to ensure that they comply with these requirements prior to January 1, 2025.

Gray Areas

Two types of digital purchases are not specifically mentioned as “digital goods” by the language of the statute, but may be covered by it nonetheless. The legislative history is unclear as to whether the law applies to the purchase of in-game content for use during a game―such as power-ups or “coins” used in games to acquire temporary features or abilities. On the one hand, the evanescent nature of these purchases makes them different from a whole game or digital book, which a consumer may expect to keep long term. On the other hand, they are digital purchases. If the law’s requirement that the disclosures be made “at the time of each transaction” or “before executing each transaction” does apply to in-game purchases, game publishers may have to make the required disclosures for each in-game purchase, potentially creating new friction or visual interruption during games. It may be better to avoid the terms “buy” or “purchase” in these situations and instead use other language that does not “confer an unrestricted ownership interest.”

It is also unclear how the new law applies to NFTs; the legislative history does not mention them either. NFT sales are generally considered to be permanent and have some of the indicia of irrevocable purchases, and the code related to the NFTs often can be downloaded to digital wallets or other offline storage locations. As such, NFTs might qualify for one of the listed exemptions. However, NFTs may be associated with or linked to digital files such as art or music, which can be altered or deleted after the purchase of the token itself. As a result, the new law may apply to sales of some or all NFTs or similar blockchain-based digital assets and may therefore require the new disclosures. Therefore, careful thought should be given to how the transaction is described.

Potential Penalties

Violation of the new statute is punishable by a fine of up to $2,500, a misdemeanor conviction and imprisonment for not more than six months. Injunctive relief and restitution are also available to both private and public prosecutors. See BPC Section 17535. Violation of this new law will also likely be considered a violation of the Unfair Competition Law (UCL) Section 17200, which may be used by aggrieved consumers or competitors as the basis for a civil action. Attorney fees are not directly available under the UCL, but may be available where authorized by other statutes, such as the private attorney general doctrine codified by California Code of Civil Procedure Section 1021.5. Therefore, although the penalties specifically listed in the false advertising statute seem somewhat limited, it is likely that other related claims will sweep in broader potential liabilities.

For More Information

If you have any questions about this Alert, please contact Jennifer Lantz, any of the attorneys in our Intellectual Property Practice Group or the attorney in the firm with whom you are regularly in contact.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.