As of January 1, 2025, a new law in California (AB 2426) has come into effect, amending existing false advertising laws to specifically address misleading claims related to the sale of digital goods. Canadian companies selling digital goods such as digital games, applications, movies, music, e-books, etc. to customers in California must now comply with this law. This legislation aims to enhance transparency by requiring companies to clearly disclose when consumers are purchasing a limited-duration license rather than full ownership of digital goods.
Background
Recent events highlighted the common misconception that purchasing a digital good equates to having full ownership of it when, in reality, these transactions often involve a revocable license.
For example, a major video game developer removed a game from its digital stores preventing consumers who had previously purchased the game from downloading it. The developer completely deactivated the servers supporting the game, making it unplayable even for those who had previously downloaded it.
Similarly, a multinational media conglomerate recently announced plans to withdraw over 1,300 seasons of various TV shows from its platform due to expiring distribution rights. The significant consumer backlash that ensued ultimately forced the company to renegotiate its licencing agreements to maintain access for its users.
What Digital Goods Does this Law Capture?
This new law applies to a broad range of digital goods, including, but not limited to:
- Video games, including in-game purchases;
- Applications;
- Movies and other audio-visual content;
- Music;
- E-books; or
- Promotion cards and codes.
However, this Act does not apply in the following circumstances, where the use of words such as “buy” or “purchase” does not trigger any disclosure requirements:
- Subscription-based services offering access only for the duration of the subscription;
- Free digital goods;
- Digital goods provided for permanent offline use.
How to Comply?
Sellers using terms like “buy” or “purchase” (or any terms implying unrestricted ownership) must ensure that they are clearly distinguishing when purchases are only resulting in licenses. To comply with this requirement, sellers must implement one of the following options:
1. Affirmative Acknowledgment: At the time of each transaction, sellers must receive an acknowledgment from the purchaser indicating:
- The purchaser is receiving a license to access the digital good;
- A complete list of restrictions and conditions of the license; and
- Access to the digital good may be revoked if the sellers no longer hold the rights to it.
2. Pre-Transaction Disclosure: Before executing each transaction, sellers must provide a clear and conspicuous statement that:
- States in plain language that “buying” or “purchasing” the digital good is a license; and
- Includes a hyperlink, QR code, or similar method to access the terms and conditions detailing the license.
Beware. These disclosures must be distinct and separate from any other transaction terms and conditions. Simply referring consumers to the terms and conditions or including the clear language license within them is not sufficient.
The law does not dictate the specific form which these acknowledgements and disclosures must take and the way they will be implemented will vary from one seller to another and how the digital good is bought.
Consequences of Non-Compliance
Non-compliance with this law can result in significant consequences for companies, including:
- Imprisonment for up to six months;
- Fines of up to $2,500 USD per violation; and
- Consumer class actions.
Implications for Canadian Companies
Canadian companies selling digital goods online to consumers in California must comply with AB 2426 to avoid potential legal consequences. They should consider the following actions:
- Deciding whether to offer digital goods as licenses or outright ownership;
- If offering licenses, replacing words such as “purchase”, “buy”, or “sell” in advertisements, offers, purchase flows and contractual terms with words that do not imply unrestricted ownership;
- Revisiting licensing agreements ahead of any expiring dates to prevent users from losing access to content; and
- Change revenue stream from a licensing or acquisition model to a pure subscription-based model.
