FTC Proposes ​“Junk Fees” Rule that Would Overhaul Pricing Practices and Disclosures across Industries

Today the FTC announced a proposed rule that could fundamentally alter how businesses across industries advertise prices and disclose fees to consumers. The proposed rule follows the FTC’s Advance Notice of Proposed Rulemaking (ANPR), released just less than a year ago, which we discussed here and here. The proposed rule as written would cover any ​“business” offering ​“goods or services, including but not limited to, online, in mobile applications, and in physical locations” except motor vehicle dealers that are already subject to special pricing rules. The rule specifically calls out restaurants, ticket sales, hotels and travel sites, rental housing, financial services, internet service providers, and others as industries the Commission believes to be engaged in ​“prevalent” unfair and deceptive acts and practices – the standard necessary to justify a rule under the FTC’s Magnuson-Moss rulemaking authority.

What Does the Rule Require and Not Require?

While the full preliminary Federal Register notice is over 160 pages, the text of the rule itself is pleasantly concise at only three pages. Rather than create categories of pricing requirements for different industries or types of offers, the rule imposes two far-reaching requirements that would generally apply across the board to all industries and all offers of goods and services:

  • “Total Price” must be displayed clearly and conspicuously, and more prominently than any other pricing information. Total Price means the maximum total of all fees or charges a consumer must pay for a good or service and any mandatory ​“Ancillary Good or Service,” except that shipping charges and government charges may be excluded. This means, for example, that a business could not advertise an item offered for sale at a particular price if it were subject to a mandatory service charge or other fee that made the actual total cost of the item ultimately higher (sometimes called ​“drip pricing”). By contrast, if the service charge only applied in certain situations or if it constituted a ​“shipping charge” or ​“government charge” imposed on consumers, it would not need to be included in the ​“Total Price.” It would not be sufficient to convey mandatory charges through a disclosure under the rule given the Total Price must be the most prominent pricing information.
  • A business must clearly and conspicuously disclose the nature and purpose of any amount a consumer may pay that is not part of the Total Price. The proposed rule describes this section 464.3 as a ​“preventative disclosure requirement” to disclose any amount that may be charged, including any Shipping Charges, Government Charges, optional fees, voluntary gratuities, and invitations to tip. The section also prohibits ​“misrepresenting the nature and purpose of fees by using vague descriptions,” such as by itemizing a mandatory service charge without disclosing what it is used for, or including an invitation to tip if the tip does not go exclusively to the individual providing the service.

In one potential silver lining for industry, the FTC declined to adopt a prohibition against ​“excessive” or ​“worthless” fees – acknowledging that such a ban would be inherently difficult to implement and impose additional costs on industry and consumers. The FTC also reasoned that the rule as proposed could effectuate similar benefits through transparency improving competition on price.

State and Local Laws Can Provide Greater Protection

As with most FTC rules, the regulation includes a provision that establishes the federal standard as a floor, not a ceiling. In other words, states, counties, and cities can impose more rigorous restrictions without federal preemption. Along those lines, California has already enacted its own junk fees legislation with last week’s signing of SB 478, which we will cover in another blog post later this week. And D.C. Attorney General Brian Schwalb has been active in speaking out and issuing guidance against hidden restaurant and delivery fees.

What’s Next for the FTC Rulemaking?

The proposed rule raises a number of general and specific questions and issues ripe for comment, including but not limited to:

  • Does the FTC’s economic analysis correctly estimate costs and benefits of the proposed rule to consumers and competition?
  • Does a one-size-fits all approach make sense or should the rule be more narrowly tailored to specific industries – for example, the ticketing and short-term lodging industries?
  • Assuming the rule retains a generalized approach, are there certain situations or industries where prices are incapable of being determined that should be exempted or subject to modified requirements?
  • How significant will industry costs be if the rule is finalized, such as costs associated with evaluating compliance and modifying current practices?
  • Are the regulations as written sufficiently clear, for example, as to what constitutes ​“Total Cost” or what constitutes a misrepresentation regarding ​“the nature and purpose of any amount a consumer may pay”?
  • Should the proposed rule explicitly prohibit fees that provide little or no value to the consumer in exchange for the charge?
  • What should the Commission consider in determining if a fee provides little or no value to the consumer?
  • Should the proposed rule prohibit excessive fees? If so, how should it define excessive fees?

There is a lot to consider, and it is difficult to overstate the dramatic impact that the rule could have across industries if finalized as written. Comments must be submitted within 60 days after publication in the Federal Register, which will occur in the coming days. More soon – and don’t forget to check back for an upcoming post on the California junk fees bill.