The Other Price Transparency Shoe Has Dropped: FTC Proposal Targets Consumer Sales "Junk Fees"

The Federal Trade Commission (FTC) has issued a new proposed trade regulation rule that would make it an unfair and deceptive practice to misrepresent the total costs of goods and services by omitting mandatory fees from advertised prices or misrepresenting the nature and purpose of any amount a consumer may pay.

Introduction: The FTC Responds to Industrywide Concerns of Hidden and Misleading Fees

On Oct. 11, 2023, the FTC proposed the Rule on Unfair or Deceptive Fees, which seeks "to improve pricing transparency" by broadly prohibiting so-called "junk fees" – hidden or misleading charges tacked on to a purchase that can significantly raise the price of goods or services.

The proposed rule follows the more than 12,000 comments received by the FTC in response to an Advanced Notice of Proposed Rulemaking that the FTC published in November 2022 to determine whether unfair and deceptive practices relating to fees are prevalent. According to the FTC, the "majority of comments expressly supported government action or described negative experiences relating to fees," including concerns that sellers do not advertise the total amount consumers will have to pay, instead disclosing fees only after consumers are well into purchase transactions. Commenters reported that mandatory add-on fees omitted from the initial offers were not disclosed until checkout in a variety of transactions, including ticket purchases for live events such as professional sports and concerts, hotel checkouts and rental car checkouts.

The comments also raised concerns that sellers do not adequately disclose the nature or purpose of the fees, leaving consumers uncertain about what they are paying for and why those fees are necessary. Some commenters noted that businesses use vague terms, such as "convenience fees" and "improvement fees" that do not adequately disclose to consumers what they are paying for.

The proposed rule seeks to prohibit two practices that the FTC believes are unfair and deceptive:

1. practices that misrepresent the total costs by omitting mandatory fees from advertised prices (i.e., "bait-and-switch" tactics)
2. practices that misrepresent the nature and purpose of fees or charges

The proposed rule is the most recent addition to the FTC's consumer protection initiative targeting hidden and misleading fees, but certainly not the first. In June 2022, the FTC proposed the Motor Vehicle Dealers Trade Regulation Rule, which requires motor vehicle dealers to disclose the full cash price of a vehicle in advertisements or communications that reference the vehicle and prohibits dealers from making certain misrepresentations. (See Holland & Knight's previous alert, "New Rules of the Road: FTC's Proposed Changes to Car, Boat, Motorcycle and RV Sales Practices," July 12, 2022.) Through the proposed Rule on Unfair or Deceptive Fees, the FTC seeks to extend similar prohibitions to fees charged by a broad universe of businesses and industries.

The Proposed Rule Would Apply Broadly to Businesses Offering Goods and Services

Based on the comments it received, the FTC believes unfair and deceptive practices relating to fees are prevalent across numerous industries and a wide array of businesses, including live-event ticket sales, hotels and short-term lodging, auto rentals and sales, internet apps and internet service providers. Therefore, the proposed rule would broadly apply to any "Business," which is defined broadly as an individual, corporation, partnership, association or any other entity that offers goods or services via an array of outlets including, but not limited to, online, mobile applications and physical locations. But the term excludes "motor vehicle dealers" that must comply with the FTC's proposed Motor Vehicle Dealers Trade Regulation Rule, as noted above.

The Proposed Rule Prohibits Hidden Fees

The proposed rule would prohibit businesses from offering, displaying or advertising amounts consumers may pay without clearly and conspicuously disclosing the "Total Price." As a preventative measure, the proposed rule would further require businesses to display the "Total Price" more prominently than any other pricing information. The popular practice of relegating essential pricing information to the "fine print" or a footnote would likely run afoul of the proposed rule.

As used in the proposed rule, the term "Total Price" includes all charges that a consumer must pay for a good or service, including any mandatory "Ancillary Good or Service." The term, "Ancillary Good or Service" means any additional good(s) or service(s) offered to a consumer as part of the same transaction, including those that are not necessary to render the primary good or service fit for its intended use but are nevertheless offered as part of the same transaction. An Ancillary Good or Service may be mandatory, such as payment processing, or optional, such as trip insurance with a reservation.

The proposed rule contains limited exceptions for "Shipping Charges" – defined as fees or charges that reasonably reflect the amount a business incurs sending a physical good to a consumer through the mail, including private mail services – and "Government Charges," which the rule defines as fees or charges imposed on consumers by federal, state or local governments. Charges for delivery through couriers, such as those in mobile delivery applications, are excluded from the rule's definition of "Shipping Charges," while "Government Charges" does not include fees or charges that a government imposes on a business and that the business chooses to pass on to consumers.

The Proposed Rule Prohibits Misleading Fees

The proposed rule would also prohibit businesses from misrepresenting the nature and purpose of any amount a consumer may pay, including the refundability of such fees and the identity of any good or service for which fees are charged. Among other things, this prohibition is intended to curb the use of vague fee descriptions.

Thus, under this section of the proposed rule, if a portion of a mandatory service charge included as part of the Total Price "is used to compensate a delivery driver while another portion is used to compensate the Business for providing the online application, a description that combines both portions without specifying the recipient of each portion of the service charge" would violate the proposed rule. Likewise, if a delivery application "includes an invitation to tip a delivery driver without disclosing that a portion of the tip is allocated to offset the delivery driver's base wages or benefits, it would violate" this section of the proposed rule.

Accordingly, the proposed rule would require businesses to clearly and conspicuously disclose the nature and purpose of any amount a consumer may pay that is excluded from the Total Price, along with the refundability of such fees and the identity of any good or service for which fees are charged. The FTC considers this information "necessary for a consumer to understand what they are purchasing and to decide whether to consent to the charge."

The Takeaway

The FTC's proposed rule prohibiting "junk fees" follows the agency's blueprint established with the Motor Vehicle Dealers Trade Regulation Rule for increased regulatory scrutiny of consumer transactions. The proposed rule would require significant changes to advertising practices across numerous industries and business sectors. It would also require businesses to revisit the consumer-facing aspects of their sales processes to ensure compliance with the rule's expanded disclosure requirements. Businesses in certain industries or sectors, such as live-event ticket sales and mobile app-based delivery services, may need to consider significant changes to their sales platforms. Businesses should continue to monitor developments on this proposed rule and begin reviewing their existing advertising practices and consumer transaction processes. Interested parties should also note that the FTC's finding that the practices relating to fees prohibited by the proposed rule are "unfair or deceptive" may carry additional consequences under some state consumer protection laws.

How We Can Help

Holland & Knight's Consumer Protection Defense and Compliance Team includes a robust FTC practice with experienced attorneys who are recognized as thought leaders in the field. The firm has represented dozens of companies and individuals in federal and state investigations concerning advertising, marketing practices, privacy and data security, consumer credit, telemarketing and debt collection, saving clients from significant financial loss, public scrutiny and having to make changes to their core business operations.

For more information or questions about the specific impact that the FTC's proposed rule can have on you or your company, contact the authors.