Junk Fees

A. Hidden Fees Prohibited Section 464.2(a) of the proposed rule defines it as an unfair and deceptive practice for businesses to offer, display, or advertise amounts consumers may pay without clearly and conspicuously disclosing the Total Price, as defined in the proposed rule. Section 464.2(b) specifies that, as a preventative measure, businesses that offer, display, or advertise an amount a consumer may pay must display the Total Price more prominently than any other pricing information. While these provisions may alter when and how, in the course of transactions, businesses disclose Total Price, the disclosure itself provides consumers with information readily available to businesses and is something businesses must do in the course of their regular business activities. Thus, the Commission concludes that the Total Price disclosure does not constitute a collection of information for PRA purposes and estimates that any additional attendant costs are de minimis. 356 44 U.S.C. 3502(3); 5 CFR 1320.3(c). 135
B. Misleading Fees Prohibited Section 464.3(a) of the proposed rule prohibits 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. This Section does not require any additional disclosures or information collection, and only requires businesses to refrain from making misrepresentations. The Commission concludes that any additional costs that might be associated with the prohibitions in Section 464.3(a) against making misrepresentations are de minimis. Section 464.3(b) of the proposed rule requires businesses to disclose clearly and conspicuously before consumers consent to pay the nature and purpose of any amount a consumer may pay that is excluded from the Total Price, including the refundability of such fees and the identity of any good or service for which fees are charged. The information required by Section 464.3(b) is necessary as a preventative measure to address the unfair and deceptive conduct of misrepresenting the nature and purpose of fees. Disclosing the amount of fees and the identity of goods or services for which the fees are charged provides consumers with information readily available to businesses and is something businesses do in the course of their regular business activities.

Definitions
(a) Ancillary Good or Service means any additional good(s) or service(s) offered to a consumer as part of the same transaction.
(b) Business means an individual, corporation, partnership, association, or any other entity that offers goods or services, including, but not limited to, online, in mobile applications, and in physical locations. Motor vehicle dealers that must comply with 16 CFR 463, requiring motor vehicle dealers to disclose the full cash price for which a dealer will sell or finance the motor vehicle to any consumer, and prohibiting motor vehicle dealers from making misrepresentations, are exempted from the definition of “Business” for all purposes under this part. 156
(c) Clear(ly) and Conspicuous(ly) means a required disclosure that is difficult to miss (i.e., easily noticeable) and easily understandable, including in all of the following ways:
(1) In any communication that is solely visual or solely audible, the disclosure must be made through the same means through which the communication is presented. In any communication made through both visual and audible means, such as a television advertisement, the disclosure must be presented simultaneously in both the visual and audible portions of the communication even if the representation requiring the disclosure is made in only one means.
(2) A visual disclosure, by its size, contrast, location, the length of time it appears, and other characteristics, must stand out from any accompanying text or other visual elements so that it is easily noticed, read, and understood.
(3) An audible disclosure, including by telephone or streaming video, must be delivered in a volume, speed, and cadence sufficient for ordinary consumers to easily hear and understand it.
(4) In any communication using an interactive electronic medium, such as the Internet or software, the disclosure must be unavoidable.
(5) The disclosure must use diction and syntax understandable to ordinary consumers and must appear in each language in which the representation that requires the disclosure appears.
(6) The disclosure must comply with these requirements in each medium through which it is received, including all electronic devices and face-to-face communications.
(7) The disclosure must not be contradicted or mitigated by, or inconsistent with, anything else in the communication.
(8) When the representation or sales practice targets a specific audience, such as children, older adults, or the terminally ill, “ordinary consumers” includes reasonable members of that group
(g) 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.

464.2 Hidden Fees Prohibited
(a) It is an unfair and deceptive practice and a violation of this part for any Business to offer, display, or advertise an amount a consumer may pay without Clearly and Conspicuously disclosing the Total Price.
(b) In any offer, display, or advertisement that contains an amount a consumer may pay, a Business must display the Total Price more prominently than any other Pricing Information. § 464.3 Misleading Fees Prohibited
(a) It is an unfair and deceptive practice and a violation of this part for any Business to misrepresent 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.
(b) A Business must disclose Clearly and Conspicuously before the consumer consents to pay the nature and purpose of any amount a consumer may pay that is excluded from the Total Price, including the refundability of such fees and the identity of any good or service for which fees are charged.

The restaurant industry has seen a recent spike in the use of hidden fees. In its 2023 State of the Industry Report, the National Restaurant Association notes that 15% of restaurants (13% of limited-service restaurants and 17% of full-service restaurants) are adding fees to bills. 343 338F These fees are typically a percentage of the subtotal before sales tax. Furthermore, 81% of the restaurants adding these fees plan to continue adding these charges for more than a year. Fees in the restaurant industry take several forms. First, it has been a long-standing practice for most, if not all, full-service restaurants to charge mandatory service fees for large parties (typically a minimum of 6 or 8 consumers). We assume in our cost calculations that all full-service restaurants employ large-party mandatory charges. Second, some restaurants have added mandatory service fees for parties of any size. These fees equal a percentage of the bill, typically 18%, 20%, or 22%, in line with customary percentages consumers use to calculate gratuities. Third, some restaurants are charging 5-10% fees they describe as supporting higher wages or enhanced benefits for workers. In state or local jurisdictions that are eliminating the distinction between tipped and standard minimum wages by raising the tipped minimum wage to equal the corresponding standard minimum wage, some restaurants are including specific fees as part of the transition. 339F 344 Finally, some restaurants have added inflation-related charges and others are charging consumers a fee for paying with credit cards instead of cash. The expectations that consumers have regarding fees will depend upon the type of fees. For example, consumers likely expect mandatory service charges for large parties given that they are a 343 State of the Restaurant Industry 2023, National Restaurant Association (2023). 344 Seven states (Alaska, California, Minnesota, Montana, Nevada, Oregon, and Washington) and one territory (Guam) have a uniform minimum wage, regardless of tips. U.S. Dep’t of Lab., Minimum Wages for Tipped Employees (July 1, 2023), https://www.dol.gov/agencies/whd/state/minimum-wage/tipped. Several states and the District of Columbia are currently considering a transition or are in the process of transitioning to a uniform minimum wage. Talmon Joseph Smith, Battle Over Wage Rules for Tipped Workers Is Heating Up, N. Y. Times (Oct. 14, 2022), https://www.nytimes.com/2022/10/13/business/economy/tipped-wage-subminimum.html. 122 common industry practice. On the other hand, recently introduced fees may be a surprise to consumers. Consumers’ expectations will depend on how such fees are disclosed. In addition, restaurants rely on local demand and so repeat customers may come to learn about the fees that restaurants charge—such as whether they have substituted mandatory service charges for tips— over time. In line with observations in the drip pricing literature, consumers are more likely to choose restaurants based on their expectations on cost, which may not incorporate the added costs of fees. In the absence of a rule, restaurants have discretion as to how they disclose these fees to consumers. Some restaurants may make prominent statements that they have moved to mandatory service charges or instruct consumers not to provide tips. Others may disclose such fees on their menus, which some consumers may not read and so only learn of the fees after receiving the bill at the end of the meal. At this point, consumers have no choice but to accept the fees. Restaurants may characterize some fees as optional and, thus, avoidable in principle, but these fees are mandatory in effect because consumers may not have a way to practicably avoid them if they do not learn of them until receiving the bill. For example, a consumer can avoid a credit card usage fee by paying with cash. If, however, the consumer does not know about this fee in advance and does not have sufficient cash on hand, it is unlikely that the consumer can obtain cash on the spot to cover the bill. As with mandatory fees, the consumer has no reasonable choice but to accept and pay the unexpected credit card usage fee. Mandatory service charges, the largest fees being added to bills, are commensurate with customary levels of tipping, but they are not necessarily used as a substitute for tipping; in fact, tips and mandatory service fees are distinct under tax and labor laws. 345 340F All fees imposed by a 345 See, e.g., I.R.S., Internal Revenue Bulletin: 2012–26 (June 25, 2012), https://www.irs.gov/irb/2012-26_IRB; U.S. Dep’t of Lab., Tip Regulations under the Fair Labor Standards Act (FLSA), https://www.dol.gov/agencies/whd/flsa/tips. 123 restaurant, including mandatory service charges, accrue to the restaurant’s owner, and the owner has full discretion regarding the use of these fees, including whether fees are passed on to waitstaff.

The Comments Show the Identified Deceptive Practices Are Widespread The FTC received comments regarding a wide range of industries from individual commenters and consumer, policy, and industry groups. Individual commenters frequently raised concerns about these practices in connection with more than one industry in a single comment, with some describing the existence of mandatory, hidden, or misrepresented fees across the economy. Although many individual commenters wrote about online purchases, they also noted that stores with physical locations also engage in advertising prices that do not include mandatory fees, and only later disclose fees using names that do not clearly inform consumers of the nature or purpose of fees. Individual commenters noted that businesses also face undisclosed fees for which the nature or purpose is not clear.

Summary of Comments to the ANPR The Commission received over 12,000 comments in response to the ANPR. Publicly posted comments are available on this rulemaking’s docket at https://www.regulations.gov/docket/FTC2022-0069/comments.

Comments on Misrepresenting the Nature and Purpose of Fees Commenters stated that consumers often do not know what fees are for because businesses routinely do not clearly or conspicuously disclose the nature or purpose of fees, including the identity of the goods or services for which the fees are charged. Commenters explained that businesses employ vague names like convenience fees, economic impact fees, or improvement fees that do not adequately disclose to consumers what they are paying for. Commenters also noted that prices are sometimes advertised as “free,” but are not in fact free when fees are added. Commenters stated that, even when businesses purport to disclose the nature or purpose of fees, the disclosures may not be truthful. Commenters described fees as arbitrary and not bearing any reasonable relationship to the costs of goods or services provided. Commenters stated that fees provided them with little or no value, were not for goods or services they received, and were merely revenue sources for businesses

The Commission published, on November 8, 2022, an Advance Notice of Proposed Rulemaking (“ANPR”) under the authority of Section 18 of the Federal Trade Commission Act (“FTC Act”), 15 U.S.C. 57a(b)(2); the provisions of Part 1, Subpart B, of the Commission’s Rules of Practice, 16 CFR 1.7–1.20; and 5 U.S.C. 553. 2 1F This authority permits the Commission to promulgate, modify, or repeal trade regulation rules that define with specificity acts or practices that are unfair or deceptive in or affecting commerce within the meaning of Section 5(a)(1) of the FTC Act, 15 U.S.C. 45(a)

Description and Estimate of the Number of Small Entities to Which the Proposed Rule Will Apply Most firms in the U.S. economy would be subject to this proposed rule, but only firms that do not currently disclose total price will need to adjust their pricing strategy. According to the Statistics of U.S. Businesses, there were 6,119,657 firms in the United States with fewer than 500 employees, representing 99.7% of all U.S. firms. 355F 360 Small businesses that currently comply with the proposed rule will have a relatively trivial cost of assessing whether they are currently in compliance, and we assume at most these firms will use one hour of lawyer time to confirm compliance. Small businesses that currently do not disclose total price (such as restaurants charging mandatory service fees), will incur additional costs to re-optimize prices and adjust the marketing campaigns and the consumer purchase process to include full total cost. The Commission seeks comment and information regarding the estimated number and the nature of small business entities for which the proposed rule would have a significant economic impact.

The Federal Trade Commission commences a rulemaking to promulgate a trade regulation rule entitled “Rule on Unfair or Deceptive Fees,” which would prohibit unfair or deceptive practices relating to fees for goods or services, specifically, misrepresenting the total costs of goods and services by omitting mandatory fees from advertised prices and misrepresenting the nature and purpose of fees. The Commission finds these unfair or deceptive practices relating to fees to be prevalent based on prior enforcement, the comments it received in response to an Advance Notice of Proposed Rulemaking, and other information discussed in this proposal. The Commission now solicits written comment, data, and arguments concerning the utility and scope of the trade regulation rule proposed in this Notice of Proposed Rulemaking to prevent the identified unfair or deceptive practices.

FOR FURTHER INFORMATION CONTACT: Janice Kopec or Stacy Cammarano, Division of Advertising Practices, Bureau of Consumer Protection, Federal Trade Commission, 202-326-2550 (Kopec), 202-326-3308 (Cammarano), jkopec@ftc.gov, scammarano@ftc.gov.