The FTC’s Forthcoming Junk Fee Rule Could Be a Candidate for the Congressional Review Act

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Introduction

The Federal Trade Commission (FTC) has declared war on so-called “junk fees” with its proposed Trade Regulation Rule on Unfair or Deceptive Fees (NPRM). The Commission is right to be concerned. Some fees warrant regulation. But the proposed rule goes too far, both with the types of fees covered and its economy-wide scope.

Rather than simply prohibiting fees that are unambiguously harmful, the proposed rule would also target fees and fee practices that provide benefits to consumers and have legitimate business purposes. The rule’s scope is also unjustifiably broad. Enforcing compliance for all industries in the economy, each with its own distinctive economic characteristics and fee practices, would not be possible unless the FTC were to sharply reallocate its limited resources away from more valuable uses. 

Unless the final rule is significantly changed from what has been proposed, it will be a candidate for nullification through the Congressional Review Act (CRA) and for litigation. As it stands, it would reduce consumer welfare, increase business costs, increase the FTC’s own costs, and result in unforeseen difficulties and confusion.

The Rule’s Analysis Does Not Justify Its Fee Coverage and Scope

The proposed rule aims to prohibit businesses from “misrepresenting the total costs of goods and services by omitting mandatory fees from advertised prices.” To explain the need for regulation and develop a cost-benefit analysis, the Commission relies on two specific and especially unpopular categories of fees -- hotel resort fees and live event ticket fees. It then uses the analysis of these narrow practices as justification for broader and more sweeping regulation. Hotel resort fees and live event ticket fees do not have a legitimate business purpose – they are designed to make it harder for consumers to compare prices (resort fee study, live event ticket fees). They are mandatory and the same for all consumers, not simply for those who choose a particular add-on option. Research has shown that this type of fee causes consumers to pay more than they would if the fees were incorporated into the posted price initially presented to consumers (live event ticket fees, airline taxes and fees, sales tax). 

While the Commission relies exclusively on these narrow fee practices for its analysis, it proposes to prohibit a widely diverse set of fees across the entire economy – fees that frequently do have a legitimate business purpose. For example, the proposed rule would prohibit credit card surcharges in restaurants. These surcharges help defray the bank fees that merchants incur when their customers choose to pay with credit cards. Covering these costs by charging only those customers who generate the costs helps keep menu prices lower for those choosing to pay with cash. Banning surcharges would be especially harmful to lower-income consumers, who disproportionately do not have credit cards, and to low-margin mom and pop restaurants that would lose business by raising menu prices or dropping their acceptance of credit cards altogether.  The Commission’s analysis does not consider these countervailing benefits and attendant costs.

The proposed rule would also prohibit large-party fees in restaurants, and suggests that to comply, restaurants would print a separate menu for large parties with higher menu prices that incorporate the fee. The dual menu solution would complicate the operation of a restaurant, especially during peak hours, and could result in diners receiving the wrong menu and then being charged a price different than they had seen.  The transactions and accounting system would need to be reprogrammed to allow for dual prices for each item, one with the original menu prices and the other prices with the large party fee included.  Dual menu prices may also make it more difficult to pass the service fee on to servers, as it would be embedded in the menu prices. It seems that a large party fee makes much more sense. 

The Commission also proposes to prohibit or regulate “sales that omit material terms such as requiring an additional purchase to make full use of the good or service.” Although the proposed rule provides no explanation of what this means or how it would be applied, a consumer complaint contained in footnote 10 (NPRM, footnote 10) suggests that it may target subscription services for automobiles. 

Automobile subscription services are optional. They allow consumers to try certain automobile add-ons, such as heated seats, traffic camera alert features, and satellite radio, without paying the higher cost of buying them outright. This lowers the costs of automakers by reducing the number of model variants they need to produce to offer features that not all consumers want. This, in turn, lowers prices for consumers. There is no evidence that subscription services are, or will become, economically inefficient and harmful.

The Commission is also considering banning what it refers to as "excessive” or “worthless" fees. While not included in the proposed rule, the Commission asks commenters to opine on the desirability of such a prohibition. It is not at all obvious how in practice the FTC would decide whether a fee is “excessive” or “worthless,” much less whether fees across the economy fall frequently into this vague category. If the rule could prohibit “excessive” or “worthless” fees simply on the subjective determination of the FTC, it is hard to imagine a fee practice that it could not challenge. 

The reason the proposed rule can cover so many different types of fees is that it does not define “mandatory fee.” Any fee could be considered mandatory if a consumer wants whatever it is that the fee pays for. This would give the Commission considerable latitude in deciding which fees are covered by the rule.

The One-Size-Fits-All Approach Leads to Confusion for Businesses

The vagueness of the proposed rule has led to considerable uncertainty about which fees would be covered.  The Internation Franchise Association testified at the FTC’s Informal Hearing that quick-serve restaurants do not know whether delivery service fees and small-order fees will be covered by the rule. These fees cannot be included in the advertised price because the delivery service provider is chosen by the customer, and the size of an order cannot be determined until the customer places the order. 

These are just a few examples of the uncertainty about what is covered by the proposed rule. With over 6 million firms in the United States (NPRM, Section VII), this uncertainty would likely result in many hours of attorney time as firms seek to determine whether they are covered by the rule and, if they believe they are, the best way to change their practices to comply. 

Compliance Would Be More Difficult Than Assumed

Finally, the Commission’s assumption that compliance with the proposed rule would occur immediately (NPRM, Section VII.B) is unrealistic, for two reasons. First, since non-compliant firms could gain a competitive advantage over compliant rivals, no firm would want to be the first to comply (StubHub). Penalties would help, but it would be necessary to coordinate compliance within each industry. Coordinating compliance with a broad array of poorly defined fee practices over the entire economy would be an enormous endeavor. Second, the uncertainty about which fees are covered by the rule would slow compliance.

Recommendation

My recommendation is to limit the rule to short-term lodging and live event ticketing fees that are mandatory for all consumers, such as resort fees. This approach has several advantages. First, research has found that fees that are mandatory for all consumers are harmful (live event ticket fees, airline taxes and fees, sales tax). Second, narrowing the industry scope would increase the chance of success. The FTC is most knowledgeable about the fee practices in these sectors from its study on the economics of resort fees, warning letters to hotels, and Online Event Tickets Workshop. Third, the rule should not cover fee practices with ambiguous welfare effects. To address other conduct that violates the FTC Act, case-by-case enforcement is more likely to yield net positive benefits than a broad-brush rule that sweeps in harmless and beneficial practices. Fourth, such a rule would be specific and would not create confusion for businesses or consumers.   

This approach was used by the U.S. Department of Transportation with the 2012 Full Fare Advertising Rule, which required that all airlines and travel agents include taxes and fees in advertised air fares. This rule achieved quick success and has been shown to have benefited consumers. Compliance with the Full Fare Rule was likely immediate because the rule applied to a single industry, one that the DOT had long regulated and knew well. The regulation was clear and specific to that industry, and what was required was unambiguous. DOT could easily determine whether all the firms were in compliance.

Unless significantly modified, the final rule would be a candidate for nullification through the CRA. It unreasonably broad in both fee coverage and industry scope. Although it would prohibit some harmful fees, the rule would also prohibit efficient fees and cause businesses to drop services that consumers value. Finally, and perhaps most troubling, the vagueness of the rule would give the Commission an extraordinary amount of power to determine what fees would be covered and challenged during this and future administrations.