“Junk” Fees and Deceptive Reviews: US FTC Begins Rulemakings
The upshot, for busy people:
- During its October 20, 2022, open commissioner meeting, the Federal Trade Commission (“FTC” or “Commission”) voted to issue two Advanced Notices of Proposed Rulemaking (ANPRs).
- The first ANPR seeks to curb companies’ use of “junk fees”—“unnecessary, unavoidable, or surprise charges that inflate costs while adding little to no value”—in industries such as telecommunications, live entertainment, hospitality, and transportation.
- The second ANPR floated a rule that would regulate product reviews or endorsements, targeting the practice of “fake reviews, suppressing negative reviews, and paying for positive reviews” across industries.
- Comments for both ANPRs are due on January 9, 2023.
- A final rule ultimately would allow the FTC to force companies to pay civil penalties and restitution for first-time offenses. But the FTC’s rulemaking procedures under Section 18 of the FTC Act are much more cumbersome than rulemaking under the Administrative Procedure Act and likely will take years to finalize.
- While the rulemaking is pending, companies should consider reviewing their practices. This applies with particular force if your company uses any tools that arguably influence consumer reviews or similar metrics since the FTC and other regulators (including the Consumer Financial Protection Bureau) have been cracking down on practices related to consumer reviews.
Background—The FTC’s Rulemaking Authority
Although the FTC primarily considers itself a law enforcement entity, Chair Lina Khan entered office with plans to exercise the agency’s rulemaking authority, including its authority to write rules outlawing specific “unfair and deceptive” acts and practices. The agency’s rulemaking authority comes from Section 18 of the FTC Act, added by Congress as part of the Magnusson Moss Warranty Act – Federal Trade Commission Improvements Act of 1975. Referred to as “Mag-Moss” rulemaking, these provisions include a number of additional procedures beyond the basic notice-and-comment rulemaking from the Administrative Procedure Act. Among other things, Mag-Moss rulemaking requires the FTC to:
- Issue an ANPR explaining the area of possible rulemaking and allow for public comment.
- Issue a Notice of Proposed rulemaking to outlaw specific “unfair or deceptive” acts or practices. This document must spell out why the FTC has reason to believe these practices are “prevalent.”
- Hold an informational hearing before a “hearing officer” where concerned individuals can present their own evidence against the rule and, if necessary, cross-examine the FTC’s evidence.
- Issue a final rule.
- Survive judicial review.
Reason for Rulemaking
Given the lengthy Mag-Moss process, why is the FTC choosing to initiate rulemaking? Money penalties. For the past four decades, the FTC relied on favorable court interpretations holding that Section 13(b) of the FTC Act—which allows the FTC to seek “injunctions” against unfair and deceptive acts and practices—also allows courts to order companies to pay restitution. The Supreme Court rejected this practice unanimously in AMG Capital Management v. FTC, issued in April 2021. That decision left the FTC scrambling to find other ways to force companies to pay money in connection with enforcement actions. Rulemaking under Mag-Moss provides one path to monetary relief, as the FTC Act expressly allows the agency to obtain civil penalties and restitution for first-time violations.
In fact, the FTC stated in both the open meeting and its press releases on the ANPRs that its main reason for undertaking the rulemaking process is to enable it to impose “stiff civil penalties” for first-time and other violators. For example, in its press release on the junk fee ANPR, the FTC wrote “while the agency has been active in addressing junk fees, it generally lacks the authority to seek penalties against first-time violators or the ability to obtain redress readily for consumers in instances in which fees violate the FTC’s prohibition on unfair or deceptive practices. The FTC can seek such remedies when a company violates a rule promulgated by the agency, which is why the agency is exploring a junk fee rule.”
What Do the ANPRs Say?
Background on the FTC’s Interest in Fees Charged for Products or Services
Fees have been a long-term area of focus for the Commission. As laid out in the ANPR’s footnotes, the FTC has brought many cases involving whether fees were authorized by consumers, fees were sufficiently disclosed, and deceptive claims were made regarding “hidden fees,” among many other questions. However, several commissioners stated they believed a rule is necessary in order to curb deceptive fees in part by enabling the FTC to bring civil penalties against companies that violate the rule. Fees were also the subject of a petition for rulemaking filed last year by a public interest group that was cited heavily by the FTC commissioners in their analysis of whether to initiate rulemaking. The FTC has stated it takes public input and petitions seriously and may take action accordingly.
On October 20, 2022, the FTC voted 3-1 to approve the issuance of an ANPR for a rule that would address these so-called junk fees—extra charges associated with products or services that companies fail to disclose upfront or that provide no added value to the purchaser. Although the ANPR indicates that this rule would apply across all industries, the ANPR identified several industries of particular note: telecommunications, live entertainment, hospitality, and transportation. Comments from the four commissioners show a strong interest in the subject. Chair Lina Khan, voting yes, noted her view that junk fees may inhibit consumers’ ability to conduct price comparisons and may enable companies to extract additional payments from consumers without their knowledge or when it seems too late to back out. Commissioner Rebecca Kelly Slaughter also voted yes and expressed concern over the effect of a consumer’s sunk costs in a transaction, noting that hidden fees effectively raise a product’s price without appearing to do so. She also mentioned that these fees may undermine competition. In approving the ANPR, Commissioner Alvaro Bedoya stated his view that these fee practices were a “pervasive pattern” experienced by more than 80 percent of American consumers. Commissioner Christine Wilson voted no, objecting to the ANPR on several grounds including that it is too broad and may overlap with other FTC rules.
Areas of Interest and Likely Questions
Although the ANPR does not set forth any proposed rule, the ANPR did outline several practices that the Commission is focused on:
- Misrepresenting or failing to disclose clearly and conspicuously, on any advertisement or in any marketing, the total cost of any good or service for sale
- Misrepresenting or failing to disclose clearly and conspicuously, on any advertisement or in any marketing, the existence of any fees, interest, charges, or other costs that are not reasonably avoidable for any good or service
- Misrepresenting or failing to disclose clearly and conspicuously whether fees, interest, charges, products, or services are optional or required
- Misrepresenting or failing to disclose clearly and conspicuously any material restriction, limitation, or condition concerning any good or service that may result in a mandatory charge in addition to the cost of the good or service or that may diminish the consumer’s use of the good or service, including the amount the consumer receives
- Misrepresenting that a consumer owes payments for any product or service the consumer did not agree to purchase
- Billing or charging consumers for fees, interest, goods, services, or programs without express and informed consent
- Billing or charging consumers for fees, interest, goods, services, or programs that have little or no added value to the consumer or that consumers would reasonably assume to be included within the overall advertised price
- Misrepresenting or failing to disclose clearly and conspicuously on an advertisement or in marketing the nature or purpose of any fees, interest, charges, or other costs
The ANPR raises many questions for public input. Questions include:
- To what extent are total costs, fees, material restrictions, and mandatory or optional charges misrepresented during the advertising or marketing of a good or service?
- Do these and related practices cause consumer injury and, if so, to what extent?
- How should a rule addressing these practices be crafted to maximize the benefits to consumers and minimize the costs to legitimate businesses?
- What types of required disclosures might be beneficial and to which industries should a rule apply?
- Aside from rulemaking, what alternative or additional actions, such as the publication of additional educational materials and workshops, would be beneficial?
The Commission has encouraged commenters to share their views and experiences on these and other questions as well as any underlying qualitative and quantitative data that informs their answers.
Endorsements and Reviews
Background on the FTC’s Interest in Endorsements and Reviews
As e-commerce has ballooned, the FTC has increasingly taken action to address unfair or deceptive practices involving consumer reviews and endorsements. This year alone, the FTC settled a lawsuit against a fast fashion company alleging suppression of negative reviews for $4.2 million dollars (as discussed in a prior Legal Update ) and brought a new lawsuit against a web-based housing marketplace web platform accused of incorporating fake reviews. The FTC also sent a Notice of Penalty Offense to more than 700 companies alerting them to possible civil penalties for deceptive endorsement practices. In May, the FTC also proposed revisions to tighten its Endorsement Guidelines for advertisers who use endorsements and reviews and to warn social media platforms about inadequate disclosure.
However, in voting for the ANPR, commissioners favoring the ANPR stated that individual enforcement actions are not enough to stem the tide of misleading or deceptive reviews and endorsements used by companies on online retail and review platforms. The FTC seeks to address the issue more systematically through rulemaking, with a final rule enabling it to once again seek monetary penalties from businesses who violate the rule.
On October 20, 2022, the FTC voted 3-1 to approve the issuance of an ANPR for a rule that would address unfair and deceptive reviews and endorsements. Comments from the four commissioners shed light on their concerns. Chair Khan (who voted yes) focused on the power of online reviews in persuading a consumer to purchase a product through the internet as opposed to in a brick-and-mortar storefront where they can test the product. She also expressed concern that deceptive reviews pollute the marketplace and have an anticompetitive effect. Commissioner Slaughter echoed this and also voted yes, noting that fake reviews can harm honest businesses in addition to paying customers. She stated she was troubled by the lack of transparency by e-commerce platforms. In his vote in favor of the ANPR, Commissioner Bedoya focused on the particular importance of online reviews to small businesses. Finally, while Commissioner Wilson agreed that deceptive and fake reviews are unlawful, she voted no, emphasizing that this approach was too broad and resource-taxing and that existing FTC tools are adequate.
Although the ANPR did not propose any rules (that comes in the next step), the Commission signaled that it is focusing rulemaking on the following practices:
- Fake reviews: These include reviews and endorsements by people who do not exist, have not used the product or service, or lie about their experiences.
- Review reuse fraud: Some sellers hijack or repurpose reviews posted about another product or service.
- Paid reviews: Marketers may pay for positive reviews about their products or negative reviews about competitors’ products.
- Insider reviews: These include reviews written by a company’s executives or solicited from its employees that don’t mention their connections to the company.
- Review suppression: Companies might claim that their websites display all reviews submitted by customers when they suppress negative reviews or attempt to suppress reviews on other platforms by threatening the reviewers.
- Fake review websites: This is when a seller sets up a purportedly independent website or organization to review or endorse its own products.
- Buying followers: This involves buying or selling followers, subscribers, views, or other indicators of social media influence.
Given that the ANPR describes these practices as those “most clearly and inarguably deceptive or unfair,” the FTC’s requests for public comment focus on whether these practices were prevalent or widespread, which is a prerequisite for FTC rulemaking under Section 18 of the FTC Act.
The FTC’s other questions address standard considerations, including whether other actors facilitate the practices at issue, whether compliance would be difficult or burdensome, and whether any technology changes might affect the rulemaking.
Implications for Businesses
The first question for businesses should be whether to submit a comment in connection with either rulemaking, either for themselves or in connection with a trade association. There are always pluses and minuses in connection with participation in rulemaking. But if your company or industry has specific, material concerns or might want to challenge the rule (if ever finalized), those concerns need to be placed before the agency—either now or in connection with the proposed rule.
While the rulemaking on both subjects is pending, companies should consider reviewing their fee practices and issues related to consumer reviews. Even if a rule is not ever finalized, these are two areas of consistent focus for the agency and companies should consider incorporating these elements into their regular hygiene related to unfair and deceptive acts and practices.
Additional author: Katherine Aragon