Lest there be any confusion – this is not a comment that we will be filing in connection with the FTC rulemaking on junk fees. But we do have lots of thoughts and concerns and have had countless conversations – with our colleagues at the firm and with concerned clients across different industries – since the proposal was unveiled a few weeks ago. Indeed, the junk fees rulemaking was quite the hot topic of conversation at the Association of National Advertisers conference the other week, and it remains a hot topic today.
For those who have been napping or not listening to our AD Nauseum podcast, the FTC proposed a rule addressing what are now called junk fees. In short, the rule is designed to protect consumers against bait-and-switch pricing tactics that bury mandatory fees or misrepresent the actual purpose of fees. The FTC proposed rule would require that an advertised price be the “total price” and that total price must be displayed more prominently than other pricing information. Mandatory charges must be included in that total price calculation. Government charges like taxes are exempted, as are shipping charges – defined as charges or fees that reasonably reflect the amount a business incurs sending physical goods to a consumer via mail. More information can be found here and here. The FTC proposal is quite similar to the new California junk fees law. So, although much of the discussion has been on how the FTC rule would address various hypotheticals, the reality is that the California law will be here before you know it (July 2024) and will require answers to a lot of these tricky questions.
And this issue is not going away anytime soon, with more states jumping on the junk fees bandwagon. Just the other day, the Massachusetts attorney general announced proposed regulations that would “require businesses to clearly disclose the total price of a product at the time it is presented to consumers, provide clear and accessible information on whether fees are optional or required, and simplify the process for cancelling trial offers and recurring charges, amongst other rules.” New York Democrats just proposed the New York junk fees prevention act on December 1st with a private right of action as well.
At a high level, we understand the impetus here – the public seems fed up with unadvertised mandatory fees in certain industries (often ticketing and hospitality). Indeed, the FTC received more than 12,000 comments about junk fees after announcing its proposed rule; imagine a litany of sternly worded one-star Yelp reviews (with reviewers wishing they could give zero stars). Consumers claim these fees are a combination of unexpected, significant, and frustrating. And the existence of these fees can make apples-to-apples comparison shopping more difficult. But a variety of product- and service-specific fees are common in industries outside of ticketing and hospitality too, and from what we can tell, the agencies are attempting to address the wide range of fees in the modern market with tools that appear too blunt. Notably, the FTC implies that it is not dictating what fees can be charged or how they are charged – but there are elements of the proposal that would effectively do that anyway, in practice. We think.
Here’s one hypothetical: home delivery for food services. Let’s say we have a franchise that offers home delivery of delicious burritos that cost $10 per burrito (guac is extra, of course). They want to run a national ad campaign that touts this price, but they are now wrestling with the issue of how to advertise this awesome offer while being mindful of the delivery fees associated with home delivery. Scenario 1 – Perhaps the delivery fee is not subject to the rule because consumers can also pick it up in the store and not incur a fee – it’s not a mandatory fee. But can we count on that if 95% or 99% of consumers are getting delivery? Does that high percentage implicitly turn it into a mandatory fee?
Scenario 2 – Perhaps $10 is only the price for the burrito, not including delivery, and let’s say it’s a flat delivery charge of $5. Well, if someone orders one burrito, the price would have to be advertised as $15 per burrito. But for the person buying two burritos, the price would actually be $12.50 per delicious burrito. And what if the delivery fee varied based on the distance between the store and the purchaser? Pardon our French, but what the &#&$ do we do now? Do we have to modify and restrict the delivery costs in order to not have any variation in the cost of a delivered burrito? If we don’t do that, do we have to advertise the burrito with the highest possible price and make everyone pay the higher price to comply with the junk fees rule or California law? Or does it get even more complex and we advertise the higher price but then reduce the cost at checkout for people purchasing massive quantities of burritos, after losing potential sales due to a higher advertised price?
Although we are clearly fixated at the moment on burritos – as we all should be – the reality is that there is a wide range of mandatory fees that often may not be calculated in a way that allows for an easily advertised national “total price.”
And if we forget about the FTC and just talk California, is the practical solution that we start seeing national ads that expressly exclude California? (Sorry state – no $10 burritos for you!) This is messy, and the blunt tool of these new rules and proposals leaves many questions unanswered. But perhaps the biggest question to think about is this: Are these food delivery fees a surprise to consumers? We don’t necessarily think these were the fees that led to national outrage many months ago. (And no shade intended to Swifties, to be clear.) But in the absence of major changes to the FTC proposal, our burrito franchise is going to be wrestling with a lot of thorny issues that will affect how it advertises its product.
There is a lot at stake in this push to require advertised prices to include all mandatory fees. But it is a complex landscape that may require more subtlety and consideration of national, regional, and local advertising practices. We anticipate that the FTC will be flooded with comments from all sorts of industries explaining why the proposal just does not mesh with how they do business, and we hope the agency will be mindful that in attempting to address this concern, they may need to craft this in a far more nuanced manner. And to be clear, we read the Federal Register Notice to acknowledge the agency’s awareness that there may be a need for industry carve-outs or other substantial modifications to the proposal. One ring may rule them all, but it’s not clear that one junk fees rule can realistically cover all industries.
And on that note – you know what we are picking up for dinner tonight.
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