In his State of the Union address this February, President Joe Biden promised to crack down on junk fees. The Federal Trade Commission (FTC) made good on that promise in short order on Oct. 11, announcing a proposed rule to prohibit junk fees. And a few days before, on Oct. 7, California Gov. Gavin Newsom signed a bill that would similarly ban junk fees, further emphasizing the focus on this area from policymakers. The California law goes into effect in July 2024; the next step for the FTC’s proposed rule is a 60-day public comment period.

But what exactly is a junk fee? Notably, neither the California law nor the FTC’s proposed rule actually defines the term. It’s generally understood as a fee imposed by businesses that isn’t tied to any real service, but it’s used relatively broadly.

Instead of defining “junk fee,” the California law regulates “mandatory fees or charges” and requires that when a business is “advertising, displaying, or offering a price,” all such fees be included. Government-imposed taxes or fees and postal or carriage shipping charges are excluded, as are those levied by financial entities generally.

The FTC’s proposed rule prohibits “hidden fees” and “misleading fees.” The misleading fees portion of the rule prohibits misrepresenting fees and whether they’re refundable. The hidden fee prohibition is similar to California’s law. It requires the total price be displayed more prominently than other pricing information, and mandatory charges must be included in the total price calculation. Like in California, government charges and postal or carriage shipping charges are excluded.

In short, if a price or service imposes a mandatory fee, then that fee must be included in the price advertised upfront.

It’s unclear, however, how this requirement works for services that offer variable fees. Food delivery operators, for example, may impose a mandatory delivery fee that varies according to the distance/time required to make the delivery. The fee is mandatory, but the amount is uncertain. California’s law specifically states it is “not intended to prohibit any particular method of determining prices for goods or services, including algorithmic or dynamic pricing.” While this practice is then not prohibited, it’s unclear what sort of disclosure is necessary. Comments on the rule will likely address this scenario, which may lead to more clarity in the FTC’s final rule.

In addition to more clearly regulating this space, one of the FTC’s goals in issuing this rule is likely to streamline its own process for seeking monetary relief. Since the AMG Capital decision removed the FTC’s ability to seek monetary relief under Section 5 of the FTC Act, the FTC has increasingly relied on other enforcement methods. One of these is rule violations, which allow civil penalties. For example, the Consumer Financial Protection Bureau (CFPB) obtained $140 million in customer refunds from banks, auto loan servicers and other financial companies for junk fees. This result was announced on the same day as the FTC proposed rule. It further highlights the regulatory focus in this area and also why the proposed rule has been put forward. The CFPB action relied on the Dodd-Frank Act in its enforcement, which is authority that would not expand past the financial sector. When the FTC’s proposed rule is finalized, it will have a similar mandate across all commercial transactions. If you want your voice heard, the comment period will run for 60 days after the proposed rule is published in the Federal Register. FTC staff reviews and considers comments carefully, often then adjusting the final rule, so don’t assume you won’t be heard.

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