Ensuring Compliance with ‘Junk Fee’ Regulatory Requirements

With the continued expansion of the regulation of “junk fees,” including bipartisan actions from federal, state, and local authorities, it is more important than ever for businesses to ensure compliance with these requirements.

“Junk fees” (sometimes called “hidden fees” or “drip-pricing”) are those that are not included in the initial price of a good or service displayed to the consumer. [1] They are generally mandatory. Over the past two years, the landscape surrounding “junk fees” has evolved significantly, with federal and state authorities intensifying their efforts to curb these fees.

As these enforcement efforts mature, it is important that businesses whose products and services are affected by these initiatives be vigilant in complying with a patchwork of regulatory regimes, including federal rules and guidance, state legislative action, and litigation based on novel applications of typical deceptive practices statutes.

These enforcement efforts may proceed via investigation and litigation or both, and they generally seek to apply laws enacted by a legislature, rules and orders, and interpretations of existing laws (sometimes known as rulemaking by litigation).

FEDERAL REGULATORY FRAMEWORK

At the federal level, the Federal Trade Commission (FTC) and the Consumer Financial Protection Bureau (CFPB) have been at the forefront of efforts to regulate junk fees. The FTC recently promulgated a new formal Junk Fees Rule that targets the short-term lodging and live event ticketing industries, requiring clear and conspicuous disclosure of all mandatory fees. [2]

This rule aims to eliminate “drip pricing,” a practice in which businesses apply additional fees only at the final stages of a transaction. Importantly, the newly promulgated rule also includes the possibility of per-violation penalties, which can add up to significant liability for non-compliant businesses.

In addition to the FTC’s formal rulemaking, the CFPB issued guidance to prevent large banks from charging excessive fees for basic services, leveraging its authority under the Dodd-Frank Act to enforce against unfair, deceptive, or abusive acts and practices (UDAAP). [3]

More recently, the CFPB under the policy guidance of the former administration’s director has issued additional guidance to state attorneys general and the private plaintiffs’ bar recommending additional enforcement strategies. [4] While this guidance has largely been withdrawn with the change of administration, it provides insight into how prosecutors look at these issues, [5] and the guidance for states forms a roadmap for action.

STATE-LEVEL INITIATIVES

All 56 state and territorial attorneys general have enforcement authority under existing consumer protection laws penalizing allegedly “unfair or deceptive acts and practices” (UDAP). [6] The broad sweep of these laws can be poorly defined and not subject to rulemaking, and thus subject to differing interpretations by different attorneys general and courts.

States such as Texas and Colorado have pursued enforcement actions against businesses for failing to disclose mandatory fees without rules, demonstrating the broad reach of these state UDAP statutes. Private actions brought under state statutes amplify litigation risk and exposure for companies whose products may include such fees.

In addition to this existing authority, certain states have promulgated new rules and enacted new statutes that give the states additional avenues for pursuing claims against businesses whose pricing practices contravene state law. [7] As with federal rules, these new state enforcement authorities can carry costly per-violation penalties. [8]

Moreover, many of these laws permit private rights of action, making them the kindling for putative class actions as well as attractive to plaintiffs’ lawyers seeking to represent states on a contingent fee basis.

BIPARTISAN SUPPORT

Despite the turnover in administrations and partisan policy differences among the state attorneys general on a number of issues, curbing the existence of “junk fees” has bipartisan support. That has led to collaborations between federal and state prosecutors and among state attorneys general. The president recently issued an executive order establishing a whole-of-government approach to enforce claims against alleged ticket scalping schemes, but the order is drafted broadly enough that it may encompass some first-party ticket sellers. [8]

IMPLICATIONS FOR BUSINESSES

The modern junk fee landscape encompasses a variety of authorities and actors at the federal, state, and local levels. These authorities and actors sometimes precede or follow the government enforcers. The continued expansion of these authorities underscores the importance for businesses to ensure compliance with both federal and state requirements. Companies should prioritize transparency in pricing, ensuring that all mandatory fees are disclosed upfront and prominently.

HOW WE CAN HELP

Morgan Lewis has been closely monitoring these developments, providing clients with strategic guidance to navigate the evolving regulatory environment. Our team is well-equipped to assist businesses in assessing their compliance with current regulations and preparing for potential enforcement actions.

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