Increases in enforcement and private litigation relating to what federal and state authorities have termed “junk fees” pose a growing challenge to businesses across geographies and sectors, as evidenced by the recent uptick in federal, state, and private actions. Federal regulators, as well as their state enforcement counterparts, are intensely focused on curbing junk fees and utilizing a wide range of tools to crack down on what they allege as unfair and deceptive practices—including through rulemaking, enforcement, and issuing informal guidance.
Recently, the regulatory and enforcement landscape concerning junk fees has shifted dramatically. Junk fees, sometimes called “hidden fees” or “drip-pricing,” refer to later disclosed—and often mandatory—fees or charges that are not included in the initial offered price of a good or service. Industries most likely to be impacted by this widespread crackdown include travel, hospitality, entertainment, and financial institutions. Concluding these hidden fees pose consumer risk and stifle competition, President Joseph Biden has made curbing junk fees central to his substantive agenda and policy messaging.
Regulatory and enforcement activity has spiked among many agencies with jurisdiction over the US economy, but the two biggest federal actors are the US Federal Trade Commission (FTC) and the US Consumer Financial Protection Bureau (CFPB).
Rulemaking
In October 2023, the FTC proposed a new rule to prohibit junk fees. While it is deceptively short, the proposal prohibits two broad types of conduct: (1) misrepresenting the total amount of fees, including by acts of omission, and (2) misrepresenting the purpose or nature of such fees. Additionally, the proposed rule requires the disclosure of the total price of any offering, defined as the aggregate of all fees or charges that a consumer must pay, except for shipping and government charges. For any enterprise, the “total price” would be extremely difficult to calculate.
The FTC’s proposed rule would:
CFPB Enforcement
While many highly regulated industries, including banks, fall outside of FTC authority, the agency seeks broader jurisdiction as to junk fees. If adopted, the FTC’s proposed rule could give the CFPB enforcement power against financial institutions and other businesses under its jurisdiction. That is in addition to its statutory authority to enforce FTC trade regulation rules (TRRs) “to the extent such
[a] rule applies to a covered person or service provider.” While banks have historically been excluded from the FTC’s TRRs, the FTC defined a covered “business” in its proposed rule as any corporate provider of goods and services, with the sole exception of auto dealers, which are covered by a separate FTC regulation.
In addition, the CFPB has issued guidance codifying the agency’s position that conduct violating state consumer protection laws may be unfair, deceptive, or abusive, and that state attorneys general may enforce alleged violations of the Dodd-Frank Wall Street Reform and Consumer Protection Act directly.
Additionally, the agency has issued new guidance aimed at preventing large banks from charging excess fees for what the CFPB calls “basic customer service.” This guidance comes on the heels of a 2022 compliance bulletin summarizing CFPB enforcement actions against automotive loan holders and servicers under existing laws regarding unfair, deceptive, or abusive acts or practices (UDAAP).
State Enforcement
All 56 state and territorial attorneys general have enforcement authority under each jurisdiction’s UDAAP statute, creating latent threats, or “icebergs.” Some states, include Arizona, Colorado, Texas, and the District of Columbia, have already taken action under their respective UDAAP authority. UDAAP statutes typically carry per violation penalties, rather than simple damage assessments. If each advertising impression constitutes a violation, for example, potential penalties could quickly exceed even a large business’s valuation or market cap.
Additionally, some state laws create private rights of action, amplifying companies’ potential legal exposure—particularly New York and California, where state financial protection departments and state attorneys general also have enforcement authority.
Federal and State Coordination
Expansion of State UDAAP Authority
In December 2023, nearly two dozen state and territorial attorneys general sent letters to the Director of the CFPB and the Acting Comptroller of the Currency asking for support in their investigations of national banks. These letters urged for expanded state authority to investigate national banks for violations of state UDAAP claims. The tone of these letters strongly indicates “buy in” from the CFPB and US Office of the Comptroller of the Currency (OCC). Additional federal and state coordination may be on the horizon.
FTC and Connecticut AG File Joint Complaint
The FTC and Connecticut AG filed a joint complaint under their respective UDAAP authorities against a Connecticut auto dealership, in which they alleged widespread undisclosed fees in the company’s “certified used car” marketing.
Notably, the FTC’s participation in this case—without the benefit of its newly finalized Combating Auto Retail Scams (CARS) Rule—demonstrates that enforcement authority may exist independent of those rules. For its part, Connecticut takes the position that it does not require a dedicated junk fee rule, as its core UDAAP authority is sufficient to bar such practices.
State authorities are raising their profiles. Enforcement actions often lead to private class action litigation, which can lead to other state enforcement activity.
Legislative Developments in California
California SB 478, effective July 1, 2024, applies to any company “doing business” in California. This legislation amended the California Consumer Legal Remedies Act to include as a prohibited act “advertising, displaying, or offering a price for a good or service that does not include all mandatory fees or charges” other than (1) taxes or fees imposed by a government on the transaction or (2) postage or carriage charges that will be reasonably and actually incurred to ship the physical good to the consumer.
Carveouts apply for rental car companies, auto dealerships, property managers, and food delivery services. Plaintiffs are entitled to recover actual damages or $1,000 per violation (whichever is greater), injunctive relief, restitution, punitive damages, and attorneys’ fees.
The implications are that it could serve as a model for other states’ enactment of similar legislation, and it is likely to increase plaintiffs’ class action bar’s scrutiny of hidden fees. While a lot of litigation has occurred over what “per violation” means, enterprises still have five months to prepare for compliance.
Legislative Developments in Other States
Private actions amplify enforcement risk. Private litigation may spawn follow-on government investigations or enforcement actions, or vice versa.
Recent enforcement actions have targeted a wide spectrum of activity, including omitting surcharges on restaurant menus; hotel charges for mandatory resort or destination fees, daily surcharges for internet or housekeeping, or worker protection fees; and fees charged by a private contractor managing the federal government website for processing, reservations, cancellation, and other alleged junk fees in connection with the US National Park Service.
When reviewing materials, advertising practices, and pricing structures, businesses should keep in mind:
Given the guidance issued, new rules proposed (pending legislation), and enforcement actions at both the federal and state levels, staying abreast of the quilt work of laws across US jurisdictions can be daunting.
Key takeaways include the following:
Vigilance, transparency, and strict adherence to requirements governing third-party compliance, as well as attention to arbitration clauses, should be top of mind.